They got them shorts on the run now

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

For those new to investing, this is a very dangerous market to learn the ropes. Making a bet long or short during these 'clean-up' phases can be profitable but it also can be very costly. We always want to look at any trade from a risk perspective and given the volatility seen lately, one has to appreciate the associated risk. Talk about volatility - over a three week period (through the end of the summer) the market fell 18% (133.89-109.7/133.89) and now in just three weeks it has rallied 15% (123.97-107.43/107.43). Could another double digit percentage swing be far off? Only time will tell but one thing is for sure - expect more volatility. 

While the fundamental backdrop has been relatively good over the past year or so, things aren't looking so rosy going forward. Two factors drive stock valuations - earnings and Interest rates. We have been confident of earnings but one can't help but get concerned when 2009-2011 market darlings like RIMM/AAPL/NFLX have either completely fallen apart or are starting to miss expectations. Corporate short term interest rates (as measured by Eurodollars futures contracts) are now trending higher not lower. This means that the credit squeeze that started the meltdown back in 2007-2008 is back on. At the same time, longer term government bonds have moved violently higher pushing their yields down. While not inverted, the yield curve is flattening which suggests that the broader economy is starting to slow. Weather it be the effects of Europe's indecisiveness over its' Sovereign debt or Chinese Central bank tightening economies are slowing and as savvy market participants we must listen to what the market is telling us. We talked a while ago on WCTS Spotlight blog about HG Copper and how it is called The Professor of Economics. Read our comments re. copper and you will further see validation to the notion of a slowing global economy.

So with all that said, how ought smart market participants to be positioned?

Investors: In our last blog entry (10/07) we suggested 'Investors' ought to be sitting in cash and doing nothing and have been advocating that stance for some time. I would re-iterate that mantra today. While our time tested trending indicator (that being the relationship between the weekly 13 EMA and the 30 SMA) remains negative, one ought to just sit on the sidelines and wait it all out. Considering the extreme volatility of the market right now, as investors we don't want to be looking at the screen every five minutes. Should that moving average relationship change (at current levels that isn't likely for some time) we will change our stance. While you won't make a pile of money sitting in short term government paper, this is a time not to be greedy.

Traders: In these kind of trading environments, fortunes can be made and lost in a matter of minutes and it is not for the faint-of-heart. Ironically, this kind of trading pattern is very common after prices have corrected to the 50% level. The 'trade' was to short up top and take profits at the 50% level, what we are seeing now is the clean-up from the trade. Quite often a market will break lower, consolidate, then break lower again (as was the case three trading weeks ago) but the last break lower turns out to be a trap. The market quickly reverses and heads right up to the top of the range. This is exactly what happened here. The 110 level was taken out three weeks ago which suggested we were going lower. The market then reversed and took out the trading range high of 122.87. In essence, the market ran out of sellers on the push through 110. When the floor traders saw this, they ran the market back up looking for any sellers and for the 'stops' on existing short positions. In summary - they got the shorts on the run.

Since we have left a rather large gap right at the 50% level (117.715), I personally wouldn't be inclinded to chase the market here. It looks to me like we will take a serious run at the origional breakdown point of 125.05 and then the 127.50 area (trend line resistance) after that. Considering how close we are to those levels now (123.97) the associated risk of going long doesn't make the trade justifiable. Those that were able to switch long on the pivot through 120 (congrats on a smooth trade) ought to look to those upside targets as areas to exit. This may happen in the coming days or may take a few weeks to develop. Keep in mind, the market is once again getting overbought on a daily basis and we are still bearishly trending on a weekly basis so at best one ought to be looking for a seasonal top over the next eight week to sell into.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

therationalinvestor.ca

The long slow process of cleaning things up

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

As the stock market in general (and in this case SPY specifically) has entered its twelfth week of consolidation one can't help but notice how bearish market sentiment has become of late. Only a few months ago we were pushing to new relative highs on both a healthy yield curve and robust corporate profits. While the yield curve has flattened appreciably over the intervening period, corporate earnings are still holding in which suggests to this market watcher that the bear market we entered through the late summer shall be only that and that we are in nothing more than a healthy (albeit painful) correction period for the market. 

