With yesterday's swoon we once again dropped below this level - while the day is young we are sitting below both the 50 day and 200 day moving averages. More importantly is this series of lower highs we continue to make.
I wrote back in mid December we are making a series of lower highs [Like a Magnet Back to 1490] which is quite a bearish development.
High #1: mid October
High #2: late October
High #3: mid December
High #4 (?): a few days ago (too early to tell but it doesn't look good)
If you simply draw a straight line on this chart from each of these 4 points you see our 'ceiling'. Again I am not technical analysis guru, but you don't need to be either - until this trend is broken we are not breaking out to the upside.
I will again keep referring to the S&P500 index as a house.
- When we are above 1490 we are in the penthouse, and we'd like to see this ceiling broken and if we did, I'd take a bullish stance
- The upper floor is between 1440 and 1490 - this is the floor we bottomed out in during December
- The bottom floor is between 1400 and 1440 - this is the floor we bottomed out in August and November.
- The basement is below 1400 - we don't want to go there.
At some point we will either break out above the penthouse or into the basement. But for most of the life of this fund (since August 07) we have been stuck in a relatively narrow range. If the economic story truly does matter and corporate profits in January start to weaken as I believe, and more importantly GUIDANCE for 2008 (i.e. confession time) is given by companies in a manner that I think is more accurate, we might be visiting the basement. But until then, we continue to simply go from 1 floor to another, but in aggregate are limited by the ceiling being formed by our series of lower highs. Hence, why it is hard to get too bullish on anything for more than a few weeks around here...
Combined with the fact most of the stocks/sectors I really like have had tremendous runs off the November lows and the "easy money" is in, it puts in a more conservative stance. As I have stated in the past, people are saying the market is cheap based on 2008 earnings. But if in fact 2008 earnings are a mirage is this market that cheap? Since the market seems to be disassociating from reality of the real economy, we are forced to use these technical analysis views to try to make overall market calls for the near term. I've stated in the past, if the market were fully reflecting what I see as an ugly economy in the coming 12-18 months, we probably should be down another 1000-2000 pts on the Dow. However, those Dow components are chock full of multinational corporations which people have deemed immune to slowdown since they are much more highly leveraged to the world economy. With Europe slowing, Japan in 15 year death spiral, and China reliant on US to export (and many other countries reliant on China to buy their commodities) I just don't buy this decoupling argument. But as always, perception is reality.... until perception changes to view a US slowdown to actually matter to China, the multinationals will hold up. I expect sometime in 2008, people to panic on the multinationals as well (many of the Dow components) when GDP growth in China and India finally falters from unsustainable 11-12% levels (even 7% would be great for them, but that is not what people are wanting to hear). So this is the long term road map. Let's see how it plays out.
