Wednesday, November 24, 2010

The slow consolidation continues

Hi there, and welcome back to CRI's S&P 500 blog.


As has been the case for the past three weeks. We are slowly consolidating the 10 week bull rally that preceded the US mid-term congressional elections and the official launch of 'QE2. 

Both traders and investors were given a clear signal to 'get-in' when prices broke above 112.58 back in mid September. The market indeed rallied to take out the spring highs (which in itself is a monthly double bottom buy signal) a move of more than 7 percent from the breakout. Unfortunately, the move higher was almost straight up, suggesting there needed to be a few weeks of consolidation before we can expect another move higher in earnest. That consolidation is happening now. 

Technically
we are a bit over-extended but not badly. We have several moving averages just below us to provide support so I wouldn't be surprised if the above mentioned support areas (refer to chart) are indeed strong enough to hold prices up.
Fundamentally
we are OK here too. Both a friendly yield curve and solid corporate profits shall help things going forward. 
The problem
1. Corporate scandal, As long as we keep reading about one scandal after another both fines and lack of focus shall hinder corporate profits in specific sectors. Specifically the financial sector this go round.
2. No-one likes war. So if the bullets are flying for real in Korea one ought to expect both a substantial rally in the US Dollar and a soft stock market. This is known as a systemic risk and no matter how hard one tries, one cannot control it. If it happens we just have to deal with it. Interestingly though, this may be the reason the market corrects (as we have been expecting) and once the event has passed the market may go through a dramatic period of catch-up as the fundamentals (earnings & interest rates) have remained relatively friendly through this whole time period.
Summary
If one missed the original buy signal (112.58) then one may have an opportunity to enter at or near that level again as prices have been (and are expected to continue to be) consolidating for a few weeks. For those that did the trade, stops still remain just below the double bottom (103 area). The low of this consolidation shall represent our new stop if and when it comes.  In the short term, it shall be hard for the market to breakdown in earnest as there currently exists significant support from 111 to 117. So I wouldn't be surprised it our stop is moved into this area but we will just have to wait and see if and where it comes. Having said that, if war does breakout on the Korean peninsula one would be best advised to cover any long positions and ride the uncertainty out in cash. While it isn't a specific recommendation, it is common sense in the trading world...

When someone asked me what would cause the market to correct after the recent 10 week bull run I had to reply, 'one can't write better fiction than reality'

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

Friday, November 19, 2010

Moving Higher But A Little Over-Extended

Hi there, and welcome back to CRI's S&P 500 blog.


It has been a  few weeks since the US mid-term congressional election and the FOMC's QE2 program launch. The market ran up into both events in a classic 'buy-on-the-rumor' and unfortunately it looks like we have begun the process of 'selling-on-the-news'. While there hasn't been any longer term technical damage done, it wouldn't surprise me if this 'correction' continues for at least a few more weeks. Irish debt, rising Asian inflation and a lot of supply of stock (GM IPO etc) are just a few issues the market is dealing with at the moment. And until we see some sort of capitulation, I won't be in a big hurry to be back on the long side from a trading perspective.

So lets go take a look at the chart to see where we might be heading [please refer to chart above]. This has got to be one of the more busy charts I have looked at in a while!
Lets start off with the longer term perspective - The move through 120.89 is significant from a longer term perspective as it represents a monthly double bottom breakout in the market. Stops on that monthly trade should be at or just below 100. While I am not taking this trade on (way too much risk for my liking) it is important for us to both recognize and appreciate what the market is trying to tell us. Specifically, the economic backdrop for stock growth going forward is OK (ie. yield curve is friendly, interest rates are low, and earnings are high). Additionally, there is still a lot of pessimism out there which unfortunately for the public is actually bullish.

Now the shorter term time from - Even from a weekly perspective, we are getting over-extended. The last major buy signal on the SPY was at 112.58. One should have stops working for that trade just below support at 103.73. This is all well in good if you did the trade (you are up almost 8 points or about 7%). The move up was ten weeks in duration and almost straight up. This straight line move up unfortunately has not given traders an opportunity to move stops. The current correction is the way for the market to find a new support line and once that is established then those that did the trade at 112.58 will be given a signal to move stops accordingly. 

So where am I thinking this new support line will come in? To me it looks like we ought to be shooting for a move back towards the 111 to 113 area. As well as there being a gap at 111.09 that needs to be filled in, a 50% retracement of the most recent move higher would bring prices back to 113.34. Lastly, all three moving averages are bunched up tightly between 111 and 116.

In summary then, investors and traders were given a huge buy signal in the broader stock market in the middle of September when prices crossed back above 112.58 and the 13 EMA crossed back above the 30 SMA. For those that did the trade, look for a nice pullback in price and then a subsequent move higher to move stops. For those that missed it, look for the anticipated pullback to try and enter the trade at the original buy point (112.58) or after the market has consolidated for another few weeks and then breaks out higher.

Either way, if you are a regular reader of CRI's offerings then you will definitely here it from here...

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

Wednesday, November 10, 2010

The Bulls are firmly in control - for the time being

Hi there, and welcome back to CRI's S&P 500 blog.


The important US mid-term congressional elections have come and gone and now we must get used to the new reality coming out of Washington (with regard to major US Federal legislation changes). Interestingly, it looks like the market has gotten exactly what it wants. The Republican win in the House was enough to dislodge the Democrat stranglehold while at the same time, wasn't significant enough to be considered any type of mandate. In essence, little to no change in US Federal Government fiscal policy ought to be expected for the next two years. 

