Short Takes

Below is an updated version of the chart we showed on March 16. Last week, the S&P 500 held above the rising wedge breakout. If the market fills the white space above, the upside potential appears to be over 1,430 (based on this chart in isolation).

Using our new risk model, we are reviewing periods with similar technical profiles to the present day. The early read (still working) is the present day market could still mover higher. From a similar technical state on December 15, 2010, the S&P tacked on 8.7% in additional gains over the next two months. Even if you used January 3, 2011 as your starting point, the S&P 500 moved 5.58% over the next thirty days. These periods had a “this market can’t go higher” profile similar to what we have today. It does not mean the market will go higher, it simply means it cannot be ruled out.

Since the markets have come up in a near vertical manner, we want to have a base/usable form of this model ready for action as soon as possible. We have made a ton of progress since the close on Friday. Fortunately, our office has a big sliding glass door, which we have open to enjoy the great Atlanta weather (75 and sunny today).

The early read on our new risk model is excellent. There is no question it will help us going forward. Development is a top priority when the markets are closed.

To better deal with increasingly volatile markets (either straight up or straight down), we are developing a simple to update rules-based system to assist with risk exposure. We have been working on the inputs for several weeks, but are just now putting it all together.

We also continue to work on a system for dividend-paying stocks. We will keep clients updated on these important projects.

The materials ETF (XLB) is trying to hold at the pink trendline (see green arrow below). Notice how the general market performed when materials bounced in recent months (follow vertical green lines to S&P 500 at bottom). Step one is XLB has to hold.

Three things as of 2:10 p.m. EDT: (1) 70% of NYSE volume is associated with gainers, (2) we briefly broke 1,388 on the S&P 500 this morning, but recovered (so far), and (3) previous laggards in the rally are showing some strength (materials, precious metals, commodities). The Copper ETF (JJC) is up 1.0% on very strong volume. The leaders can’t lead every day - it is good to see some other sectors post gains. All of the above means very little unless it holds into the close.

This morning before the open we said:

Some firmness in commodities and materials stocks would also increase the odds of the recent breakouts holding (S&P 500 > 1,370).

We have it today (as of 12:44 pm) - good sign, especially if it holds into the close.

The markets remain in a bullish stance longer-term, but it makes sense to understand possible downside risks. While busy, the weekly chart of the S&P below helps identify possible points of important support. They appear to be:

1. This week’s low of 1,388.
2. May 2, 2011 weekly high of 1,370.
3. January 30, 2012 weekly high of 1,345.
4. January 30, 2012 weekly low of 1,300.

A break of 1,388, especially on a weekly closing basis, would possibly open the door to 1,370. If 1,370 does not hold, 1,345 becomes a real possibility. If 1,345 is breached, 1,300 could come rather quickly.

A correction back toward 1,345 or 1,300 would enable the market to possibly push higher later in 2012. Some consolidation above 1,370 could also help improve the sustainability of the rally. Some firmness in commodities and materials stocks would also increase the odds of the recent breakouts holding (S&P 500 > 1,370).

As of 3:45 p.m. EDT, the 30-minute chart of the S&P 500 had some positive divergences as we revisited the daily low of 1,388, giving something to possibly build on in tomorrow’s session.

We took an incremental step away from risk today by selling a portion of our broad market position at 1.24% above what we paid for it. The correction may have further to run or the market may make another push toward new highs. As we noted yesterday:

Given what we know today, we would view a two to three week pullback as a buying opportunity, but it depends on how we come down. The odds are very low we will add to our holdings at current levels and above, but that too depends on how we advance. A weak move above 1,414 toward 1,430 may offer an opportunity to sell into strength. We have some long exposure and a good bit of cash on hand, so we can benefit from additional gains or a pullback that creates a better risk-reward entry point.

As we showed intraday: (a) the S&P 500 is trying to steady itself near 1,392, and (b) a move back toward 1,380 to 1,385 seems reasonable if 1,390 is broken. 1,385 represents a 38.2% retracement of the gains off the March 7 low.