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We are
participating in a PIMCO conference call this morning with Mohamed A. El-Erian and Bill Gross. PIMCO is very well connected and
knowledgeable regarding the bond markets. We may be able to gain some insight
into the debt problems in Europe and the United States. Serious debt problems
remain and the solutions are not going to be easy since haircuts and negative
impacts will be involved.
We recently outlined some bearish
concerns in Parallels
To 2000 And 2008 Should Not Be Ignored. It is very important to
understand that even if we have already entered a bear market:
- We
may not know it for several months.
- Stocks
could rally back toward 1,260.
- A
move to 1,260 represents a gain of 7.5%.
- A
break above 1,260 could reinvigorate the bull market.
How the market behaves near 1,260 (if
we get there) will be very telling. The chart below shows the S&P 500's
next major hurdle sits near 1,200. A break above 1,200 could lead to a swift
move toward the bottom of the head-and-shoulders neckline (labeled A). Other
bull market tests take the form of the now downward-sloping 200-day moving
average (labeled C) and the downward-sloping trendline
(labeled B). The point is we will know much more about the risk-reward
profile of stocks and commodities based on how the S&P 500 fares at the
three points of possible resistance (A, B, and C).
 
If the S&P 500 fails below A, B,
and C above, then we would most likely sell a good portion of our remaining
exposure to stocks. Another option would be to hedge our current positions
near A, B, and C. A hedge could take the form of a vehicle like the ETF SH,
which goes up when the S&P 500 goes down.
A very similar bear market rally
occurred in 2000. The chart below shows a drop similar to the recent
waterfall decline in stocks. Notice, like today, the 200-day moving average
had already turned down in 2000 (see red arrow near C), which leaned bearish.
In 2000, stocks rallied hard back
toward the previous trendline, which is labeled B
below. The 200-day continued to roll over (near D), which meant the odds of
the rally failing were much higher than under typical bull market conditions.
After the sharp rally where it was declared
"we have found a bottom", stocks reversed near the intersection of
the 200-day and the blue trendline B (near point C
and red arrow). If the present day rally approaches similar obstacles
(200-day and trendline/neckline), it will be a very
big test for the sustainability of the bull market. If the 200-day is
noticeably sloping downward as stocks approach it, we will be skeptical, but
open to, a bullish resolution.
The scenario above is one of many
possible scenarios that could play out, but it suggests that having a mixed
approach with some stocks, some cash, and precious metals is appropriate
until we get some more clarity regarding the issues above. If stocks make a
lower low, rather than rallying, we will look for bullish divergences on the
way back down. If they exist, we will be patient. If they do not, we will
continue to cut back on our exposure to risk.
We did a study this week looking for
high probability ETFs relative to a possible move back toward 1,260; more
information, including some ETF symbols, can be found in the Twitter post "ETF Screen for Possible S&P 500 Neckline
Rally". Some other important levels to watch on any rally
attempt are shown below.
Chris Ciovacco
Ciovacco
Capital
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