Reflecting on the Last Three Weeks of Market Action

This past weekend I looked at every single stock in the SP500 one by one.  It occurred to me after looking at all of them that they were in a stance to move higher after significant consolidations during the last half of October.  Sure enough today we get all indices moving higher and a few moving to new high ground.

The indices continue to exhibit ‘bear busting’ behavior and have avoided bearish divergences, broadening topping patterns, rising wedges and head and shoulder tops (XHB is an example of that).  When that many technical sell signals fail you have got to ask yourself if something else is going on.

I do think something else is going on and the name of it is inflationary prosperity.  We are not going to suffer a deflationary crash or a break down of the March lows any time soon.  This is my conclusion now and I intend to stick with this forecast into the end of this year. 

I think it is real critical to try to get the longer term forecast correct at this point otherwise the next year and a half can be very hazardous to your financial health.  I did play the short side of this market the last few weeks with some success but I gotta tell you it was really somewhat stressful.  Stressful because we are dealing with a market that is not showing ‘ease of movement’ to the downside.  The tape is not falling apart and the benefit of the doubt goes to the bulls.  That is not a scenario where you want to be short the market for too long a period at a time.

At some point we will have an intermediate correction of 3 to 6 months duration, but it will likely not be more than 15% and will serve as another long buying opportunity in the context of a much larger run topside.

This was my original take a few other times here at BestOnlineTrades and I am sticking to this forecast.  It makes the most sense to me from all the indicators I follow and the entire context of this bear market which really started in the year 2000.  Here is the chart that I posted before that I think is important.

That chart shows that in 1975 the market was able to blast through the initial bear market down trendline initially significantly weakening it.  It would be quite amazing if we are able to do that again with the current market because it would be telegraphing the same bullish signal.  The more I look at the 1975 market the more I begin to think it is almost like having tomorrow’s newspaper today.

It could very well be that we break into and above the bear market down trendline in the sp500 going into the end of this year and then come January start the necessary 15% or so correction that starts the consolidation phase.

Another clue that we are in an expansionary inflationary trend is the GDX gold miners index (The ETF that represents the XAU gold mining index) and the gold price itself.  I looked at the longer term chart of the GDX today and it is telling me that it wants to blast out to new all time highs going into the end of this year.  I think that is interesting because it is saying that the Gold mining indices will be the first ones to break out to new all time highs.  The broad market indices are about half way there.  So clearly we see the gold sector leading the charge and the rest of the market playing catch up.  All this to me looks inflationary and supports the forecast that we trend higher into end of year, correct for a few months and then head higher again after that.

Ultimately I think the gold sector will win the race, but for now still the whole market wants to participate in this inflationary trend.

So anyway to conclude, I think it is a mistake to be in the deflationary camp at this point.  The tape action is not suggesting it and the bigger picture is not supporting it either.  In my opinion the final nail in the coffin of the deflationary scenario will be a busting of the bear market trendline in force since the 2007 market top.  So that is what I am on watch for now from a bigger picture perspective.

Posted in Index Trading, Market Timing, SP500
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