What to Expect Next in the sp500

Today was a clear sign of strength in the sp500.  Today we printed a marubozu candlestick on the daily chart which is a clear sign of who is in control of the tape.  There was almost zero bottoming tail and almost zero topping tail on today’s candlestick.

Signs of strength are great, but they still need to be consolidated.  It is possible we could get some more follow through tomorrow, but we need to keep in mind that the sp500 is quite overbought in terms of the RSI which is currently in nosebleed territory at 77.6 today.

My expectation is that we will see the sp500 start some type of short consolidation either tomorrow or next week that will essentially reset the RSI overbought level and perhaps slam it back down to the 70 range again.  Somewhere near that range is where I think new longs can be added for a renewed run higher.

sp50020101104

This type of behavior of the RSI versus price may continue on for quite a while longer whereby the market pushes RSI higher, gets overbought and then initiates small short term sell offs that bring RSI back down near the 70 range.  So near the 70 range in the RSI is what I view as new buy points.

Part of the logic I am trying to work with here is the presumption that the market is now working in the ‘power zone’ with a clear and persistent trend north.

The possibility exists that we could get a deeper selloff when we see the NDX 100 reach key resistance levels as I wrote about yesterday.  So keeping a close eye on the NDX 100 is not a bad idea in my opinion as it seems to be the lead sled dog anyway and could be the first move on the downside as well for the inevitable correction.

My current take is that when the correction comes in the NDX 100 it will be more of the variety of a ‘shotgun’ type correction.  In other words, it would be likely short sharp and contained so that it sufficiently resets the overbought levels of the market.  Thereafter I expect plenty of more upside.

I do have to say that it is almost astonishing how similar the current rally is resembling the 1975 recovery rally.   The 1975 recovery rally was just as persistent and relentless.

Posted in Market Timing, SP500, Technical Analysis
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7 comments on “What to Expect Next in the sp500
  1. JR says:

    Possibly this market is over bought. But for sure sentiment has not turned overwhelmingly bullish.
    As a matter of fact most advisers are still advising their client to keep at least 50% in cash.
    Sentiment is not strongly bullish, aside from the tape being bullish. This market just wants to soar! The Fed wants it to soar!

    Although the Fed cannot restore the middle class’s loss of wealth in their homes, they can and are restoring the wealth in their 401ks.
    If you think back, the Fed responded to the dot com bust by pumping money into the real estate market. Looking the other way as banks lent to the homeless without jobs. It worked and instead of being depressed about the stock market, the electorate became elated about how the value of their home’s, their own little nest, had become their ATM.
    So Greenspan averted a depression by counter balancing the market dot com bubble bust by creating a new real estate bubble.
    Now the Fed is jumping on the other asset inflator, create a new stock market bubble. People will feel wealthier and go spend.
    Also, since they are investors in the market, they think they are Capitalists.
    Thus the Fed not only accomplishes through smoke and mirrors the illusion of wealth, but again they pull the Wall Street Capitalists nuts out of the fire.
    Understanding what the Fed is doing, it is clear they will not cut back to moderate the bubble until the market again reaches its old time high.
    If they then can hold the market there or slightly above, they will have created a new psychology among the population that “happy days are here again”.
    You cannot fight the tape, but also you cannot fight the Fed.
    Ergo, it is up, up and away for the stock market!
    Two years from now we will be talking about what a genius Big Ben is. Just the way we talked about Greenspan.
    Americans love their bubbles!

  2. Geoff says:

    Comment on JR’s comment:

    quote: But for sure sentiment has not turned overwhelmingly bullish.
    As a matter of fact most advisers are still advising their client to keep at least 50% in cash. Unquote

    Well, in the end JR may be right – – never fight the FED, but the exact words above seem pure RUBBISH! “not overwhelmingly bullish” – – – look no further than the Nov 1 issue of Barron’s – – – cover said “Bye-Bye, Bear”. On the inside on page M57, Investor Sentiment Readings indicate that 68% Bullish Sentiment (Consensus Index) and Aall Index Bullish is 51.7% (almost 2.5x greater than Bearish 21.5%). This is the same Barron’s that famously had June 2, 2008 cover saying “Buy GM” with GM stock at nearly 17 and the cover saying “Why GM’s share price could nearly triple”. Within seven months, GM share’s were worthless and GM was bankrupt.

    Furthermore, I am a daily reader of the WSJ and frequent watcher of CNBC and I very rarely, if ever, have heard of ANY investment advisor recommending 50% cash position. As a matter of fact, I believe that mutual funds currently hold an obscenely low amount of their holdings in cash – – i think the % is about 3.3% only.

    Finally, if you go to http://pugsma.wordpress.com/ site you will see that that blogger, an Elliott Waver, is claiming that Elliott Wave International is now presumably admitting an error in their wave count and now indicating that we are in a multiyear bull market. If this is true, I presume that Prechter’s forecast of Dow 1000 will now be revised to Dow 20,000+. I am not a subscriber to EWI so I can not confirm.

