Tuesday, June 29, 2010

Sitting on a Signal: No More Waiting

This morning I felt the conviction to pull the trigger on my equity long exposure and recommended getting neutral. The reality is that there is no longer enough reward potential for the degree of downside risk that appears to be supportable by the technical evidence. I may be early if I get it right, otherwise I'm just wrong. The decision came amid widespread observations of the S&P 500 head & shoulders formation having completed according to some, a notable exception is Carl Swenlin. This evening he and his daughter published their position, saying that they have little confidence that the formation will not complete itself, thereby signalling a bear trend beginning. They described their perspective this way, "Let's be honest, things don't look good right now. The PMO (Price Momentum Oscillator) had a negative crossover today and although support held, Carl and I don't think it is likely to hold much longer. The original set-up was for a rally off the June low, a retracement to about 1080 and then the resumption of the rally. That didn't happen and that is not good."

One of the most vocal technical analysts is Chris Kimble, on DShort.com, who wrote this description of today's activity for his post this evening. "Seems like no matter what business channel you were listening to today, all the "talk was about support, at the 1,040 level." This support line has been in play several times since mid-January.

Is something different this time around, in testing support?

Could be! Each test prior to today, the market hit that level and rallied, leaving a decent size "bullish downside wick!" Today though, there was NO downside wick as the 500 index closed fairly close to the low of the day and below the support line drawn off the wicks.

Tomorrow is the last day of the month and last day of the quarter. Let's see if the 1,040 level remains the same ole boring line in the sand."

Calculated Risk, not known for market analysis but is known for real estate analysis, has this to say this evening in a column he titled "2nd Half Slowdown or Double Dip?"  "The arguments for a slowdown and double-dip recession are basically the same: less stimulus spending, state and local government cutbacks, more household saving impacting consumption, another downturn in housing, and a slowdown and financial issues in Europe and a slowdown in China. It is only a question of magnitude of the impact."

On The Big Picture today, I found an article quoting an analyst making the point that the head and shoulders formation is not the only technical sign coming into scrutiny now."The bearish counterpart of the Golden Cross is called a Dark Cross. This signal occurs when the 50-day moving average crosses below the 200-day moving average. For the S&P 500, Dark Crosses are not all that bearish." And then she finishes with this  unsettling conclusion. "The current trading range on the S&P 500, which began in 2000, has seen two of these more bearish signals – one in 2000 and the other in 2007." I don't need any help remembering the carnage to equities that began in those years.

Danielle Park issued a warning today for a financial hurricane with potential for financial asset destruction. Her perspective and mine are very similar. Not surprising since I aspire to have her demeanor in stressful times. She is as pragmatic and unemotional about her work as anyone I am aware of. I can do that.

And finally, John Hussman published his Recession Warning on June 28. In his article he discusses how reliable his method of projecting recessions is. He incorporates the ECRI Weekly Leading Index (WLI) with the ISM Purchasing Managers Index (to be announced on July 1). The current level of the WLI has been widely observed and referenced. Hussman writes "what prompts my immediate concern is that the growth rate of the ECRI Weekly Leading Index has now declined to -6.9%. The WLI growth rate has historically demonstrated a strong correlation with the ISM Purchasing Managers Index, with the correlation being highest at a lead time of 13 weeks."

Here are updates to the charts I have used.