an tSionna {07.13.13}

The last time we posted this chart of the S&P 500 ETF SPY was in the teeth of the most recent sell off that began back in May.  In our base case scenario we outlined a view that the highest probability event was for a range bound market during the summer.  Nothing we've seen so far makes us want to change our base case scenario at this point.  Stocks have rallied into the teeth of this resistance and are now over bought via our shortest term indicators.  We did some repositioning when things were lower {again see our base case post} and may look to take the opportunity to make a few strategic sales now that stocks have moved closer to their all time highs.  We are not negative on the markets but are cognizant of reasons why markets could stall out around here to catch a breather.  Longer term we are positive on equities.

Now look, it is entirely possible that the basic scenario that we've outlined for the next few months may not occur {although so far it has played to script}.   For all we know stocks may simply power through and just continue moving higher.   That has occurred in the past as recently as 2009.  There are reasons this could happen, particularly if earnings season comes through better than expected.  If stocks continue their relentless march higher then we'll be along for the ride as we believe we are well positioned in equity ETFs.  However, prudence dictates at least understanding where we are in the yearly cycle and where we are vis-a-vis our current base case scenario.

A few final thoughts:

1.  Our base case scenario won't change even if we make marginal new highs these next few weeks.  I don't have a "market weather gauge" that can tell me the exact point when markets will make their final highs during this bullish cycle.  It will be the overall pattern that I'm interested in and only time will tell what goes on with price movements.

2.  If stocks are going to play to the "summer swoon" script then they will likely make their highs for this current rally cycle sometime between the beginning of this week and the end of July.  That's at least what has traditionally occurred.

3.  Don't overlook the importance of recent new money flows into stocks.  The beginning of July marks the beginning of a new month, new quarter and new half year.  Also it is our opinion that the rotation out of bonds or bond funds into equities is only now getting started and that could put a floor under any market sell off.

Chart courtesy of FINVIZ.com.

*Long ETFs related to the S&P 500 in client and personal accounts.