A pullback - yes, a breakdown - no

Hi there, and welcome back to CRI's S&P 500 blog.

In typical market fashion, as soon as one gets lulled into a state of complacency problems start to develop. I would argue that is exactly what has happened of late. Interestingly, even though the selling has been a bit abrupt, there appears very little technical damage being done. In fact, one might argue that some sort of pull back was long overdue and that prices are now just getting back to an area of support on the charts.

So, as rational investors, lets take a look at both the fundamental and technical views to see if our market stance needs to change.

Fundamentals

From this perspective, the market is quite healthy. Recently, Ben Bernanke suggested to the US congress that further stimulus would be needed from the Fed. To that end, Fed purchases of shorter term US government maturities will continue for the foreseeable future. Additionally, inflationary pressures within the US economy are still relatively low suggesting there isn't a great need for a tightening of credit for some time to come. This is very much the same message as has been the case for a few quarters (if not years) and there doesn't seem to be any change in the trend. Couple this Macro backdrop with the fact that US corporations are both flush with cash and are producing solid earnings growth (from a yield curve perspective as well as from a friendly US dollar trend perspective) and one has the makings of further price appreciation down the road. Ironically enough, the rising oil price (due to non-market forces) may help prolong the current economic expansion since the US Fed won't need to raise short term interest rates (protecting yield curve earnings) as long as commodity prices continue to climb.

Technicals

From this perspective, the market is very healthy. The recent break above the spring '10 highs (120 on SPY) suggests the market wants to go higher (MUCH HIGHER!). While this is a longer term price pattern (taking months if not quarters to play out) the ultimate target for this breakout is 155 [(120-65) + 100]. This is my late summer / early fall '11 target and suggests SPY will rally another 19% higher from current levels! From a shorter term perspective, a pullback was a little overdue. The short term bullish price pattern (the A-B-C-D pattern noted above) had a price target of 136.09. We hit 134.69 (or about 1.5% away!) and if that is the ultimate top for this bull wave then I will be happy. I think we have way more upside to come, but maybe we ought to take a few weeks and clean things up a bit. Considering that our 'investor buy signal' was registered more than five months ago (and almost 20 points lower than where we are now!) a period of consolidation seems more than realistic. There is NO 'investor sell signal' anywhere in sight so investors ought to just sit back and be long.  Traders ought to be long from three different points (112 area, 122 area and 130 area) stops on these positions could either be just below the lows registered 7 weeks ago (124 area) or use last week's low as your new stop. Either way, if we break back below last weeks lows (which happens to be right at the 13 EMA and the bottom of the trend channel) I think we are going lower.

Summary

"Beware the ides of March"

Like Caesar, investors ought to be aware of the seasonal pivot that often accompanies the ides. Equity markets love to rally into the spring, earnings are still robust and short term interest rates are historically low. With this backdrop, I see no reason to believe we are coming to an end of this bull run. Having said that, markets never move in a straight line forever and a period of a few weeks of consolidation may lay the ground for a serious rally into the spring/summer.

Be long, stay long and enjoy the ride!

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Getting close to near term upside targets

Hi there, and welcome back to CRI's S&P 500 blog.

As there has been little change to either the technical or fundamental picture over the past week, this will be shortened blog entry. For more on the current fund or tech backdrop please go through the recent posts to bring yourself up to speed.

So, as has been the case for a few months, the broader US stock market (as measured by the S&P 500 depository reciepts, SPY) has been trending higher. Investors ought to be long from the cross of the 13 EMA back above the 30SMA (near 112 area). Traders have been given three 'buy' signals since then lending support to the notion of higher prices to come. Traders latest 'buy' signal was registered when prices moved through the recent peak (at or near 130).

Currently we have a trader upside objective of 136.09 and I feel very confident that will be hit in the coming weeks if not days. Once that number has been hit, I wouldn't be surprised to see some sort of pullback as we are currently 7 points (or a little more than 5%) above short term support levels (13EMA). Additionally, the spread between the 13 EMA and the 30 SMA is getting very wide suggesting we are getting a little over done.

Be long, stay long and enjoy the ride!

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Higher and Higher we go

Hi there, and welcome back to CRI's S&P 500 blog.

For the better part of 5 months now, the US stock market has been booming higher. Those regular readers will of course clearly remember CRI's overt bullishness coming out of the US mid-term congressional elections last fall. Along with a fundamental shift away from Federal anti-business government, the US Fed. reserve board also promised a substantial injection of capital into the market in the form of $600 billion of new 2 to 5 year bond purchases. This program, known as QE2 literally guaranteed a floor in equity prices and indeed, the market responded accordingly.

