SAN DIEGO (ETFguide.com) - The market hasn't gone anywhere for
over 6 weeks and there's been no trend or follow through to either
up or down moves. Periods of stagnation are often followed by
bursts, either up or down.
If you're an avid reader, you're probably familiar with analysis
paralysis - the more you read the more complex and less clear the
Below is a concise summary of potentially market -moving bullish
and bearish trends and currents. Combine those with trigger levels
for the major indexes and you have an action plan that should slice
through the muddy view.
We are getting bombarded with economic news and stats everyday:
housing starts, mortgage apps, industrial output, cpi, ppi,
manufacturing index, consumer spending, etc.
It's not scientifically accurate, but the consumer confidence
index more or less reflects the change of the sum of economic
indicators. The chart below plots the S&P against the Consumer
Confidence Index since 1999. The correlation between consumer
confidence and stocks is pretty straight-forward.
The question is, does consumer confidence (and economic
statistics) lead or lag the stock market? Wall Street
considers them a leading indicator and a legitimate forecasting
I disagree. Here's why: Confidence is a reflection of
sentiment, and bullish sentiment, when at an extreme, tends to be a
net negative for stocks.
Here's an example of what Wall Street and the media said right
before the market crashed 20% in April 2011:
"Leading U.S. indicators, consumer confidence gain as fuel costs
discounted" - Bloomberg
"World revs up profits" - Wall Street Journal
"GE CEO Immelt says global economy is improving" - AP
Using consumer confidence and sentiment as a contrarian
indicator rather than a leading indicator and combining it with
technical analysis, the ETF Profit Strategy Newsletter came up with
this contrasting forecast in April 2011:
"Even though odds do not favor bearish bets the first half of
April, I believe a major market top is forming. S&P 1,369 -
1,382 is a strong candidate for a reversal of potentially historic
proportions." Despite - or more accurately because of - optimistic
sentiment, the S&P peaked on May 2, 2011 at 1,371 and spiraled
down 20% thereafter.
"Sell in May and go away" is almost upon us and it worked like a
charm in 2010 and 2011. It might be too much to expect an exact
replica here and now, but the fact is that stocks tend to under
perform during the summer period.
Longer-term seasonalities suggest quite a roller coaster market
ahead. The summer doldrums are balanced by the election year cycle,
which is the second strongest of the 4-year Presidential cycle.
The incumbent administration does what it takes to get
re-elected (monetary stimulus via the Fed, promised but undelivered
law changes, tapping into the national oil reserve, etc.). Once the
election is over, there's no motivation to 'bribe' citizens or earn
goodwill, and stocks tend to take a breather in the post election
Combining Economic/Seasonal Data with Trigger
Economic reports have been improving, although this can be
expected because the economy was so bad it had nowhere to go but
up. Short and long-term seasonality is bearish with bullish
potential sandwiched in between (later this year).
How do you manage your portfolio based on this information? It
helps to add some technical analysis to the mix.
Right now, the S&P (SNP: ^GSPC) is suspended in a technical
vacuum. That means it's stuck below up side resistance (represented
by various Fibonacci levels and a trend line going back to 2002)
The Dow (DJI: ^DJI) has fallen below short-term support but
remains above longer-term resistance, the same is true for the
Nasdaq Composite (Nasdaq: ^ IXIC) and the Apple-heavy Nasdaq-100
Support/resistance based risk/reward analysis shows that the
risk to the down side is greater than the reward to the up side. A
drop below support will trigger the down side risk.
To understand the implication of broken support, it's important
to know how support/resistance (S/R) levels works.
Understanding How the Market Works
S/R levels are like subway stations. Although a subway can stop
anywhere, it is most likely to stop at a station.
The October 2, 2011 ETF Profit Strategy update identified
S&P 1,088 as the 'station' likely to stop the decline and send
stocks higher. Here's the exact wording of the October 2
"Based on the data we have, it's prudent to scale down short
positions around 1,100 and exit most short positions around 1,090.
Buy after the S&P registers a new low (around or below 1,088)
and comes back up above resistance at 1,088 and/or 1,121."
The S&P reversed directions after an intraday slide below
1,088 and rallied strongly thereafter. I personally thought that
the S&P rally would stop around 1,369, the next major
But the market cares little about what I think, that's why I
have to care about the market's inner workings, and the market
works in terms of S/R levels. If you understand S/R levels, you are
a giant step closer to understanding the market.
The March ETF Profit Strategy Newsletter stated that: "A break
above 1,369 would unlock more bullish potential with 1,425 as a
potential target." Since the S&P didn't stop at 1,369 it was
likely to keep going. The S&P hit 1,422 on April 2 and has been
stair-stepping lower since.
This stair-step decline has brought the S&P perilously close
to must-hold support. A break below support would lead to lower
prices and possibly trigger a nasty decline like in 2010 or
ETF Profit Strategy Newsletter
employs various techniques to identify the type of
support/resistance levels that coincide with the onset of major
market moves and provides a common sense, out-of-the-box short, mid
and long-term forecast.