This bullish enthusiasm can be clearly seen in the price action. The chart above (as always) is the ETF for the S&P 500 stock index. It represents a basket of the 500 biggest stocks in the US. Since many US companies derive their revenue from international sources, this one index is an excellent proxy for world equities in general. This past week saw the index break to new 52 weeks highs and more importantly, crossed through the spring '10 peak at 120.85. Ideally, we would like to see the market finish two consecutive weeks above that level but make no mistake, the break higher was/is bullish for equities over the longer term going forward.


[The big picture.....If one can look at the market from a little longer time perspective, one can justifiably make an argument for a long term buy signal to be registered on a weekly close above 120.85 (with corresponding stops just below the most recent correction lows of 100.59). This price pattern (known as a bull flag formation) suggests prices want to ultimately move up into the 155 area [(120.85 - 65.65) + 100.59 = 155.79]. I know it sounds crazy, but given the additional $600 billion in bond purchases announced by the Fed and the propensity for Washington to be un-able to get in Wall Street's way.....leads this investor to believe this all may happen.]

Having said all that.....please don't inturprete this price action as a good entry point for either a trade or a longer term investment - Here's why: 
1. We already were told to get back into equities nine weeks ago (apon the double bottom breakout on SPY at 112.51). The market is up 7% from the breakout....so if you missed it, then you missed it.....
2. The stop on the current trade is STILL just below 103.73. This means that even if you are long from 112.51 you still have to risk the market moving down into the 103.73 area without closing the position. That represents almost 17 points lower than where we are now (or 14%!). No indeed, if you didn't do the trade nine weeks ago then don't chase it!
3. Our time tested 'Investor signal (that being the relationship between the 13 EMA and the 30 SMA) turned bullish (right around the time of the price breakout through 112.51) and is now quite extended in the bulls favor. Again (this time from the slow 'Investor' signal system) if you missed the trade, then you missed it...

So what does this mean going forward?
The US Federal Government (in the form of the US Federal Reserve Board) is spoon feeding the market capital. Additionally, there will be a lot of rhetoric but little substantive change to US Federal Government's fiscal legislation for at least the next two years. Historically, the years following the US mid-term congressional elections are often very good. The market told us to buy a little over two months ago. Other than an expected technical correction (ie. a 50% retracement of the recent move on the SPY would bring prices back into the 112 area [(103.73+122.09)/2]) there is little standing in the way of prices moving higher over the next few months. With this in mind, one ought to seriously consider any correction a buying opportunity.

Strap on your safety belts, we are in for a wild few years ahead of us!

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

Tuesday, November 2, 2010

US Congressional Mid-term elections are finally here

Hi there, and welcome back to CRI's S&P 500 blog.

The much anticipated US mid-term congressional elections are finally here! Long time readers will of course be familiar with our expectation of both a Republican win (more so for the House than the Senate) and more importantly, that the market had little choice but to rally into that event. Coincidentally, the US Federal Reserve Board is meeting today and tomorrow to both decide the near term direction for US short term interest rates but also to consider the size and scope of the much telegraphed 'QE2' program talked about over the late summer and early fall.

It is interesting to see how the market has slowly worked its way back up to within 1 point of the spring highs. CRI was of course expecting this after a substantial 'buy' signal was registered the week of September 13th (when the market moved back above 112.58). For those that did the trade, congrats! You might even think about taking some profits as we are coming up to a significant resistance point (the April highs at 120.89). For those that did not, I wouldn't be surprised if you get an opportunity to enter at or even below that level in the coming weeks. CRI, of course, has done very well through this market rally. While not in SPY in particular, CRI has been busy 'making hey while the sun's shining'. (Three doubles in junior resource stocks for the month of October alone). For more information of CRI's actual trades please visit (CRI's OnlyDoubles).

Here is my thinking as to what one ought to expect in the coming weeks:
The market appears to be 'buying-the-rumor' (that being both an expected massive quantitative easing program announced by the US Federal Reserve and a more market friendly Republican party in charge of the US Congress).
The problem here, that may be exactly what they get and unfortunatly, that may mean more than what appears on first blush.
1. If the Fed is indeed embarking on another round of QE then does that not mean they see a further deterioration in the US economy in general? Classical economics suggests one likes slightly rising rates, not collapsing rates....So, ok, maybe the economy isn't that bad and they don't need to be as aggressive as last go round....is the market going to be disappointed? Too many ifs for serious money managers in my opinion.
2. If the Republicans come sweeping into power, does that not mean that current congressional programs may loose funding? Is there going to be a transition period? Is there going to be an outright freeze on spending? Again, too many ifs for serious money managers...

Fundamental Summary: There very well could be a 'sell-on-the-news' event. There will be a lot of new fundamental variables to calculate into the equation once all this news is out and it wouldn't surprise me if the market gave back 5 to 10 percent in a period of 'cooling-off'. Having said that, the backdrop for stocks is still very appealing over the medium term (very low short term interest rates and robust international corporate earnings). Additionally, there is a tendency for stocks to do well in the year following a mid-term congressional election. So whatever hangover comes from this big event, it probably won't be too long lasting.

Technical summary: While the market is still very much pointing higher (as both a double bottom in price and a positive 13 EMA vs 30 SMA relationship currently exist) one cant help but get the feeling we are a little toppy. Over the course of the past week we have failed on a few attempts to move higher. Additionally, the move through 112.85 has been uninterrupted which unfortunately means the original stop point (103.73) has not changed. Again, yes the market is pointing higher, but one must be comfortable with the 103.73 level being tested as that is the current key support level. My hunch; we do a 50% retracement of this latest rally [(103.73 + 119.75)/2 = 111.74 or about 6.5% off the high] then put in a base for the X-Mass rally. If one hasn't taken a position or either taken profits along the way, that correction window may be a good time to consider purchases...

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com