Tuesday, December 31, 2013

Chartology: A Longer Term View of The S&P 500

You haven't seen much on equities on the blog for months. We've had the short then long Tesla trades which got close to the $160 target-$158.00- on the 26th and the hatin'-on-the-gold-miners shorts but for the overall market not many posts.

There are two reasons for the lack of commentary:
First, and overriding, I'm not that good in the latter stages of a bull market. Early on seems easy, catching the turn the day after the Mar. 9, 2009 bottom,* albeit thinking it was only the start of a six or so week rally, the confidence intervals were a lot higher then than they are as we approach the five-year anniversary in a few months.

As a side note the first part of the '80's-'90's Big Bull Market lasted 5 years and 13 days-from 776.92 on Aug. 12, 1982 to 2722 on Aug. 25, 1987.

The second reason for the lack of commentary has been the monetary environment-"Don't fight the Fed" on steroids.
As long as the federales are doing the QE thing the appropriate posture is to shade ones positioning to the long side while at the same time realizing it's a game of musical chairs where the one certainty is the music will stop, if for no other reason than to give the band a chance to grab a cocktail and change conductors, and since the underlying philosophy of the stuff we put out in public is higher certainty trades even if that means lower expected returns (you won't see many exotic or hybrid instruments, for example), when the certainty levels decline the appropriate action is to shut up.

In just the last ten days we're starting to see forecasts for 2014 which definitely carry a whiff of complacency with them, how the new year is shaping up to be the perfect economic environment for equities etc and that gets the antennae twitching.

Just so any future archeologists can ascertain whether we are even close to having a clue as to what is going on we try to include the level of the instrument on any post that might be construed as a recommendation, in this case it is the S&P 500 which looks to open at 1838 up 3.00 (or alternatively the DJIA which looks set to open at 16,472 up 33.00).

Finally, we don't have a lot of faith in Elliot Wave Theory, the "alternate" wave counts are just too loosey-goosey for holding the analyst accountable.

From Dragonfly Capital:
A year end series taking a longer perspective in many market indexes, macro related commodities, currency and bonds. Over three weeks these reviews are intended to help create a high level road map for the the next twelve months and beyond. We finish today with the S&P 500 ($SPY, $SPX).

The S&P 500 has long ago replaced the Dow Jones Industrial Average as the benchmark index for most managers. And for good reason, its broad constituency gives it enough diversification among the large cap names to give a clear understanding of market direction. 2013 was a breakout year for this index, breaking a 15 year channel of price action and continuing the move higher since the bottom of the financial crisis. It has climbed a wall of worry the whole way and there is still a very low participation rate among individual investors. The monthly chart below shows that channel and projects a target of 2400 on the break out above it on a Measured Move. Another 550 points to go. Wow! This can be roughly confirmed by using Elliott Wave principles as well. Since the 2010 bottom the price action has been in Wave III of the impulse higher. This is often the strongest wave. The fractal nature of Elliott Wave shows this is also Wave III since October 2011 and Wave v within that Wave III. All that means is that it could make an interim top shortly at 1923. That would be supported by the Relative Strength Index (RSI), currently technically overbought, reverting lower. The next wave, Wave IV, would be expected to be very flat as it usually is opposite in nature to Wave II, which was down. Using a 5%
spx m
correction would bring it back to about 1820 before the Wave V higher to complete the bigger Wave III. All this says that 2400 can be seen from 2 different perspectives. The weekly picture can help fill in some of the details along the way, and I promise no more Elliott Wave. The chart below shows that the S&P 500 has been in a rising channel, narrowing very slightly, since the November 2012 launching point. Currently it is at the top of that channel and with a RSI that is hovering around the technically overbought level at 70 it would make sense if it reverted to towards the bottom of the channel. The 20 week Simple Moving Average (SMA), also roughly the 100 day SMA, has acted as support and is just above the channel bottom. That would be a target entry point on a hold there if it does pullback. All of the SMA are rising and have
spx w
good separation, as they move higher in a parallel fashion with the price channel. This is a strong trend. The daily chart though suggests that it may not get that low in the near term. The S&P broke a rising wedge from July in October, retested it and has moved higher. The recent break out of the yellow box has a Measured Move to 1848, about where it is now, and near the round number 1850...MORE
It looks like more up, then down. Do click through for the larger charts.

*March 3, 2009
Marc Faber: Stocks Poised to Rally
March 10, 2009
S&P 500 5% Days
I'll go with Faber on the timeline, at least three, maybe six weeks before we see a change in direction, i.e. more than a one day move.
March 13, 2009
Markets: Where Do We Go From Here?
Using the low I.Q. approach* to investment analysis, refined by yours truly, while we will have some down days in the next two weeks, the trend will be up.
Then come the first quarter earnings reports and the crystal ball gets a bit cloudier....
Being on the right side of the move makes it easier to stay on the right side of the move.
Plus, it's pretty funny when the computers start asking if they can use some margin.

See also the calls on the move in the Nikkei. We were late, waiting until December 2012, but quite exuberant once we realized what was going on:
 ...As was advised in January's "No typo: Analyst sets Nikkei 63 million target (it's Société Générale's Dylan Grice)":
....A couple characteristics of big bull markets:
1) Once the move is underway waiting for a pullback almost guarantees you will be underinvested. Everybody is waiting for a pullback, not everybody has the fearlessness/foolishness to committ.

2) The market will find a way to make your day-to-day prognostications and pronouncements look stupid.

Ease in, even if you have to grit your teeth and shut your eyes.