I thought I’d check-in on the S&P 500 ETF ($SPY), as it’s been a couple of weeks since my last focus piece on the benchmark index, and some important long term developments have welcomed the next stage of this cyclical bull market.
I wanted to start by refreshing the 2006 analogue, which still proves to be a handy guide for the larger trend this year. Since 2013’s rally has been so strong and steep—almost linear—I must admit that the likeness of the 2006 v 2013 priceactions has deteriorated. While the undulations of the price patterns do align, they differ in magnitude, so I’ve switched to focusing on indicators, which are a much better (and tighter fitting) gauge of trading range, momentum, and buyers’/sellers’ interest. Thus, I’ve recalibrated the analogue, now tracking relative to around 2006.02.17.
The daily analogue says SPY only has ~1% left in upside by the second week of May (around 2 weeks), before a short term pullback of ~2%. Both 2006 & 13 show an ebb in momentum, manifest in 3x MACD and MFI bear divergence:
It’s definitely not worth liquidating exposures to take shelter from such a measly drawdown—particularly since it’ll last for only 5-7 trading days. That’s too short a timeframe to add value in [clumsily] trading a whole book. Plus, as the weekly analogue to 2006 can attest, this little drawdown barely registers in the grand scheme, where the +3% expected rally into July looks like a straight line headed east/northeast:
That being said, I may use my remaining 2.5% cash to counterbalance our excess risk with some inversely correlated asset like Treasuries ($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:
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).
¹Benchmark is 60/40 stocks/bonds
N.B.- All charts from 2013.04.30 intraday