Technically, both investors and trades ought to be long from the considerable breakouts last fall. Investors will recall our time tested indicator (the relationship between the 13 EMA and the 30 SMA) crossed bullishly in October. At the same time, a nice double bottom was registered at about the same level. Since that original entry, investors are advised to sit on the long side and be long. Traders have been given yet another entry signal. when prices crossed back above 122.31. Currently those traders have their stops just under recent support at 116.97. Short term support appears to be in and around the breakout high (122.31) and the 6 EMA (125.09).


Enjoy the rally and be sure to take some profits along the way. What to find out what CRI is trading now? Go to CRI's OnlyDoubles NewTrades to see what CRI is buying right now. What to see what CRI is taking profits on? Go to CRI's OnlyDoubles Profit Blog to see how recent purchases have paid off...

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

The Bull Marches On

Hi there, and welcome back to CRI's S&P 500 blog.

As has been the case for quite some time, the broader US stock market is moving higher. Both investors and traders where issued significant buy signals coming out of the US mid-term congressional elections in November. Most recently, we were issued yet another trader 'buy' signal, when prices broke above the Fall '10 highs at 122.31. Currently, stops should be just below recent support at or near 116.97.

From the fundamental perspective, the first two weeks of the quarter saw money move into Energy, Tech. & Financial. These three sectors all have the wind at their backs (rising energy prices, rising global demand for consumer electronics and a very steep yield curve) which will help an already rosy earnings picture. Couple this will a friendly US Fed. and we have the backdrop for a continued fundamental push higher into the spring. 

From the technical perspective, there are two major bullish forces at work here.

1. From a longer term perspective, the recent break above the  Spring '10 highs implies an upside bullish flag pole formation where the target is near $155 dollars per share on SPY [(120-65)+100 = 155]. This formation will be in place until a corresponding 'top' is registered or the market breaks back below 100 again. This may take months, if not years to play out but unless some catastrophic meltdown occurs, prices over the longer term are pointing much higher.

2. From a shorter term perspective, the break above 122.31 eight weeks ago implies a very short term bullish flag pole formation where the target is near $136 dollars per share on SPY [(122.31-103.19)+116.97].  I see no reason why this target won't be hit in the coming two quarters. We are into the seasonally friendly time of year for stocks and the market has lots of momentum behind it.

Enjoy the rally and be sure to take some profits along the way!

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Climbing the wall of worry

Hi there, and welcome back to CRI's S&P 500 blog.

 

With the new year and new quarter upon us, CRI has been patiently waiting and watching to see where we might be heading over the coming months*. Considering the significant bottom in the US dollar and tops in the Euro. & gold, we may be getting an indication already of what to expect for Q1'11.

Specifically with regard to SPY, the repeated message must be:

'As has been the case for many weeks now, the SPY is pointing higher. Regular readers of this blog will recall CRI's bullish enthusiasm coming out of the US mid-term Congressional elections and the announcement of the US Fed's QE2 program. Fundamentally we experienced a dramatic political shift in Washington coupled with a guarantee of an additional $600 billion in Fed. bond purchases before the end of Q1'11. Technically, the market registered a very well defined double bottom breakout from 112.58 (our 'trader buy signal') coupled with a nice cross of the 13 EMA back above the 30 SMA (our 'investor buy signal').'

Currently, stops on this trade should be just below the recent lows at 116.97. Considering that level is more than 10 points below current levels [with short term support near the 13 EMA (121.69)] new purchases ought to be delayed until some sort of consolidation comes in. On a longer term basis, investors ought to take some solace in the fact that the market has broken cleanly through the spring 2010 highs. This monthly breakout suggests the current cyclical bull run is far from over.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

 *The first two weeks price action each quarter is a really good guide as to where new money may be flowing during the entire quarter.

Market over-view heading into Q3'10 end

Hi there, and welcome back to CRI's S&P 500 blog.

As CRI prepares for the quarter and year end, this week's S&P 500 Blog will include a quarterly review of SPY, (and for all you Canadian's out there) the TSX Composite and TSX-Venture exchanges.

SPY

As has been the case for many weeks now, the SPY is pointing higher. Regular readers of this blog will recall CRI's bullish enthusiasm coming out of the US mid-term Congressional elections and the announcement of the US Fed's QE2 program. Fundamentally we experienced a dramatic political shift in Washington coupled with a guarantee of an additional $600 billion in Fed. bond purchases before the end of Q1'11. Technically, the market registered a very well defined double bottom breakout from 112.58 (our 'trader buy signal') coupled with a nice cross of the 13 EMA back above the 30 SMA (our 'investor buy signal').

