S&P 500 Pushes To All Time Highs On First Economic Contraction In Three Years

http://www.zerohedge.com/news/2014-05-29/sp-500-pushes-all-time-highs-first-economic-contraction-three-years

This IS Your S&P 500…On Inflation

http://bloom.bg/TFJnDU

The trend is your friend

According to Ned Davis research, when 90% of companies trade above their 50-day moving averages, it's a bullish sign.

http://www.marketwatch.com/story/a-rare-buy-signal-with-a-good-record-2010-04-21

He suggests this powerful equities rally since March, 2009 could have some upside left, climbing the wall of worry. I have my own opinions on long-term secular trends, but wouldn't doubt it if the SP 500 may rise further in the short-term. Having said that, investors should keep an eye on the exits and be ready to push the sell button if another black swan event occurs.

See disclaimers in the side bar.

Disclosure: long select energy, precious metals, biotech, and technology shares.

Market sentiment: we all go to zero eventually.

Dead cat bounce?

Due to my increasing anxiety with every rally in equities, I gathered some charts of the S & P 500 Index. It recorded a low of 666 in early March 2009, down from the October 2007 high of 1565. This represents a decline of 57.5% from the peak. What came next has been this powerful 50% retracement to approximately the 1000 level. A Fibonacci 61.8% retracement yields a value of 1078 as an intermediate peak for the SP 500. I would be a net seller if and when we approach that level.

For comparison's sake, between the 1929 peak of the Dow Jones Industrials Average to the low in 1932 (see first chart above), the market had a handful of double-digit gains. But in that duration, the market declined by 90%! In other words, for every 1 step up, the market took 3 steps down.

From the 1932 low to the 1937 peak, the DJIA had 3 triple-digit gains, including one for almost 300%--almost a quadruple. But none of these powerful rallies prevented the Great Depression. And investors holding since 1929 weren't whole again until 1953.

The harder a market falls, the higher the market rebounds, but the more difficult it is to get back to even--despite multiple powerful rallies. With the 2007-2009 decline "only" measuring 57.5%, this retracement rally should not have been surprising.

To the trained eye of an electronics engineer, the SP 500 chart between 2007 and 2009 looks like a waveform transitioning between logic "1" to logic "0" (see second chart above). However, instead of being an ideal waveform with uniform horizontal and vertical lines, the signal is distorted with undershoot and high-frequency ringing.

In layman's terms, this market is a dead cat bounce. And gravity will eventually cause it to fall back down before finding a steady-state equilibrium. The hope is that the SP 500 secular low of 666 will not be revisited, and that the index will find a trading range of consolidation above that low until a recovery is well-established.

I still posit this is a bear market rally--and not the beginning of a secular bull market. The world economy is still undergoing a delevering process as corporations, individuals and governments are still awash in debt. Banks haven't honestly accounted for toxic assets on their balance sheets. With unemployment climbing, tight credit conditions, and the American consumer tapped out, any economic recovery will remain muted. Equities may still rise from here, but at some point (soon), the market will become over-extended.

Facebook

I posted this on my Facebook profile on a normal whim:

Gregory Nguyen S & P 500 at 920 and Dow Jones Industrials look tired--a pullback could be coming. Time to step aside and lock in some profits. Due your own due diligence. Good luck to all.
May 7 at 10:02am · Comment · Like

Look at the date and S & P 500 level: I called the top almost to a tee. Thank God I was right. I forgot Facebook is different than the finance message boards. Because had I been wrong, I would have received a lot of hate mail. Facebook is pretty much an open kimono, so lesson learned. Be careful what you post because others DO read your ramblings.

For example, here's a response I got today: "I love reading your updates and not understanding one word of them."

At least SOMEONE is reading my ramblings. :-)

Reflation play intact

Oil, natural gas, commodities, copper, and 30-year T-bond yields are all up big, so I took some profits off the table. Long-term treasury bonds are looking really shaky, so the TBT trade was profitable. I'm hoping we get a correction--even if it means I lose some money, because if we don't, whatever recovery we hope to have will be toast. Having said that, most of the reflation trade is still in play, despite any looming correction, as the long-term trend is high inflation--despite the government's efforts to downplay it. If there's only one thing to learn from this financial crisis, it's not to trust central bankers. The last 2 years should have cleared any doubts.

The Chinese are shunning T-bonds as I predicted, and opting for gold, base metals, energy and commodities as they rebuild their domestic and export economy. Expect the yield curve to steepen long-term, as it has since December.

The S & P 500 at 920 and Dow Jones Industrials look heavy here, after a big 30% run up. The fundamentals of our economy are still terrible--rising consumer debt defaults, rising jumbo loan mortgage foreclosures, rising commercial real estate defaults, and toxic assets being shoved under the rug with sketchy accounting. A steep yield curve will help banks earning operating profits with widened net interest margins, but the big money centers still are left holding the bag of toxic assets in their basement. I re-entered puts in a certain for-profit educator, and I think all the indices will correct here. This bear market rally has been powerful, but the market's only function is to take down as many suckers as possible. Too many retail investors are just now joining the bandwagon, and I suspect the majority of the move is now behind us. Let's hope the coming correction isn't a whopper.

I'm not a good trader, altho I'm gettng better at valuation, so please do your own due diligence, and good luck to all.