01/29/13 – Jeff Saut, Hurst Cycles, Fibonacci

MARKET MESSAGES

1/29/13

The following is a SPX chart where I did some doodling.  It has Fibonacci levels matched to previous highs and lows and also has a “projected” peak at approximately 1520 or 1550.  The all time was October 5, 2007 at SPX 1562. These Fibonacci projections are rough estimates, because I’m making the Fibonacci levels roughly fit earlier corrective points.  It’s not an exact science, but I do like the fact that this came out close to the all-time high.  It seems reasonable that the market isn’t going to make it through the old high on it’s first try.  Of course if it did break through and moved away crisply on increasing volume, that would be certainly be interesting.

01-29-13 SPX 60 MIN BARS - FIBONACCI

01-29-13 SPX 60 MIN BARS – FIBONACCI

As bond prices come down, we are seeing bond money money move into the stock market.  There is a LOT bond money that could make that move.  That’s all new buying power and that could certainly makes things very interesting.

01-29-13 BONDS VS STOCKS

01-29-13 BONDS VS STOCKS

In the above chart you can see how bond prices have been moving down since the middle of November (green vertical line).  Simultaneously with that bond peak, stocks began moving upward.  At some point it’s possible that bond money could pour out of bonds and into stocks.  Wouldn’t that be fun!

JEFFREY SAUT – 01/29/13

Recall that “buying stampedes” tend to last 17- to 25-sessions with only one- to three-session pauses and/or pullbacks, before they exhaust themselves. It just seems to be the rhythm of the thing in that it takes that long to get everybody bullish enough to throw-in their “bear towels” and commit capital right in time to make a short-term trading top. While it is true a few stampedes have lasted 25 to 30 sessions, it is extremely rare to have one extend for more than 30 sessions. Today is session 18. Granted, for the past few weeks I too have been overly cautious, influenced by tried and true indicators that have served me well over the years. To be sure, the S&P 500 (SPX/1502.96) remains overbought with 92.6% of its stocks above their respective 50-day moving averages (DMAs), as well the NYSE McClellan Oscillator is still overbought in the short-term. However, the stock markets can remain overbought for longer than most think in a bull move. Further, the Volatility Index (VIX/12.89) is not confirming the renewed stock strength and some of the hitherto leading stocks are not acting well.

On the bullish side, we began the year with back-to-back 90% Upside Volume Days, a feat that has not been seen since 1987 when the D-J Industrial Average (INDU/13895.98) was beginning a rally that would carry it 24% higher into April. Interestingly, year-to-date this is the best beginning of the year rally since, you guessed it, 1987! Also recall that the history of back-to-back 90% days is for the SPX to be higher an average of 6.8% one month later 83% of the time and 12.8% higher three months later 100% of the time. Then there was the breadth thrust that occurred last Thursday when the net percentage of new 52-week highs in the S&P 500 hit 25% (see chart on page 3). According to the sagacious Bespoke Group, “This is a very strong sign for the long-term health of the market, but it’s also a sign that we remain overheated in the short term.” The DJIA, however, seems to paying no attention to the term “overheated” as it is now in position to challenge its all-time high of 14164.53 made on October 9, 2007. While I have conceded to a half-hearted Dow Theory “buy signal,” when the Industrials broke above their recent reaction high of 13610.15 (made on October 5, 2012), therefore confirming the D-J Transports (TRAN/5870.05) breakout to new all-time highs, it would be much better for the Industrials to achieve a similar new all-time high (above 14164.53). That would definitely be a Dow Theory “buy signal;” and, we are only 268.55 points away.

Ladies and gentlemen, if we can put the government’s dysfunction behind us, the really good things that are occurring in our country should take the lead. Things like energy independence, onshoring, increased manufacturing, the strengthening housing recovery, strong auto sales, a technology boom, more employment, etc. Furthermore, as investors grow more comfortable with this outlook, money should move out of cash and fixed income and into stocks, other assets and goods/services; and, that move may have already begun (see chart on page 3). As Bridgewater’s Ray Dalio said, “The shift of that massive amount of cash is what will be a game changer.”

The call for this week: In last Friday’s Morning Tack I talked about a pattern in candlestick charting known as a “doji” formation. A doji represents indecision in the market. When a doji forms in an uptrend or downtrend, this is normally seen as significant, as it is a signal the buyers are losing conviction, or that sellers are losing conviction. If, however, the doji formation is ignored by the market, like it was on Friday, it probably means the buying stampede remains in force. But at day 18, in the typical 17- to 25-session skein, this rally is pretty long of tooth. That said, there is nothing in my work that suggests we are anywhere near a major top in the equity markets, even though we could be near a short-term trading top based on my day-count sequence and the overbought conditions. Nevertheless, I would not get bearish because in the intermediate term we could be involved in what we saw from July 2006 until February 2007 where the SPX gained 225 points (~18%) and only experienced 20- to 30-point pullbacks along the way. Indeed, as Bridgewater’s Ray Dalio said, “The shift of that massive amount of cash is what will be a game changer.”

HURST CYCLES

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The video is from SentientTrader.com  and they have a very good cyclic software package.  You should take a look at the different products they offer.

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