Commentary: Stocks go up and stocks go down - that is just the way it is. However, I find it fascinating how the public/media seem to only get really interested during the times when the market goes down. While the media plays up the recent pull back in price (no doubt a function of ratings driven news reporting - horrible) few appreciate the fact that the SPY was up more than 16% in less then six month heading into the May peak at 168 and even after the meltdown dejour, we are still up more than 10% for the year (and that is excluding dividends). As the chart above outlines, we are still very much contained within a very wide upwardly pointing price channel. Indeed, into the very typical seasonal peak (Sell in May and walk away) we actually touched the top of the channel. Could we take some time & trade back down the the bottom channel line to 'cleanup' some of the excess euphoria - absolutely. Is this an outright 'sell' signal where one ought to get out of stocks completely - no way, not even close!
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. Seeming to coincide, investor sentiment hit a new cycle high in May (a reading above 90 on the S&P 500 bullish percent index: chart link) and is now in the process of coming back down to earth. Put it all together and I think one can make the argument for a 'correctionary' period for stock prices in general and a short term end to the run away bull we watched develop since the last 'investor' buy signal in November, 2011.
Technical: As pointed out in the chart above, prices had moved so far that we ended up (through the later part of May) brushing up against the upper channel of the current upwardly pointing price trend channel. The move into the 168 area on the SPY represented a 16% appreciation since the beginning of the year. While we may end the year at or near these levels, a further continuation heading out of the seasonally bullish window seems unlikely. The 13ema and 30sma are very wide at the moment so a period of consolidation to bring those two moving averages back near each other seems realistic too. Lastly, price itself has a 'double top' working which further suggests a 'correction' is underway in equity prices.
Rational Summary: As our typical seasonal 'peak' window has now come and gone (Sell in may and walk away) one shouldn't be surprised to see stock prices have cooled. The fact that so many in the media are calling for a collapse (yet our time tested 'trending' indicator is still very much bullish) suggests to me investor sentiment is undergoing a very natural correction within a broader bull market. The US Fed has NOT raised interest rates but has suggested they may end their QE programs IF the market warrants it. I would argue the market will remind the Fed that QE is still necessary - the question is, how big of a pull back in price does the Fed need to start turning the printing presses back on? 10%, 20%, 30%....too hard to judge at this point.
Trader Stance: Traders who exited their long positions in early May (at really good reward to risk levels) were forced to watch the market slowly grind higher into the end of the month. While no specific sell patterns were evident one just had to sit, watch and patiently wait for a setup to develop. The recent drop in prices suggests a trader short setup may be in play. The recent double top in price suggests on could be short from the 13ema fail at or near the 159.41 level with corresponding stops just above recent highs at 165.12 (or about 5.5 points of risk). To justify this risk one really ought to see at least 11 points in potential profit. The lows of April 15th at 152.74 look to be right at the 30SMA and would be my target going forward. That would equate to about 7 points of profit and (in my opinion) NOT worth the risk. Should we get a rally back up to test those highs at or near the 165 area, I might be inclined to take a look at the trade at that point.
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
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