Market Exuberance Over Greek Default?

Market exuberance displayed after the Greek default deal was announced may provide for short or intermediate term market gains, but I have one question.  If it is such good news that Europe has negotiated a deal to allow Greece to default on 50% of their debt why not just allow them to default on 100% of their debt?  As we saw over the weekend and today this story is not over yet.  We are now seeing market concern over Italian debt driving Italian bond rate over 6 percent.  This is exactly what should happen when a borrower has overextended themselves, and if allowed to occur this would limit future borrowing and stabilize markets as investors chase the potential for higher returns in the bond market.  However, we will likely witness attempts by the European Union to protect low bond rates.  These attempts to control the natural market response will likely manifest as unintended consequences.

I have updated the sentiment chart below to indicate on the price line buy, tentative buy, sell, and tentative sell periods (see legend).  It is important to note that as long as the green line remains below zero the market remains in a long term buy period, but I suggest that you only make market entries on days when the market closes at least 2% lower.  Always utilize a cost averaging methodology to avoid over commiting to any single entry or exit.  The buy, tentative buy, sell, and tentative sell signals are based on a set of consistent rules applied to the data set.

1. Buy - a buy signal (green) which indicates a long term signal has confirmed its trend.
2. Tentative Buy - a buy signal (yellow) that indicates a good opportunity, but the signal has indicated before a long term trend is established.
3. Sell - a sell signal (red) which indicates a long term signal has confirmed a trend shift.
4. Tentative Sell - a sell signal (purple) that indicates a good opportunity, but the signal has indicated before a long term trend is established.

Chart 1: 10/31/2011 S&P 500 Market Sentiment

Chart 2: 10/31/2011 S&P 500 Ultimate Sell Signal

Intermediate Market Resistance Expected

Since the last post, the market has continued an upward trend.  However, the blue line in the chart below is indicating that the market is sensing resistance (not completely unexpected as the price approaches the 200 day SMA).  Although a good sign is that the long term sentiment line (green) has leveled out.  This indicates that there has been an improvement in the long term sentiment.  However, for safest entry point, wait until it crosses the orange signal line for confirmation. Also a good entry point may be soon after the green line seperates from the yellow signal line, but the risk for a reversal is higher especially since the slope of the 200 day SMA is negative .  Remember also try to only make entries on days when the market has taken a significnat drop.  Typically I wait until right before market close to place mutual fund purchase orders.

10/21/2011 S&P 500

10/21/2011 S&P 500

The Market Established A Floor ... But Be Cautious.

Just a couple weeks ago it appeared that the markets were likely to slip into another recession, the Euro was on a path to collapse.  However, the market has rallied over the last 2 weeks suggesting that the market is betting that we are not headed into another recession, and the Euro is not going to collapse.  However, there are still significant headwinds facing markets around the world:

1. European debt crisis (Portugal, Italy, Ireland, Greece, Spain).

2. US Housing Market

3. Bank Mortgage Fraud

4. US High Unemployment

5. Chinese Banking (click on link to see story)

6. Chinese Real Estate Bubble? (click on to see video report)

The chart below indicates that market sentiment has indeed made a marked shift towards positive gain.  However, the long term trend is just now beginning to level out.  Whatever one does, do not buy the rallies.  Wait for significant down days (at least 2% drops) for entry points, and do not over commit.  I believe the market will tend to trend upward for the time being, but it will continue to be highly volatile as long as interest rates remain near zero.

Chart 1 - S&P 500 Sentiment 10/14/2011 (click on chart to enlarge)

The chart below is also indicating that we have not signaled a market crash yet as it did in 2001 and 2008:

Chart 2 - S&P 500 Market Crash Signal (click on chart to enlarge)

S&P 500 - Still Tentatively Bullish

The intermediate signal line (blue - graph 1) continues to approach zero, but the slope of the long term signal line (green - graph 1) is still negative and the slope of the 200 days simple moving average has turned negative.  The new signal (graph 2) has not indicated that the market is crashing. This appears to be confirmed by the fact that despite all of the headwinds that the market appears to be facing and the limited upside potential the market has held within the trading range of 1101.54 and 1231.71 suggesting that the market has either found a floor or is waiting on a significant indicator (i.e. news out of Europe, third quarter results, etc.).

09/30/2011 S&P 500 Chart 1 - Click To Enlarge

09/30/2011 S&P 500 Chart 2 - Click To Enlarge