Sunday, August 10, 2014

Indices Look Terrible

SGS Market Timer Status:   NEUTRAL 
Neutral as of close of 8/1/2014
 
RTS Long Term Current and Past Portfolios
In Cash 
 
During the sell off last week, SPX was supported well by its 100 D-SMA.  Should that support fail and SPX closes below it, chances are good that SPX sells off quickly to test its PUL (thick black which was btw drawn incorrectly previously) and possibly its 200 D-SMA.

The Fed ending its debt buying is a game changer in my opinion.   In the past (since 1980) Fed tightening of interest rates caused a sell off in the short term (a few months), but indices recovered and went on to set new highs because the economy kept on growing at a healthy 3% to 4% rate. The sell off this time around could be deep because: 
  • SPX went up 199% since March 09 low (666 to 1991). It's quite probable and healthy for SPX to give up 10% to 20% of that gain before heading back up again.
  • What the Fed has done since March 2009 is unprecedented and historic. Although I  supported what they did (the alternative would have been "a collapse of world's economy"), but no one knows if our economy would continue to grow and accelerate that growth to 3% to 4% once the Fed is no longer stimulating by buying mortgage back debts. If we stop growing and enter into a recession or even grow at an anemic rate of 1% to 1.5%, then a 50% correction is very likely (i.e. Japan economy, Nikkei Index and Japanese real estate in 1990's).
  • In the last five years, SPX had two significant corrections (first one was in Summer of 2010, 17% correction, and the second one in Summer / Fall of 2011, 22% correction). Both corrections started when Fed's QE's (I and II) ended and both correction did not end until the Fed announced new QE programs.  The last QE plan  "QE Infinity" is ending in October and the Fed has no plan to any more rounds fo QE in the foreseeable future.  
From here forward, indices will react in a direct correlation to economic news. Growth rate, PPI, unemployment, initial claims data, auto sales, new homes, durable goods, Michigan consumer sentiment ... will push indices up and down.  If our economy does not start to grow at 3.5% to 4.5% rate with very little or no inflation, there is hell to pay (at least a 20% to 30% correction) in the short term no matter what.


Disclaimer: The views expressed are provided for information purposes only and should not be construed in any way as investment advice or recommendation.  Furthermore, the opinions expressed may change without notice.
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