Commentary: Here we go again. It seems to me the more I do this, the more I see the same things over and over again. In September, the US Congress must address the debt ceiling as the US Federal government is expected to run out of borrowing room shortly. One ought to recall our last experience with the political fireworks out of Washington over hitting their respective debt ceiling and how the Republican controlled US House of Representatives could literally be brought to a standstill over an issue that really is completely out of their control. Regardless, those politically motivated will use this crisis dejour to their ends. The problem is the stock market is currently over extended, pointing lower in the short term and heading into a historically questionable seasonal period. Put it all together and price feels a bit vulnerable.
Rational overview:
Fundamentals: Since the 2007-2008 meltdown in the broader US economy, the 'E' in the P/E ratio has been steadily rising in the face of both a very accommodative US Fed monetary policy and relatively easy earnings comparison. That story on both fronts is now more than a few years old and getting a bit stale. Indeed, earnings guidance has waned of late and US Fed policy, while currently still accommodative, has turned more hawkish. Recent talk of 'tapering' purchases of US treasuries seems to be the tightening proxy of this cycle. As Fed. speakers one by one use the term more often, they are trying to introduce an exit strategy for themselves once they feel direct intervention in the US economy is no longer required to maintain necessary growth rates. Having said that, stock prices themselves seem to dictate the pace of that tapering. Should a healthy correction in stock prices occur (like we saw in June) Fed. officials have been quick to back away from tapering talk. While that talk of late has been back on the taper side (as stock prices once again hit new highs) I find it more than coincidental how we have rolled over here heading into the showdown out of Washington and that there is a significant Fed. meeting scheduled for the week of October 31st.....didn't someone once say...'buy when it snows and sell when it goes'.....
Technical: Through the seasonal spring peak of 2013, prices came back to the 30SMA, touched a significant trendline and then rather smartly reversed to new highs. Interestingly, we are currently basically right where we were in May when we were then well advised to expected 'traders' to be short and for 'investors' to remain in their long positions. Once again that seems to be the technical outlook (traders short, investors long) as we head through the current questionable season period. Failure at the 13ema suggests a test of the 30sma ought to be in order. A daily ab=cd bear price pattern confirms a short term target in the 160 area isn't unrealistic. Indeed, a simple 50% correction of this past year's rally suggests 151.71 isn't out of the question either. One final note, considering relative investor complacency and the current position of the 200sma (some 20% lower!), one has to appreciate the considerable risk of any new purchases at or near these levels.
Rational Summary: The US stock market, and 'assets' in general did well coming out of the seasonal trough but stocks in particular have not really appreciated too much from those spring peaks. As we head through a usually tough seasonal window, one has to appreciate the short term risks apparent both from the fundamental and technical sides - its a risk market! Investors are so far 'in-the-money' (last signcal for them was at 120 area) they could handle a short term pullback of as much as 10% to 15% and still be in profits. Traders are traders and will be more than happy to go long or short, whenever the potential reward vs. the risk is acceptable.
Trader Stance: Traders have been given a short setup coming off the 13ema fail and the daily bear ab=cd price pattern. that objective appears to be {(170.97-164.19)-167.30} 160.52 at the moment which happens to be in and around the 30SMA currently at 160.43. 'Bot' short setups look interesting on a failed rally to fill the gap.
Investors Stance: While the media will try to get you to panic, there is NO reason for investors to even consider liquidating positions at this point. Yes our time tested 'investor' trend indicator (that being the relationship between the weekly 13ema and the 30sma) is quite wide at this point, it is still very much bullish. Until that relationship changes, investors are best to enjoy the nice dividends being paid quarterly and appreciate the huge capital gains they are sitting on from the last 'investor' buy signal issues way back in November, 2011.
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
Brian Beamish FCSI The Canadian Rational Investor the_rational_investor@yahoo.com
http://www.therationalinvestor.ca/RI_Tradents.php#sp500bloglink
