Hi there, and welcome back to CRI's S&P 500 blog.
In typical market fashion, as soon as one gets lulled into a state of complacency problems start to develop. I would argue that is exactly what has happened of late. Interestingly, even though the selling has been a bit abrupt, there appears very little technical damage being done. In fact, one might argue that some sort of pull back was long overdue and that prices are now just getting back to an area of support on the charts.
So, as rational investors, lets take a look at both the fundamental and technical views to see if our market stance needs to change.
Fundamentals
From this perspective, the market is quite healthy. Recently, Ben Bernanke suggested to the US congress that further stimulus would be needed from the Fed. To that end, Fed purchases of shorter term US government maturities will continue for the foreseeable future. Additionally, inflationary pressures within the US economy are still relatively low suggesting there isn't a great need for a tightening of credit for some time to come. This is very much the same message as has been the case for a few quarters (if not years) and there doesn't seem to be any change in the trend. Couple this Macro backdrop with the fact that US corporations are both flush with cash and are producing solid earnings growth (from a yield curve perspective as well as from a friendly US dollar trend perspective) and one has the makings of further price appreciation down the road. Ironically enough, the rising oil price (due to non-market forces) may help prolong the current economic expansion since the US Fed won't need to raise short term interest rates (protecting yield curve earnings) as long as commodity prices continue to climb.
Technicals
From this perspective, the market is very healthy. The recent break above the spring '10 highs (120 on SPY) suggests the market wants to go higher (MUCH HIGHER!). While this is a longer term price pattern (taking months if not quarters to play out) the ultimate target for this breakout is 155 [(120-65) + 100]. This is my late summer / early fall '11 target and suggests SPY will rally another 19% higher from current levels! From a shorter term perspective, a pullback was a little overdue. The short term bullish price pattern (the A-B-C-D pattern noted above) had a price target of 136.09. We hit 134.69 (or about 1.5% away!) and if that is the ultimate top for this bull wave then I will be happy. I think we have way more upside to come, but maybe we ought to take a few weeks and clean things up a bit. Considering that our 'investor buy signal' was registered more than five months ago (and almost 20 points lower than where we are now!) a period of consolidation seems more than realistic. There is NO 'investor sell signal' anywhere in sight so investors ought to just sit back and be long. Traders ought to be long from three different points (112 area, 122 area and 130 area) stops on these positions could either be just below the lows registered 7 weeks ago (124 area) or use last week's low as your new stop. Either way, if we break back below last weeks lows (which happens to be right at the 13 EMA and the bottom of the trend channel) I think we are going lower.
Summary
"Beware the ides of March"
Like Caesar, investors ought to be aware of the seasonal pivot that often accompanies the ides. Equity markets love to rally into the spring, earnings are still robust and short term interest rates are historically low. With this backdrop, I see no reason to believe we are coming to an end of this bull run. Having said that, markets never move in a straight line forever and a period of a few weeks of consolidation may lay the ground for a serious rally into the spring/summer.
Be long, stay long and enjoy the ride!
That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com
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