Thursday, September 2, 2010

Sustainable Rally or Bear Trap?

On June 29 I made a decision to become market neutral as much as possible. In my post titled Sitting on A Signal: No More Waiting, I referenced a number of high profile blogger's and people whose fundamental and technical opinion I respect simply due to their objectivity. There was no shortage of concern for the potential loss of capital. Since then, the S&P 500 Index has tumbled and jumped through July and August. It's been a bumpy period. The bears have been formidable players making the biggest weekly moves, as shown by the red candlesticks in the chart below. The bulls have answered in their way, making a game of it. On June 29, the index closed on 1041 and on August 31 it closed on 1049.

Next, is the chart from above, modified to show daily periods. Daily is said to be a better short-term analysis, while the weekly view is a good way to evaluate an intermediate period, monthly for long-term trends. I want to use weekly periods to smooth out the daily volatility.

Since the end of June I have certainly questioned my decision to be neutral to the stock market, but the one or two day moves up and down did not develop into trends. Gold miner's have provided a strong upward trend. Here's a weekly look at an ETF for the miner's, GDX. It has obeyed the 40 week moving average (MA) for 17 of the 18 months shown here. As the trend line flattens out now there appears to be no momentum left in the tank. From here it will need to live or die on fundamentals. Can it? I'll focus on currency charts to monitor the fundamentals for gold.

Another investment class that has enjoyed a solid performance for the past 20 years, as well as since the end of June, is bonds. Here is a weekly chart of the Barclays Capital US Aggregate Bond Index. The Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, Corporate bonds, and a small amount of foreign bonds traded in U.S. Notice that the steepness of the price change has remained week above the 40 week MA which is the red line in the lower right hand corner of the graph.

So most of the choices I am using are holding up. Maybe I should be a little less defensive. The bottom line is that these results are not in my control and they are being influenced, if not controlled, IMHO. That makes this period of investing especially difficult. Where to from here? These graphs only tell a little bit of the story and I will not make a decision from this little analysis. But I do take from them that so far I have made some prudent decisions. The S&P 500 and price of Gold are right at resistance of 1080 and 1260 respectively. There are increasing pleas for more Quantitative Easing (QE). Obama is expected to discuss a new economic invigoration plan next week. The August US Employment Condition Report is out tomorrow, Sept 3. More bad data will support the argument for QE. Bull rally or bear trap, let it come.