Short-Term Conviction Faltering for Bulls

The expression "we are stuck in a trading range" can lull investors into a state of short-term complacency, especially when the market has exceeded expectations since the early August low. While there were many important market moving events over the past seven weeks, the bulls tended to look forward to the Fed's September 21 statement and Germany's approval of the July 21 changes to the European Financial Stability Facility (EFSF). The Fed meeting disappointed and stocks reacted in a negative manner. It may be too early to grade the reaction to Thursday's EFSF vote in Germany, but as we postulated on Wednesday, it appears as if the bullish gains following the vote may be short-lived.

A CNN article summarizes some of the concerns related to the latest version of the European bailout fund:

But there is now widespread agreement among economists and investors that the â?¬440 billion fund is not big enough to be effective if some of the larger euro area economies fail. Some economists have estimated that the fund would need up to â?¬2 trillion to bail out Spain or Italy. Both nations are struggling with unsustainable levels of debt and dim economic prospects.

“Even an enhanced EFSF will have barely â?¬100 billion to throw at the bond market…minus, of course, any new commitments made to Greece” said Carl Weinberg, chief economist at High Frequency Economics, in a note to clients.

More recently, European officials have been discussing ways to increase the fund’s ability to absorb bad sovereign debt by leveraging its assets in some way. However, experts say the fund is unlikely to see an increase in the amount of money it is able to deploy.

It may take the Europeans several weeks or months to negotiate and ratify the next "solution" for the debt-ridden economies in the block. The Fed has signaled it will take action, but only if the data supports an imminent threat of deflation, which is not currently the case. It may be the bulls have little to hang their short-term hats on now.

The markets have known for weeks that the problems in Europe will be with us for some time, which seems to be reflected in the S&P 500's short-term trends. The S&P 500 has traded between 1,101 and 1,231 for seven weeks. As described and shown in the charts below, the bulls controlled the trading range from August 9 until the high was made on August 31. Since the S&P 500 hit 1,231 on August 31, we have gone four weeks without making a new high, which signals the bears have regained the upper hand within the trading range. The shifting trends below tell us the odds of a bearish break from the trading range have increased in recent weeks.

The bulls can regain some momentum by having the S&P 500 close over (a) 1,180, and (b) 1,220, but presently the bears are making a stealth move to recapture the short and intermediate-term trends. In the daily chart of the S&P 500 below:

Investors should be careful about bullish predictions based on oversold readings from one technical indicator. As shown in the table below, the CCM Bull Market Sustainability Index (BMSI) uses a wide variety of ways to determine the probabilistic outlook for the stock market.

What does the Bull Market Sustainability Index tell us now about the longer-term outlook for stocks? It is bearish. In fact, the historical risk-reward profile is one of the worst looking out three months.

As we outlined on September 22, we still believe the odds strongly favor a bearish break of the current trading range and a move below 1,050 on the S&P 500. Consequently, we may add to our deflation-friendly bonds (TLT) and our stake in the U.S. dollar (UUP). We may also add shorts (SH) back into the mix very soon.

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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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