Hi there, and welcome back to CRI's S&P 500 blog.
The time tested cliche, 'Sell in May and walk away' has once again put a seasonal top in the broader US equity market (as measured by the S&P 500 index depository receipts - SPY). This top comes after an impressive 30% rally since the US mid-term congressional elections just last November. While the market has yet to break down in earnest, traders should be nervous. The rally has failed twice at the top of the trend channel and is now in the process of testing key support at or near 129.51. Should that level fail, our next support level comes in near the 125 area.
This latest bearish move in equity prices (an outside downside key reversal no less) has came on the heals of a very poor May US Employment report issued last week. It suggested far fewer people found work in the US than had been expected and points out how this 'recovery' has not been broad based. Since we know that the yield curve is still rather healthy (with long term interest rates still well above short term rates) one doesn't have to worry about the prospects of a recession any time soon. So then what kind of correction are we talking about here? A natural 50% correction (of the bull ran that started last fall) seems most likely to be expected. Indeed, a 50% correction of this bull run would bring prices back into the 118.5 area and would clean up a lot of the excesses built into the market over the past seven months.
Traders will be watching the important low from the week of April 18th at 129.51. Should this level be broken one ought to expect a move back down into the 125 area and then should that area fail an ultimate move down into the 115 area.
Investors ought to just sit tight for the time being as our time tested 'investor signal' (that being the relationship between the 13 EMA and the 30 SMA) is still very much in the bullish camp.
In summary then, at worst one ought to expect a quick violent move back down into the 115 area and at best we will slowly move down/sideways into the 120 area. A 50% correction of the entire bull run brings prices back into the 118 area and I wouldn't be surprised if that number is hit over the coming weeks/months. Either way, it would appear we are starting to clean up the excessive bullishness of the past seven month post mid-term US congressional election rally.
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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