Correction at key pivot

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

 

As we enter the 20th week of this current correction we seem to be approaching some kind of pivot. You will notice on the chart above, a massive wedge pattern that has taken a year and a half to form. While I am reluctant to call a breakout just yet, a weekly close above the 128.60 area would imply a resumption of last year's bull run at best and at worst would represent an indication of a serious test of last summer's peaks. That has not happened yet and as of writing we are still very much range bound between that 129.42 peak and the recent violent low of 116.2. From a cautionary perspective - our time tested trending indicator (that being the relationship between the 13EMA and the 30SMA) is still sitting in a negative position [Interestingly, a break above that 130 area would probably be enough to drag the short term moving average back above the medium term moving average]. Until that relationship changes (no matter how tempting it may be) it is well advised for those 'investors' out there to error on the side of caution. Another additional cautionary note - the low of just three weeks ago was extremely violent and did leave a sizable gap which all suggest we need to test that level again at some point down the road.

So what fundamentals could be causing the market to consolidate and possibly resume it's upward march? There are two answers to that I believe. 1. Corporate earnings have been remarkably good. From what I understand, S&P 500 company earnings are nearing 2007 levels once again. Third quarter earnings season put a bottom in the market. 2. Macro economic developments could help the market. Specifically, there is talk of QE3 once again. Should the US Fed. embark on yet another currency printing regime, the markets will eat it up just like the last two QEs. Additionally, there is some optimism about European debt. While not definitive, bond yields themselves have begun to trend lower. It is far too early to declare that problem over (or really near over) but as long as it isn't in crisis mode, equity prices will generally move higher through this seasonally good time of year. Speaking of seasonality, equity markets generally get a bid through the end of the calendar year. Weather it be portfolio dressing by find managers, or the generally upbeat feeling around holiday spending, prices generally rise in what is called 'The Santa Claus Rally'. 

So with all that being said, how ought our two camps to be positioned?

Investors: while it has been tempting to get back into the stock market, our time tested 'Investor' indicator is still pointing lower. It is approaching a potential cross and there is a bullish price pattern trying to form. So pay close attention over the coming weeks as we attempt to breakout.

Traders: One has to have an iron stomach to trade this market. From the one day crash/reversal seen just three weeks ago to the even more violent reversal of ten weeks ago, those getting caught short are getting punished. If you have the good fortune to short the tops you must take profits along the way down or you may see a winner quickly turn into a nightmare. My personal hunch is to stay on the sidelines until we get a new price pattern to work with. Currently I am looking for a test of the low seen just a few weeks ago. I would use a weekly close above 128.6 to look for new long entries.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com
http://www.therationalinvestor.ca/RI_Tradents.php#sp500bloglink

http://www.therationalinvestor.ca

The Painful Process of Correcting Continues

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

Third quarter, 2011 earnings season came to the market's rescue. Indeed (as measured by the S&P depository receipts - SPY) the market enjoyed a 20% bounce off the lows seen in early October.  As earnings season has drawn to a close, macro-economic concerns have overtaken the bullish euphoria seen just a couple weeks ago. Since many industrialized countries spend far more than they bring in they are held hostage by the market. If the market feels there may be a chance of default, countries can literally see their cost of borrowing skyrocket. That seems to be the case for the 'PIGS' of the Euro land but it now seems like that contagion is spreading the previously thought immune countries like Germany. Many have suggested that (in our globalized system) if a region as large as Euro-land slips into recession, the rest of the world will be dragged down with it. While it may be a bit early to come to that stark conclusion, one must respect the fact that Europe is now firmly on the road to recession. Couple this with the fact that China is in the process of 'cooling' its economy (in an effort to dampen inflation fears) and one can't help but get a rather gloomy feeling for equity valuations going forward.

Having said all that, lets take a look at the chart and see what it suggests we ought to expect going forward. The one thing that stands out to me when I look at this chart is the fact that the market moved back to the 50% level of the 2010-2011 rally (117.735) and has spent the past four months oscillating around this number. As is so typical of us humans, in both overly optimistic and overly pessimistic fashion, we moved way below and then way above the 50% level only to be pulled back to it. Consider too the fact that our time tested 'trending indicator' (that being the relationship between the 13 EMA and the 30 SMA) has been bearish for more than four months (and still remains very bearish) it shouldn't surprise anyone that our cautionary stance on equity investments continues. The market is correcting and until things settle down a bit, the correction will go on.

Now lets take a look at how our two investment 'camps' ought to be positioned through this well defined correction:

Investors: Investors have been well advised to be in cash for more than a quarter of a year now. Our trending indicator (as outlined above) suggests cash is the place to be and will remain so until the 13 EMA can cross back above the 30 SMA on a weekly basis. If and when that relationship does change, so too will our Investor stance.

