Hi there, and welcome back to CRI's S&P 500 blog.
As the title of this week's blog entry outlines, the bull run that began last fall has run its' course. Our time tested trend indicator (and our 'investor buy/sell' signal) has turned negative with this weeks collapse in equity prices. Furthermore, those investors that bought on the last bullish cross-over (at or near 110.95) should have exited that position when the market moved through the most recent support level (125.70) talked about at length in previous posts. This trade (that lasted about 10 months) equated to more than a 13% return on invested dollars in a little less than a year. Considering that the long term historical average return for stocks is about 11%, our 13% beats that number comfortably. Consider too that this return does not take into account any dividends paid while holding the position (add another 2%) and one can clearly see that this was a very profitable position to take.
So where does this leave us now? The market is heading down - and rather quickly at that. Political rhetoric is at a fevered pitch and there have been no clear indications of the beginnings of a QE3 program by the US Federal Reserve Board. Additionally, the debt situation in Europe is still dominating the headlines suggesting that there ought to be some sort of climatic finish to that problem before it goes away in earnest. Ironically enough, the best thing the market has going for it is that corporate earnings are still ok and the yield curve is still supportive going forward. This indicates to me that there probably won't be a 'crash' but rather a normal 'correction' in the market going forward. So where might prices go over the coming period. As the chart above suggests, there are three significant technical targets I have in mind going forward. Firstly, a 50% retracement of the 10 month bull run ought to bring prices back into the 117 area. Secondly, the breakout high from April, 2010 was near the 119 area. And lastly, the weekly 200 SMA currently sits near 111.5. This all suggests to me that the market will take a run into the 111-119 area before this correction has ultimately run its course.
So lets review the to major investor groups and how they ought to be currently positioned:
Traders: those that are nimble enough to be able to move in and out of the market quickly would have been well advised to be short from the recent daily double top breakdown which occurred when the market moved back below the weekly 13 EMA (129.63) just last week. As the market is in 'free-fall' at the moment, profits should be taken whenever possible. Picking an exact bottom is never easy and the recent volatility suggests we could bounce right back up top. So with this in mind, I myself have covered my shorts (long put option position) and am sitting comfortably in cash for the time being.
Investors: because our time tested 'investor' signal has officially rolled over, investors would be best to sit in a cash position. They should have exited their long position on SPY (and the broader market in general) on the break of recent support (at or near 125.70). Since the market is in flux at the moment, one would be best to put that money into a 90 day t-bill and just sit back and enjoy the rest of the summer.
So in summary then, the bull run that began last fall has come to an end. the break of recent support (125.70) represents a significant breakdown in the market and it will take some time to clean up the mess. One can't know for certain exactly where the bottom of this move shall be so for safety sake, cash is king!
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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