I was asked yesterday about the market on a longer term time period so here goes. First off let me apologize because this chart has an awful lot of information so it is perhaps too "busy" for some folks. I'll try to go through the most important points that I glean from this and I hope that makes this a bit clearer. You can double click on the chart to make it bigger.
I would also remind my readers that money flow analysis is taking a look at probabilities. We look at where the money wants to go and take a "Weight of the Evidence" approach as to what that is telling us. Since we are dealing with the future and the future is an unknowable event, then we have to be prepared to change our analysis as conditions change. In short-we try to deal with the world as it is, not as we wish it to be and then try to apply that world to our client's accounts.
The first thing I notice when I look at the market is that stocks in aggregate have filled their gap down from last fall. In fact if you would fold this chart over from the beginning of October, 2008 to the beginning of this October then you would have what looks like a typical bear market chart pattern. That of course is far from what occurred. My thesis is that the rally up to where we currently stand has to do with the Great Depression Part II being taken off the table. That is investors by and large now believe that a world wide financial collapse has been averted. If that's the case then investors can now focus on economic data. That data in the past few months has generally been better than expected, likely leading many investors to assume that the worst of the economic contraction is behind us. I could go into some of this data but it would make a long post longer. I'll try to do a piece at some point on the more positive data points we are currently seeing to add some heft to this point. For now you'll just have to take my word.
The next major thing I see is that the market is likely going to reach a resolution point in terms of its longer term character soon. That is that the market has stair stepped its way higher since March {heavy red line} and now for the first time in over a year is bumping up against major resistance levels that date back to this bear market's inception in late 2007 {heavy green lines} thus forming a triangle pattern that time says must soon be resolved. Probability indicates that a breakthrough of resistance should lead to a market that will at some point approach the 1200 level on the S&P 500 or 120 on the SPY {which is the chart pictured above}.
Probability also suggests that a market that ultimately fails to break through here could spend some time consolidating its gains or retest a level between 1060-1000 or 106-100 on the SPY. We will adjust the game plan accordingly to this sequence over time.
Shorter term of course the market has some very positive momentum going for it in terms of its end of year cyclical patterns. It is still somewhat overbought although that has worked itself off as the market trended sideways most of the Fall. Until this past week stocks spent most of the past two months going nowhere and it is beginning to look like our Autumn correction was one of time and not per se of price. We'll continue to monitor these patterns and update this sequence accordingly in the future.
*Long ETFs related to the S&P 500 in client and individual accounts. Long SPY in certain client accounts.
Intended solely as an illustration of money flow analysis. Not intended to be investment advice as we do not know casual reader's risk/reward parameters. If you are not a client of our firm please do your own homework regarding the markets or speak to your own investment advisor. Better yet you can hire us!
