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Market at Major Crossroads

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Why the US dollar is critical for the S&P 500 this week.

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The human animal differs from the lesser primates in his passion for lists.
– H. Allen Smith

Was that it? Is it over? Everything back to normal? In Florida these are common questions typically asked once you've had to prepare for devastation. The trouble is, it becomes akin to the "boy who cried wolf' story. It seems at least once or twice a year we are asked to prepare for some massive storm heading our way, and yet it is only a few that actually… well, let's just say, wipe the slate clean. The trouble with this scenario lies between the frequency of which the warnings occur and the actual event, hence creating the all-too-common mis-preparedness that accompanies some of these warnings.

Thankfully, when technically evaluating the market, we have a little more data, and possibly more foresight, to determine when these storms may arise and what caliber they may be. As a risk manager, for over 20 years I've learned – the hard way, may I add – to never leave without an umbrella. As such, comprehending where the potential may lie on either side of the tape should be the mantra of every investor. As Benjamin Graham says... (paraphrased): It is only through the relentless management of risk based on arithmetic metrics in which investors can continually triumph over emotion and create success longevity... not by the management of returns on optimism!

Assessment of probabilities and stacking of empirical evidence, these are the tools at our disposal to calculate, evaluate, estimate (all the …"ates"). So today we offer something a little different – a list; a list to reflect on, comprehend, and ascertain.

Let's begin with the fact that one year ago (end of April / beginning of May) the markets topped and began the August to November descent. Calculating this gives investors a technical point of inflection to use as their proverbial yardstick. Onto the list.



In essence we have two of the 11 major sectors that are confirming the move thus far and driving the three majors to new heights -- consumer staples and technology. (Tobacco, food/beverages, prescription drugs, household products and the Apple (AAPL) iPad – OK, maybe more technology.)


Click to enlarge

Since the May 2, 2011 high, investors have sat through the anticipation of arrival, been tossed around in 150 mph winds and since 2012, have felt quite a reprieve. Now the question arises, Is the eye of the storm or the end of it? As my firm's readers know, once the market (S&P 500) broke above 1,370 (5/2/11 high) we technically called for 1,440, a smaller consolidation and low volume retest, followed by 1,550-1,560 if the market could get some follow-through (sector confirmation). Since this call the market has seen 1,422, trailed by ~1,358 (twice) and closed back above 1,400. All while the average volume continued to decline – even with earnings season upon us – and its 50-day moving average never once changed slope (turned negative). Albeit nerve-racking, it's technically positive.

So we ask again, Was that it? A lot of pundits are clambering about Spain and the PIIGS. Some are discussing a great earnings season thus far and some are going so far as to discuss the French elections at the end of this week and what this will mean for the US markets. Let's not forget the negative economic data last week. This is quite a bit of information to digest when evaluating the next potential move in the equity market and yet none of it is actually quantitative, hence the list.

Lists are always good. They keep things in perspective and help provide clarity to a murky situation. So, here's our latest thought:

If the markets can hold April's bottom and there is follow-through with other sectors besides tobacco, beer, and iPods (mainly transports and banks), we believe our original target still holds true. If (when?) the SPX does reach those levels (~1,550) there will be a much bigger conversation to have considering this would put the market at the top of the secular channel we've been clambering about since we first published the 100-Year Market Theory in 2003. But… we'll save that for a different day.

Editor's Note: Read more at Tesseract Asset Management.

Twitter: @TAM_News
No positions in stocks mentioned.

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