Wednesday, August 28, 2013

Getting very nervous, but....

I continue to be patient with this market, but I'm growing increasingly nervous. As I wrote last week, my indicators and metrics continue to show a mixed picture, with some bullish, some bearish and some neutral. However, recent price action has me concerned.


The daily chart of the S&P 500 Index (above) shows the market gapping down yesterday -- this after gapping down earlier this month. A move like yesterday can often serve as a final shake-out of nervous holders ("weak hands") and as shown in the lower inset, the stochastic is at oversold levels which has indicated short-term lows within the market's rising intermediate trend (see orange circles). While the Index has clearly broken down through its 50-day MA, note that the 100-day MA (red line) served as support in December and again in June. Also, there's the chance a head-and-shoulders formation is developing (labelled above), which if true would infer that the Index should rise to the 1670 level to form the right shoulder -- we'll see....

Two things in particular worry me. First, the stochastic recently hit an extreme low level, well below 20, and is remaining depressed -- "bad oversold" characteristics. 

The second item of concern is more subjective but worth mentioning. The market has sold off hard whenever possible U.S. strikes against Syria have been reported. On the surface, such limited attacks should not prompt such a harsh reaction from the stock market. This is not the first time that the U.S. has indicated air strikes against a country could be forthcoming and very often in the past the market has taken such news in stride, barely reacting adversely. 

The fact that the market has been undergoing abrupt and meaningful declines with this recent talk of strikes is concerning. It can signify that current investor sentiment is very fragile, with many potentially looking to "knee-jerk" sell and lock-in gains from the impressive YTD rally, and/or it could suggest that if strikes were to occur (as seems to be the eventual case), such limited attacks may have serious repercussions with Syria reportedly targeting Israel for retaliation. I cannot vouch for the veracity of such reports or rumors, with much of this likely posturing, but my point is the market typically does a good job at getting to the truth and recent price action would intimate that investors are very apprehensive and/or military strikes against Syria may result in significant complications.

That said I also wanted to once again discuss seasonality.

Source: Bloomberg

The chart above shows the 5- and 10-year average performance for the S&P 500, the average of just post-election years (back to 1981), and the S&P 500 performance for this year (blue line). I would argue that since May 1st,  the S&P 500 has more or less tracked the seasonal averages directionally. Note that all three seasonal lines show the S&P 500 rising from the end of August and peaking out not long after mid-September (see orange trend lines). 

As discussed, the Syria situation could make any seasonality studies meaningless, and I also don't wish to put too fine a point on timing issues given the chart displays just a 2-3 week tendency for the market to rise from here. But it's more evidence to consider -- never a bad thing. 

At this point, I continue to let holdings dictate when they should be sold via stop-loss targets and relative performance, and I'm not reallocating proceeds back into equities but rather building some cash, awaiting better clarity on this mixed picture.

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