February 4th, 2010

Sovereign debt or jobs?


Sovereign debt or jobs? That’s about all I heard from those trying to explain or, more correctly, rationalize today’s decline. What does it matter? All this conversation acts as a veil to diffuse the truth which is …. this correction was predictable. Better yet, it was predicted by many technical analysts (including moi) who looked at the difficulty the market was having crossing above the critical 1150 level (see “The Importance of S&P 1150 Can’t be Overstated” of January 19).

Those who headed the many warning of an impending correction over the past several months may have shielded at least some of their hard earned gains. Personally, I’m around 50% in cash and have put on significant amount of hedges in the form of calls on SDS, the double short ETF on the S&P 500 Index (as described in “Protect Yourself Against An Imminent Market Correction” of November 22). Unfortunately, the hedge has yet to kick in since I put them on at the end of November, just about the same level the market is at now.

With the market having declined about 7% from that call on January 19 and now rests just above the low of the 2004 correction, the proper question to ask is less “what caused the correction” than “how much father will it go”?

Using the domino analogy (“Market Dominoes Beginning to Fall” of January 26), my guess is that the market will test the support capabilities of the 200-day moving average, currently at 1016, just 5% further below current levels. If that domino falls, a new and different quandary presents itself. Crossing the 200-day moving average technically represents a flashing red light according to the Market Timing Indicator (haven’t hear anything about the MTI in some time!).

Should that come to be, by that time I plan to be only about 25% exposed to stocks with the remaining 75% in cash. And if the market stays below the 200-day moving average for more than a week or penetrates below it by more than 1.5-2.0%, it would indicate to me a high probability that even more serious declines are possible. Should that happen, I would have to revert to an all-cash position again.

I’m not predicting it but I am getting mentally prepared for the possibility. Shades of 2008 all over again? Don’t think so; hope not. But it’s better to be safe than sorry.

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  • Anonymous

    "With the market having declined about 7% from that call on January 19 and now rests just above the low of the 2004 correction, the proper question to ask is less "what caused the correction" than "how much father will it go"?"

    ~1060 should hold, according mcclellan oscillator..Now, Can we bounce back to 1150 like 2004??

    oildigger

  • Anonymous

    Democratic needs to seriously put the uptick rule back or we are in trouble

  • Joe

    You're asking would I bet (i.e., would I buy stocks today) on the premise that we hit the 2004 bottom and therefore are due for a bounce back to the starting point. I'd have to say no because I'm more interested in a longer-term perspective like a positive trend to the market and I don't see that happening until late summer.

  • Joe

    You're asking would I bet (i.e., would I buy stocks today) on the premise that we hit the 2004 bottom and therefore are due for a bounce back to the starting point. I'd have to say no because I'm more interested in a longer-term perspective like a positive trend to the market and I don't see that happening until late summer.

  • Anonymous

    "Now, Can we bounce back to 1150 like 2004??"

    In 2004, The market had channel btw 1160 to 1080 & did not move up till October, so maybe that will happen to this year for SPX.

    oildigger

  • Anonymous

    "my guess is that the market will test the support capabilities of the 200-day moving average, currently at 1046"

    SPX hits 1046 (200 MA)..That does not take too long.

  • Joe

    The quote should have been 1016, not 1046. Market did hit 1045 today.

  • Anonymous

    Guru, SPX SMA is 1016, EMA 1046..

    I guess you use SMA. do you know what the difference between SMA & EMA?

  • Joe

    Of course I know difference but found that SMA serves my purposes better (and that's what are on the charts I post here). Reason SMA works better is because I use 4 moving averages and if I used EMA (exponential moving averages) then they wouldn't be as discrete in the near-term …. they'd all bunch together in the near periods. Plus I'd have to decide on different averaging factors for each of the four (50, 100, 200 and 300 day).

  • Anonymous

    Joe, let me first say thanks for all your insights and teaching. Its greatly appreciated. Secondly, I am wondering how meaningful todays bounce was to you? It doesnt seem like a head fake but could it be? AG and Coal did well but I am trying to understand if that really tells me anything?

    -Kevin

  • Joe

    Kevin,
    Thank you for the kind words. I have to say that, unfortunately, today's bounce was nothing more, a bounce. No change of trend — yet. The bounce may take the market back to 1100 but I'm not sure how much further or longer.

    Remember, the 2004 correction that we continue to compare this crash recovery to took 9 months to resolve before the bull market continued; the depression correction took 2 years (see Two Market Consolidation Models.

    If we're lucky, this time it might turn out to be the mid-term election cycle (see January 28 below).

  • Anonymous

    Guru,could you give your views on the chart of GOOGLE ? How far down it could go and if it makes up a large index component,as goes Google so does SPY etc.Thanks for any info.

  • Anonymous

    Is it possible we should compare 2010 to 2003 instead of 2004?

  • Joe

    Interesting thought. Reason I haven't compared against 2003 is because that correction took place immediately coming out of the double-bottom base and we are so far above this crashes inverted h+s base.

    That correction was 4.57% over seven weeks, this is more severe being 7.57% over 12 days. I think there's more to come.

  • Joe

    Excellent analogy-used to be "as goes GM so goes the economy" and today "as goes GOOG so goes the SPX".

    Unfortunately, I see that a break below current levels leaves little support until 440, possibility, another 17% down. That would make for 30% correction from Jan 4 high of 626, remote although unfortunately a distinct possibility.

    440-50 is approx. where the 300dma will be and also zone that corresponds to 960 on SPX, the neckline of inverted h+s bottom adding weight to notion that's the target of this correction.

  • Anonymous

    Guru, I remember you have a SPX 10 years chart, but I cannot access your archive.

    Would you be able to show me the link. thx!!

  • Joe

    Recommend you try FreeStockCharts.com. Once there, you can add trendlines, moving averages and many other indicators. It also has a watchlist including charts of each of the 500 stocks which can be sorted according to a variety of variables (volume, %daily change, etc.)

  • Anonymous

    thx!I'll check FreeStockCharts.com

    FYI:
    http://finviz.com/groups.ashx