Stock market update 12 June 2011

Stock Market update 12 June 2011.

In my last blog post dated 13 May 2011 I warned of a general weakening of equities and a rotation into defensive sectors.  At the time of that post the short term indicators were negative (which is typical market behavior and not of concern for longer term investors) with the medium and long term indicators still bullish.  That changed this week.

Over the past 6 weeks the market has experienced a decline of approximately 7%.  This type of decline is typical of a pullback during a bull market advance so it is premature to conclude we have commenced a new bear market.

During the past 2 pullbacks in this bull market there were declines of 17% and 7% respectively (Apr-Jun 2010 17%, Feb-Mar 2011 7%).  However, several of my "fear" gauges are showing an abnormal amount of fear amongst retail investors (who are traditionally the worst at picking "tops" and "bottoms") during this relatively minor pullback.  As such, at this point I am still bullish (more so now that we have a decent correction finally underway to reduce the excessive optimism in the markets) and am looking to add to positions when this current correction is past.

CLICK ON ALL IMAGES TO ENLARGE


SHORT TERM CHARTS

SPX 60 minute

The 60 minute chart is currently bearish.  Price was established in a relatively narrow downtrending channel that broke to the downside several days ago.  I have drawn a new tentative lower channel which appears to target a bottom near the area of the last significant area of support at 1249.

There is positive divergence of the MACD histogram (not annotated on the chart) so it would appear we are near the end of the short term decline and can expect a bounce at any time.

SPX daily

The daily chart turned bearish on May 13.  A break last week of the lower trend line of the descending channel along with the area of support at 1305 was a short term bearish development.

All the technical indicators remain bearish but the RSI is approaching oversold near the 30 level.  As such we could expect a bounce near these levels.

As mentioned previous, the tentative lower trend line intersects with the previous support near 1249.  In addition, the 200 day moving average (in green) is rising to meet price (currently at 1253).  This 1249-1253 area will be a significant test to see if we are going to  recover back into a short term bullish pattern or maybe begin the start of a  nasty decline.  Too early to say but you need to watch this area closely.

The 1-box point and figure chart turned bearish on a price break of 1338.  It is evident there is very little price support on the chart until the 1250 area.


MEDIUM TERM CHARTS

SPX weekly

The weekly chart turned bearish this week.  This is a significant development as it is the 1st warning sign that we may have a bearish change in the markets.

The technical indicators have all turned bearish indicating we are in an intermediate term downtrend.  However, it is interesting to note the volume on this decline is significantly lower than the last major decline (Apr-Jun 2010) as well as the last small decline in Feb-Mar 2011.  Volume always must confirm price action and in this case it has yet to do so.  As such, while the technical indictors are bearish; the "degree of bearishness" is not making me concerned (yet?).

Point and Figure (traditional) with volumetric

The point and figure chart turned bearish on a price print of 1290.  It targets a price objective of 1160.


LONG TERM CHART

SPX Monthly

The monthly chart remains bullish as price has yet to close a month below the 12 month moving average.

All the technical indicators remain bullish.



BOTTOM LINE:

The short and intermediate term charts are now bearish with the long term chart bullish.

Using my rules of scaling into and out of positions, this has placed me in a 50% equity/50% cash model positioning due to the fact the intermediate term charts are bearish with the long term charts bullish.

It is too early to tell if this is the start of the next bear market or a correction within an ongoing bull market.  All bear market declines start with the intermediate term charts turning negative followed by the long term charts.  We are not there yet so it is still too early to call an end to this bull market.

My cautious approach to these markets had me in a 50/50 position.  Now my models have come to the same conclusion.

Should the monthly charts turn bearish I will move into a 100% cash position; should the weekly charts return to bullish I will increase my exposure to either a 75% equity/25% cash or 100% equity position (depending upon the extent of the current correction; the more the better).


Emirates Provident Fund:

As of Friday, 10 June I remain in a strategic 50% equities/50% USD cash weighting as follows:**

-BlackRock US Dollar Cash Portfolio Fund: 50%

-Russell Global 90 Fund: 15%

-Fidelity International Fund: 10%

-BlackRock Managed Equity Fund: 25%

**Actual positions will change daily based upon price action and market volatility.


For information, the ECAM Asset Allocation Fund is currently 67% invested with a 33% cash reserve.  I will blog an update on it's current holdings at a later date for those who might be interested.


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