Traders: Those who consider themselves swift enough to take advantage of the turns have seen some wild price action over the past few months. Since the October lows, the broader market has rallied some 20 plus percent (from trough to peak) and then turned and gave a large portion of that back. Currently we are heading towards filling an important gap that was left at 115.71. Additionally, a move back to that area would bring the market back to a significant trend-line (dotted trend-line on chart above). My hunch, if you can have one, is that we will test this trend-line over the coming sessions. I believe we will hit some sort of selling climax in early December and then have a small counter-trend rally into the seasonally friendly end of year - the Santa Claus rally. It is important to note, the lows from October were 'V' shaped which does suggest they will need to be tested in earnest some time down the road. Once into January, I expect that October low to be tested. We will then find out if the perceived bottom put in just last month is for real or not - trade accordingly.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com
http://www.therationalinvestor.ca/RI_Tradents.php#sp500bloglink

http://www.therationalinvestor.ca

Consolidating in Upper End of Bearish Channel

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

While the world awaits some sort of climactic finish to the European debt situation, corporate earnings have come to the market's rescue. Indeed, given the relatively stellar performance from a wide variety of sectors, one can now understand the relative ferocity of the October bounce. The pros knew earnings were going to be good and stocks were bid up into the event. Unfortunately, that event is now almost done and macro economic events may start to dominate the investment stage once again. While we have yet to break back into the 'glass half empty'' side of this correction (dominated by doom and gloom) we are consolidating right on the pivot line. Should we fail through these consolidation lows, a revisit of the 50% level (and more importantly the gap left on the weekly charts just under it) seems highly likely. Given too our fear of the rising 'Ted spread' (and more importantly its' accelerating trend) investors are still well advised to sit on the sidelines, pay off all your debts and ride this current market out.

Investors: As has been the case for some time, investors were well advised to 'get-out' through the end of July/beginning of August. Out time tested 'investor' indicator (that being the relationship between the 13 EMA and the 30 SMA) turned bearish the week of July 25th and the market broke its most recent support the following week. Since then, the moving averages have been pushed to extremes but still remain bearish. Until that relationship changes (as seen through the correction of 2010) one is best to keep investment dollars in a nice safe place.

Traders: This market isn't for the faint at heart. If you can consistently make money in these markets then congrats to you - but enough commentary, on to the trade. After the sizable bounce through October, we are now entering the 3rd week of consolidation. Through this period that market has been bounded by the 30 SMA on the upside and the 13 EMA on the downside. The market tested the 13EMA again this week and it held. We finished the week back above the 30 SMA and are now within shouting distance of a breakout. Should the 129.42 level be breached one could realistically see a test of the summer highs in earnest. Conversely, should we fail through last week's lows of 121.52, one ought to expect a move back to the weekly 50% level and the rather noticeable gap left just below it. Either way, stops (and here I mean risk) on the trade would be rather wide and may not be worth the potential profit. As I said earlier, this market ain't for the faint at heart. I myself may just leave the whole thing alone for a little while. Check in on CRI's Day Trading Blog to see if and where I am doing any day-trading at all.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com
http://www.therationalinvestor.ca/RI_Tradents.php#sp500bloglink

http://www.therationalinvestor.ca

Volatility can go both ways

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

The current fundamental-reassurance-vacuum (wow, there's a word) that is overhanging the market can and is leading to violent ups and downs as new potentially 'game-changing' fundamentals hit the market. "Will the Greeks default or won't they", seems to dictating trade on a daily basis. These short term blips can translate into wild gyrations. Interestingly, I have personally found that those markets that have just completed a 50% retracement of their primary move often see some dramatic swings.

Our goal here at the S&P blog ins''t to tell you (the reader) where the market is going, but rather to give you a basic framework (50% rules, double tops/bottoms, flagpoles, MA crosses, seasonality etc) that will help you understand where we have been. Hopefully, with that contextual understand, you may be able to glean a sense of where the market ought to go- that's the plan anyway.

So with all being said, lets take a look at this chart. First off, we must appreciate the fact that the broader US stock market has just gone through a very natural 50% correction of a larger trend that began just about one year ago. As should be expected, the price action is very violent right now as the market digests its new fundamental backdrop. One could argue that September's sell-off left the market very oversold and a counter trend rally was likely. What I personally find most interesting is that the market 'topped' last week just under the original breakdown. As for the 'why', It simply appears as though the market just ran out of sellers heading into October. In the absence of new sellers, the market's 'path-of-least-resistance' was up, and boy did we go up. The tragedy is that we may go back down just as fast. Volatility does indeed work both ways.

Trader: Traders want to be in and out on tops and bottoms which seem to be coming in on the hourly charts. This market is moving so fast that you simply can not see the turns on the weekly chart. Indeed, I don't remember hearing anyone was call for a 2000 point rally in the Dow, but it happened and here we are. My 'hunch' during these times is just leave the market alone until it calms down. Having said that, there are those of us need who want to trade, or at the very least try and understand short term price action. So to that end, I will give you my .02 cents. Since we are currently above the 13 EMA one might argue that pull backs represent buying opportunities. Also too, given the fact that we are selling off into a Fed announcement, we may find an ultimate bottom within that first hour after their announcement Wednesday. It's just a guess, but it will be what I am looking for.

