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
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