The Pennant Chase!
Technical and fundamental forces collide.
On the other side of Manhattan, professional investors are fanning over flags of a different form, the "pennant formations" in the equity realm. Over the last several weeks, a series of "lower highs" were put in place, which are about to intersect with the uptrend from the March lows, creating compression points for the marketplace as we edge into earnings season.
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There's an old trading adage that these patterns typically "break" in the direction of the prevailing trend. If that proves true, the recent downtrend will kneel before Hoofy, who will pave the way to S&P 1120ish, which is the technical equivalent of the World Series ring. Uptrend from the March low, meet the downtrend from the 2007 high, precisely at the 50% retracement level of the entire crisis decline.
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If technical analysis were the only metric, making cake would be easy as pie. Trading, however, is an assimilation of four primary metrics, with fundamentals, structural influences and psychology being the others. At least that's how markets used to function before the dealer placed bets at his own table, but alas I digress.
My point is two-fold. First, respect the animal spirits; perception is reality in the marketplace (it's not what is, it's what's perceived to be).
Second, given the cumulative imbalances we've written about through the years, understand that traditional investment approaches are at risk when historical precedent need not apply. While chants of "don't fight the Fed" echo with laughter, the markets are no longer free through a traditional lens and that opens an entirely new can of worms.
We've discussed the bovine relay race in play. The government is attempting to hand the baton to corporate America (credit issuance seems to confirm a clean pass) who will, in turn, stuff it into the clamoring hands of the consumer. That's the plan but as it stands, the cumulative effects of the crisis continue to weigh on the anchor leg.
Take a step back and think about it for a moment, sans emotion and void of any performance anxiety you may be feeling.
Total debt-to-GDP is hovering around 390%, which are pre-crisis levels.
One of five Americans is out of work, according to respected alternative calculations.
Capacity remains in residential housing, commercial real estate looms large, underfunded pension funds abound and foreign-holders of dollar-denominated assets are pissed.
The icing on Boo's cake, I suppose, is that the S&P can still rally 5% before hitting the aforementioned downtrend from the 2007 high, which is the definition of a secular bear market pattern.
I "see" the action and certainly respect it, lest it's a repeat performance of 2003, when I learned a most valuable lesson. Nobody is smarter than the market-most certainly not me-and consistent with the Minyanville mission, we'll paint the probability spectrum so Minyans can see all sides.
Seems Like Old Times
We used to say it should never take something bad to make you realize you've got it good, which were "just words" for many folks before they got smoked. I understand the rules changed in the middle of the game but the definition of insanity is repeating the same thing over and over again and expecting a different result.
The other side to that discussion, I suppose, is that the destination we arrive at pales in comparison to the path we take to get there; and that's a valid point. Where you stand is a function of where you sit and how you approach the tape is unique to you all. I will only encourage you to sync your risk profile and time horizon to help mitigate unpleasant surprises.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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