Technically speaking, one should have appreciated the noticeable bearish cross of the weekly 13 EMA and the 30 SMA some twelve weeks ago. That relationship is still very much bearish suggesting there ought to be further correction ahead. One should also respect the fact that the important low put in  nine weeks ago (109.70) was violated just this past week. Lower highs and lower lows define a bear market - and judging by the market's action over the past week - we are still very much in a bear market. Having said that, the time to short was at or near 125 not now. Indeed, fortunes are won and lost trying to pick exact bottoms so I will leave that thought with the basic message that we have hit many of the well defined down side targets (50% rule, previous rally peak, 200 Week SMA, etc.) and one ought to be taking profits on shorts - not adding new ones.

So lets see how our two respective market participants ought to be positioned:

Traders: This camp would have gotten new sell signals on the break of 109.70. Stops on the trade should be just above recent resistance (just above 122.80). This would represent a 12% risk and maybe a little to large of a risk for most traders to take.  For those wishing to trade to the short side - use this past week's rally to look for a failure into resistance (just above 120 area) on the daily charts. The lows of this past week ought to be tested at some point down the road and that would be my short term target on any shorts taken.

Investors: This camp was well advised to get out of the market in earnest back through the late summer and more specifically upon the break of the important low of 125.70 in late July. Our time tested trending indicator (that being the relationship between the 13 EMA and the 30 SMA) is still very much pointing lower and has been the mantra for some time now - CASH IS KING. Consider too that the US Dollar index has been moving higher for about the same period, it would appear that international money managers are respecting that mantra.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Correction healthy & normal.....for now

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

 

As has been the theme now for more than a month, the stock market (as measured by the SPY - S&P 500 stock index ETF) has corrected from an over bought condition that developed through the spring and early summer of 2011. The correction at the moment represents a healthy and normal market occurrence - the questions is, where do we go from here. Considering the seasonal nature of stocks, the looming US fiscal year end, and the considerable credit problem developing in Europe my hunch is we will be pointing lower for some time to come.  Having said that, markets often look the absolute worst at the bottom. Things look rather bleak at the moment so as a contrarian notion, we must be getting close to some sort of climax . Regardless of personal opinion lets let the chart tell us what to do - and to that end lets review how our two primary market participants ought to be positioned.

Investors: Investors should be in cash! Until the 13EMA can cross back above the 30SMA you are best to leave your money in t-bills or short term US treasury notes that you intend to hold onto until maturity. 

Traders: After a great short trade (through the break of 125.70) profits ought to have been taken. The past 5 weeks have defined the current market's trading range. Where a break of either (top 123.51 and bottom 110.27) would be your signal to act. We shall test the bottom of the range over the coming days so be prepared should you want to act.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Clean up time

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

Amid all of the 'end-of-the-world' talk out there the broader stock market (as measured by the S&P 500 stock index) has worked its way back to the 50% rule and begun to consolidate in a very orderly (if not swift) fashion. Currently, the market is doing nothing more than cleaning up the excess's of the past year's bull run. We have made a very natural 50% correction of that move and shall now need some time to confirm that this is indeed nothing more than a healthy correction within a massive bull market.

As has been previously stated, this correction comes on the heels of US federal political instability rather than poor economic fundamentals. As a result, one is left with the feeling that if only Washington could just get it's act together the market would stabilize and resume its previously well established up-trend. Make no mistake, the 135 area (on SPY in this case) shall now act as considerable resistance to the upside but given that the two primary drivers for stock valuations (earnings and the yield curve) continue to be supportive, a resumption of that uptrend would seem likely upon a resolution. The big 'if' now is indeed Washington (or more succinctly - US Federal political leadership) and given the current extreme polarization of the US Congress (and now the US Fed's insistence that any solution must be fiscal in nature and not monetary) that much needed leadership is in serious question.

So lets review how our two primary market participants ought to be positioned.

Investors: As has been the case now for several weeks, cash is king! Investors were given a very clear 'exit' signal when our time tested trending indicator (that being the relationship between the weekly 13 EMA and the 30 SMA) crossed bearishly 5 weeks ago. That exit should have come on a break of key support in and around the 125.70 level (or about 6% higher than where we are currently). Until the moving average relationship turns back up, investors are well advised to sit on the sidelines and watch the fireworks. Ironically enough, this camp is cheering for further price deterioration which would make their exit look all the more significant.

