Fundamentals, Schmundamentals

Fundamentals, Schmundamentals

Fundamentals, schmundamentals. Here is an easy lesson on how to navigate the current market.

Figure 1 is a weekly chart of the SP500. The trend channel (in green) is drawn from the 2009 lows. The failed breakout is noted. Pretty simple stuff!

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Figure 1. SP500/ weekly

fig1.2.7.14

Failed breakouts often result in much lower prices as undisciplined investors, whom were late to the party to begin with, buy the breakout and dump their positions on the slightest of discomfort. Thus the markets had a mini spasm. But why did the market bounce when it did? Once again, it is very elementary as our weekly chart of the SP500 shows. The orange trend line is drawn from the 2013 bottom.

Figure 2. SP500/ weekly

fig2.2.7.14

But there are several problems going forward at least from a technical perspective. It was only 3 short weeks ago that everyone was all in. Not a lot of people. I mean everyone as the bullish sentiment numbers were pushing very, very extreme. Those folks most likely are underwater and are probably thinking to themselves, “Geez, the market has rebounded some this week; I better sell as I don’t want to go through the trauma of seeing my account dip more than 2%.” In my opinion, sellers lurk at higher prices, and this puts a cap on higher prices. The second problem is less anecdotal and is one I am well familiar from my own studies and data. A market that fails to turn bulls into bears at periodic intervals is not a strong market, and this has been a problem with this market for a long time. If dips remain shallow (and this has been a shallow dip), then bulls are not converted to bears. Short covering to power the market higher doesn’t exist, and the price action loses momentum quickly without that short covering fuel. The venerable (love that word) market technician, Richard Russell, used to say and I paraphrase: that “bull markets are like bucking broncos; they will do their best to throw you off. As an investor, your job is to ride that bull as long as you can without getting thrown off.” These 5% dips or mini swoons that we are seeing really have not tested investors’ resolve. This kind of price action isn’t consistent with bull market action, but more consistent with a market top. The best thing that the bulls could hope for is a break of that 2013 trend line. This would bring the sellers in and ultimately set up the next leg higher provided the fundamental/ schmundamentals are supportive.

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