Heading Into Last Week of Quarter, Market Is at Key Inflection Point

By Jim Koford  SEP 24, 2012 12:45 PM

If we start to see aggressive selling that takes the S&P 500 (INDEXSP:.INX) back below its recent breakout level around 1420, then you need to worry about ratcheting up your defenses.

 


MINYANVILLE ORIGINAL We came into last week about as extended to the upside as we’ve been at any point over the past three years and in desperate need of some sideways action to help the market digest some.  Five days of range-bound action in the major indices gave us exactly that, and we’re now at a key inflection point as we head into the last week of the quarter.
 
The bearish side here is particularly easy to understand, and as always, is quite compelling. Now that the afterglow of the central bank announcements has worn off, investors are starting to worry about the laundry list of negatives out there. We’re facing the fiscal cliff, Taxmageddon, a probable European recession, high unemployment, and slowing global growth. Any number of problems threatens to take the wind out of the bulls’ sails. Heck, if things are so rosy, then why did the Fed find it necessary to pull out all the stops a couple weeks ago?
 
Outside of some vague assertions about how “equities are undervalued,” the bulls have a hard time coming up with equally persuasive arguments. However, since the low of 2009, the easiest mistake by far has been to underestimate just how sticky the action to the up can be. We all have our doubts about the long-term effects of all this money printing. We can’t help worrying that the artificiality of these moves will suddenly be discovered and that the ‘other shoe’ will finally drop. However, anticipating that has proved to be fruitless.
My firm's approach has been to pay close attention to all the potential pitfalls out there, but keep our focus on individual stocks and lean with the overall trend until we start seeing signs of clear distribution in leaders and technical damage in the major indices. It may sound quaint, but market axioms like “the trend is your friend” and “don’t fight the Fed” really do matter. We have some weak action this morning, but even if we are seeing the first indications of a top, any such action will be a process that will play out over time. If we start to see aggressive selling that takes the S&P 500 (INDEXSP:.INX) back below its recent breakout level around 1420, then we’ll need to worry about ratcheting up our defenses. 
 
For now, though, the trade remains to avoid chasing when the indices become stretched to the upside and to look for opportunities to remount positions into dips and pullbacks. Until we have clear evidence that this approach isn’t working, the assumption needs to be that these recent technical breakouts have ramped up the level of performance anxiety out there and created a supply of eager dip buyers. 
 
So, pay attention to all of the potential pitfalls, but don’t get caught up in the game of trying to time when those things will start to matter again. In most cases, there is far more money left on the table by anticipating turns than there is money lost when those shifts actually take place. Right now, the market is acting fine. That can change in a heartbeat, of course, and we always need to employ a disciplined money management scheme. So far, though, there has been no change in the overall character of the action, and that’s the most important thing.
No positions in stocks mentioned.

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