Investors: This camp was well advised to get into cash back in the late summer. I find it fascinating that the market's recent rally failed at almost the exact original exit point. The market was literally giving those that missed the first short entry another opportunity to get short again. As long as the 13EMA is lower than the 30SMA one is best to leave this thing alone. Should that relationship change then so to will our investor stance. Yes, we have seen a very nice rally in equities over the past month. But no, it really hasn't changed things in the longer term all that much.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

therationalinvestor.ca

CRI's S&P 500 Blog

They got them shorts on the run now

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

For those new to investing, this is a very dangerous market to learn the ropes. Making a bet long or short during these 'clean-up' phases can be profitable but it also can be very costly. We always want to look at any trade from a risk perspective and given the volatility seen lately, one has to appreciate the associated risk. Talk about volatility - over a three week period (through the end of the summer) the market fell 18% (133.89-109.7/133.89) and now in just three weeks it has rallied 15% (123.97-107.43/107.43). Could another double digit percentage swing be far off? Only time will tell but one thing is for sure - expect more volatility. 

While the fundamental backdrop has been relatively good over the past year or so, things aren't looking so rosy going forward. Two factors drive stock valuations - earnings and Interest rates. We have been confident of earnings but one can't help but get concerned when 2009-2011 market darlings like RIMM/AAPL/NFLX have either completely fallen apart or are starting to miss expectations. Corporate short term interest rates (as measured by Eurodollars futures contracts) are now trending higher not lower. This means that the credit squeeze that started the meltdown back in 2007-2008 is back on. At the same time, longer term government bonds have moved violently higher pushing their yields down. While not inverted, the yield curve is flattening which suggests that the broader economy is starting to slow. Weather it be the effects of Europe's indecisiveness over its' Sovereign debt or Chinese Central bank tightening economies are slowing and as savvy market participants we must listen to what the market is telling us. We talked a while ago on WCTS Spotlight blog about HG Copper and how it is called The Professor of Economics. Read our comments re. copper and you will further see validation to the notion of a slowing global economy.

So with all that said, how ought smart market participants to be positioned?

Investors: In our last blog entry (10/07) we suggested 'Investors' ought to be sitting in cash and doing nothing and have been advocating that stance for some time. I would re-iterate that mantra today. While our time tested trending indicator (that being the relationship between the weekly 13 EMA and the 30 SMA) remains negative, one ought to just sit on the sidelines and wait it all out. Considering the extreme volatility of the market right now, as investors we don't want to be looking at the screen every five minutes. Should that moving average relationship change (at current levels that isn't likely for some time) we will change our stance. While you won't make a pile of money sitting in short term government paper, this is a time not to be greedy.

Traders: In these kind of trading environments, fortunes can be made and lost in a matter of minutes and it is not for the faint-of-heart. Ironically, this kind of trading pattern is very common after prices have corrected to the 50% level. The 'trade' was to short up top and take profits at the 50% level, what we are seeing now is the clean-up from the trade. Quite often a market will break lower, consolidate, then break lower again (as was the case three trading weeks ago) but the last break lower turns out to be a trap. The market quickly reverses and heads right up to the top of the range. This is exactly what happened here. The 110 level was taken out three weeks ago which suggested we were going lower. The market then reversed and took out the trading range high of 122.87. In essence, the market ran out of sellers on the push through 110. When the floor traders saw this, they ran the market back up looking for any sellers and for the 'stops' on existing short positions. In summary - they got the shorts on the run.

Since we have left a rather large gap right at the 50% level (117.715), I personally wouldn't be inclinded to chase the market here. It looks to me like we will take a serious run at the origional breakdown point of 125.05 and then the 127.50 area (trend line resistance) after that. Considering how close we are to those levels now (123.97) the associated risk of going long doesn't make the trade justifiable. Those that were able to switch long on the pivot through 120 (congrats on a smooth trade) ought to look to those upside targets as areas to exit. This may happen in the coming days or may take a few weeks to develop. Keep in mind, the market is once again getting overbought on a daily basis and we are still bearishly trending on a weekly basis so at best one ought to be looking for a seasonal top over the next eight week to sell into.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

therationalinvestor.ca

The long slow process of cleaning things up

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

As the stock market in general (and in this case SPY specifically) has entered its twelfth week of consolidation one can't help but notice how bearish market sentiment has become of late. Only a few months ago we were pushing to new relative highs on both a healthy yield curve and robust corporate profits. While the yield curve has flattened appreciably over the intervening period, corporate earnings are still holding in which suggests to this market watcher that the bear market we entered through the late summer shall be only that and that we are in nothing more than a healthy (albeit painful) correction period for the market. 

Technically speaking, one should have appreciated the noticeable bearish cross of the weekly 13 EMA and the 30 SMA some twelve weeks ago. That relationship is still very much bearish suggesting there ought to be further correction ahead. One should also respect the fact that the important low put in  nine weeks ago (109.70) was violated just this past week. Lower highs and lower lows define a bear market - and judging by the market's action over the past week - we are still very much in a bear market. Having said that, the time to short was at or near 125 not now. Indeed, fortunes are won and lost trying to pick exact bottoms so I will leave that thought with the basic message that we have hit many of the well defined down side targets (50% rule, previous rally peak, 200 Week SMA, etc.) and one ought to be taking profits on shorts - not adding new ones.

