May Letter To Clients {Part II}

The chart {above} is a more detailed version of events since August. I want to focus on the market’s trading range since then-which is roughly 200 S&P points or about a 30% swing from its bottom to its top.

Stocks have twice been turned back from the top of this range, the first time back in early November and then at the end of the year. The current evidence is indicating a likelihood that we are in the process of a third failure at this resistance line. Investors have been sellers into rallies recently and many companies have taken the opportunity to raise cash through stock offerings. This has the effect of bringing more supply to market than current demand seems to be able to support.

Under the surface are several positives which indicate that stocks are beginning to repair themselves. Stocks’ moving are now starting to exhibit upward as opposed to declining slopes. Moving averages show the average value of a security’s price over a set period. They are generally used to measure price momentum and define areas of possible support and resistance.

The second positive is that each time a security approaches a major line of support or resistance brings a higher probability that it will penetrate this next level. That is why any correction should provide clues as to market direction in the coming months. It is not unreasonable to expect a pause in the advance given how far stocks have traveled in a short period of time. Also stocks can correct in price (that is by declining) or by time (spending a certain period essentially going nowhere).

*Long ETFs related to the S&P 500.

{Tomorrow Part III}