As a special treat this week we added what CRI would consider to be the significant up-trend lines on the above chart. Notice the 2009 bull run was dominated by line 1. So far the year 2010 bull run has been dominated by line 2. CRI is expecting this trend line to hold up for the time being but if it should fail, next significant support is line 3. Notice that a 50% retracement of this entire bull run brings prices right back to line 3. at around the 95 area so keep on eye on this line should things start to get ugly again.

TSX Composite

The primary stock index for Canadian investor, the S&P TSX Composite Index is a basket of stocks very much like the S&P 500 index in the US. The Canadian stock market is dominated by commodity related assets as Canada is a very rich commodity nation. From wood to oil to gold, Canada has it all and its products are very much in demand. Very much like its southern counterpart too, the Canadian stock market registered a significant buy signal in the middle of September when prices crossed back above 12,321. Canadian interest rates are very stock friendly, a large portion of the $600 billion Fed QE2 program is going directly into commodity related assests and Canadian corporate earnings are in far better shape than their US counterparts. Given this fundamental backdrop, one should not be too surprised to see rising stock prices. Applying the same technical logic as SPY, one can clearly see a massive Bull flag formation that has been carved out over the past 2 years. The conservative upside target here is 13851 (with an aggressive target near 16,000!) and considering the violently bullish nature of many commodity markets of late, a move to this conservative point would not be too big of a surprise.

TSX-Venture Exchange

Probably the most surprising to the investment community has been the dramatic comeback in the Venture Capital market of late. Above is the Canadian equivalent of the Russell 2000 stock index in the US. This index represents the smallest companies in the Canadian universe and as you can see from the chart above, the move higher over the past two years has been dramatic. But more dramatic was its initial fall. Consider that the market has just now gotten back to the 200 week EMA. In essence, when the rest of the market came back in 2009 the venture market was still in panic mode. If one considers that corporate borrowing rates in North America have fallen from about 2% this time last year to about .5% now, it makes sense that the speculative market is finally starting to see investment capital again. Unlike their larger brethren, venture stocks took off like a rocket heading out of the summer and into the fall. The election and subsequent QE2 announcement was further validation for this index. What is interesting here is that if one looks at the Point & figure charts (link) we still have some way to go till we get to our target (2640 area). Like the major index's, the venture exchange has a bull flag working too. The formation here suggests that prices want to move up into the 2355 area. 

Summary

North American stocks are in a massive bull wave which is pushing prices higher across the board. Canadian stocks look to benefit from the move higher in a greater degree than US stocks because of the better structure of the Canadian banking system, a friendly macro trend towards commodity related assets and a strong currency. The first two weeks of Q3 suggested money was going to be flowing primarily into Basic Materials, Energy and Tech. Two of which are a hallmark of the Canadian investment landscape, need we say more...

The markets never move in a straight line so CRI will be looking for ebb and flow to this move higher but make no mistake, equities are moving higher and if you are not participating you will be left behind.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Irrational Exuberance Once Again?

Hi there, and welcome back to CRI's S&P 500 blog.

The brief consolidation that followed the post mid-term US Congressional election rally (try saying that 10 times fast!) has resolved itself bullishly. So much so that one has to realistically expect to see much higher prices in the weeks to come. Indeed, if the bullish flagpole formation (that has been registered with a move above 122.95) is to be believed, then our target must be in the 137 area or more than 11% higher than current prices.

Regular readers will of course be well aware of CRI's bullish stance on SPY (specifically when the SPY crossed back above 112.58 confirming a double bottom breakout AND an 'Investor' buy signal was registered when the 13 EMA crossed back above the 30 SMA) as of the middle of September. The most significant development of the three week consolidation is it has allowed those that bought the breakout at 112.58 to finally have a new support zone to move their collective stops to (actually just under the support zone....like 117.64 for instance). 


So what might be going on fundamentally to prompt such a move? CRI's opinion has been that the triple effect of QE2 ($600 billion of 2-5 year US government bonds by the US Federal Reserve through Q1'11) , relatively strong corporate earnings and the balancing of power within the US Federal Government has laid the ground work for a 'perfect storm' for stock appreciation.


So where is this $600 billion going? CRI publishes a report every quarter that helps in determining where new money is flowing: 1st 2 weeks of Q4'10 Report. The last report suggested money was moving primarily into the Basic materials, Energy and Tech. sectors. Indeed, these areas have done well and CRI shall be concentrating efforts for the remainder of the month to trade these sectors accordingly. For an idea of what CRI is buying right now, subscribe to CRI's OnlyDoublesNewTrades to get the low down on what CRI likes right now.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com