Sunday, March 29, 2009

Long Term Analysis

Haven't even looked at the market since Wednesday. I've had problems with my dog, and then with my grandmother out of town. I've missed all this churn for the past week, thankfully.

We can see a bullish, rising wedge forming for over a week now. It appears that XLF may be falling through support, but it's still within tolerance, and the aftermarket moved back up to 9.19. This pattern should break Monday or Tuesday. I've reached boredom with looking for a reversal, so I'll be looking at FAS. However, since I'm a pretty good contrarian indicator, I'll just keep an eye on XLF and get ready to go either way, FAS/FAZ. Recent narrowing of the channel has reduced volatility of the financials, and I've seen traders (the smart ones) moving into pure equities (not the ETF's) to get bigger profits. After enough people get bored with XLF, there may be good opportunity for a big move when this bullish wedge breaks.

As for where this market is going to go, this rally has really felt like "the bottom." But I still have serious doubts. Recent news about Tobin's Q-Ratio has apparently gone out to the CFA's of the country, as I've heard several of them talk about it recently. One of them is Steve Pomeranz, to whom I listen every week. Here's another CFA who explains Q-Ratio and where it is today. Mr. Pomeranz, by the way, states that the Q-Ratio during 1932 was around 0.30 (& 1921, 1949, & 1952), today it's at 0.76. He also quotes an analyst who believes we'll be in a rally for 2 years supported by the Stimulus until it wears off, and then we'll see things drop to 0.30 by 2014. Congress has been known to extend laws dealing with money, so I'm not too sure about this analysis. But a decent, 2-3 year rally could compare with the the roller coaster ride of 1965-1977. Listen to his radio show from March 23, 2009. He explains all this in the first 7 minutes.

Long term, this looks like a Bear Market Rally that will remain relatively flat for a few months, churning around to look like a wide, dome shape. This rally is being floated by all the stimulus getting pumped into the system by the Fed and Congress with borrowed money. I don't think this jump-start is enough, the fire needs to be put out at the source, and there's not enough fire trucks. This thing is world-wide, and repercussions are still rippling around across the oceans. There is still a lot of room to fall, and I don't see that the fundamentals have really changed enough to turn things around...yet.

Also, here is a monthly chart of the S&P 500 since 1928, log scale. Look at the very right side, 1999-present. I'm concerned about the negative divergence between the double tops and the MACD & RSI peaks down below. Not a good sign...

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