Traders: This camp was well advised to begin shorting the market in earnest through the final week of July and again when the important 125.70 level was breached. Those that were fortunate enough to get short should have been more than happy to take profits on those short positions as we approached our well established downside target zone (119.15 - 111). The fact that the market has basically oscillated around the 50% level (for the past four weeks) suggests that the market is trying to relieve the oversold condition that developed on the initial downward move. The recent consolidation in price has both relieved that short term oversold condition and may be laying the ground work for the next leg lower. Should the 110.27 level be taken out, one would have no choice but to look for another move lower equal to or greater than the previous. This bear flag formation would imply a price target of 96.65 [(134.82-110.27)-121.20]. Conversely, should the 121.20 level be taken out, one ought to look for a counter-trend rally that would imply an initial price objective of 122.935 [50% retracement; (135.6+110.27)/2]. Should that breakout occur, one could also argue that the 13 EMA shall act as resistance and it ought to be in and around that level as well.

So in summary then, the market needs political leadership in order to continue the expansion that was established last fall. The US Federal reserve has stated that it will be very reluctant to initiate a QE3 program and that in its opinion, fiscal stimulus is what is needed. Couple this with extreme political polarization in Washington and there appears to be no quick resolution on the horizon. All of this suggests that the market will have to take some more time to clean up this mess and that if one were to suggest a general direction for price in the coming weeks/months, that direction continues to suggest down rather than up.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

A violent conclusion to a well telegraphed event

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

The past two weeks have virtually wiped out an entire years worth of growth in the market and have underscored the significance of adding a little timing to anyone's portfolio. 

From the violent break seen just weeks ago prices have fallen more than 14% and as of yet haven't shown clear signs of a bottom. Yes downside targets have been hit (and even exceeded at times) but to get back to a more 'normal' market we may have to see some violent tugging and pulling over the coming weeks/months. Make no mistake - the bull run (that was initiated with QE2 and the re-alignment in the US Congress) just 10 months ago is over and some tough slogging will have to lay ahead.  It is unfortunate if you are just reading this blog for the first time because you will fail to fully grasp how entirely predictable this correction has been.

So what happened?

To answer this one need only look at the charts above. First is our regular weekly chart of SPY (S&P 500 depository receipts) and then below that is a daily look at SPY. First off, our time tested trending indicator (that being the relationship between the Weekly 13 EMA and the 30 SMA) and our 'investor-signal' turned negative two weeks ago. Our collective 'stops' (that being the point that if breached would represent our time to get out) were just under recent lows (support) at 125.70. We here at the SPY blog made it very clear that cash was king and all those that did get out - congrats! 

Market Participant Position Review

 

Investors: Those out there who consider themselves investors in stocks and not market timers are sitting in cash. How long is anyone's guess, but until our 'Investor-buy' signal comes back - cash is king. Yes our downside targets have been hit, but that by no means we are in a bull market.

Traders: Traders were well advised to short the market when it broke back below the 13 EMA (at or near 130.68) just three weeks ago. Those that were able to short on the break (if you don't like to short stocks then consider buying Put options) are well advised to take some profits. Readers were made well aware of our target zone (119.15 to 111.15) which has now been hit and if its one thing you shouldn't be in this kind of market is greedy. Take it - you won - be happy!

So where do we go now?

That is a very good question, and a reason why I have included the daily chart in this week's blog post. Based on the daily chart, we entered and extremely oversold condition just a few days ago. Traders would have seen the fact that the market was getting 'washed-out' - and figuring the risks were relatively low. They gained further support on the news that European countries would be outlawing the shorting of bank stocks for the next two weeks. With the short sale ban, those wanting to short will have no choice but to sit on the sidelines. Those willing to step into the breach have been rewarded for their courage as the SPY itself has rallied some 7% off the bottom. This vacuum has and will pressure stocks higher as late summer trading volumes are very thin and anyone who did want to sell (positions that they already owned) has already done so. The rally may be short lived as we head into the Labour Day weekend. The week following the holiday is when many professional traders come back to work and will be more than happy to sell into any strength. Additionally, the short sale ban will have expired and those wishing to short European bank shares will be given the green light to do so once again. 

Summary: In this very oversold market, expect there to be a slightly bullish bias to trade but once the 'no-shorting' ban expires (in about 2 weeks) and the Labour Day weekend holiday is behind us - there is no telling were they will take this market - Cash is King!

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

All good things must come to an end

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

As the title of this week's blog entry outlines, the bull run that began last fall has run its' course. Our time tested trend indicator (and our 'investor buy/sell' signal) has turned negative with this weeks collapse in equity prices. Furthermore, those investors that bought on the last bullish cross-over (at or near 110.95) should have exited that position when the market moved through the most recent support level (125.70) talked about at length in previous posts. This trade (that lasted about 10 months) equated to more than a 13% return on invested dollars in a little less than a year. Considering that the long term historical average return for stocks is about 11%, our 13% beats that number comfortably. Consider too that this return does not take into account any dividends paid while holding the position (add another 2%) and one can clearly see that this was a very profitable position to take. 

