Hi there, and welcome back to CRI's S&P 500 blog.
The past two weeks have virtually wiped out an entire years worth of growth in the market and have underscored the significance of adding a little timing to anyone's portfolio.
From the violent break seen just weeks ago prices have fallen more than 14% and as of yet haven't shown clear signs of a bottom. Yes downside targets have been hit (and even exceeded at times) but to get back to a more 'normal' market we may have to see some violent tugging and pulling over the coming weeks/months. Make no mistake - the bull run (that was initiated with QE2 and the re-alignment in the US Congress) just 10 months ago is over and some tough slogging will have to lay ahead. It is unfortunate if you are just reading this blog for the first time because you will fail to fully grasp how entirely predictable this correction has been.
So what happened?
To answer this one need only look at the charts above. First is our regular weekly chart of SPY (S&P 500 depository receipts) and then below that is a daily look at SPY. First off, our time tested trending indicator (that being the relationship between the Weekly 13 EMA and the 30 SMA) and our 'investor-signal' turned negative two weeks ago. Our collective 'stops' (that being the point that if breached would represent our time to get out) were just under recent lows (support) at 125.70. We here at the SPY blog made it very clear that cash was king and all those that did get out - congrats!
Market Participant Position Review
Investors: Those out there who consider themselves investors in stocks and not market timers are sitting in cash. How long is anyone's guess, but until our 'Investor-buy' signal comes back - cash is king. Yes our downside targets have been hit, but that by no means we are in a bull market.
Traders: Traders were well advised to short the market when it broke back below the 13 EMA (at or near 130.68) just three weeks ago. Those that were able to short on the break (if you don't like to short stocks then consider buying Put options) are well advised to take some profits. Readers were made well aware of our target zone (119.15 to 111.15) which has now been hit and if its one thing you shouldn't be in this kind of market is greedy. Take it - you won - be happy!
So where do we go now?
That is a very good question, and a reason why I have included the daily chart in this week's blog post. Based on the daily chart, we entered and extremely oversold condition just a few days ago. Traders would have seen the fact that the market was getting 'washed-out' - and figuring the risks were relatively low. They gained further support on the news that European countries would be outlawing the shorting of bank stocks for the next two weeks. With the short sale ban, those wanting to short will have no choice but to sit on the sidelines. Those willing to step into the breach have been rewarded for their courage as the SPY itself has rallied some 7% off the bottom. This vacuum has and will pressure stocks higher as late summer trading volumes are very thin and anyone who did want to sell (positions that they already owned) has already done so. The rally may be short lived as we head into the Labour Day weekend. The week following the holiday is when many professional traders come back to work and will be more than happy to sell into any strength. Additionally, the short sale ban will have expired and those wishing to short European bank shares will be given the green light to do so once again.
Summary: In this very oversold market, expect there to be a slightly bullish bias to trade but once the 'no-shorting' ban expires (in about 2 weeks) and the Labour Day weekend holiday is behind us - there is no telling were they will take this market - 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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