Money & Finance - Analyzing the Rally

Analyzing the Rally

The S&P 500 is rapidly approaching its previous 2007 high. We continue to be long the market albeit a very conservative position as we have raised significant cash positions through profit taking coming off our early December buys.

When reading the various market analysis we have come across a few interesting facts surrounding the rally. John Murphy from stockcharts.com has brought to light the coming resistance that the S&P 500 will face. He notes that traders will take profits as the market tests previous highs, especially when the stock market is overbought as it is now.

 

“The 14-week RSI line (above chart) has just moved above 70 (red circle) for the first time since early 2011 which puts the SPX in an overbought condition. That increases the odds for some short-term profit-taking.” – John Murphy, Stockcharts.com.

 

“The daily bars in Chart 8 also carry a short-term warning. They show the 14-day RSI (above chart) forming a slight negative divergence from the SPX from overbought territory at 70 (down arrow).” – John Murphy, Stockcharts.com

“The numbered boxes on Chart 8 also show the SPX having completed a five-wave advance from its November low. A negative divergence during a fifth wave usually carries more weight, and increases the odds for some type of pullback.” – John Murphy, Stockcharts.com.

Historical Perspective

Sam Stovall from S&P Capital IQ (via Business Insider) provided a little history lesson as to what happens to the markets after setting a new record. His findings suggest a high probability of a pullback even if temporarily.

“The S&P 500 may have little time to rejoice following the setting of a new record high before collapsing again, as the median advance following the recovery to break-even from bear markets since WWII has been only 3% before stumbling and falling into another meaningful decline within only two months.” - Sam Stovall, S&P Capital IQ.

S&P Capital IQ provided the following table to highlight the results of their finding. The positive piece of information from their findings is that the pullback that typically happens does not result in a new bull market.

Sell in May and Go Away

Yale Hirsch, founder of the Stock Trader's Almanac found the market exhibits six month cyclical patterns where the stock market gains and loses momentum.

The finding by Hirsch (via Arthur Hill from Stockcharts.com) finds, “Over the past 50 years, the average gain for the Dow was less than 1% from May to October. In contrast, the average gain was more than 7% from November to April.”

Note from the chart that the S&P 500 peaked in April 2010, May 2011 and April 2012.

Playing the Rally

We absolutely believe there is a coming market correction that will take place in the very near-term. We continue to hold our long positions and take profits as the market heads higher.

After reading a blog post from “Humble Student of the Markets – Give in to the Dark Side”, Cam Hui pointed out a very real dilemma when managing money for clients and investors. “My inner trader, on the other hand, says to listen to the market and go with the momentum. The US economy seems to continue to improve despite concerns about the payroll tax increase and sequestration cuts. Last Friday's Non-Farm Payroll number was an unambiguously positive release. In addition, indicators such as rail traffic point to continued growth in the economy. So it may be the time for my inner trader to take a walk on the Dark Side and get long this stock market, though with tight stops.”

Video Game Investing

The new market euphoria has taken hold. Barron’s released a story (via Business Insider) pointing out the overly bullish sentiment that runs rampant in our system.

“Other signs of frothy sentiment also have been bubbling up, notably a jump in bullishness among investment advisory services polled by Investors Intelligence. Bulls increased sharply to 50.0% last week from 44.2%, while outright bears fell to 18.8% from 21.1%, their largest weekly drop in 10 months. Advisors looking for a correction also dwindled to 31.2% from 34.7%. Moreover, the spread between bulls and bears surged to 31.2% from 23.1% in just a week and put it in "the dangerous territory around 30%," Investors Intelligence commented. A wide spread a year ago preceded a market retreat, the service noted.”

The other day I was having diner at a local restaurant and overheard a couple speaking about the market. They were getting off the sidelines and increasing their stock holdings. Actress Mila Kunis went public with her changes in her asset allocation, saying she is putting more money into the stock market (huh?) and I saw fifth graders on CNBC giving their favorite stock ideas.

This rally is turning into a joke. It’s what I like to call video game investing.

Bottom Line

At JSK Partners we continually take in new investors and investment dollars. The problem lies in the new investors and new money that arrived in mid-January through February. We have been taking profits in our legacy clients’ accounts while the newer investors wait for a better time to deploy. We have found that chasing rallies are like chasing buses, it is a futile endeavor because there is another one coming right behind it. While the urge to jump in is high, the probability of a market correction is this higher and its prudent to wait for a better entry.

- Joseph S. Kalinowski, CFA

References

http://stockcharts.com/members/analysis/20130315-1.html

http://stockcharts.com/members/analysis/20130312-1.html

http://www.businessinsider.com/sam-stovall-recovery-and-pullback-2013-3#ixzz2NnsWdPem

http://humblestudentofthemarkets.blogspot.com/2013/03/give-in-to-dark-side.html?m=1

http://www.businessinsider.com/barrons-on-mila-kunis-and-alan-greenspan-2013-3

http://www.businessinsider.com/barrons-on-mila-kunis-and-alan-greenspan-2013-3#ixzz2NoA1DFiz

 

 

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