We are participating in a PIMCO conference call this morning with Mohamed A. El-Erian and Bill Gross. PIMCO is very well connected and knowledgeable regarding the bond markets. We may be able to gain some insight into the debt problems in Europe and the United States. Serious debt problems remain and the solutions are not going to be easy since haircuts and negative impacts will be involved.
We recently outlined some bearish concerns in Parallels To 2000 And 2008 Should Not Be Ignored. It is very important to understand that even if we have already entered a bear market:
How the market behaves near 1,260 (if we get there) will be very telling. The chart below shows the S&P 500's next major hurdle sits near 1,200. A break above 1,200 could lead to a swift move toward the bottom of the head-and-shoulders neckline (labeled A). Other bull market tests take the form of the now downward-sloping 200-day moving average (labeled C) and the downward-sloping trendline (labeled B). The point is we will know much more about the risk-reward profile of stocks and commodities based on how the S&P 500 fares at the three points of possible resistance (A, B, and C).
If the S&P 500 fails below A, B, and C above, then we would most likely sell a good portion of our remaining exposure to stocks. Another option would be to hedge our current positions near A, B, and C. A hedge could take the form of a vehicle like the ETF SH, which goes up when the S&P 500 goes down.
A very similar bear market rally occurred in 2000. The chart below shows a drop similar to the recent waterfall decline in stocks. Notice, like today, the 200-day moving average had already turned down in 2000 (see red arrow near C), which leaned bearish.
In 2000, stocks rallied hard back toward the previous trendline, which is labeled B below. The 200-day continued to roll over (near D), which meant the odds of the rally failing were much higher than under typical bull market conditions.
After the sharp rally where it was declared "we have found a bottom", stocks reversed near the intersection of the 200-day and the blue trendline B (near point C and red arrow). If the present day rally approaches similar obstacles (200-day and trendline/neckline), it will be a very big test for the sustainability of the bull market. If the 200-day is noticeably sloping downward as stocks approach it, we will be skeptical, but open to, a bullish resolution.
The scenario above is one of many possible scenarios that could play out, but it suggests that having a mixed approach with some stocks, some cash, and precious metals is appropriate until we get some more clarity regarding the issues above. If stocks make a lower low, rather than rallying, we will look for bullish divergences on the way back down. If they exist, we will be patient. If they do not, we will continue to cut back on our exposure to risk.
We did a study this week looking for high probability ETFs relative to a possible move back toward 1,260; more information, including some ETF symbols, can be found in the Twitter post “ETF Screen for Possible S&P 500 Neckline Rally”. Some other important levels to watch on any rally attempt are shown below.
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Copyright © 2010 Ciovacco Capital Management, LLC. All Rights Reserved. Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC (CCM). .Terms of Use. This article contains the current opinions of the author but not necessarily those of CCM. The opinions are subject to change without notice. This article is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. The charts and comments are not recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations are not predictive of any future market action rather they only demonstrate the opinion of the author as to a range of possibilities going forward. All material presented herein is believed to be reliable but we cannot attest to its accuracy. The information contained herein (including historical prices or values) has been obtained from sources that Ciovacco Capital Management (CCM) considers to be reliable; however, CCM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change and readers are urged to check with tax and investment advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. CCM would like to thank StockCharts.com for helping Short Takes create great looking charts Short Takes is proudly powered by WordPress . Entries (RSS)
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Copyright © 2010 Ciovacco Capital Management, LLC. All Rights Reserved. Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC (CCM). .Terms of Use. This article contains the current opinions of the author but not necessarily those of CCM. The opinions are subject to change without notice. This article is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. The charts and comments are not recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations are not predictive of any future market action rather they only demonstrate the opinion of the author as to a range of possibilities going forward. All material presented herein is believed to be reliable but we cannot attest to its accuracy. The information contained herein (including historical prices or values) has been obtained from sources that Ciovacco Capital Management (CCM) considers to be reliable; however, CCM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change and readers are urged to check with tax and investment advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. CCM would like to thank StockCharts.com for helping Short Takes create great looking charts Short Takes is proudly powered by WordPress . Entries (RSS)
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