Tuesday, December 13, 2011

Correction at key pivot

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


As we enter the 20th week of this current correction we seem to be approaching some kind of pivot. You will notice on the chart above, a massive wedge pattern that has taken a year and a half to form. While I am reluctant to call a breakout just yet, a weekly close above the 128.60 area would imply a resumption of last year's bull run at best and at worst would represent an indication of a serious test of last summer's peaks. That has not happened yet and as of writing we are still very much range bound between that 129.42 peak and the recent violent low of 116.2. From a cautionary perspective - our time tested trending indicator (that being the relationship between the 13EMA and the 30SMA) is still sitting in a negative position [Interestingly, a break above that 130 area would probably be enough to drag the short term moving average back above the medium term moving average]. Until that relationship changes (no matter how tempting it may be) it is well advised for those 'investors' out there to error on the side of caution. Another additional cautionary note - the low of just three weeks ago was extremely violent and did leave a sizable gap which all suggest we need to test that level again at some point down the road.

So what fundamentals could be causing the market to consolidate and possibly resume it's upward march? There are two answers to that I believe. 1. Corporate earnings have been remarkably good. From what I understand, S&P 500 company earnings are nearing 2007 levels once again. Third quarter earnings season put a bottom in the market. 2. Macro economic developments could help the market. Specifically, there is talk of QE3 once again. Should the US Fed. embark on yet another currency printing regime, the markets will eat it up just like the last two QEs. Additionally, there is some optimism about European debt. While not definitive, bond yields themselves have begun to trend lower. It is far too early to declare that problem over (or really near over) but as long as it isn't in crisis mode, equity prices will generally move higher through this seasonally good time of year. Speaking of seasonality, equity markets generally get a bid through the end of the calendar year. Weather it be portfolio dressing by find managers, or the generally upbeat feeling around holiday spending, prices generally rise in what is called 'The Santa Claus Rally'. 

So with all that being said, how ought our two camps to be positioned?
Investors: while it has been tempting to get back into the stock market, our time tested 'Investor' indicator is still pointing lower. It is approaching a potential cross and there is a bullish price pattern trying to form. So pay close attention over the coming weeks as we attempt to breakout.
Traders: One has to have an iron stomach to trade this market. From the one day crash/reversal seen just three weeks ago to the even more violent reversal of ten weeks ago, those getting caught short are getting punished. If you have the good fortune to short the tops you must take profits along the way down or you may see a winner quickly turn into a nightmare. My personal hunch is to stay on the sidelines until we get a new price pattern to work with. Currently I am looking for a test of the low seen just a few weeks ago. I would use a weekly close above 128.6 to look for new long entries.

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor