an tSionna {02.08.14-Playbook}
Please note that the following discussion is based on my reading of the tealeaves and is a probabilistic assessment of what could occur. It is based on what I am seeing today and could end up looking very foolish on a going forward basis. There is therefore no guarantee that the scenario I'm painting will occur. Also I reserve the right to change my opinion at any time and reserve the right to do so without necessarily posting that change on this blog. Investors that are not affiliated with Lumen Capital Management, LLC should consult your own investment advisers if you have one, do your own research or better yet, hire us before acting on any opinions you might see in this blog. There are no guarantees. With that out of the way, here goes……!
The S&P 500 as represented by it's major component ETF, SPY, in the chart above sold off around 7% in roughly a three week period. We covered some of that here. The market likely served us up a warning when it behaved in a different manner in early January than it has in the past several years. Instead of rocketing out of the gate in 2014 like we've seen in every year since 2009, the market pitched and stalled out. Now readers know that I think part of that is because we stole some of 2014's gains in the last two months of last year. However, stocks are in a different pattern now and I think we need to ponder what that might be telling us.
We never go anywhere without consulting our playbook. The playbook is situational and probabilistic analysis based on historical market results. We use our studies of money flows along with the disciplines of fundamental and valuation analysis to see how markets have responded to similar historical events that we might currently be facing. The playbook will give us different market scenarios to current market activity. From the playbook we formulate a game plan.
The game plan is tactical and strategic allocation of our clients assets based on what the playbook tells us has historically occurred. It is further refined to the specific risk/reward parameters of our various client groups. In some situations portions of the game plan will be implemented across the board in all client accounts or in a specific investment category. At other times portions of the game plan can be specifically implemented in individual client accounts where events or certain client events may warrant such action.
Today we'll discuss what the playbook is telling us and tomorrow we'll give you a tiny peak at the game plan.
We entered the year with stock valuations in no-man's land. They weren't exactly at nose-bleed levels but the market was also not cheap like it had been in past years. We covered market valuations back in January 17th. This obviously began to bother the market. Stocks will fall under their own weight unless there's buying power to move them higher. Valuation plus some less than stellar economic news {largely related to weather in my opinion} and worrisome news out of emerging markets provided investors with the excuse to move stocks lower.
Looking at this action plus where we stand on valuations, the playbook says that probability would indicate a consolidating market that moves sideways now for a period of weeks or even months. Probability also would indicate that stocks have the potential now to trade in a range that we've defined in the chart above by the red trend lines. That is roughly a range between 1,730 and 1,845 on the S&P 500. In the short term, say the next few days/weeks, it would seem that there is a higher probability that stocks would try to rebound into the upper bands of these resistance levels and may even test the prior market highs. For one reason the market is now oversold enough in the short term to indicate a rally. It remains to be seen how much the 3.5% rally since Feb. 5th has changed this short term condition. However, the playbook also says that those upper resistance bands now form a significant level of resistance absent better economic or valuation news.
Probability would also now indicate that there is the potential in the next few months for stocks to perhaps have a more significant correction that what we've currently seen. Absent a significant change in the economic outlook, that correction has the potential to take us into that green trading band which is roughly between 1,600 and 1,680 on the S&P 500. Such a correction, if it were to occur, would see the markets decline 9-15% from their January highs and 7-12% from where we are currently trading. Again please note there is no way to tell if the markets will correct to those levels. For all I know stocks could turn around here and head to new highs. I'm just telling you what our work says has the highest probability of occurring.
Tomorrow we'll discuss a bit our current game plan.
*Long ETFs related to the S&P 500 in client and current accounts.
SPY chart courtesy of FINVIZ.com
Today we'll discuss what the playbook is telling us and tomorrow we'll give you a tiny peak at the game plan.
We entered the year with stock valuations in no-man's land. They weren't exactly at nose-bleed levels but the market was also not cheap like it had been in past years. We covered market valuations back in January 17th. This obviously began to bother the market. Stocks will fall under their own weight unless there's buying power to move them higher. Valuation plus some less than stellar economic news {largely related to weather in my opinion} and worrisome news out of emerging markets provided investors with the excuse to move stocks lower.
Looking at this action plus where we stand on valuations, the playbook says that probability would indicate a consolidating market that moves sideways now for a period of weeks or even months. Probability also would indicate that stocks have the potential now to trade in a range that we've defined in the chart above by the red trend lines. That is roughly a range between 1,730 and 1,845 on the S&P 500. In the short term, say the next few days/weeks, it would seem that there is a higher probability that stocks would try to rebound into the upper bands of these resistance levels and may even test the prior market highs. For one reason the market is now oversold enough in the short term to indicate a rally. It remains to be seen how much the 3.5% rally since Feb. 5th has changed this short term condition. However, the playbook also says that those upper resistance bands now form a significant level of resistance absent better economic or valuation news.
Probability would also now indicate that there is the potential in the next few months for stocks to perhaps have a more significant correction that what we've currently seen. Absent a significant change in the economic outlook, that correction has the potential to take us into that green trading band which is roughly between 1,600 and 1,680 on the S&P 500. Such a correction, if it were to occur, would see the markets decline 9-15% from their January highs and 7-12% from where we are currently trading. Again please note there is no way to tell if the markets will correct to those levels. For all I know stocks could turn around here and head to new highs. I'm just telling you what our work says has the highest probability of occurring.
Tomorrow we'll discuss a bit our current game plan.
*Long ETFs related to the S&P 500 in client and current accounts.
SPY chart courtesy of FINVIZ.com
posted by CR English at 7:00 AM
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