What Are You Looking At?!?

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Sometimes that question can be an innocuous inquiry and other times it is a veiled challenged. That phrase was often issued as a threat on the mean parochial school playgrounds of my youth in the fine city of Oakland, CA.  Now I am asking it of technicians and strategists, anyone I can find, to help me navigate these increasingly difficult waters.

For those that are looking at the stream of information from Leading Economic Indicators the news continues to be strong. Investor sentiment has risen to multi-year highs. Data from the housing sector has continued to be strong. ISM new order data, unemployment claims data and the economic surprise index data have all recently improved. But, as these numbers have improved we are in the middle of a 6% correction in the market. What gives?

There is a divergence in the longer term trend in economic data and the near term moves in the market. That divergence has, in my opinion, been caused by a surging fear over what the fiscal cliff holds for us. Near term concerns can definitely drive the market as those concerns impact people’s perception of future growth prospects. The current fiscal cliff concerns are very similar to the concerns that roiled the market several times over the past few years regarding trouble in the Eurozone. When those fears rose to a fevered pitch the markets sold off sharply only to spike aggressively higher when good news came.

When politicians get involved people become nervous and sell first and ask questions later. History with other issues politicians have had to deal with tells us they cobble together a plan or kick the can down the road a few weeks prior to the stated deadline. So, we could be in for a rocky path here for the next several weeks.

So, if your focus is in the LEI’s you are looking at an attractive buying opportunity here. If you are a pure market technician what are you looking at?

The best technicians I know are split on the current situation. They feel the move to the 200-day moving average on the indexes is a buying opportunity that should be used to buy attractive names on a pullback. They feel that the move is healthy and the short term angst over the fiscal cliff has not done enough damage to the bull market to say we are now in a bear market. Some technicians are just going by the numbers and do not consider the why that has moved the market lower. They are just concerned with the level of the market. As long as the averages are below their 200 day moving averages rallies should be sold and the market should not be given the benefit of the doubt. If you follow their way of thinking you are selling now and asking questions later. If you are going to follow that strategy you better be ready to buy when the 200 day moving averages are surpassed. Most of us are somewhere in between and we sell some of our holdings as they weaken and hold the names that continue to perform.

The market attempted to rally and closed on Election Day just below the resistance levels I gave you on the major averages of 1436/13,300/3035/834. Then the world changed the day after the election and the support levels I gave you of 1402/13,035/2959/804 all gave way over the next couple of days and all the major averages now trade below their Maginot Lines, their respective 200-day moving averages. Thus, the long term trend of the market is now negative. If the S&P 500/Dow/NASDAQ/Russell 2000 close above the following levels, 1403/13,000/2951/808, then expect a rally from oversold conditions. If selling persists and the following levels give way, 1372/12,740/2858/755, oversold or not, the markets will continue to weaken.

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About Thomas J Smith CFA