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Stock Market Tops are a Process

sp-500-topping

I know I’ve been boring you with my posts about the fact that the market indicators we follow show that the stock market had gotten a bit ahead of itself. Markets can tend to move in a direction longer than logic dictates as long as momentum is behind them. But, eventually, the direction changes and the momentum follows.

On the chart above, I’ve drawn a box around the the last month in the market. You can see that we’ve had a pretty contained market with some sharp moves up and down within the range. This is either a topping process or a consolidation. Topping indicates that the market will break out of the range to the downside but consolidation indicates the market will break out of the range to the upside. The direction generally depends upon sentiment, valuation, and news.

In our current case, the the indicators I follow show that we will likely break to the downside as the oscillator is trending down. [If you click on the chart above, it will take you to a live version of the chart and you can see that we have broken out of the range to the downside since I drew the original chart above earlier this morning.]

Our plan is to be a buyer when the market pulls back . We anticipate a 6% or so pullback from the peak, so we have started to scale into some positions (particularly Canadian positions since Canada has the best economy in the G7) and will be adding some others.

Don’t look for a pullback to the March 09 lows – that’s not even reasonable to consider, but if you look at the chart of the entire bear market below, you can see that the 50% retrancement level is a possibility. We bumped up against he 68.2% level but could not muster the gusto to break through. That would be somewhere around 1115 on the S&P 500 index.

sp-500-bear

Corporate earnings have been strong, driven by easy monetary policy. The Fed has started to lessen the easy monetary policy (ending purchases of mortgages, talk of reducing its balance sheet size) but as long as the Fed Funds Rate is near 0% and commercial loan growth is tepid, that liquidity will make its way into marketable securities and keep the bullish move since the March 09 lows in tact – albeit with increased volatility as investors worry that the next step in lessening an easy monetary policy is increasing the Fed Funds Rate.

Stay tuned as we are in for some hand wringing and changing of tunes by the talking heads on TV – from a buy equities at any price mindset to we’re headed back down to test the lows mindset.

As I’ve written before, you have to invest what you see, and we’ve seen a correction coming for several weeks now and will be using the cash we’ve accumulated to take advantage of it.

Mark