So lets see how our two respective market participants ought to be positioned:

Traders: This camp would have gotten new sell signals on the break of 109.70. Stops on the trade should be just above recent resistance (just above 122.80). This would represent a 12% risk and maybe a little to large of a risk for most traders to take.  For those wishing to trade to the short side - use this past week's rally to look for a failure into resistance (just above 120 area) on the daily charts. The lows of this past week ought to be tested at some point down the road and that would be my short term target on any shorts taken.

Investors: This camp was well advised to get out of the market in earnest back through the late summer and more specifically upon the break of the important low of 125.70 in late July. Our time tested trending indicator (that being the relationship between the 13 EMA and the 30 SMA) is still very much pointing lower and has been the mantra for some time now - CASH IS KING. Consider too that the US Dollar index has been moving higher for about the same period, it would appear that international money managers are respecting that mantra.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Correction healthy & normal.....for now

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

 

As has been the theme now for more than a month, the stock market (as measured by the SPY - S&P 500 stock index ETF) has corrected from an over bought condition that developed through the spring and early summer of 2011. The correction at the moment represents a healthy and normal market occurrence - the questions is, where do we go from here. Considering the seasonal nature of stocks, the looming US fiscal year end, and the considerable credit problem developing in Europe my hunch is we will be pointing lower for some time to come.  Having said that, markets often look the absolute worst at the bottom. Things look rather bleak at the moment so as a contrarian notion, we must be getting close to some sort of climax . Regardless of personal opinion lets let the chart tell us what to do - and to that end lets review how our two primary market participants ought to be positioned.

Investors: Investors should be in cash! Until the 13EMA can cross back above the 30SMA you are best to leave your money in t-bills or short term US treasury notes that you intend to hold onto until maturity. 

Traders: After a great short trade (through the break of 125.70) profits ought to have been taken. The past 5 weeks have defined the current market's trading range. Where a break of either (top 123.51 and bottom 110.27) would be your signal to act. We shall test the bottom of the range over the coming days so be prepared should you want to act.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Clean up time

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

Amid all of the 'end-of-the-world' talk out there the broader stock market (as measured by the S&P 500 stock index) has worked its way back to the 50% rule and begun to consolidate in a very orderly (if not swift) fashion. Currently, the market is doing nothing more than cleaning up the excess's of the past year's bull run. We have made a very natural 50% correction of that move and shall now need some time to confirm that this is indeed nothing more than a healthy correction within a massive bull market.

As has been previously stated, this correction comes on the heels of US federal political instability rather than poor economic fundamentals. As a result, one is left with the feeling that if only Washington could just get it's act together the market would stabilize and resume its previously well established up-trend. Make no mistake, the 135 area (on SPY in this case) shall now act as considerable resistance to the upside but given that the two primary drivers for stock valuations (earnings and the yield curve) continue to be supportive, a resumption of that uptrend would seem likely upon a resolution. The big 'if' now is indeed Washington (or more succinctly - US Federal political leadership) and given the current extreme polarization of the US Congress (and now the US Fed's insistence that any solution must be fiscal in nature and not monetary) that much needed leadership is in serious question.

So lets review how our two primary market participants ought to be positioned.

Investors: As has been the case now for several weeks, cash is king! Investors were given a very clear 'exit' signal when our time tested trending indicator (that being the relationship between the weekly 13 EMA and the 30 SMA) crossed bearishly 5 weeks ago. That exit should have come on a break of key support in and around the 125.70 level (or about 6% higher than where we are currently). Until the moving average relationship turns back up, investors are well advised to sit on the sidelines and watch the fireworks. Ironically enough, this camp is cheering for further price deterioration which would make their exit look all the more significant.

Traders: This camp was well advised to begin shorting the market in earnest through the final week of July and again when the important 125.70 level was breached. Those that were fortunate enough to get short should have been more than happy to take profits on those short positions as we approached our well established downside target zone (119.15 - 111). The fact that the market has basically oscillated around the 50% level (for the past four weeks) suggests that the market is trying to relieve the oversold condition that developed on the initial downward move. The recent consolidation in price has both relieved that short term oversold condition and may be laying the ground work for the next leg lower. Should the 110.27 level be taken out, one would have no choice but to look for another move lower equal to or greater than the previous. This bear flag formation would imply a price target of 96.65 [(134.82-110.27)-121.20]. Conversely, should the 121.20 level be taken out, one ought to look for a counter-trend rally that would imply an initial price objective of 122.935 [50% retracement; (135.6+110.27)/2]. Should that breakout occur, one could also argue that the 13 EMA shall act as resistance and it ought to be in and around that level as well.

So in summary then, the market needs political leadership in order to continue the expansion that was established last fall. The US Federal reserve has stated that it will be very reluctant to initiate a QE3 program and that in its opinion, fiscal stimulus is what is needed. Couple this with extreme political polarization in Washington and there appears to be no quick resolution on the horizon. All of this suggests that the market will have to take some more time to clean up this mess and that if one were to suggest a general direction for price in the coming weeks/months, that direction continues to suggest down rather than up.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

A violent conclusion to a well telegraphed event

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

The past two weeks have virtually wiped out an entire years worth of growth in the market and have underscored the significance of adding a little timing to anyone's portfolio. 

