Hi there, and welcome back to CRI's S&P 500 blog.
The important US mid-term congressional elections have come and gone and now we must get used to the new reality coming out of Washington (with regard to major US Federal legislation changes). Interestingly, it looks like the market has gotten exactly what it wants. The Republican win in the House was enough to dislodge the Democrat stranglehold while at the same time, wasn't significant enough to be considered any type of mandate. In essence, little to no change in US Federal Government fiscal policy ought to be expected for the next two years.
This bullish enthusiasm can be clearly seen in the price action. The chart above (as always) is the ETF for the S&P 500 stock index. It represents a basket of the 500 biggest stocks in the US. Since many US companies derive their revenue from international sources, this one index is an excellent proxy for world equities in general. This past week saw the index break to new 52 weeks highs and more importantly, crossed through the spring '10 peak at 120.85. Ideally, we would like to see the market finish two consecutive weeks above that level but make no mistake, the break higher was/is bullish for equities over the longer term going forward.
[The big picture.....If one can look at the market from a little longer time perspective, one can justifiably make an argument for a long term buy signal to be registered on a weekly close above 120.85 (with corresponding stops just below the most recent correction lows of 100.59). This price pattern (known as a bull flag formation) suggests prices want to ultimately move up into the 155 area [(120.85 - 65.65) + 100.59 = 155.79]. I know it sounds crazy, but given the additional $600 billion in bond purchases announced by the Fed and the propensity for Washington to be un-able to get in Wall Street's way.....leads this investor to believe this all may happen.]
Having said all that.....please don't inturprete this price action as a good entry point for either a trade or a longer term investment - Here's why:
1. We already were told to get back into equities nine weeks ago (apon the double bottom breakout on SPY at 112.51). The market is up 7% from the breakout....so if you missed it, then you missed it.....
2. The stop on the current trade is STILL just below 103.73. This means that even if you are long from 112.51 you still have to risk the market moving down into the 103.73 area without closing the position. That represents almost 17 points lower than where we are now (or 14%!). No indeed, if you didn't do the trade nine weeks ago then don't chase it!
3. Our time tested 'Investor signal (that being the relationship between the 13 EMA and the 30 SMA) turned bullish (right around the time of the price breakout through 112.51) and is now quite extended in the bulls favor. Again (this time from the slow 'Investor' signal system) if you missed the trade, then you missed it...
So what does this mean going forward?
The US Federal Government (in the form of the US Federal Reserve Board) is spoon feeding the market capital. Additionally, there will be a lot of rhetoric but little substantive change to US Federal Government's fiscal legislation for at least the next two years. Historically, the years following the US mid-term congressional elections are often very good. The market told us to buy a little over two months ago. Other than an expected technical correction (ie. a 50% retracement of the recent move on the SPY would bring prices back into the 112 area [(103.73+122.09)/2]) there is little standing in the way of prices moving higher over the next few months. With this in mind, one ought to seriously consider any correction a buying opportunity.
Strap on your safety belts, we are in for a wild few years ahead of us!
That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com
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