Market Timing Brief for 10-19-2012: The Correction Will Likely Deepen

A Market Timing Report based on the 10-19-2012 Close published Monday October 22nd, 2012

UPDATED SP500 Index Chart as of 12:58 pm ET 10-25-2012:


SP500 Index in Danger of Breaking Support

The Ten Year Treasure Note (TNX,TLT) is rallying again as of Friday from about the same position it had back in both August and September.  This could mean further bad news for stocks.  I looked critically over the intermediate term as the next link shows and found that Treasuries have been basically going sideways while the stock market has inched up.  If Treasuries rally hard, I would expect stocks to be correcting further.  Corporate bonds have been holding up well in the face of uncertainty.

The 10 Year Treasury Note chart:

The horrible performance of such key stocks as Apple (AAPL), IBM, Google (GOOG), Intel (INTC, and McDonald’s (MCD) over the past couple of weeks is certainly bad news to the Bulls who predicted that these multinationals would escape the slowdown occurring around the world.  That has not been the case.

Of course China slowed from its previously torrid growth rate, but is showing some recent responsiveness to government policy changes meant to stimulate the economy.  For this reason the emerging markets have done better on a relative basis than their U.S. counterparts.  This is a theme that you can likely profit from in the coming months.  If I had to do a Jan. 1 prediction that began today, it would be to consider increasing exposure to emerging markets (using a stop loss point as always).

The SP500 Index (SPX, SPY) is correcting off of a top and is barely below the 50 day moving average this week (even after the 10-22 close), but there is some nearby support as shown:

I give you my “first target” for the SP500 at the above link.

When growth slows, there is often a bias toward value stocks and that is showing up in the index performances this week. 

The VIX volatility index shot up on Friday.  It stopped just quite shy of the late August high.  There is still plenty of room for it to rise, which means a further stock correction is very possible.

The US dollar index looks ready to rally.  Near month futures have held a higher low and the tone is UP.  Metals are under pressure with gold dropping through some nearby support and falling to 50 day moving average support as shown in this week’s chart:

The GLD Gold ETF Chart:

The drug stock group is still doing very well, despite the impression that Gov. Romney is gaining on President Obama.  As I’ve said, this predicts an Obama victory, so the Republicans have their work cut out for them still.  (NOTE: after close Tuesday – Romney has pulled ahead in the polls and drug stocks are now selling off)

AAII Investor Sentiment is of use to us again this week!  Bulls are 28.66%, Bears 44.55% and the spread is therefore -15.9% per the AAII data.  That is enough for a temporary low, which means the area of the 50 day moving average could hold for the SP500 Index, but there it is not a wash-out bottom.  For that the spread is too low.   A spread of -22.4% marked the low this past May.

All in all, the data suggest a further stock market correction, perhaps after a short bounce or sideways move.  The Fed has created upward pressure in the stock markets by driving interest rates to abnormally low levels.  This is why the correction we’ve had has been slow and not enough to satisfy the Bears.  If the fiscal cliff is averted, the Bulls will have a big run ahead of them.   So our ability to invest rationally is GONE, because our government is interfering in the markets in such a massive way.  Other than buying deep value as Buffett does, the direction of the market as seen in the charts is one of the only clues we have!

Standard Disclaimer: It’s your money and your decision as to how to invest it.

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This entry was posted in federal reserve, gold, gold etf, investment, investor sentiment, Market timing, S&P 500 Index, trading, US Dollar Index, volatility index, Warren Buffett and tagged , , , , , , , , , . Bookmark the permalink.

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