Long Term Musingsl

I was about to post this over the weekend but Scott beat me to the punch and I wanted everyone to see his most excellent update. Although he was spot on about the one-two wave scenario (which seems to be resolving into a third way down this morning) I would be very careful about making one directional bets at this point. Best to take one day at a time and to gradually shift positions along with what the tape is telling us. To facilitate this process I have compiled a collection of my momentum charts to aid us in to assessing the medium to long term picture.

But before we’ll get to the good stuff here’s a quick NLSL (net-lines sell level) update on the spoos, which thus far has been breached. It is very important that we close below 1316 today to support the odds for a continued push toward 1280. If we see a late day reversal then we are back in limbo land and the longs may get another lease on life.

Alright on to the juicy stuff…
[amprotect=nonmember] Charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
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This is my CPCE Deluxe chart and it has been a very good long term guide through the past two years – until most recently. Quite frankly that new spike up is not only completely out of character – it also is pushing in the wrong direction.

The reason I am posting this chart in the first place is that in the context with my other momentum charts it may point toward a possible looming trend change in equities. For a prior precedence look no further than the first three months of 2009 when the P/C ratio was dropping and painting a divergence.

Here I am relativizing NYSE stocks above their 50-day MA by dividing it by down volume – kind of a lie detector test as the down volume divisor should not impact the output signal. Well, it has been slowly building in the past year as its clearly visible in the chart above. In the past three months the signal has been particularly anemic and we have been stuck in small compression range, after which I am sure we’ll see some sort of resolution (i.e. big move in one direction or the other).

Similar story over on the Summation Index – we are coiling up here folks and whatever comes after this should be big.

The McClellan Oscillator is a medium breadth indicator derived from net advances, the number of advancing issues less the number of declining issues. As such is it directly related to the previously shown Summation Index which is simply a running total of the McClellan Oscillator values. Now what I am doing here is to divide it by the long term Bullish Percent Index which also is a breadth indicator based on the number of stocks on Point & Figure buy signals within the NYSE.

Despite this unholy brew of indicators the output has also been quite spot on in the past few years. And as you can see we are for some reason approaching buy line territory again – despite and perhaps because of all the corrective whipsaws in the past few weeks. Could it be that we are actually correcting sideways ahead of another bullish move to the upside?

It’s very much possible but even if we do bust higher again after SPX 1280 I would not want to get too comfortable up there. What you see before you is a five year chart of the slightly smoothed SPXA50 against the SPX. See a theme here? What’s particularly fascinating is that the degree of the current divergence appears to exceed what we saw back in early 2010 and even the highs preceding the big slide in 2008.

A more smoothed perspective on the very same chart – just to make sure we’re not looking at a medium term anomaly. So, should we expect some P3 situation to transpire anytime soon? I wouldn’t waste my time pondering about six sigma events and instead focus on the sheer fact that upside risk here seems to be growing.

The fixed income crowd seems to have gotten the message – and as such it’s just a matter of time until the less tuned equity slobs follow suit. In the end Mrs. Market does quick and cruel business with fat piglets and I am confident this time won’t be any different.

Bottom Line:

I can understand if you’re a bit confused right now. We are pushing down on a short term basis – long term charts are pointing down as well. So why isn’t Mole backing up the truck to get short? Quite simply because the medium term picture has not aligned itself with the long term outlook. And the last position you want to find yourself in is to be early during a long term trend change (Jesse Livermore made that very point). For we will most likely see a few nasty gyrations before everything comes into alignment. And remember that the grizzlies have a lot to prove at this point as they have failed to assert themselves for over two years now.

What I would like to see, if you will, is a final push higher painting some sort of exhaustion candle on the weekly and monthly charts. What I’ve seen in the past few weeks more resembles the type of tape preceding a blow off top and thus I can’t get too excited about the short side just yet.

However, having said that – on a long term basis I think that equities are going down and I wouldn’t be surprised if we saw a revisit of the 1000 mark on the SPX by the time this year is over, so keep your powder dry. In the interim let’s not get too excited during the summer slow down – we’ll have plenty of time to get positioned later in the year. For now let’s just play the swings and keep collecting evidence.

Of course if those sentiment indicators start turning then I will change my outlook accordingly. That’s not a ‘cover your ass’ statement – it’s the core of how I operate. Always always always leave a door open for an opposing scenario. We are not pundits – we are stainless steel rats and we work with whatever the market throws at us.

Cheers,

Mole