Here is a new update on recent market actions to give you a
clue on what we are looking at when managing your money. I have started to incorporate new trading skills by using Technical Analysis. “Timing can be everything”. And with
technical analysis I hope to help fine tune those transition points and improve
results. Obviously in the investment world nobody has the crystal ball, but the
combination of my fundamental analysis & new technical analysis should
help. Hopefully my analysis below helps you conclude the same. So without
further ado here is my take on the state of things as we continue into July.
From the beginning of the year until the 2nd half
of May the market was on a tear. Since May 22nd the market has
slowed and languished a bit. I see this continuing until the S&P 500 drops
to around 1500. If we look at the short term chart below it seems to confirm
that the next move is more likely to head lower to 1500 versus back up to the
peak of 1687. The short term trend has been broken and is struggling to
recover.
Next is a medium term
chart showing a positive ascending channel since the summer of 2011 US debt
downgrade. It has not been broken. You can clearly see that by April/May stocks
really got ahead of themselves and broke above the trend only to correct below
it. Based on technical analysis the S&P 500 could fall to about 1500 as it
reverts back to the mean. 1500 is only about 11% off the peak of 1687 and would
not break the channel. See below for the medium term chart which I feel is the
most convincing one.
The S&P 500 has been following an establish ascending
channel which has been positive for the long-term health of the market is since
2009. Currently I don’t see anything on the horizon that will break such strong
long term upward momentum.
Now let’s use some Fundamental Analysis to determine if
these moves make sense. Again I see short term correction to possibly 1500pts
for the S&P 500 before making a move back up. In the short term the reason
for the drop is a result of 3 catalysts. The 1st and most
significant is a potential change in Federal Reserve Bank stimulus policy. The
“Fed” has really been the greatest driver of stocks, bonds, and commodity
prices over the last 5+ years. The Fed came out in May and then June before
backtracking that it would taper then stop it’s bond purchasing program of
Quantitative Easing. Which currently has a run rate of $85billion in
Treasury/Mortgage bond purchases per month! World markets have become
increasingly dependent on this massive stimulus from central banks around the
world. So the thought of stopping the “free money train” creates a lot of
unknowns. This has had a big effect on the bond market as well. Which leads to
the other catalyst for my short term bearishness. A sudden increase of interest
rates across the board. In an economy that is indebted as ours that can be
troublesome. Here is the 10 year Treasury Bond Yield chart showing just how big
a move this is:
The third catalyst is the global economy is showing signs of
slowing with China & Europe leading the way in that department. To save ink
I will leave that for another time.
The verdict is however not all bad and should keep the
medium and long term trends intact. Here are the bullish factors that should
keep those inline. There are no signs of an impending recession within the US.
We continue to muddle through as an economy. In fact the reason the Federal
Reserve is looking to slow its stimulus is because economic factors have shown
improvement. They want the economy to grow organically and without stimulus.
That’s a good thing, but it must still prove it to the markets. I am not
worried about interest rates going much higher in the short term after their
big move. Rates act to slow an economy that has been very speculative. Rates
have been manipulated well below real interest over the last 5+ years. That
causes speculation. The example of course is the housing market frenzy over the
last 18 months. It isn’t healthy for housing to be so one-sided and going up as
quick as it has during that time frame. Housing believe it or not historically
only goes up at about the same rate as inflation, 3%/yr. Obviously in the last
10 years it has been a lot more volatile. Corporations are in great shape with
healthy balance sheets and profits. Today’s reported number of 194,000 new jobs
confirms that health. All of these factors again should keep the medium &
long term trends in tact even though there is likely short term market pain headed
our way.
So the next week to the next month or two I will
be monitoring the charts and fundamentals as they change. There should be some
volatility as things get sorted out. We will see how it all plays out soon enough!