From the violent break seen just weeks ago prices have fallen more than 14% and as of yet haven't shown clear signs of a bottom. Yes downside targets have been hit (and even exceeded at times) but to get back to a more 'normal' market we may have to see some violent tugging and pulling over the coming weeks/months. Make no mistake - the bull run (that was initiated with QE2 and the re-alignment in the US Congress) just 10 months ago is over and some tough slogging will have to lay ahead.  It is unfortunate if you are just reading this blog for the first time because you will fail to fully grasp how entirely predictable this correction has been.

So what happened?

To answer this one need only look at the charts above. First is our regular weekly chart of SPY (S&P 500 depository receipts) and then below that is a daily look at SPY. First off, our time tested trending indicator (that being the relationship between the Weekly 13 EMA and the 30 SMA) and our 'investor-signal' turned negative two weeks ago. Our collective 'stops' (that being the point that if breached would represent our time to get out) were just under recent lows (support) at 125.70. We here at the SPY blog made it very clear that cash was king and all those that did get out - congrats! 

Market Participant Position Review

 

Investors: Those out there who consider themselves investors in stocks and not market timers are sitting in cash. How long is anyone's guess, but until our 'Investor-buy' signal comes back - cash is king. Yes our downside targets have been hit, but that by no means we are in a bull market.

Traders: Traders were well advised to short the market when it broke back below the 13 EMA (at or near 130.68) just three weeks ago. Those that were able to short on the break (if you don't like to short stocks then consider buying Put options) are well advised to take some profits. Readers were made well aware of our target zone (119.15 to 111.15) which has now been hit and if its one thing you shouldn't be in this kind of market is greedy. Take it - you won - be happy!

So where do we go now?

That is a very good question, and a reason why I have included the daily chart in this week's blog post. Based on the daily chart, we entered and extremely oversold condition just a few days ago. Traders would have seen the fact that the market was getting 'washed-out' - and figuring the risks were relatively low. They gained further support on the news that European countries would be outlawing the shorting of bank stocks for the next two weeks. With the short sale ban, those wanting to short will have no choice but to sit on the sidelines. Those willing to step into the breach have been rewarded for their courage as the SPY itself has rallied some 7% off the bottom. This vacuum has and will pressure stocks higher as late summer trading volumes are very thin and anyone who did want to sell (positions that they already owned) has already done so. The rally may be short lived as we head into the Labour Day weekend. The week following the holiday is when many professional traders come back to work and will be more than happy to sell into any strength. Additionally, the short sale ban will have expired and those wishing to short European bank shares will be given the green light to do so once again. 

Summary: In this very oversold market, expect there to be a slightly bullish bias to trade but once the 'no-shorting' ban expires (in about 2 weeks) and the Labour Day weekend holiday is behind us - there is no telling were they will take this market - Cash is King!

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

All good things must come to an end

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

As the title of this week's blog entry outlines, the bull run that began last fall has run its' course. Our time tested trend indicator (and our 'investor buy/sell' signal) has turned negative with this weeks collapse in equity prices. Furthermore, those investors that bought on the last bullish cross-over (at or near 110.95) should have exited that position when the market moved through the most recent support level (125.70) talked about at length in previous posts. This trade (that lasted about 10 months) equated to more than a 13% return on invested dollars in a little less than a year. Considering that the long term historical average return for stocks is about 11%, our 13% beats that number comfortably. Consider too that this return does not take into account any dividends paid while holding the position (add another 2%) and one can clearly see that this was a very profitable position to take. 

So where does this leave us now? The market is heading down - and rather quickly at that. Political rhetoric is at a fevered pitch and there have been no clear indications of the beginnings of a QE3 program by the US Federal Reserve Board. Additionally, the debt situation in Europe is still dominating the headlines suggesting that there ought to be some sort of climatic finish to that problem before it goes away in earnest. Ironically enough, the best thing the market has going for it is that corporate earnings are still ok and the yield curve is still supportive going forward. This indicates to me that there probably won't be a 'crash' but rather a normal 'correction' in the market going forward. So where might prices go over the coming period. As the chart above suggests, there are three significant technical targets I have in mind going forward. Firstly, a 50% retracement of the 10 month bull run ought to bring prices back into the 117 area. Secondly, the breakout high from April, 2010 was near the 119 area. And lastly, the weekly 200 SMA currently sits near 111.5. This all suggests to me that the market will take a run into the 111-119 area before this correction has ultimately run its course.

So lets review the to major investor groups and how they ought to be currently positioned:

Traders: those that are nimble enough to be able to move in and out of the market quickly would have been well advised to be short from the recent daily double top breakdown which occurred when the market moved back below the weekly 13 EMA (129.63) just last week. As the market is in 'free-fall' at the moment, profits should be taken whenever possible.  Picking an exact bottom is never easy and the recent volatility suggests we could bounce right back up top. So with this in mind, I myself have covered my shorts (long put option position) and am sitting comfortably in cash for the time being.

