Correction at key pivot

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

 

As we enter the 20th week of this current correction we seem to be approaching some kind of pivot. You will notice on the chart above, a massive wedge pattern that has taken a year and a half to form. While I am reluctant to call a breakout just yet, a weekly close above the 128.60 area would imply a resumption of last year's bull run at best and at worst would represent an indication of a serious test of last summer's peaks. That has not happened yet and as of writing we are still very much range bound between that 129.42 peak and the recent violent low of 116.2. From a cautionary perspective - our time tested trending indicator (that being the relationship between the 13EMA and the 30SMA) is still sitting in a negative position [Interestingly, a break above that 130 area would probably be enough to drag the short term moving average back above the medium term moving average]. Until that relationship changes (no matter how tempting it may be) it is well advised for those 'investors' out there to error on the side of caution. Another additional cautionary note - the low of just three weeks ago was extremely violent and did leave a sizable gap which all suggest we need to test that level again at some point down the road.

So what fundamentals could be causing the market to consolidate and possibly resume it's upward march? There are two answers to that I believe. 1. Corporate earnings have been remarkably good. From what I understand, S&P 500 company earnings are nearing 2007 levels once again. Third quarter earnings season put a bottom in the market. 2. Macro economic developments could help the market. Specifically, there is talk of QE3 once again. Should the US Fed. embark on yet another currency printing regime, the markets will eat it up just like the last two QEs. Additionally, there is some optimism about European debt. While not definitive, bond yields themselves have begun to trend lower. It is far too early to declare that problem over (or really near over) but as long as it isn't in crisis mode, equity prices will generally move higher through this seasonally good time of year. Speaking of seasonality, equity markets generally get a bid through the end of the calendar year. Weather it be portfolio dressing by find managers, or the generally upbeat feeling around holiday spending, prices generally rise in what is called 'The Santa Claus Rally'. 

So with all that being said, how ought our two camps to be positioned?

Investors: while it has been tempting to get back into the stock market, our time tested 'Investor' indicator is still pointing lower. It is approaching a potential cross and there is a bullish price pattern trying to form. So pay close attention over the coming weeks as we attempt to breakout.

Traders: One has to have an iron stomach to trade this market. From the one day crash/reversal seen just three weeks ago to the even more violent reversal of ten weeks ago, those getting caught short are getting punished. If you have the good fortune to short the tops you must take profits along the way down or you may see a winner quickly turn into a nightmare. My personal hunch is to stay on the sidelines until we get a new price pattern to work with. Currently I am looking for a test of the low seen just a few weeks ago. I would use a weekly close above 128.6 to look for new long entries.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com
http://www.therationalinvestor.ca/RI_Tradents.php#sp500bloglink

http://www.therationalinvestor.ca

The Painful Process of Correcting Continues

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

Third quarter, 2011 earnings season came to the market's rescue. Indeed (as measured by the S&P depository receipts - SPY) the market enjoyed a 20% bounce off the lows seen in early October.  As earnings season has drawn to a close, macro-economic concerns have overtaken the bullish euphoria seen just a couple weeks ago. Since many industrialized countries spend far more than they bring in they are held hostage by the market. If the market feels there may be a chance of default, countries can literally see their cost of borrowing skyrocket. That seems to be the case for the 'PIGS' of the Euro land but it now seems like that contagion is spreading the previously thought immune countries like Germany. Many have suggested that (in our globalized system) if a region as large as Euro-land slips into recession, the rest of the world will be dragged down with it. While it may be a bit early to come to that stark conclusion, one must respect the fact that Europe is now firmly on the road to recession. Couple this with the fact that China is in the process of 'cooling' its economy (in an effort to dampen inflation fears) and one can't help but get a rather gloomy feeling for equity valuations going forward.

Having said all that, lets take a look at the chart and see what it suggests we ought to expect going forward. The one thing that stands out to me when I look at this chart is the fact that the market moved back to the 50% level of the 2010-2011 rally (117.735) and has spent the past four months oscillating around this number. As is so typical of us humans, in both overly optimistic and overly pessimistic fashion, we moved way below and then way above the 50% level only to be pulled back to it. Consider too the fact that our time tested 'trending indicator' (that being the relationship between the 13 EMA and the 30 SMA) has been bearish for more than four months (and still remains very bearish) it shouldn't surprise anyone that our cautionary stance on equity investments continues. The market is correcting and until things settle down a bit, the correction will go on.

Now lets take a look at how our two investment 'camps' ought to be positioned through this well defined correction:

Investors: Investors have been well advised to be in cash for more than a quarter of a year now. Our trending indicator (as outlined above) suggests cash is the place to be and will remain so until the 13 EMA can cross back above the 30 SMA on a weekly basis. If and when that relationship does change, so too will our Investor stance.

