Sunday, May 13, 2012

The Bull Needs To Take A Break

Hi there, and welcome back to CRI's S&P 500 blog.
The seasonally positive window for assets in general and equity related ones in particular has begun to close.  As suggested recently, those long the breakout trade from last fall ought to have been stopped out of their long positions when the market broke the 135.76 lows (marked as point A on the chart above). Since our Investor signal (that being the relationship between the weekly 13 EMA and the 30 SMA) is still sitting rather bullishly; I am reluctant to consider the current pull back anything more than a correction within a broader move higher. Should that moving average relationship change (over the coming weeks/months) our collective stance on equity investments will change - but that is not the case at present.

So if I believe price is correcting, were we ought to expect it to move to? Since there are both a 50% retracement target and a rather noticeable gap around the 125 area, that shall be my short term target going forward (point B on chart above). That represents about a 12% correction from the highs and is historically 'normal' given the upcoming seasonal pressures. Should all hell break lose, my secondary downside target will be a test of the entire uptrend (and another significant gap) in and around the 115 area (point C on chart above).

Traders Stance: Either flat and enjoying the nice profits from being long through the seasonally bullish window or if one must, short from the break of 135.76 (with stops just above the recent highs at 141.66). This would represent a six handle risk for a ten handle profit potential and frankly I wouldn't be surprised to see the trades run those stops. One probably ought to try and get/be short from above the 137.5 area expecting them to run it to new highs. A stop above the 142.5 area would represent a $5 risk for a $12.50+ reward (or about 1:2.5). The market may not rally back up to the 140 area and I might miss the trade but I like the risk reward ratio better by being a little patient if I must be short - which really I am not leaning to be.

Investors Stance: As investors we were given the 'time to get back in' signal more than five months ago. Even with the recent pullback that represents a  7.5% capital gain. With dividends, this represents a very acceptable return. While no Investor sell signal is close, based on the chart analysis above, one ought to expect to see some more softness in the coming weeks and that capital return may 'come-in' a bit more. Having said that, that softness isn't necessarily a bad thing. Indeed, what we may find is that the next significant low represents a place where we as investors can move our collective stops and 'lock-in' profits over the longer term. Markets just can't keep going up indefinitely. Like stair-cases, there is a rise then a pause, then a rise, then a pause. For now, our 'Investor signal' is still bullish and therefore we must consider this a 'pause' and nothing more.


That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
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Saturday, April 28, 2012

The bulls remain in control

Hi there, and welcome back to CRI's S&P 500 blog.
Through this seasonally good time of year for the economy in general and equity investments in particular, it is not surprising to see the SPY move up to our previously stated upside objectives. While the weekly bull flag target was hit rather briskly, the market came within a whisker of the monthly target before backing off here recently. The recent pull back probably represents a good place for traders to move their collective stops to lock in a good portion of the late winter early spring rally. While I am still looking for another burst higher here in the short term, one must appreciate both the seasonal nature of stocks and the sheer distance of this latest bull run. Interestingly, a 50% retracement of this bull run would bring us right back to about where the original buy level came in - but we will leave that analysis for when the market does indeed breakdown.

Trader Stance: As stated above, traders ought to move their stops on the remaining half of their long position [exiting first half upon hitting the first upside target (136.71)] to just under the recent lows (135.76) and exit should the market break below this important pivot area.  

Investors Stance: Investors have been long since last fall (when our time tested indicator - that being the relationship between the weekly 13 EMA and the 30 SMA - turned bullish) and there appears to be no reason to change that stance as of this week's close. While price may fluctuate for a while in our current trading range, collect dividends and know you already have a capital gain buffer to absorb any short term pullbacks. As long as our moving average relationship remains positive, stocks are an ok place to be.


