Over the past week I was asked numerous times what I foresee for stocks during the summer months. The question may be a little too forward to fully answer at this juncture, simply due to the fact that headline and rumor risks are at ultra high levels and that has the potential to shoot risk assets in either direction. I do however see a few signs pointing down one path.
Before looking at the charts, allow me to make a rather obvious yet important statement that I think for one way or another not enough people have come to realize.
There is much talk about how Europe and specifically Germany is not acting quick enough to put out the fires of the Euro area crisis. While I don’t disagree with that statement it is important to understand the magnitude of these very structural issues at hand in Europe. Such changes will take time. Secondly, Germans are a fairly serious bunch and will think a ‘problem’ through 1000 times before making a decision. That too, will take time. Again, I am not agreeing with the snail’s pace at which decisions (or lack thereof) are being made in Europe, I am merely pointing out a cultural difference here.
To the charts we go;
Because we are currently faced with global issues it is best to look at a global equity index for broad strokes – the MSCI World Index. The head and shoulders pattern currently in play is a) rather obvious and b) has been building since the middle part of 2009. My base case is that the head and shoulders pattern does not break much below the 1100 mark, yet if we do a target near 770 would present us with what I consider to be a more or less worse case scenario. The 770 target on the MSCI World Index is a little over 30% below yesterday’s close.
Closer up we note that the MSCI World Index is showing positive divergence between price and the RSI trend indicator. I.e. price made a lower low this week while RSI made a higher low. This is an important development I look for in order to sniff out better buying areas.
Additionally, volume on the SPDR S&P 500 ETF Trust (SPY) made a lower high versus a lower low in price on Monday. This simply points to an easing in selling pressure, which could also be seen during the August – October 2011 period.
The above signs in my mind point to a near term buyable bottom for those that either need to (due to investment mandates) or want to (with a long enough time horizon and defined risk parameters) put some money to work on the long side of equities.
Looking beyond the summer however I would again take a more precautionary stands. For good longer-term buyable bottoms investor sentiment should see extreme bearish levels, which we currently don’t have. Additionally, note the charts of the S&P 500 and the transportation stocks below – both have plenty of downside to touch the up-trend dating back to the early 2009 lows, which in my mind is a better area of support.