Analysts are split over the long-term direction of stocks. While we see a definite downturn in the cards for late 2006 and early 2007, near term it may be a good time to unplug the computer and head to the beach.
This chart shows the price action in the S&P 500 Cash Index from the recent early May top. There are four technical indicators on the chart. The light blue line is the 50-day moving average. The horizontal dark blue line is the 50% Fibonacci retracement line from the top in May to the recent bottom in mid June. The black downward sloping line is a 1/3 speed resistance line. Finally, the indicator at the bottom of the page is a slow stochastic. The white circled area shows that the current closing price of the cash S&P is right on the 50-day moving average and very close to the 50% retracement line and the 1/3 speed resistance line. In other words the market has moved to a state of equilibrium. After the sharp sell off in May, the confluence of these indicators acted to draw the market to this price level after the market bottomed in June. The stochastic is indicating that the market is short term overbought and should correct before attempting to move higher.
The four-year and 25-year cycles call for a low late this year. Both cycles have a reliable history, which increases the probability of a significant low. The near term sentiment measures aren’t providing much assistance as they are evenly mixed between bulls, bears and undecided with bulls at 37.4% and bears at 36.3%. Therefore, the market has either declined in an a-b-c pattern or is about to put in a fifth wave to the downside. If it is the former, then we should rally now after a minor decline. If it is the latter, the market will make a new low before a meaningful rally is in the cards. In either event, the odds strongly favor lower prices in the second half of the year. The downturn most likely will be preceded by a rally culminating in late August.
Until the short-term picture clears up it may be best to hold off or initiate a long-term options position that will take advantage of a sell-off whenever it comes. This may be one of those times when the smart trader takes a vacation.
Garrett Jones is a partner with Peter Eliades in Stockmarket Cycles Management Inc. He is also affiliated with Hillier Capital Management Inc. Jones can be reached at garrett111@comcast.net.
