Market Outlook Tuesday June 25th

Before I get started with my take on the current state of the markets, I would once again like to thank the community for continuing to value my inputs.  It’s a great honor to be able to step in when the venerable Sam Collins takes a couple of days off.

When I last wrote this column it was mid April and stocks after dropping roughly 3% over the course of five trading days showed all the signs of giving us the first more meaningful pull-back of 2013.  From a trading perspective I was positioned short after the first 1.00% or so, but after the S&P 500 found solid lateral support around the 1538 area I quickly flipped my short-side exposure back to the long side.  It simply wasn’t to be quite yet and as traders we either adapt or…die.  While all the signs from a cross asset perspective were there for stocks to head lower at the time, markets being markets decided to push higher and ultimately gave us a better top on May 22nd, the day of Fed Chairman Ben Bernanke’s testimony in front of the Joint Economic Committee of Congress.

To illustrate the divergence between stocks and most other things that could be labeled as an asset class please note the below chart, on which I drew stocks (green), commodities (red) and US Treasury bonds (blue).  While both bonds and commodities topped in 2012 and developed a series of lower highs in early 2013, stocks, ever the fearless animal, continued their push higher.  As I often point out, gravity applies to the stock market as much as it does in nature, which is why eventually a mean reversion move on the part of equities was just a matter of time.

multi asset chart

Fast forward to present day and after last week’s FOMC  statement stocks finally got going on a more meaningful mean-reversion move lower.  By now everyone should have noticed the pattern in play, which is that major directional changes have over recent years almost always come after a central bank spoke.  Of course this is a sign of the times, markets propped up on drugs have to follow their dealers.

The technical picture on of the S&P 500 has, thanks to the roughly 4.60% sell-off (on a daily closing basis) from last week’s highs to yesterday’s close, significantly deteriorated for the medium term.  As of last night’s close the index rests right near its 100 day simple moving average (blue) and the 38.20% Fibonacci retracement of the entire rally from November 2012 to May 22nd 2013.  Most sectors as well as the S&P 500 itself closed well off their lows yesterday, thus leaving long tails on their daily candlesticks.  From here I suspect a bounce back up to the 1600 – 1620ish range is in the cards in the near-term, which ultimately however should only be of the dead-kitty variety and lead stocks toward better support anywhere between 1500 up to 1540.

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