The Painful Process of Correcting Continues

Hi there, and welcome back to CRI's S&P 500 blog.

Third quarter, 2011 earnings season came to the market's rescue. Indeed (as measured by the S&P depository receipts - SPY) the market enjoyed a 20% bounce off the lows seen in early October.  As earnings season has drawn to a close, macro-economic concerns have overtaken the bullish euphoria seen just a couple weeks ago. Since many industrialized countries spend far more than they bring in they are held hostage by the market. If the market feels there may be a chance of default, countries can literally see their cost of borrowing skyrocket. That seems to be the case for the 'PIGS' of the Euro land but it now seems like that contagion is spreading the previously thought immune countries like Germany. Many have suggested that (in our globalized system) if a region as large as Euro-land slips into recession, the rest of the world will be dragged down with it. While it may be a bit early to come to that stark conclusion, one must respect the fact that Europe is now firmly on the road to recession. Couple this with the fact that China is in the process of 'cooling' its economy (in an effort to dampen inflation fears) and one can't help but get a rather gloomy feeling for equity valuations going forward.

Having said all that, lets take a look at the chart and see what it suggests we ought to expect going forward. The one thing that stands out to me when I look at this chart is the fact that the market moved back to the 50% level of the 2010-2011 rally (117.735) and has spent the past four months oscillating around this number. As is so typical of us humans, in both overly optimistic and overly pessimistic fashion, we moved way below and then way above the 50% level only to be pulled back to it. Consider too the fact that our time tested 'trending indicator' (that being the relationship between the 13 EMA and the 30 SMA) has been bearish for more than four months (and still remains very bearish) it shouldn't surprise anyone that our cautionary stance on equity investments continues. The market is correcting and until things settle down a bit, the correction will go on.

Now lets take a look at how our two investment 'camps' ought to be positioned through this well defined correction:

Investors: Investors have been well advised to be in cash for more than a quarter of a year now. Our trending indicator (as outlined above) suggests cash is the place to be and will remain so until the 13 EMA can cross back above the 30 SMA on a weekly basis. If and when that relationship does change, so too will our Investor stance.

Traders: Those who consider themselves swift enough to take advantage of the turns have seen some wild price action over the past few months. Since the October lows, the broader market has rallied some 20 plus percent (from trough to peak) and then turned and gave a large portion of that back. Currently we are heading towards filling an important gap that was left at 115.71. Additionally, a move back to that area would bring the market back to a significant trend-line (dotted trend-line on chart above). My hunch, if you can have one, is that we will test this trend-line over the coming sessions. I believe we will hit some sort of selling climax in early December and then have a small counter-trend rally into the seasonally friendly end of year - the Santa Claus rally. It is important to note, the lows from October were 'V' shaped which does suggest they will need to be tested in earnest some time down the road. Once into January, I expect that October low to be tested. We will then find out if the perceived bottom put in just last month is for real or not - trade accordingly.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com
http://www.therationalinvestor.ca/RI_Tradents.php#sp500bloglink

http://www.therationalinvestor.ca

Consolidating in Upper End of Bearish Channel

Hi there, and welcome back to CRI's S&P 500 blog.

While the world awaits some sort of climactic finish to the European debt situation, corporate earnings have come to the market's rescue. Indeed, given the relatively stellar performance from a wide variety of sectors, one can now understand the relative ferocity of the October bounce. The pros knew earnings were going to be good and stocks were bid up into the event. Unfortunately, that event is now almost done and macro economic events may start to dominate the investment stage once again. While we have yet to break back into the 'glass half empty'' side of this correction (dominated by doom and gloom) we are consolidating right on the pivot line. Should we fail through these consolidation lows, a revisit of the 50% level (and more importantly the gap left on the weekly charts just under it) seems highly likely. Given too our fear of the rising 'Ted spread' (and more importantly its' accelerating trend) investors are still well advised to sit on the sidelines, pay off all your debts and ride this current market out.

