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/RI_Tradents.php#sp500bloglink
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