Current SPY weekly chart: http://scharts.co/ZFMFJe
Commentary: Once a market gets a head of steam behind it, it is both foolish and rather financially dangerous to start 'picking tops'. Indeed, this past month has witnessed countless professionals exclaim 'this is the top' only to be embarrassed. Is the market overbought - unequivocally yes. Is it a short - unequivocally no! Regular readers will recall the title of my last SPY Blog post - Don't get run over by this bull. I sure hope you didn't.
Rational overview:
Fundamentals: Two month's ago 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: While last month's post was on the heels of a dramatic bullish resolution to the 'fiscal cliff', this month's post comes in the face of two significant technical barriers (bullish extension target 158.89 and bullish ab=cd target 154.43). While the former remains open, the later target has now been hit. Additionally, the market has become quite violent and is now almost 10% above our short term moving average (weekly 13ema) suggesting a correctional period may be fast approaching.
Seasonal: Comments from last month's post still seem to be relevant: '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: As our typical seasonal 'peak' window fast approaches (Sell in may and walk away) the market has moved higher in earnest. Over the course of the post 'fiscal cliff' rally traders were given a fabulous 2:1 risk/reward trade that should have been exited over the past week and investors have built an even further cushion to their purchases made in November 2011. While there is no 'top' in place as of yet, certainly no new long positions should even be considered until we consolidate some of these gains.
Trader Stance: Traders were given the green light to get back in on the long side of this market when prices broke their highs at 144.55 on the bullish resolution to the 'fiscal cliff'. 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. Since the trade itself had about $5.00 in risk (stops just below the reversal low of 139.54) a 2:1 risk reward model would suggest taking profits at or above $154.55; and as pointed out above, that trade should have been filled this past week. WTG Traders!
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
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
http://www.therationalinvestor.ca/RI_Tradents.php#sp500bloglink
