Looking tired into seasonal peak

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

Further to recent posts, a typical seasonal top (sell in may and walk away)  seems to be establishing itself as move into the 'May 24', weekend. With what is known as the official kick-off to the summer driving season, many commodity wholesalers have stocked up on their supplies and their demand (seen for these products over the past few months) shall wane going forward. Couple this lack of demand with the idea that the Fed intends to end its' QE2 program in June '11 suggests we might head into a bit of a demand vacuum going forward. Price could be vulnerable here so please be careful.

As suggested by the chart above, real technical support for the broader US stock market now sits substantially lower than where we are now. Currently the 200 SMA for the SPY sits near 112 and the bottom of the massive monthly uptrend channel sits near 115. Interestingly, both of these points are very close to where the market turned higher last fall. Does this mean that the rally from last fall my totally evaporate? It is a definite possibility but we will cross that bridge when we come to it. For now, the market is at worst 'going sideways'. And since our time tested trending indicator (that being the relationship between the 13 EMA and the 30 SMA) is still bullish we must continue to look for higher prices down the road. Should that relationship change, then too our stance will change. 

The question here is one of risk. Currently the upside target for the tight bull-flag formation registered just a few weeks ago is 138.77, while real support is near 112. Since we finished this last week at 133.61 we can conclude that owners of SPY have a little more than 5 points of potential profits with 21 points of risk. Is a 5/21 risk-reward ratio really worth it? Maybe not. Either the economic situation or earnings have to drastically improve to justify these high prices and I personally don't think either will.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com