Investors: because our time tested 'investor' signal has officially rolled over, investors would be best to sit in a cash position. They should have exited their long position on SPY (and the broader market in general) on the break of recent support (at or near 125.70). Since the market is in flux at the moment, one would be best to put that money into a 90 day t-bill and just sit back and enjoy the rest of the summer.

So in summary then, the bull run that began last fall has come to an end. the break of recent support (125.70) represents a significant breakdown in the market and it will take some time to clean up the mess. One can't know for certain exactly where the bottom of this move shall be so for safety sake, cash is king!

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

The previously outlined trading range continues

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

As was mentioned in depth last week, the market has established a trading range for the time being. Considering the end of QE2 (and no clear indication of the beginnings of a QE3), an unstable if not uncertain situation with regard to European sovereign debt and an equally unstable if not uncertain future for the US's coveted triple A credit rating, the market is relatively neutral. Ironically enough, the two most important factors for stock prices (earnings and yield curve) are both in good positions for stock appreciation. 

Fundamental backdrop: Lets take a closer look at the current market fundamentals. In any given market, there are two types of risk - systemic and un-systemic. Systemic risk has everything to do with macro-economic situation (stability of governments, demographic composition etc) while un-systemic risk is directly attributable to an individual issues' concerns (earnings, management etc). The current economic backdrop, and its predominantly uncertain macro-economic outlook means we are trading more on systemic concerns rather than un-systemic. At the same time, one might argue that individual company balance sheets are quite healthy with robust earnings to back this notion up. Supportive of price appreciation too - the yield curve is quite healthy (where short term interest rates are generally lower than longer term interest rates). Put this all together and one gets a fairly clear idea of what is going on - macro-uncertainty coupled with micro certainty. Generally, this is bullish of equities over the longer run and if the macro situation can calm down a bit, one might see substantially higher equity prices in the quarters to come.

Traders: since the market moved back above the 13 EMA (129'ish) just a couple weeks ago, traders have been long the market expecting a test in earnest of the early May highs. Stops are probably fairly tight given the seasonal nature of the current rally and those traders would be best to exit long positions should the market fail through the late spring lows (127.50). Most undoubtedly, those traders would probably be best to go short on that break should it occur.

Investors: our time tested 'investor' signal (that being the relationship between the 13 EMA and the 30 SMA is still supportive of higher prices to come. Investors were given a long entry signal way back in the fall of 2010 and have been best to sit on the long side of the market and slowly move their collective stops higher as newer/higher lows have been established. Like the traders, investors would probably be best to exit those long positions should the market (in this case the SPY is our proxy for the broader US stock market and really of the world) break back below the late spring lows (at or just under 127.50).

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

A Range bound market - for now

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

 

The rally that saved the bull has run its' course for the time being. Readers will recall how just a couple weeks ago CRI was of the opinion that the one year rally may be coming to an end. Only a substantial rally would prevent our time tested trending indicator (that being the relationship between the 13 EMA and the 30 SMA on the weekly charts) from turning bearish. The rally came and the relationship between the two moving averages remained bullish. Since it remains bullish so too we must remain cautiously optimistic about trade going forward. Should that relationship change then so too will our stance. 

So what can one take away from the current market? As the chart above illustrates, we are at best 'range bound' for the time being. The highs of earlier this spring represent resistance (many of those that bought then will be more than happy to sell those positions should they see their original price once again) while the lows of last month represent support (where those that sold then will be happy to buy their positions back). 

Considering the fundamental backdrop (good earnings numbers coupled with a relatively healthy yield curve) one has a hard time believing any sort of 'crash' is imminent. Yes, there are plenty of reasons why we ought to trade back down (probably into the support area highlighted on the chart above) but that isn't the current situation - for now, we are trapped in a trading range. Adding to this notion of market malaise, we are officially well into the 'summer doldrums' and there is plenty of negative media attention to keep the bulls in check.

Indeed, the market will need nothing short of the beginnings of a new QE3 program to resume its upward march. As has been previously suggested by CRI - any new QE3 program will only be initiated when the market is looking to be heading into free-fall. It was very interesting to see how the market abruptly halted its two week rally when Mr. Bernanke threw cold water onto a growing market belief that QE3 was imminent. Should the market break the bottom of our current trading range (125.70) and we trade back down into the 'support' area (highlighted on the chart above) talk of QE3 will gain momentum once again.

So lets take a moment and talk about debt. Its ugly, and will be an enormous drag on western economies for some time to come but it isn't going anywhere. There are far too many stakeholders around the world for it to be magically forgiven. According to our 35 year generational cycles, the situation will only get worse as we head into the anticipated 'fear' cycle peak in 2017.  However, debt ceiling rhetoric itself doesn't come under the heading of cycle ending events so I am of the opinion that this period of rhetoric out of Washington shall come and go like so many others. The US has to raise its debt ceiling, no ifs ands or buts. The questions really is of when they shall get their budget deficits trending lower. And that, as we all know won't be done until either taxes are raised or entitlement spending is reduced. Since either choice at the present is political suicide, the choice just won't be made. And since we don't see any signs of the market forcing that decision (US dollar, US Treasuries and US Stocks all trending higher) , its ultimate reckoning will be put off until another day.

