Monday, March 19, 2012

Stock Market Trading Thoughts on March 19

Stock market has decided that it will never go down again. Sounds familiar? I am not going to turn this blog into Zero Hedge. I promise that I will be bullish again one day. I turned bearish since 1330, not that long time ago. Yes, 70 points of bull missed, and perhaps a bit more, as the quarter-end window dressing may kick in now. I can not chase this "runaway train", just not my style. Here are a few more reasons why I continue to stay cautious, and rather sit the last gasp higher out.

I have been pointing out many divergences in the last few weeks. Some of them are widening out, as others are narrowing. But more are appearing and are yet to be resolved and/or explained.
This one is serious (in my opinion), as corporate health may be in question. LQD and HYG are not participating in this last leg higher. They have disconnected from S&P 500 on Feb 29th, when SPX was at 1365. Why? Shrinking margins, slower EPS growth, what else?? Investment grade and high yield corporate bond investors are sounding an alarm.

click on chart to enlarge

I have heard enough of sudden bullish sentiment from bears in the last few weeks to make me even more cautious. They are correct so far, and I should be quiet. But I will provide one very important undeniable fact, and would like everyone to pay extremely close attention to the following. I decided to pull up 20-year chart of SPX. I went back to the start of bull market after Gulf War I, as this was about the time I started paying attention to stock market (and then actively involved myself in trading since 1998). S&P 500 traded below the last year closing price (LYCP) in every one of those 20 years, without exception. This year it is still yet to do so. Will it be "different this time"?
Below is the data sheet I compiled. Average decline below LYCP was 11.81%
I went one step further and excluded the last two bear markets' lows in the years of 2000-02 and 2008-09. Avg decline below LYCP still came in at 5.18%
I repeat, SPX did not trade below LYCP in 2012, yet. Make your own conclusions, but the data is pretty convincing.

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