Investors: As has been the case for some time, investors were well advised to 'get-out' through the end of July/beginning of August. Out time tested 'investor' indicator (that being the relationship between the 13 EMA and the 30 SMA) turned bearish the week of July 25th and the market broke its most recent support the following week. Since then, the moving averages have been pushed to extremes but still remain bearish. Until that relationship changes (as seen through the correction of 2010) one is best to keep investment dollars in a nice safe place.

Traders: This market isn't for the faint at heart. If you can consistently make money in these markets then congrats to you - but enough commentary, on to the trade. After the sizable bounce through October, we are now entering the 3rd week of consolidation. Through this period that market has been bounded by the 30 SMA on the upside and the 13 EMA on the downside. The market tested the 13EMA again this week and it held. We finished the week back above the 30 SMA and are now within shouting distance of a breakout. Should the 129.42 level be breached one could realistically see a test of the summer highs in earnest. Conversely, should we fail through last week's lows of 121.52, one ought to expect a move back to the weekly 50% level and the rather noticeable gap left just below it. Either way, stops (and here I mean risk) on the trade would be rather wide and may not be worth the potential profit. As I said earlier, this market ain't for the faint at heart. I myself may just leave the whole thing alone for a little while. Check in on CRI's Day Trading Blog to see if and where I am doing any day-trading at all.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com
http://www.therationalinvestor.ca/RI_Tradents.php#sp500bloglink

http://www.therationalinvestor.ca

Volatility can go both ways

Hi there, and welcome back to CRI's S&P 500 blog.

The current fundamental-reassurance-vacuum (wow, there's a word) that is overhanging the market can and is leading to violent ups and downs as new potentially 'game-changing' fundamentals hit the market. "Will the Greeks default or won't they", seems to dictating trade on a daily basis. These short term blips can translate into wild gyrations. Interestingly, I have personally found that those markets that have just completed a 50% retracement of their primary move often see some dramatic swings.

Our goal here at the S&P blog ins''t to tell you (the reader) where the market is going, but rather to give you a basic framework (50% rules, double tops/bottoms, flagpoles, MA crosses, seasonality etc) that will help you understand where we have been. Hopefully, with that contextual understand, you may be able to glean a sense of where the market ought to go- that's the plan anyway.

So with all being said, lets take a look at this chart. First off, we must appreciate the fact that the broader US stock market has just gone through a very natural 50% correction of a larger trend that began just about one year ago. As should be expected, the price action is very violent right now as the market digests its new fundamental backdrop. One could argue that September's sell-off left the market very oversold and a counter trend rally was likely. What I personally find most interesting is that the market 'topped' last week just under the original breakdown. As for the 'why', It simply appears as though the market just ran out of sellers heading into October. In the absence of new sellers, the market's 'path-of-least-resistance' was up, and boy did we go up. The tragedy is that we may go back down just as fast. Volatility does indeed work both ways.

Trader: Traders want to be in and out on tops and bottoms which seem to be coming in on the hourly charts. This market is moving so fast that you simply can not see the turns on the weekly chart. Indeed, I don't remember hearing anyone was call for a 2000 point rally in the Dow, but it happened and here we are. My 'hunch' during these times is just leave the market alone until it calms down. Having said that, there are those of us need who want to trade, or at the very least try and understand short term price action. So to that end, I will give you my .02 cents. Since we are currently above the 13 EMA one might argue that pull backs represent buying opportunities. Also too, given the fact that we are selling off into a Fed announcement, we may find an ultimate bottom within that first hour after their announcement Wednesday. It's just a guess, but it will be what I am looking for.

Investors: This camp was well advised to get into cash back in the late summer. I find it fascinating that the market's recent rally failed at almost the exact original exit point. The market was literally giving those that missed the first short entry another opportunity to get short again. As long as the 13EMA is lower than the 30SMA one is best to leave this thing alone. Should that relationship change then so to will our investor stance. Yes, we have seen a very nice rally in equities over the past month. But no, it really hasn't changed things in the longer term all that much.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

therationalinvestor.ca

CRI's S&P 500 Blog