The last week or so in the market has us seeing a lot of mixed signals out there in regards to a market bottom. On the one hand, we finally saw some strong price action in the indexes and key stocks like AAPL, SHW, & HD. However, we still have relatively dismal price action in key commodities like oil and copper, and bond rates in Italy and Spain are still elevated. While we’re cautiously bullish at current levels, there are caveats to our optimism.
For instance, we’re aware that any delayed reaction to the action in oil could really send the indexes back towards their recent lows quite easily, especially with the VIX still above 20. Yet the VIX also flashed a positive last week after it declined 5 days in a row for the first time since early March. Our commentary over the last week may have some thinking that we’re just changing our mind over and over again as we analyze more and more indicators. That brings us to this point: anyone who thinks they has the market figured out at a time like this, is setting themselves up to be caught off guard.
When the market is in a clear trend and all key indicators are giving the same signal then it is easy to formulate expectations. After all, expectations, or adjustments to them, are what drives market prices. If the market does something that most were expecting, it is much easier to react to what it did and trade accordingly. At a time like now, when the market is very volatile and giving mixed signals, one must have multiple expectations.
Even if you choose to have a dominant expectation, or a bias, the current state of the market requires you to consider all of the hurdles to your expectation. Otherwise if you do not, something could happen that could paralyze your ability to make sound decisions in a market as ever changing as this one. For example, Spain received a bailout over the weekend. One might expect the market to react positively to this news. If it doesn’t though what will you do? For us our expectation is simple: the recent price action on Friday suggests a break a 1,334 is very possible. If 1,334 breaks we expect further upside. We don’t expect much more downside unless the low around 1,310 breaks.
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