So in summary then, the market is range bound for the time being. Investors are long (and have been for almost a year) with stops just below recent support (125.70). Traders, on the other hand, where given a nice little entry on the 'dead-cat-bounce' from the 129 area but are now most undoubtedly reluctant to put on any new positions. Debt talk is all the media rage for the moment which ought to cool broader market bullish enthusiasm until the issues are ultimately resolved.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

A Head Fake Keeps The Bull Alive

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

near 6%

Just when you least expect it....kaboom....a rally!

We here at the Canadian Rational Investor have been doing this so long that we could almost feel a rally coming as we headed into the pre-holiday trading period. The small failure at 130 and the subsequent bullish moment divergence on the 60 min chart led us to believe that a rally was imminent and sure enough, on almost no volume, they were able to bring the market back close to 6%. What is interesting is that we are just now back at the original top put in on the weekly charts with the outside downside reversal mentioned in previous posts.

So lets take a look at things from our trader/investor perspective.

Traders: Well, if you didn't take advantage of the 'dead-cat-bounce' then you really shouldn't consider yourself a trader! Daily charts were heavily oversold the put/call ratio and the short term trading index were at lofty highs and in very typical trader fashion, they were able to take the market up into the July 4th long weekend on very little volume. Traders should have been all over the trade on a move back above 130 (128.32 to be precise). I had someone ask me today about new long positions and I suggested that the risks now are almost 50/50 from here - the easy trade is gone....

Investors: If it is one thing I have come to rely upon it is the old time tested trending indicator (that being the relationship between the 13 EMA and the 30 SMA on the weekly charts) and it has proven its worth again. Regular readers will recall in our last post how we were getting worried that indeed the market may be rolling over. I stated, "...On the failure last week, the 13 EMA is just a fraction above the 30 SMA and unless there is some sort of explosive rally coming, that relationship will turn negative for the first time in six months." Well, the explosive rally did come and because of the rally, the moving average relationship is still bullish. Important here is the 'kiss' effect - what I mean by this is that whenever moving averages come together and 'kiss' but do not cross, we get an important pivot. Since the initial move lower was 'V' shaped (An inverted 'V' really) and we all know markets like to make 'M''s when they top, we didn't have alot of confidence that the market had indeed topped. Now that a rally has come, the market has found an important low and we know that if that low fails again, we are definitely heading lower. With all that said, investors can now, quite comfortably, move collective stops to just under the most recent sell-off's lows (in this case the low is 125.70...so something like 125.67) knowing that if the market breaks these levels an 'M' top will have been registered and that (in all likelihood) the moving average relationship will cross back into a bearish stance. 

So in summary then, we got the dead-cat-bounce were looking for and an important new low has been registered. Our cycle analysis suggests this market still wants to go higher into the late summer so traders ought to be taking advantage of low volume spikes. Investors ought to still be long with the notion that a failure of the recent lows may be the big 'sell' signal we have been looking for. While the market is ok in the short term, one has to appreciate the building case for a modest correction to bring us back down into the 'support zone' highlighted on the chart above.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Eighth week of consolidation leading to a change in primary trend

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

For the past eight weeks we have seen the broader US stock market flounder as it comes to grips with the notion that the US Fed will stop flooding the market with cash. The end of QE2 has been met with a literal stop to any and all new purchasers. Last week's blog entry suggested that the market needed to rally a bit to relieve its oversold condition and that the 130 area seemed like a reasonable target. Indeed, as the market headed into the 2 day FOMC meeting (held last Monday to Wednesday) the 'dead-cat bounce' was fully underway and the market did rally into the suggested target zone. Upon the completion of the meeting (and more importantly the announcement of no new QE3 program) the market topped and then failed miserably into the weekend. So what can both traders and investors take away from this past week's price action?

Traders: Since the 'outside-downside' bearish price pattern registered just three weeks ago, traders have been well advised to be flat and watching from the sidelines. Considering the steep sell-off, I still wouldn't be surprised to see a bit more of a rally before one considers going short aggressively. So, as was the case last week, traders ought to be sitting in cash and watching.

Investors: Here we have a potential event that warrants attention. Since last fall's breakout, investors have been well advised to be long (and stay long). The market slowly worked it's way higher as our time tested 'investor signal' (that being the relationship between the 13 EMA and the 30 SMA) had been comfortably bullish. That may be about to change. On the failure last week, the 13 EMA is just a fraction above the 30 SMA and unless there is some sort of explosive rally coming, that relationship will turn negative for the first time in six months. While I am reticent of jumping out too soon, investors would be well advised to pay close attention to this important relationship and more importantly - for a change.

