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The Breakout Will Govern The Market

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You are probably familiar with the chart above if you’ve been reading the blog for the past six weeks.

Initially, I drew the blue box and told you we had determined this was a topping pattern and that we were using that as a selling point to raise 10% to 15% cash in client accounts.

Then, when the market fell, I drew the purple box and told you that this range was where we saw value (at a P/E of 12 on the S&P 500, a below average level) in the market and were adding to positions.

Now, I’ve drawn the green box on the chart to show you how the market is in transition. You’ve seen that over the past several trading sessions (as shown by the Newsweek Indicator saying that the Euro was history – fyi, our stock market trades in conjunction with direction of the Euro at this time as both are “risk” assets) that the stock market has solidified just a bit.

What I also see here is a range that has been erratic within a tight range of 1110 and 1040 on the S&P 500 index. Its possible we will move within this box for awhile, but eventually we will break either up through it or down through it. But whichever way it breaks, that will likely be the direction of the market for at least a several session move.

Gut feeling: we will break to the upside once earnings season hits and have a Summer rally that, while maybe not a once in a life time investment opportunity like the March 2009 post-crash lows, could provide an opportunity to move up toward the upper end of our trading range. But that is still over two weeks away.

A lot can happen to spook investors and drive down prices until something fundamental like earnings become known. So, we are trading carefully and not chasing the market at the top of the green box.

What will be of particular interest is earnings from multinationals that do business in Europe. Pre-announcements of companies that have a significant business presence in Europe is that the negatives are being touted much wider than they really are – that economic momentum is not as bad as TV would have you believe.

But, that is all just speculation until the actual numbers are announced. Until then, keep an eye on the green box – if we break out, the direction will give you the interim direction of the market.

Into the blue, after the money’s gone…only David Byrne could tell us what that means…

Mark