Given yesterday’s action, we have decided to publish a quick alert in advance of the call. Yesterday’s trading was a surprise to us, but has not turned us negative as of this writing. Further weakness could raise concerns, however. We will discuss briefly here, and more on the call at 10:15.
First, we mentioned in the Midweek Review that we would have serious concerns about the uptrend if the market moves much below 120 on SPY. This would have been surprising Tuesday night, but now looks possible. We do, however, have a couple of observations.
- As mentioned in last week’s letter, the 118 area is actually a 50% retracement of the up-move. We have felt that the market was stronger than this, but that may not be the case.
- It is worth noting that, if accumulation models were run today stocks still look strong – but this model is only run-able at the end of the week and that may change.
- The McClellan is back to -33, the area that held the first sharp pullback day. If it breaks this area a drop to the -150 to -200 area cannot be ruled out. We are not horribly oversold, in other words, and this is a concern.
For now, we remain positive, but would turn to neutral below 120 on SPY. Love to see a down open followed by a rally Thursday.
Second, if I run bond accumulation for the week it is negligible, a surprise – but the accumulation model has been stronger than expected, also a surprise. The strength of the model, intermediate-term, is a concern as it says bonds are in “strong hands” and is an excellent indication that the bears are right and stocks should take out the lows for the year. However – if this model continues to show negligible increase when we have Friday’s numbers in the bag, it would suggest that Italy (and possibly Jefferson County) is what this market has been waiting for. What this means is I would be alert to further lighten bonds if signs of a reversal occur by Friday. And, we note that the only really bearish indicator I have for stocks is the bond accumulation model.
Third, we continue to like the look of commodities and think they will outperform stocks and bonds into the end of 2011, unless there is a geopolitical hooraw.