Bullish Set-Ups Similar To 2010
We have been getting a lot of emails and phone calls asking, “Why are you bullish in the face of all these problems?” Our answer:
- We are not bullish. The charts are bullish.
- As long as the charts remain in a bullish stance, we will be open to better than expected outcomes.
- Central banks tend to take action when economic conditions are weak. In the short-run, central banks can make markets move. Many investors greatly underestimate the role of central banks in terms of their intermediate-term influence on asset prices. Did things look good economically in early 2009? No, but the Fed printed money.
- We understand the problems as well as anyone. If the charts change, we are happy to change with them. Our objective is to make money, not to feel comfortable or try to outsmart the charts. The charts are what they are.
If you know technical analysis, you also know that when moving averages turn up, it tends to be bullish. We have shown numerous bullish moving average slopes in recent weeks. On the chart of the NYSE Composite Index below, both the 50-week and 200-week are trying to make bullish turns (see blue arrows). The last time both the 50-week and 200-week were graced with bullish slopes was early 2005 (above point A). Stocks did very well to the right of point A. 2012, or near point C, looks nothing like 2008 (point B) given the current state of the chart below.
This may be all you need to know about why the charts look bullish (from Bloomberg):
German Chancellor Angela Merkel backed a bond-buying plan announced last week by the European Central Bank, a spokesman said yesterday. “The current thoughts are that the European situation is finally coming to a head,” said Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers in London. Weak data from Europe will “prove positive in increasing the likelihood of definite action from the European authorities.”
The weekly chart below of the NYSE Composite is loud, but easy to understand if you take each piece in isolation. We currently have a bullish MACD cross taking place similar to 2010 (compare A1 and A2). Full Stochastic looks similar as well (B1 vs. B2). The same can be said for Williams %R that recently moved from below -80 to above -20 (C1 vs. C2). The NYSE Composite tacked on 21% between points D1 and D2. The present day is similar to point D1, which leans bullish for stocks. The chart below is also trying to break above a symmetrical triangle (upper green line). Symmetrical triangles tend to be “continuation patterns” about 75% of the time, meaning the current trend remains in place about 75% of the time; the current trend is up.
The charts above are weekly charts. How they look as of the close on Monday means little if the set-ups cannot hold into the end of the week, which underscores the need to remain flexible and open minded. We are not forecasting anything with these charts. As long as they look bullish, we will remain positioned for bullish outcomes. If conditions change in a material way, we are happy to join the bearish camp.
