Sunday, December 30, 2012

Fiscal Cliff setup is in place & ready to go

Hi there, and welcome back to CRI's S&P 500 blog. Our peak at the SPY (S&P 500 depository trust units):
  The final week of 2012 brings us all to a very interesting point in the market. Due to political gridlock from Washington it would seem we here in North America are going to jump off the 'fiscal cliff' in unison come January 1st, 2013. Considering this was a term coined by a US government official, there really isn't any telling exactly what is going to happen to the North American economy once the calendar turns, but it is very interesting to watch the collective psychology of 'investors' as they hum-and-haw over the possibilities. Fundamentally, one could make the argument that the US government's balance sheet has long been due for some cleaning up and the broader market drivers (interest rates & corporate profits) are actually very supportive of higher not lower stock prices. Additionally, markets love split democratically elected governments. The more gridlock, the less that can be done to tinker with the market's underlying fundamentals. The 64k question really seems, do we get caught up in the short term 'panic' or do we approach our market participation from a Rational perspective and not get caught up in the short term hoop-la.

 Rational overview:
Fundamentals: As pointed out above, the 'E' in current P/E ratios is still rather healthy. Additionally, the US Federal Reserve Board's current low short term interest rate policy is supportive of both yield curve driven earnings and the general cost of doing business going forward. Put it all together and one can make the arguement that the underlying fundamentals for corporate profits look ok going forward. Lastly, investor sentiment is currently rather poor. Last summer investors got a little ahead of themselves (with the likes of AAPL etc.) but now much of that euphoria is gone. Sanguine investors don't make the backdrop for stock market crashes. - corrections, maybe - crashes, no.

 Technical: This market is a bit overdue for some sort of corrective price action. We have basically been heading straight up for more than a year now and find ourselves quite far away from serious support (200 period simple moving average - our 4 year business cycle - is currently more than 17% lower than current prices). Additionally, there are noticeable gaps to the downside (in that 200sma area) that ought to be filled in at some point down the road. Even a move back to our time tested '50%' level would imply a better than 10% correction from where we are now. Finally, as hopefully you can see from the chart above, the market is currently working a 'bullish wedge' pattern (Notice the converging Red and Blue trend lines). Unfortunately, these types of patterns often resolve themselves bearishly.

Seasonal: The seasonal underlying drivers were supportive of price moving higher into the end of the year both from a regular annual event driven basis (Santa Clause rally) and from the US Presidential election year cycle forces. Unfortunately, that bullish window is closing and typically the period from the first week of January through the middle of February has been met with selling pressure since the beginning of the current 'fear' cycle back in 2001. This seasonal  tendency shall continue for another five years (into anticipated peak Q3'17) and there is no reason to suspect otherwise this go round. Once through the middle of February we ought to see our regular seasonal pressures drive prices higher into the spring but that is at least a month and a half away.
 
Rational Summary: Put it all together at it would seem to me we are due for some price consolidation. But that does not mean we have broken down. Indeed, at worst, one can argue we are stuck in a very wide trading range at the present (146.29 to 133.75). Fundamentals would still support higher prices over the medium term but maybe a period of technical 'cleaning-up' is in order. With that said, one should determine what kind of market participant you are and then act accordingly.

 Trader Stance: Traders have been given a nice shorting opportunity heading into the end of the calendar year with the rally into the daily OTE Short SS (70.5% retracement of previous sell-off) at 142.59. With stops just above the old highs 146.30 area (4 points of risk) and targets near the recent lows 133.75 (9 points of reward) this represented an attractive 2:1 reward to risk ratio. Aggressive traders could add to their short positions on the close below the 13ema (with stops on the added position just above last week's high). But given the fact that our 'fast' indicator (13ema) is still well above our 'slow' indicator (30sma) I don't think we are quite ready to break down in earnest just yet.
 
Investors Stance: While this commentary may sound boring and very repetitive, this camp has been well advised to be long and stay long for more than a year now. Those that took last year's investor 'buy' signal are well into double digits returns (if not more) considering dividends. As long as the 13ema remains above the 30sma I see no reason to touch long positions at the moment. Be long and stay long as we collectively climb the 'wall of worry'. 
 
That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
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Sunday, December 16, 2012

Santa's in charge - for now

Hi there, and welcome back to CRI's S&P 500 blog. Our peak at the SPY (S&P 500 depository trust units):
While surfing the web I came across an interesting blog entry from Avondale Asset Management on the Santa Claus rally and its effect on stock prices in general through the end of year holiday season:


So here we are at the end of another year. 2012 is almost behind us but doesn't seem to want to go out without a bang. As was posted in our last entry, stocks themselves looked to be 'climbing-the-wall-of-worry' heading into and now out of the 2012, US Presidential elections. Historically, markets often do quite well coming out of October and into the end of the year and because of the US Presidential cycle's influence it seemed as though this year would be very much like others of the same ilk. Indeed, prices have slowly chopped their way higher over the past month or two and there still is no solid reason to abandon what has turned out for investors, to be a very fine trade. Regular readers will remember that our 'investor camp' was given the 'buy' signal (based on our time tested weekly 13ema/30sma cross over system) a little over a year ago. The capital gain on the trade alone is more than 18% and if you included dividends it is well over 20%. As long as that moving average relationship remains bullish then we are best to just sit back and leave the trade alone. Having said all that, one must respect the 'nose-bleedy' territory the market is currently within. As the chart above illustrates, we recently bumped up against a resistance line (red dotted line) and failed. Should we reverse and start closing below the support lines (blue dotted lines) we may see the end of this current rally. Given that backdrop, it should also be noted, price are indeed currently over-extended. A 50% retracement of the last year's rally represents almost a 15% correction in price from current levels. Notice too how far away our 200 week sma (or our 4 year business cycle moving average) is. Real support in price ironically is back around where our 'investor camp' last bought in. Should a correction in earnest occur through the early part of 2013 (fiscal cliff worries et all) we may see our 'investors' get a chance to buy their investments back at the prices they paid a little over a year ago.  


Trader Stance: Traders were given a shorting opportunity on the double top and subsequent break of the weekly 13 ema about eight weeks ago. That pattern was quickly reversed when prices rejected the weekly 30 sma touch and we have basically rallied since then. Traders may consider OTE Short SS entries at or near a 70.5% retracement of the recent trading range [0.705(147.32-134.7)+134.7=143.59]. Stops would be at least 10 ticks above those highs at 147.32 and targets would have to be at least two times risk. Should one take the OTE short, traders would be well advised to take partial profits on a test of recent support at or near 134.70.
Investors Stance: This camp has been well advised to be long and stay long for more than a year now. Those that took last year's investor 'buy' signal are well into double digits returns (if not more) considering dividends. As long as the 13ema remains above the 30sma I see no reason to touch long positions at the moment. Be long and stay long as we collectively climb the 'wall of worry'.

That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
Posted by at No comments:
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