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
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