So where does this leave us now? The market is heading down - and rather quickly at that. Political rhetoric is at a fevered pitch and there have been no clear indications of the beginnings of a QE3 program by the US Federal Reserve Board. Additionally, the debt situation in Europe is still dominating the headlines suggesting that there ought to be some sort of climatic finish to that problem before it goes away in earnest. Ironically enough, the best thing the market has going for it is that corporate earnings are still ok and the yield curve is still supportive going forward. This indicates to me that there probably won't be a 'crash' but rather a normal 'correction' in the market going forward. So where might prices go over the coming period. As the chart above suggests, there are three significant technical targets I have in mind going forward. Firstly, a 50% retracement of the 10 month bull run ought to bring prices back into the 117 area. Secondly, the breakout high from April, 2010 was near the 119 area. And lastly, the weekly 200 SMA currently sits near 111.5. This all suggests to me that the market will take a run into the 111-119 area before this correction has ultimately run its course.

So lets review the to major investor groups and how they ought to be currently positioned:

Traders: those that are nimble enough to be able to move in and out of the market quickly would have been well advised to be short from the recent daily double top breakdown which occurred when the market moved back below the weekly 13 EMA (129.63) just last week. As the market is in 'free-fall' at the moment, profits should be taken whenever possible.  Picking an exact bottom is never easy and the recent volatility suggests we could bounce right back up top. So with this in mind, I myself have covered my shorts (long put option position) and am sitting comfortably in cash for the time being.

Investors: because our time tested 'investor' signal has officially rolled over, investors would be best to sit in a cash position. They should have exited their long position on SPY (and the broader market in general) on the break of recent support (at or near 125.70). Since the market is in flux at the moment, one would be best to put that money into a 90 day t-bill and just sit back and enjoy the rest of the summer.

So in summary then, the bull run that began last fall has come to an end. the break of recent support (125.70) represents a significant breakdown in the market and it will take some time to clean up the mess. One can't know for certain exactly where the bottom of this move shall be so for safety sake, cash is king!

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

The previously outlined trading range continues

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

As was mentioned in depth last week, the market has established a trading range for the time being. Considering the end of QE2 (and no clear indication of the beginnings of a QE3), an unstable if not uncertain situation with regard to European sovereign debt and an equally unstable if not uncertain future for the US's coveted triple A credit rating, the market is relatively neutral. Ironically enough, the two most important factors for stock prices (earnings and yield curve) are both in good positions for stock appreciation. 

Fundamental backdrop: Lets take a closer look at the current market fundamentals. In any given market, there are two types of risk - systemic and un-systemic. Systemic risk has everything to do with macro-economic situation (stability of governments, demographic composition etc) while un-systemic risk is directly attributable to an individual issues' concerns (earnings, management etc). The current economic backdrop, and its predominantly uncertain macro-economic outlook means we are trading more on systemic concerns rather than un-systemic. At the same time, one might argue that individual company balance sheets are quite healthy with robust earnings to back this notion up. Supportive of price appreciation too - the yield curve is quite healthy (where short term interest rates are generally lower than longer term interest rates). Put this all together and one gets a fairly clear idea of what is going on - macro-uncertainty coupled with micro certainty. Generally, this is bullish of equities over the longer run and if the macro situation can calm down a bit, one might see substantially higher equity prices in the quarters to come.

Traders: since the market moved back above the 13 EMA (129'ish) just a couple weeks ago, traders have been long the market expecting a test in earnest of the early May highs. Stops are probably fairly tight given the seasonal nature of the current rally and those traders would be best to exit long positions should the market fail through the late spring lows (127.50). Most undoubtedly, those traders would probably be best to go short on that break should it occur.

Investors: our time tested 'investor' signal (that being the relationship between the 13 EMA and the 30 SMA is still supportive of higher prices to come. Investors were given a long entry signal way back in the fall of 2010 and have been best to sit on the long side of the market and slowly move their collective stops higher as newer/higher lows have been established. Like the traders, investors would probably be best to exit those long positions should the market (in this case the SPY is our proxy for the broader US stock market and really of the world) break back below the late spring lows (at or just under 127.50).

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com