    While all of this may not mean the market collapses tomorrow, I think it surely disputes the assertions made by JR.

    I agree that it is not good to fight the FED, but FED did not guarantee to implement QE2 in its totality, but to monitor the situation closely. According to this blogger (Tom), one of his postings of about 3 months ago attempted to show apply TA to a graph of unemployment trends and he surmised that unemployment levels would become less severe. If true, inflation should heat up, and in theory the FED should start removing the “sauce”. That is a big “if”. . . . this market for about the past 15 years has been addicted to FED intervention. . . Wall Street wants no pain. . . ever. . . and the FED accommodates them. BUT IF the FED does not remove the sauce than the USA is headed the way of Zimbabwe and heaven help us. In that instance all the bulls will be right. . . the stock market will soar, but for totally the wrong reason. hyperinflation which is what the gold market is currently obsessing over.

    I agree with you that America loves their bubbles, but all bubbles end the same, whether the Tulip Mania, the South Sea, the Internet, or the Housing. I agree that with you that it will take time, but in the case of the Buy GM stock cover of Barron’s, it only took 4 months until we were inside the eye of a financial hurricane and only a couple months more and GM was gone.

    I disagree TOTALLY with your first paragraph. Read Barron’s. The issue cited had the “Fall 2010 Big Money Poll Results”. They absolutely do not validate your assertion in your first paragraph. But read Barron’s with some discrimination. . . . insert “a lot” in the place of some.

  3. Geoff says:

    A Further Note:

    On Friday’s (Nov 5) Kitco site, an Adam Hamilton posted his research that confirms “Mid Term Election Rallies” over the past 50 years or so.

    With investor sentiment currently at least at a strong simmer, if we go without some sort of sharp surprise correction or extended drift lower (either event to reset investor sentiment), than I predict that within six months or less investor sentiment will be at full boil.

    I recently read that Geremy Grantham the quite famous investor was saying there was nothing wrong with Apple as an investment. This is the same Grantham that had an interview on CNBC around June 2008 where it said he was short copper and that copper’s price would fall to its cost of production which he estimated was below $1 per pound. I was holding FCX and his prediction made me very nervous. I strongly wish that his years and years of wisdom had not been an influence on me. I sold my FCX very near the bottom about 6 months later. Copper never fell anywhere close to $1 per pound. Getting back to Apple, it has almost the highest market cap of any stock on the planet, second only to Exxon i think. And yet the handheld space has a huge number of very very very deep pocketed rivals, all just itching, to get into the space – – – RIM, HP (via Palm), Nokia, Google, Microsoft. And it is not clear how much of an influence ONE MAN (Jobs) has on Apple. It sure seems unlikely to me that all of these industrial / hi-tech behemoths can end up being big winners. A very very lot of money has been made to date. I think a very very lot of money stands to be lost.

    Sorry for the digression on Apple and the handheld space.

    My point is simply – – beware of the conventional “wisdom”. As an investor I have been rather consistently way too pessimistic and way to trusting of the “experts” and “gurus”.

  4. Tom says:

    One would think that if the inflation rate starts to move significantly above the Fed’s target rate then they would start to raise rates or at least start talking about it.

    It is unknown to me how fast the inflation rate can rise and at what level of acceleration.

    In 2008 it dropped from 5.5% to -2.2% for a total of 7.7% move in just one year. So if it can drop so quickly in just one year, I do not see why it cannot rise just as fast in only a one year time frame. If it moves that fast then it would maybe cause the Fed to have to react more quickly.

    I just don’t see the DJIA going too much higher than 13,500 or so. There is a massive wall up there. If at that level inflation is still very subdued then maybe it can go much higher. But my preferred take is that inflation will start to creep in higher at that level and cause the market to stagnate.

    This would seem to be a perfect environment for commodity stocks for quite a long time.. I think they will be the outperforming sector for the next year. If inflation starts to become a serious problem they should go to the moon and this time they should continue to rise even if the stock market declines.

  5. Geoff says:

    Holy COW!

    check out this website immediately – – he is an EW blogger and he is going ALL IN with an incredible prediction of market collapse

    http://www.elliottwavehound.blogspot.com/

    His post is tonight – – extremely current – – calling for a market collapse as soon as tomorrow apparently or in the next couple wks.

    Simply incredible.

  6. JR says:

    Hi Geoff and you other doubter.
    I like the fact that you are such a great critical thinker.
    You are right to think that my statements were just opinions rather than a reasoned attempt to convince.
    I have included one of my sources regarding many traders still holding significant positions in cash.
    Additionally, I am including todays CNBC opinion on the market. You will easily see that there are many who now on Monday, note not last week on Friday, when I wrote my comment, are more and more siding with my position.
    I particularly like the theme of the article which is ‘don’t fight the Fed”. Remember you heard that first from me!
    First I feel compelled to defend my position regarding the recommendation of many advisors to keep about 50% in cash.
    My site among other is the Hulbert Financial Digest. See below!
    Additionally, you might note the CNBC article about the direction of the market. This article was written today. But as you can see they copied my comments of Friday!
    As to getting information from the Wall Street Journal, BEWARE!
    To paraphrase Nietzsche said those that can do, those that can’t write in the WSJ!

