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Stock Market Strategy: The More Things Change the More They Stay the Same

I must begin today’s missive with an ebullient congratulations to my good friend Blaine Bell! The wedding in Napa Valley this past weekend was beautiful, the bride radiant and the party atmosphere prodigious.

While my computer did make the trip to Napa, it was used for portfolio management only. Any free time this past week was spent in the lovely company of Rebecca, my girlfriend and the grape vines of Napa. Needless to say I had a tremendous amount of reading to catch up on upon my return to RCM headquarters.

If I could condense this past week’s worth of erudition into a single thought I’d say ‘the more things change the more they stay the same.’ Certainly we have witnessed a significant amount of volatility in 2010.  The ‘change’ component of the above phrase can best be described as nauseating. If you wish to see a graphical interpretation of this 2010 phenomenon feel free to subscribe to our ‘Market Moving Chart of the Day’ located in the top right corner of this page.

As for the ’staying the same’ part of the equation I will simply direct your attention to the following three headlines. In fact, I could have chosen at random any three headlines from the past week and they all sound similar. The basic gist is as follows:

First, a piece of economic news is released that disappoints. However, Wall St. and the powers that be, do their best to put the proverbial lipstick on the ever distending pig… Retail Sales Dip, but It Could Have Been Worse – Briefing. Next, some Fed member chosen to be that week’s puppet (are straws used or is Dictator Ben punishing those who wish to stray?) makes a supposed market soothing comment… Fed’s Hoenig on CNBC says the economy continues to recover modestly, and he still sees 3% economic growth in 2010.  Almost immediately following the sock’s elucidation, a contradicting, real and market troubling story hits the wire…

FOMC minutes from from Jun 22-23 meeting:

The pace of the expansion over the next year and a half was expected to be somewhat slower than previously predicted…

The participants generally made modest downward revisions to their projections for real GDP growth for the years 2010 to 2012, as well as modest upward revisions to their projections for the unemployment rate for the same period…

We are stuck between intense volatility and an insipid news cycle. At times like this I find the best tonic is a revisit with our trusty steed, technical analysis. Below please scrutinize the daily price chart of our favorite index the NYSE Comp..

 123NYSE

As you can see, the major uptrend remains intact. Moreover, three attempts have been made to breach this trend in May, June and July to no avail. You may however, remember that everyone and their proverbial brother on CNBC and the like were calling for an epic Head and Shoulders breakdown at the beginning of this month (labeled 3 & highlighted yellow). Naturally you will not be able to find this obvious prediction on the RCM blog site. Rule number one: When CNBC et all call for imminent market demise expect instantaneous market rally. You may recall that when these jokers were calling for new highs on the market we were ‘Stalking the Bear’.

The above chart also suggests a change in trend may be in the offing. The market price has been locked in a downtrend since the April highs moving from the top of the channel to the bottom. However, as the blue, yellow and red Fibonacci Fan lines illustrate, a change in trend has been signaled.  For your convenience I have highlighted with a green box an initial target area for the current rally.  

Allow me to conclude by writing that fundamentally I can see no reason for the markets to rally. We are firmly of the mind that economic growth will not be able to continue without massive government support. Financial regulation will continue to be a hot button right up to the November elections at the very least. Regulation of the GSEs will continue to cause consternation. I will warn that a fourth breach of the uptrend line will be deadly.

However, our credit guru Michael Johnson continues to write, Bank CDS & CDX Index spreads point to continued equity market gains. Being short equities as credit improves is dangerous…”  So, until such time as a fourth breach has commenced, the technical picture of the market remains encouraging.

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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