 October 12, 2011
In spite of the nice stock market rally the past week, nothing has changed the overall technical picture of the S&P 500. We believe that we remain in the initial stages of a bear market. While pundits and fundamental analysts talk about the “typical” 4th quarter rally and seasonably favorable time for the market cycle, we prefer to guide our investment decisions based on objective technical and price trend analysis…this allows us to invest based on probabilities. We are not seeking perfection and remain open to the reality that a robust break out above 1225 and then 1260 could cause us to change our tune and re-look things. While a break above 1225 is within the realm of reason and would certainly be a nice move for the bulls, we believe that the probabilities of pushing past 1260 are very slim. Currently, our managed accounts are overweight fixed income and hybrid mutual funds and we are giving the bears the benefit of the doubt. W e think this allows us to respect bear-market rallies, yet weather a significant storm to the downside. Obviously, there are no guarantees and only time will tell. Patience and discipline will be our umbrella and rain gear.
Yesterday I “tweeted” about the S&P 500 approaching and moving into “the red zone.” Below is the chart that I posted.
Below is a chart of the VIX as of the close from yesterday. The VIX is within range of channel support. In my opinion, if it bounces off support, it could mean trouble for equities.
Lastly, in the chart below, check out the huge red “storm cloud” that the S&P 500 has just moved into. In technical analysis, this is known as an Inchimoku Cloud. It’s size and the resistance zone that it is hovering over portend a very ominous picture for equity investors. Again, this is not guaranteeing a 100% bear market condition. Conditions could change and the storm clouds could clear out. However, from a probability standpoint, when combined with other indicators, this pattern warrants caution.
Best returns,
Matt Falvey
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