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Market Pulls Back – Here is what we are doing

sp-bear-mkt-view

Click the link below to see an enlarged view of the graph:

S&P 500 Index - Enlarged View

Well, we had a big down day today.  You see that we have dropped to the 34 day moving average, a key indicator I follow.  The last time this happened at the beginning of September, we rallied strongly.  Will we this time?

We are due for a consolidation of the + 50% gains we’ve had since March.

For those clients with a lot of cash, this is a good thing as we can start buying some positions (in fact, we have some good till cancelled purchases already in the system that we hope will hit as the market pulls back so that we are establishing their portfolio at below-market-top levels).

For those clients with established portfolios we have stop losses set which will protect the gains they’ve experienced since March.

It may seem counter-intuitive to be both a buyer and a seller here, but different clients are at different stages of the investment process.

So, what is the market telling us?  If you look at the RSI indicator at the top, this gives us an indication of the relative strength of the market over the last 7 days.  You can see that it has moved from above 70, which is an unsustainable level of strength to approaching 30, which is an unsustainable level of weakness.  That is pretty positive.

Unfortunately, the other indicators on the page are less positive.  The On Balance Volume has moved decisively negative as the selling pressure volume has moved above the moving average line.

The stochastics is heading down but not yet near the 20 level which generally indicates a turn back up.

The green and red line have converged on the ADX while the black line has curled down.  You always want the green line above the red line, which indicates you are in an uptrending market.  You can see that the green and red line met in early September but turned around.  Black line indicates the strength of the trend, so a falling black line and a rising red line indicates that the selling is present but not currently in a strong trend – this is a good thing – but the trend could strengthen.

If the black line on the MACD continues to fall and seperate from the red line, then you can expect the black trend line on the ADX to move upward indicating a downtrend in the overall market is likely.

The CMF graph and Accumulation/Distribution line at the bottom show that money is still moving into the market.  This is a good thing as it shows that people are buying (although at a slightly slower pace – you can see that the black line is down slightly from its high and the blue shaded area has dropped a bit).

So, what does all of this mean when you combine it with the fundamental data on the economy and corporate earnings?  Earnings season is just getting started.  It is likely that on a year-over-year basis the numbers should be better – however the impact on stock prices will come from comparisons to estimates (have the analysts been too rosy or too gloomy in their forecasts) and company forecasts for the balance of the year and into 2010.

If companies disappoint against estimates or in their forecasts for the next six to nine months, then the market will sell off and retrace back to the 920 level on the S&P 500.  If companies beat estimates and forecast improving earnings, then we could see a move up to the 1150 area.

As always, we are positioned for either event with stop losses to protect against the downside, GTC buys to establish positions at lower prices, and established positions to ride the intermediate uptrend we’ve established since March.

Its an interesting time.

We are in the process of updating our primary investment themes.  We’ve been putting them into place in client portfolios as opportunities have arisen but will put out a new Investment Strategies newsletter once they are finalized.  If you do not receive the newsletter by mail, please email me at ballard@bankchampaign.com and I will add you to the mailing list.

Have a great night and check back here for updates and analysis.

Mark