Full speed ahead, for now

January 14, 20135 Comments

If you follow my blogs or media appearances, you will be more than aware of my “short termed bull, longer termed bear” opinion for markets over the coming months. So far, so good, as the bullish trend is dominant at this time. A new peak in the S&P’s 4-year uptrend occurred last week – confirming that the bull is still intact. Higher highs and higher lows = uptrend. And an uptrend must be assumed to remain in place until a high or low is taken out. As Newton’s first law states, “An object that is in motion will not change its velocity unless an unbalanced force acts upon it.”

I will point out that the nature of this bull market, as compared to the last 2 bull market trends (the 1990’s, and the 2003-2007 runs) is far different in volatility. Take a look at the S&P chart above. The trend was smooth sailing, relatively speaking, in the prior 2 runs. The retracements in the 2003-2007 bull run had only small single-digit pullbacks, and the late 1990’s saw only one double-digit retracement (in mid 1997).The current bull market, which began in 2009, has been characterized by 2 huge double-digit retracements – one in mid 2010,  and the other in mid 2011.

I’ve circled three 15% + bull market corrections on the chart (only one of which was in the 1990’s bull run), and I’ve noted the consolidation and topping patterns along with the bull markets over the 20 years studied. Thus, I think it’s safe to note that higher volatility is the new norm. We can discuss at length the cause of that volatility (programmed trading, internet, hedge funds, government QE programs, etc) but that’s just academics. We’re here to try and make some money, not to discuss market theory.

That’s why, although there is always room for a new leg in the bull market to occur, at or near S&P 1550 I am going to take some profits and hide in cash. Sure, I could be wrong. Markets could take out the 12-year highs to enter a new era of bull market highs. But even if you don’t buy into my theory of a new bear market cycle emerging later this year, you certainly could acknowledge the very real probability of a correction pending after the recent run from October 2012. Simple observation of the last two corrections suggests that such a retracement would involve a double-digit loss on the markets before the bull market continues. In my mind, that’s the best scenario that could happen – but not the most likely.

Thackray’s Newsletter

My friend Brooke Thackray, publisher of The Thackray Newsletter (www.alphamountain.com) and research analyst for Horizons Seasonal Rotation ETF recently wrote the following at the end of his January newsletter. It summarizes my feelings exactly:

“With another fiscal cliff a few weeks out as the government has to deal with debt ceiling limit and spending cuts, I cannot help but think that we “have been here before:” same actors, same stage and same play. We are all growing tired of watching the same thing over again. Somehow we have a deep sense of resolve that things will work out, after all, it is America, the land of the creative. The problem is that one of these times the situation is going to get pushed too far and things will unfortunately trip up. Just as I expect the US to have more QE programs in the future, despite the talk of Federal Reserve Governors talking about pulling back the last QE early, I expect that US will have more “cliffs” ahead. The government is still maintaining the position that they just need to hold on a bit longer and then a growing economy will pull America out of its problems. Unfortunately, we are still in a debt deleveraging cycle that is going to last another few years yet. In this environment it is going to be very difficult for the growth to take hold. The best we can probably hope for is an economy that muddles along with slow growth. The good news is that seasonal (and technical!-Keith’s input) investing works very well in this type of environment.”

 

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5 Comments

  • Looks like an ascending wedge formation on the S&P. If so I want no part of the limited upside because when it breaks it could be ugly

    Reply
    • Yes I noticed that–good eye, Dave! But I look for the breakout before confirming and moving in action in any direction. Meanwhile, the trend is up until proven otherwise.

      Reply
  • BULLISH BIAIS ON THE MARKET?

    AN ASCENDING TRIANGLE PATTERN IS BECOMING APPARENT WITH RESISTANCE AROUND 1475. A BREAKOUT ABOVE RESISTANCE OF1475 WOULD LIKELY PULL SUBSTANTIAL SUMS OF ASSETS INTO THE EQUITY MARKETS, RESULTING IN VOLUME CONFIRMATION OF THE MOVE AS INVESTORS RACE TO CAPTURE THE STOCK MARKET STRENGTH. BOND MARKET ARE EXPECTED TO SUFFER. HOWEVER, BEYOND THIS BULLISH BREAKOUT, UPSIDE CAPITULATION COULD RESULT IN EXHAUSTION OF THE LONGER-TERM TREND, SUGGESTING A RETRACE OF SOME SORT IS BOUND TO OCCUR (RISING SUPPORT AT 1400). (SOURCE: EQUITY CLOCK)

    Reply
  • On your suggestion, I have been watching Sentiment Trader (and thanks for that) and it would appear the contrarian bullish exuberance is not yet in place but there may be signs it may be just around the corner.

    The Silver season is having trouble arriving. Will it happen this year?

    Reply
    • Hi Fred
      Yes, there are few signs of excessive bullishness at this point- which points to my continued belief in S&P 1550 in the next few months.
      Silver is having trouble, as is gold (which isnt as seasonally strong, but can “tag along”)–but this is a very volatile commodity. It could turn on a dime, so patience is probably the best strategy now.

      Reply

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