Diary of a Financier

SPX still heading higher after long term demons slain

In Capital Markets on Wed 1 May 2013 at 06:04

I thought I’d check-in on the S&P 500 ETF ($SPY), as it’s been a couple of weeks since my last focus piece on the benchmark index, and some important long term developments have welcomed the next stage of this cyclical bull market.

I wanted to start by refreshing the 2006 analogue, which still proves to be a handy guide for the larger trend this year. Since 2013’s rally has been so strong and steep—almost linear—I must admit that the likeness of the 2006 v 2013 priceactions has deteriorated. While the undulations of the price patterns do align, they differ in magnitude, so I’ve switched to focusing on indicators, which are a much better (and tighter fitting) gauge of trading range, momentum, and buyers’/sellers’ interest. Thus, I’ve recalibrated the analogue, now tracking relative to around 2006.02.17.

The daily analogue says SPY only has ~1% left in upside by the second week of May (around 2 weeks), before a short term pullback of ~2%. Both 2006 & 13 show an ebb in momentum, manifest in 3x MACD and MFI bear divergence:

SPY 2006 v 13 analogue (daily)

SPY 2006 v 13 analogue (daily)

It’s definitely not worth liquidating exposures to take shelter from such a measly drawdown—particularly since it’ll last for only 5-7 trading days. That’s too short a timeframe to add value in [clumsily] trading a whole book. Plus, as the weekly analogue to 2006 can attest, this little drawdown barely registers in the grand scheme, where the +3% expected rally into July looks like a straight line headed east/northeast:

SPY 2006 v 13 analogue (weekly)

SPY 2006 v 13 analogue (weekly)

That being said, I may use my remaining 2.5% cash to counterbalance our excess risk with some inversely correlated asset like Treasuries ($TLT) or Volatility ($VXX), then rotating any gains into preexisting positions that get battered. No buying on up days, no selling [longs] on down days.

The current daily/weekly/monthly SPY charts reiterate the pronounced short term bear divergence that’s near reversal. More importantly, that haunting bear divergence in weekly & monthly charts has already been convincingly reversed–something that happened in late 2006, when the market entered its fruitful momentum phase:

SPY daily/weekly/monthly

SPY daily/weekly/monthly

With these longer term demons slain, the rally in risk assets can proceed towards Thrill and Euphoria.

~~~~

I’m trying not to get too entrenched in my longstanding thesis of ‘a rally into the summer, before we get 2013’s real correction in the order of 7-10%.’ But, everything from technicals to fundamentals to macro to sentiment to analogues continues to concur.

Our portfolio’s up to a beta of 0.87 vs 0.76 benchmark,¹ with sigma 1.31 vs 0.54 benchmark and an allocation of 59.5/38/2.5 (stocks/bonds/cash).

–Romeo

¹Benchmark is 60/40 stocks/bonds

N.B.- All charts from 2013.04.30 intraday

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