So if the market continues to consolidate, where might we be heading? As the chart above suggests, there is a lot of evidence to support the notion that the market would like to work its way back down into the 110-115 area. Three technical indicators suggest such an event. 1. The 200 SMA is sitting at 111.65. 2. A 50% rule of the entire bull move (from June 2009 to now) suggests prices want to come back to 110.09. 3. The bottom of the very well defined price channel sits in and around the 115 area. 

Ironically, this target zone  is within a fraction of where it broke out last fall, suggesting that the last six months of rally was for nothing. Additionally, any new QE3 program will only be initiated when the market is looking to be heading into free-fall. I might suggest that these two events will coincide - When the market makes its final push into the target zone - macro-economic will force QE3 and the market will stabilize once again....but that is just a theory for now.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Seasonal top leads to healthy correction

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

As has been the case for many weeks now, we here at CRI have been looking for some of the steam to come out of the market given the typical seasonal pressures that are at work through the end of the spring. The old cliche, 'Sell in May and walk away' has indeed played itself out - and as a result prices have fallen appreciably. The question now is, is this a normal healthy correction within a bull market or is this the beginning of a new bear cycle. 

As was noted last week, I am more than happy with the notion that this latest bearish price action is nothing more than a normal (healthy) correction within the framework of a rather large bull cycle. Considering  the yield curve is still quite healthy (where long term interest rates are still higher than short term interest rates) I don't see a reasonable case to be made of a pending recession. Consider too that the current bull cycle itself seems to be pointing towards a climactic peak some time in late August/early September (as a trader ) I am not ready to short the market but rather to sit patiently on the sidelines and wait for a new long entry. Investors on the other hand, should be quite happy to sit in their long positions and patiently wait out this latest bearish action. Of course, should our time tested 'investor' signal (that being the relationship between the 13 EMA and the 30 SMA) turn negative, that stance will have to change. It is still very positive so again, investors ought to just sit on the long side and enjoy the nice spring weather.

So what should one expect over the coming week then? I myself wouldn't be surprised to see a nice 50% retracement of this recent sell-off. We started the latest push lower about a month ago with a nasty outside-downside bearish engulfing pattern where the high was 134.26 and we worked our way down to 125.7. With these numbers in mind, I am looking for a bounce back into the 130 area [50 rule; (134.26+125.7)/2 = 129.98]. The peak from 6/14 was 129.77 and I bet the pro's are going to go fishing for the stops in and around that area. Also too, keep in mind we are (as of today's writing) into the 2 day FOMC meeting and traders love to play with the market into such events. Once the announcement of their decision is made - the market ought to resume its 'normal' trend.

Considering there is much speculation about if there will be a QE3, one ought to expect this debate to drive the trade until they are done their meeting. My hunch is, they will only start QE3 with the proverbial 'sh*t hits the fan' - as long as the market isn't tanking - there will be no QE3. Once the market starts to tank - then they will consider action. Adding in our cycle analysis (suggesting there ought to be a pivot at the end of the summer) my hunch is that debate will not begin in earnest until the fall - no pun intended. Considering too that current medium term market support is still a good 10% lower than where we are now (1 year 50% level, 200 SMA, and trend channel support) a climactic push into that correction zone (highlighted by the box on the chart above) will probably coincide with the announcement of QE3 which will coincide with that bull cycle end. But that target is still off in the distance and as is always the case - we will cross that bridge when we come to it.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Natural progression of stock market cycles

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

For the sake of breaking the repeated message for the last while - when in May, blah blah blah, I thought we ought to take a good look at where we have come from and where we may go if indeed we are entering a corrective period. 

First off, lets start by appreciating how symmetrical the market is. If one starts with the massive upward channel (double black lines) and then uses the end of July, 2010 as a pivot, one sees how we have gone through a 26 month cycle (double diagonal red line) from trough to peak. The 26 month cycle comes to an end in September, 2011 and suggests we will have to go through a new 26 month cycle after that. Regardless of weather the new cycle is up or down is not relevant here, just the appreciation for the fact that we are at an end of a cycle - not the beginning.

Alright, now back to the present...

After yet another failed rally attempt, we are now breaking support of the most recent bullish uptrend. Last week's bearish engulfing pattern has led to further weakness. The most recent 'stop' point (129.51) for traders has been broken and traders should now be very comfortably on the sidelines. Investors can still take comfort in the fact that the 13 EMA is still well above the 30 SMA suggesting we are still in a correction of a bull market. Should that relationship change, investors will be given the exit signal and we will officially end the bull market.

Now if we do continue to 'correct', where might we go? The most important number that jumps out at me is the good old 50% rule. A one year 50% rule suggests we ought to look for prices to pull back into the 118.40 (point 2.) area and a two year 50% rule suggest we ought to look for prices to pull back into the 110.60 (point 3.) area. This bracket (118 to 110) ought then to be a realistic zone for correction. Further supporting this argument is the fact that both the 200 SMA and the bottom of the massive channel (double black line)  are currently comfortably in this zone too.

Since our last 'investor' buy signal (110 area) the market has advanced more than 16% so all those that did do the trade should still feel very good. Should the market roll over here (and we do get an 'investor' sell signal) there shouldn't be too many complaints. But we will cross that bridge when we come to it.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com