Traders: Those who consider themselves swift enough to take advantage of the turns have seen some wild price action over the past few months. Since the October lows, the broader market has rallied some 20 plus percent (from trough to peak) and then turned and gave a large portion of that back. Currently we are heading towards filling an important gap that was left at 115.71. Additionally, a move back to that area would bring the market back to a significant trend-line (dotted trend-line on chart above). My hunch, if you can have one, is that we will test this trend-line over the coming sessions. I believe we will hit some sort of selling climax in early December and then have a small counter-trend rally into the seasonally friendly end of year - the Santa Claus rally. It is important to note, the lows from October were 'V' shaped which does suggest they will need to be tested in earnest some time down the road. Once into January, I expect that October low to be tested. We will then find out if the perceived bottom put in just last month is for real or not - trade accordingly.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com
http://www.therationalinvestor.ca/RI_Tradents.php#sp500bloglink

http://www.therationalinvestor.ca

Consolidating in Upper End of Bearish Channel

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

While the world awaits some sort of climactic finish to the European debt situation, corporate earnings have come to the market's rescue. Indeed, given the relatively stellar performance from a wide variety of sectors, one can now understand the relative ferocity of the October bounce. The pros knew earnings were going to be good and stocks were bid up into the event. Unfortunately, that event is now almost done and macro economic events may start to dominate the investment stage once again. While we have yet to break back into the 'glass half empty'' side of this correction (dominated by doom and gloom) we are consolidating right on the pivot line. Should we fail through these consolidation lows, a revisit of the 50% level (and more importantly the gap left on the weekly charts just under it) seems highly likely. Given too our fear of the rising 'Ted spread' (and more importantly its' accelerating trend) investors are still well advised to sit on the sidelines, pay off all your debts and ride this current market out.

Investors: As has been the case for some time, investors were well advised to 'get-out' through the end of July/beginning of August. Out time tested 'investor' indicator (that being the relationship between the 13 EMA and the 30 SMA) turned bearish the week of July 25th and the market broke its most recent support the following week. Since then, the moving averages have been pushed to extremes but still remain bearish. Until that relationship changes (as seen through the correction of 2010) one is best to keep investment dollars in a nice safe place.

Traders: This market isn't for the faint at heart. If you can consistently make money in these markets then congrats to you - but enough commentary, on to the trade. After the sizable bounce through October, we are now entering the 3rd week of consolidation. Through this period that market has been bounded by the 30 SMA on the upside and the 13 EMA on the downside. The market tested the 13EMA again this week and it held. We finished the week back above the 30 SMA and are now within shouting distance of a breakout. Should the 129.42 level be breached one could realistically see a test of the summer highs in earnest. Conversely, should we fail through last week's lows of 121.52, one ought to expect a move back to the weekly 50% level and the rather noticeable gap left just below it. Either way, stops (and here I mean risk) on the trade would be rather wide and may not be worth the potential profit. As I said earlier, this market ain't for the faint at heart. I myself may just leave the whole thing alone for a little while. Check in on CRI's Day Trading Blog to see if and where I am doing any day-trading at all.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com
http://www.therationalinvestor.ca/RI_Tradents.php#sp500bloglink

http://www.therationalinvestor.ca

Volatility can go both ways

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

The current fundamental-reassurance-vacuum (wow, there's a word) that is overhanging the market can and is leading to violent ups and downs as new potentially 'game-changing' fundamentals hit the market. "Will the Greeks default or won't they", seems to dictating trade on a daily basis. These short term blips can translate into wild gyrations. Interestingly, I have personally found that those markets that have just completed a 50% retracement of their primary move often see some dramatic swings.

Our goal here at the S&P blog ins''t to tell you (the reader) where the market is going, but rather to give you a basic framework (50% rules, double tops/bottoms, flagpoles, MA crosses, seasonality etc) that will help you understand where we have been. Hopefully, with that contextual understand, you may be able to glean a sense of where the market ought to go- that's the plan anyway.

So with all being said, lets take a look at this chart. First off, we must appreciate the fact that the broader US stock market has just gone through a very natural 50% correction of a larger trend that began just about one year ago. As should be expected, the price action is very violent right now as the market digests its new fundamental backdrop. One could argue that September's sell-off left the market very oversold and a counter trend rally was likely. What I personally find most interesting is that the market 'topped' last week just under the original breakdown. As for the 'why', It simply appears as though the market just ran out of sellers heading into October. In the absence of new sellers, the market's 'path-of-least-resistance' was up, and boy did we go up. The tragedy is that we may go back down just as fast. Volatility does indeed work both ways.

Trader: Traders want to be in and out on tops and bottoms which seem to be coming in on the hourly charts. This market is moving so fast that you simply can not see the turns on the weekly chart. Indeed, I don't remember hearing anyone was call for a 2000 point rally in the Dow, but it happened and here we are. My 'hunch' during these times is just leave the market alone until it calms down. Having said that, there are those of us need who want to trade, or at the very least try and understand short term price action. So to that end, I will give you my .02 cents. Since we are currently above the 13 EMA one might argue that pull backs represent buying opportunities. Also too, given the fact that we are selling off into a Fed announcement, we may find an ultimate bottom within that first hour after their announcement Wednesday. It's just a guess, but it will be what I am looking for.

Investors: This camp was well advised to get into cash back in the late summer. I find it fascinating that the market's recent rally failed at almost the exact original exit point. The market was literally giving those that missed the first short entry another opportunity to get short again. As long as the 13EMA is lower than the 30SMA one is best to leave this thing alone. Should that relationship change then so to will our investor stance. Yes, we have seen a very nice rally in equities over the past month. But no, it really hasn't changed things in the longer term all that much.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

therationalinvestor.ca

CRI's S&P 500 Blog

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