Saturday, February 9, 2013

Fiscal cliff? What fiscal cliff....Don't get in the way of this bull

Hi there, and welcome back to CRI's S&P 500 blog. Our peak at the SPY (S&P 500 depository trust units):
Commentary: I find it fascinating to watch cycle after cycle (I have been doing this now for almost 20 years and this blog in particular for 5 years) as we humans repeat the exact same behavior and yet each time we expect a different result - didn't someone famous say something about exactly that? At the time of my last SPY blog post (mid December) I found it very hard to find too many outright bulls and even today, still seem to encounter a fair amount of resistance to the idea of the market moving higher. But in very typical fashion, the market charged higher on that sanguine sentiment, broke to new highs and has further pulled a few more of those previous bears over to the bull's camp. The fiscal cliff turned out to be a pothole at worst and in very market friendly way (and completely expected...I might add) Washington did absolutely nothing on the issue. The fundamental backdrop for stocks has been rather good of late and it is interesting to see (because of a project I have been working on specifically within the field - WDB Options Pricing Model) many smaller companies are starting to outperform on what I would consider very reasonable fundamental valuations. The Russell 2000 (small cap benchmark) broke to new highs a while ago and has been leading this bull charge which seems to further confirm this notion. Ironically enough, it will only get dangerous to own stocks again once everyone else likes the idea. 

As I post this blog, the market is charging to new highs and looks to be heading even higher. Are we near a blow-off top? That is hard to say, but we are fast approaching two technically substantial upside targets so a euphoric melt-up into that area certainly isn't out of the question. Keep in mind, markets are often most volatile at the tops and bottoms of moves, so given the recent rather orderly move to new highs, price action itself isn't suggesting an end just yet. If you see some violence, then we may be getting closer.

Rational overview:  
Fundamentals: Last month's analysis seems to continue to be correct..."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 argument 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." As of this month, the Fed is humming and hawing over when to end QE. Until that event, I shall be looking at US Fed. interest rate policy as market supportive. As for the market's reaction, I shall be watching the US Yield curve for an indication of anticipated economic expansion (normal yield curve) or contraction (inverted yield curve). As for sentiment, AAPL's collapse has washed many of those 'weak hands' out of the market. It is now the market's job to suck them back in. 

Technical: 'Show me a new high, and I'll show you a buy...' seems to be appropriate here. The trading range established into the fiscal cliff resolved bullishly. Those traders that took the OTE short trade heading into the event ought to have been stopped. As pointed out in my last commentary, the bullish stance on the MA's (13ema > 30sma) suggested the bears where in for a tough fight and indeed the market turned right back up as price entered that support area. Either the bullish resolution of that test (buy the 13ema with 2:1 r/w) or the subsequent reversal breakout (bull ab=cd on move back above 144.55 with stops just below 139.54) should have swept traders long . On the reversal trade the risk is about $5.00 so a 2:1 r/r model would have traders looking to book profits at or above the 154.55 area. Based on the working bull ab=cd pattern target (155.12) that doesn't seem unrealistic. 

Seasonal: 'Buy when it snows, sell when it goes...' seems to be appropriate here. From now until the end of May is the proverbial 'sweet spot' for the economy in general and the stock market in particular. Bob Pasani (a favorite market commentator of mine) recently did a write up on seasonal tendencies in the market and the January Barometer. I highly suggest you take a look if you have a moment. The January Barometer itself was rather market friendly (suggesting an up year for the market for 2013) and as pointed out above, the market is currently in a very seasonally friendly time of year. That in itself doesn't guarantee price performance, but it does suggest the wind is at our backs for the next few months, not in our faces... 

Rational Summary: Price has resolved bullishly heading out of the 'fiscal cliff' and given the rather friendly fundamental backdrop will probably continue to do so into the next political showdown out of Washington. Technical targets suggest the mid to high 150's aren't out of the question and unless we get some horrendous reversal I can't see our slow march higher stop until those levels are hit (and even exceeded). In either case (trader or investor) if you are not currently 'in' then it seems a little too late to chase this bus, the next one will be along in ten minutes....  

Trader Stance: Aggressive traders where short heading into the fiscal cliff (OTE Short SS entry) but were rejected when price couldn't break back below the MA's. The break back above the previous peak represented both a 'key reversal' and a short term bullish ab=cd price pattern. While buying the 13ema touch was the correct 'knife catching' trade (and boy where they rewarded) a more conservative trader ought to have bought the reversal at 144.55. As pointed out above, that trade has (and still does have) about $5.00 of risk (stops just below the reversal low of 139.54) so using a risk reward model of 2:1 would have them looking for at least $154.55. And as pointed out above, that target area isn't unrealistic given the two rather significant looming upside technical targets.

Investors Stance: I hate to say it for you investors out there....but more of the same....last month's post was spot on so I don't see any reason to change it..."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
the_rational_investor@yahoo.com
http://www.therationalinvestor.ca/RI_Tradents.php#sp500bloglink