That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
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Sunday, February 19, 2012

The bulls are back in control

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


The more I do this the more I am reminded that more than 80% of people who 'play' the market lose money. Only those that can remove emotion from trading can truly prosper. Case in point - those that sold (or even went short) into the panic of last fall are feeling the pain today. Indeed, if one were to believe the media, there is plenty to bring the markets down, and yet they rise. I myself was incredibly reluctant to believe the latest 'Investor' buy signal and yet here we are - moving higher. Having said that, with this past week's breakout through last spring's highs on the SPY we are registering yet another massive buy signal. As the saying goes, higher highs and higher lows define a bull market. Seasonally too, we can and ought to see the markets move higher. The current seasonal window closes near May which is several months away. Make no mistake, there are plenty of reasons to see a quick 1-2 percent drop. But unlike the last five months of 2011, pull backs ought to be considered as buying opportunities.

The current bull charge began some eight weeks ago. Traders and investors got the signal to 'get back in' in unison (which is rather bullish in itself). The signal was both a crossing of the 13 EMA back above the 30 SMA (Investor signal) and a double bottom price pattern (trader signal). 

Traders Stance: As suggested above, one ought to be long now (from about 126.46) and that trade has been on now for more than seven weeks. Stops ought to be just below the recent significant lows and the 13 EMA (just under 130 area). The market is still pointing higher so I wouldn't be in a big hurry to take the position off; ultimate target is 143 area (weekly bull flag).

Investors Stance: Investors got the signal to get back into stocks at just about the same time as traders (in and around the 126.50 area). This 'investment' is up more than 7% so a period of consolidation ought to be expected at some point in the not too distant future. As the massive bull flag suggests an ultimate upside target of 143 (or a 13.5% capital gain from 126) will be the point when we officially suggest taking profits. That may not happen for many months down the road, but considering the January Barometer's reading, the fact that this is a US Presidential election year, and the fact we are very early in the seasonal trade, it does seem like a realistic target.  

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
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Tuesday, January 10, 2012

A resolution to the upside

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



After taking some time off to visit with family I am back in the saddle to comment and guide readers through these tumultuous markets. And what greeted me first thing yesterday morning was a surprisingly bullish tone to the market. They often say that January's price action will give you an indication of what to expect for the remainder of the year (known as the January Barometer). With this in mind, I will be closely watching how January plays itself out. Additionally, we are now into the second week of Q1, 2012 so I will be watching how each sector finishes the week for an indication of where international money managers are putting money to work. The more I do this (I'm now comfortably into my 17th year of being a full time student-of-the-market) the more I find it interesting how we move from one market cliche to another. In this case, I am reminded of Don Vialoux's addage..... buy when it snows and sell when it goes.

So Lets review how our two primary camps ought to be positioned:
Traders: Interestingly, both traders and investors got good looking buy signals four weeks ago, each for their own reasons. Traders ought to have bought the steep double bottom formation where the long trigger was the high of 126.46 (from the week of December 5th). This occurred through the end of the week of December 19th. Santa Claus came this year, indeed. Targets on this trade should be in and around the 131.00 area [Bull flag formation: (126.46-115.47)+120.03 = 131.02]. Stops on this trade ought to be just below the recent significant lows of 120.03.
Investors: As indicated above, investors finally got the signal to get back into stocks through the week of December 19th. This signal was generated when the short term moving average (13 EMA) crossed back above the slow moving average (30 SMA). And again, this signal was generated when the market broke back above the early December highs of 126.26. For those that missed the initial signal, look to buy half your position now and use any pullbacks to add to the position. I do see a rather noticeable gap at 125.50 that was left just a couple weeks ago. My hunch would be that that gap will be filled at some point in the not too distant future. With the move though 128.60 just this week, we now have a rather large upside target of 138.32 [Bull flag formation: (128.6-106.75)+120.03 = 115.47]. Yes this number does seem a bit extreme, but as we head into the typical seasonal peak of late spring, I wouldn't be surprised to see that number hit. And as Don suggests, Sell those stocks when that snow melts!!!

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
 
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Tuesday, December 13, 2011

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
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Saturday, November 26, 2011

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
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Saturday, November 12, 2011

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

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