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A Trepidatious Trader

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For the first time since 2009, earnings growth for S&P companies has turned negative, which is a significant warning sign.

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The broader market reached my first upside target of 1440 on the back of Bernanke. This is a significant pivot point on a weekly time frame as shown by the chart below. A prolonged break above this upper channel along with a daily chart look of a cup-and-handle pattern that triggered at an identical juncture point to a test of my second upside target of 1550-1570, which is where a cluster of Fibonacci retracement levels reside. This early stage breakout can still be voided, and with a move below 1420-1400. As you can see, I originally called for a market top at 1440, with a final end to the bear market residing near 1175. Europe's recession, China's growth stalling, and the domestic election are all variables that would lend credibility to this trade.


Click to enlarge


Click to enlarge

It wasn't long ago that operating earnings per share on the SPX was a reliable guide to forecasting growth and finding a proper valuation on equities. The same can be said for technicals as reliable conditions pointed towards a major top. The Fed has stepped in and made a statement of "check with me" before placing your bets, thus making it difficult to position oneself based upon pure fundamental or technical belief. Case in point: For the first time since 2009, earnings growth for S&P companies has turned negative, which is a significant warning sign. As a whole, corporate earnings are expected to drop 2.2% in the third quarter. At this point, cost-cutting through employee headcount reduction is likely the only way to salvage profits, thus placing further strain on the economy.

But the Fed has told you, "We are here," and that makes it tough to be short. Massive intervention by the Fed and global central banks has made it clear that there is a high probability that internal supply and demand dynamics of asset classes have been altered significantly, turning minor moves into head fakes, and reducing the value of one's usual tactical trading toolbox.

We now have a set of asset classes within defined ranges to monitor for the markets next direction, which won't be a minor move in either direction. In the near term, market conditions seem extended and a retracement should be expected shortly, setting the stage for an additional move higher. Please note that this report was compiled with the SPX trading at 1465, and the retracement should likely be viewed as well underway.
No positions in stocks mentioned.

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