In this article from Chris Ciovacco, the Chief Investment Officer for Ciovacco Capital Management, LLC we take a look at where the market is and where it is going. ~Tim McMahon, editor
Bears in Control Until Charts Improve
From a fundamental perspective, the markets have much to worry about with excessive debt in the United States and Europe. The euro zone is not yet ready to authorize more money for Greece. Spain and Italy have not requested formal bailouts, which leaves the European Central Bank on the bond-buying sidelines.
The markets want some “resolution” regarding the rapidly approaching fiscal cliff. Let’s assume the dysfunctional system in Washington can reach a compromise; it is difficult to see how raising taxes and cutting government spending will be economy-or-market friendly.
Markets with profiles similar to the present day often experience one to three week countertrend rallies. Having said that…the current market remains in a dangerous state and could experience a “flash crash” type plunge.
The following are covered in this week’s video:
(a) bonds vs. stocks (01:45 mark),
(b) stocks vs. Treasuries (05:40),
(c) S&P 500 vs. VIX (11:28),
(d) Fear Index (12:46),
(e) stocks above 200-day (14:34), and
(f) All-World Stock Index Ex – USA (16:55).
Weekly RSI below 50, a market below its 22-week, and bearish weekly MACD crosses are all concerning (see below). Can these charts help? see some of our recent market calls here.
The charts shown here will improve at some point; that process could begin on Monday or it could begin in three weeks. Until the charts improve, our bias will be to the bearish end of the spectrum (hedges, high cash position, etc.). The chart below shows a breakdown (red arrow) for risk-on relative to risk-off similar to May 2012 (a poor period for risk).
A 50-day moving average with a negative slope is indicative of an intermediate-term downtrend. Notice how the market acted after turns down (red arrows) and a turn up (green arrow).
The chart below shows stocks breaking down relative to bonds. Below the thick horizontal red line, stocks have not performed well (see bottom of chart for S&P 500).
At lasting bottoms, and more importantly favorable risk-reward entry points, bullish divergences tend to be present as they were at the June 2012 low. Both Rate of Change (ROC) and RSI made new lows last week with price, which is not what we want to see from a possible turn perspective.
Bad things tend to happen when the risk-on vs. risk-off ratio below closes below the centerline. We closed below the center line this week.
Market breadth continues to deteriorate. We would like to see the chart below move back above the blue and red moving averages.
Note the slope of the trendlines originating from the top of the chart; they are all down, which defines a downtrend. When stocks are in a downtrend the odds are against investors.
These charts could improve soon…they may not improve for some time. We do not need to forecast what will happen next…we just need to pay attention with an open mind. Markets will tell us what to do if we are willing to push our biases and egos aside. Targets and forecasts bring egos and bias into play. We all make better decisions when we reduce biases and remain open to bullish or bearish outcomes. It can be very expensive to argue with the markets or the charts above.
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Copyright © 2010 Ciovacco Capital Management, LLC. All Rights Reserved. Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC (CCM). Terms of Use. This article contains the current opinions of the author but not necessarily those of CCM. The opinions are subject to change without notice. This article is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. The charts and comments are not recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations are not predictive of any future market action rather they only demonstrate the opinion of the author as to a range of possibilities going forward. All material presented herein is believed to be reliable but we cannot attest to its accuracy. The information contained herein (including historical prices or values) has been obtained from sources that Ciovacco Capital Management (CCM) considers to be reliable; however, CCM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change and readers are urged to check with tax and investment advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. CCM would like to thank StockCharts.com for helping Short Takes create great looking charts Short Takes is proudly powered by WordPress. Entries (RSS)
