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