    “Consider the average recommended equity exposure among a subset of the shortest-term stock market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). Perhaps not surprisingly, given the strength of Thursday’s rally, the HSNSI jumped during the day by 20.5 percentage points.
    That big a jump would normally be a cause for contrarian concern, but I’m not so sure it is this time: Thursday’s rise in sentiment comes after an extraordinary five-week period in which the HSNSI didn’t budge at all. And a 20.5 percentage point increase in sentiment over that long a period is not so large as to cause particular contrarian concern — especially given how strong the market has been of late.
    Furthermore, even after Thursday’s big jump, the HSNSI remains quite low — considering that the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 11,400, -44.24, -0.39%)   is at new bull-market highs. The HSNSI now stands at 45.7%, for example, which means that the average short-term stock market timer is still recommending that his or her clients allocate more than half of their equity portfolios to cash.
    To put this 45.7% into historical context, consider that the HSNSI today is still lower than it was two months ago, when the Dow was trading as much as a thousand points lower. The HSNSI then got as high as 47.5%. Contrarians see evidence of a strong wall of worry that the market timers are more bearish today than then, despite the stock market today being so much higher.
    Furthermore, contrast the HSNSI’s current level with where it stood in late April, the last time the Dow was trading close to current levels. The HSNSI then was at 65.5%, some 20 percentage points higher. This, once again, is evidence of a strong wall of worry for the bull market to continue climbing.”
    It is interesting to read the following article from the CNBC web site.

    Fed Policies, GOP Victory Put Markets In ‘Sweet Spot’: Pros
    Published: Monday, 8 Nov 2010 | 11:56 AM ET
    By: Jeff Cox
    CNBC.com Staff Writer
    So at a time when a lot of conventional market maxims have proven unreliable—”as goes January, so goes the year” comes to mind, along with others—”don’t fight the Fed” nevertheless seems strongly in vogue. (See my comment BOT Friday)
    “Fighting this trend is a fool’s game,” hedge fund manager and The Gartman Letter author Dennis Gartman wrote Monday morning, even while calling the Fed’s posture “heinous and inflationary and ill-advised.”
    “The Fed has a great good deal more ‘margin money’ than we have and to take the Fed on at this point shall cost not only real capital, but the expenditure of mental capital shall be exhausting,” he said in predicting the Standard & Poor’s 500 [.SPX  1222.34    -3.51  (-0.29%)   ] could be on its way to approaching an all-time high around 1,500.
    Equity research firm TrimTabs changed its market position from “cautiously bullish” to “fully bullish” on the grounds that “the Fed is determined to manipulate stock prices higher and is blowing up a multi-trillion dollar bubble.”
    Federal Reserve pump-priming and likely policy changes coming to Washington have market pros scurrying into bullish positions for the days ahead.
    The Fed’s planned injection of at least $600 billion into the system through its money-printing Treasury-buying program has increased expectations for a prolonged risk-on trade, while Republican gains in the midterm elections have spurred hopes that Washington will stay out of Wall Street’s way.
    “This is a sweet spot politically that we don’t recognize, we’re just kind of blind to,” Ken Fisher, founder of Fisher Investments, said in a CNBC interview. “We move from high political aversion where everybody’s’ chittering and hostile about all the things we were hostile about this year, down to a point where next year nothing’s going to happen except for baby-kissing, and that’s the low point of political risk aversion.”
    Fisher pointed out that since 1939 stocks have never been negative in the third year of a presidency. He said that the year following a mid-term coincides strongly with the ending of risk aversion as investors get a clearer view of the regulatory climate.
    Similarly, the Fed’s policies are convincing more and more market participants that the central bank’s policies, though posing dangers over the long run, are at least supportive for the near term to stock prices.
    In a research note, Goldman Sachs chief economist Jan Hatzius said the firm’s financial conditions index is indicating easing conditions and the Fed’s policy “has gotten off to a very good start.”
    He noted that “lower interest rates, higher stock prices, and a weaker dollar is basically indistinguishable from what one would expect in the runup to a conventional monetary easing, suggesting that most of it has been the Fed’s doing.”

  7. Geoff says:

    Barron’s Fall 2010 Big Money Poll Results (Nov 1, 2010 issue)

    page #38:
    Current Cash Allocation: 10.8%
    6 Months (Future) Cash Allocation: 7.7%
    12 Mos: 8.0%

    A far far far cry from 50%!

    WSJ today – Nov 8, , page C1 “Dumb Money Tests Bullish View of Stocks” – – – the 8 week moving average of Bulls to Bears is at the widest point in last four years (about 47% Bulls to 26% Bears). this is 8 wk moving average and much wider than pre-crash 08/09!

    I totally (100%) disagree with your first paragraph that I commented on earlier.

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