Now or Never !!!
It has been an interesting week so far, chock full of interesting technical events. Perhaps most compelling is the further pullback in oil:
The May contract in Crude Oil broke the potentially bullish (for oil prices) ascending triangle pattern (dashed lines in chart above.) This is no guarantee that oil is about to plummet, but the oil bulls missed a great chance near-term for a breakout above $60. Now comes a big test of support at the gap just below $50 (see circle.) If this support level fails, and oil prices fall well into the $40s, this could be a stimulus for a Q2 stock market rally. But this week the markets seem unenthused by oil's slip:
The above chart of the S&P 400 Mid Cap Index clearly shows a jump in positive seasonality beginning on or just after April 15th. The "r" statistics are very high, meaning this seasonal pattern has persisted for the last 13 years, and the current price action is following it closely (r=0.63.) Seasonal patterns don't cause market moves, but highlight periods when the market tends to move one way or the other. How the market moves during highly correlated seasonal cycles is extremely informative. If the market fails to rally significantly in Q2, that would bode very poorly for the rest of the year. In fact, Q2 2005 is basically the end of the line for the positive seasonality for the bulls. So it is a now-or-never type situation.
The above chart of the S&P 600 Small Cap Index also shows a jump in positive seasonality beginning on or just after April 15th. The "r" statistics are also very high, and the current price action is following it closely (r=0.70.) We are focusing on mid and small cap issues because our work shows they are the most heavily shorted. If mid and small cap issues follow these seasonal cycles, they will likely put pressure on the outstanding short positions.
Large cap issues are another story. We have seen less short selling there. Also, as we noted a week ago, the volatility indices (especially the VXN-NASDAQ 100 Volatility Index) show no fear in the wake of weak/choppy price action. This is a large cap phenomenon, and a marker of the secular bear cycle that we believe continues for most of this decade.
Stay tuned! Next week we get a fresh reading of short data, and it will be very interesting to see if the markets follow the seasonal cycles discussed.
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