October 24, 2011
With the S&P 500 up over 6% for the month ending 10/21/2011, I wanted to take a quick look at the charts and focus in on a longer term perspective.
Bottom line upfront, we continue to give the bears the benefit of the doubt and view the recent stock market strength as a bear market rally. The probability that we are in a bear market is high. The key word is probability. Certainly, I can’t guarantee this and it is possible that we could return to a rising equity market, or bull market. We believe this scenario is unlikely however. So the question one might ask us is, “At what point would you change your opinion?” So here is what would cause us to change our tune:
- Our monthly momemtum model favors equities, Commodities, and possibly REITs over Treasuries.
- The S&P 500 blows thru 1275 on strong volume and then retakes it’s 12 month simple moving average.
Until one or both of these scenarios take place, we will continue to be conservatively invested.
Below are two charts. I know some of you get intimidated or confused with charts, but if you take your time and just look at the patterns that we are seeing and monitoring, you will understand why we are not impressed with the current market strength….even though the bulls have clearly seized the upper hand in the short term (from both a technical picture and price momemtum).
In this chart of the S&P 500, draw your attention to the negative slope of the 200 day moving average, as well as the 1275 price level. The negative slope of the blue line (200d moving average) does not portend a healthy market. The 1275 price level is close to the 200d moving average and it also where I place a strong technical resistance line.
The second chart that I would like to share with you shows the pattern similarities to what the S&P 500 looked like back in 2007/2008. Of particular note, look at the left blue circle and see how the market rallies about 14% before very quickly retracing all of it’s gains and then turning control back over to the bears. This pattern bothers us and warrants caution.
If you have any questions, please don’t hesitate to call or email me.
Respectfully,
Matt Falvey, Chief Investment Officer, Rich Investments, Inc.
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