Thursday, May 28, 2009

Gazing at Charts

Anyone involved in the investment industry knows that technical analysts are the pariahs of the business. My son who in ten days will take his first Chartered Financial Analyst exam already scoffs that technical analysis cannot predict the market future. Jeremy, well duh!

What charts do is describe, in a distilled fashion, the market response to all of the fundamental aspects of the economy. It does not predict, it shows. When in the midst of a maelstrom of information, opinion and pontification stepping back and looking at what a market is doing as it absorbs the information is invaluable.

We have had nearly three months of revisionist aftercasting as the pundits fall over themselves to celebrate "green shoots" and second derivative improvements. I am not privy to the machiavellian cabals of Wall Street and the White House. Interpreting the data which is at best statistically meaningless and at worst massaged ceaselessly for policy reasons is no better than a guess. (click on image to enlarge)

What I see in the S&P 500 market is a bear market doing a cowboy death kick. Not pretty, not quick but inevitable. It isn't unlike the high school horror film where the psychopathic killer is vanquished, everyone hugs and cries in relief, and then the camera pans to the spot where he died. The body is gone. He's still out there!

The recent bounce was powerful and feel good, but when we zoom out it is evident that all trends are not repaired. The market is above the 50 day moving average which was my initial buy indicator in early march, but like any wounded animal, this is when it when it is most dangerous. As this rebound has matured, the volume has dried up and it looks like late comers to the party.

The market short term cycle ebb and flow still shows lower highs and lower lows. Until I see a higher high and high low I will be cautious. In March the oversold chart combined with reasonable market valuations. In May we are now at an overbought condition and no longer attractive value. We went from an A/B market grade (oversold, reasonable value) to now a D/C market (overbought/neutral value). I do not expect to see significant valuation improvement but absent a market breakdown I will be taking a more positive equity position in portfolios on the next oversold condition.

I am hedging modestly to hold recent gains, and formulating the thematic guidelines of the next secular market forces. Following my daily thoughts will give a reader a good idea of those themes.

John Barnyak