Richard Rhodes | Sep 24, 2012 06:35PM ET
STOCKS:
The European debt contagion has been “kicked down the road” a bit further as Spanish and Italian short-and-long term bond yields have moderated recently given the ECB “plan” to buy bonds of up to 3-years in maturity...but only if asked; and only if conditionality is imposed upon those asking. The Fed has also changed its game from “inflation-fighting” to “unemployment fighting”; and with any war — they will go further and farther than anyone believes in printing money to achieve their ends. This will support all asset prices ultimately.
STRATEGY: The S&P 500 remains above long-term support at the 160- wma at 1228; which delineates bull/bear markets. The much followed 200-dma support level stands at 1353, and remains the bulls “Maginot Line.” We’ve noted this is perhaps one of the “weirdest rallies” we’ve ever seen, and it causes us a great deal of consternation. But the new Fed policy is directly at stocks; expect an S&P all-time high test at 1576.
In terms of the current state of the stock markets, they are still consolidating the gains seen prior to the Fed’s “game changer” 10-days ago; and we still see them going higher in the very short-term. We view the current consolidation in the S&P 500 as very similar to that seen prior to the Fed’s announcement; and look for higher prices towards the all-time highs at 1550-to-1600. Now, we won’t say this rally will be dressed up and really pretty, for we believe it shall be rather ugly and scraggly – and once it arrives at the “dance zone”, then we’ll see a rather material correction as that is nearly always the case on the first attempt to poke to
new highs.
But to this end we’ve provided a ratio chart of the Dow Industrials/Dow Transports. It is quite clear to us that the Industrials are breaking out against the Transports above the 300-week moving average for the first time since 1998 – just as the Fed was once again easing monetary policy aggressively in lieu of the Russian Credit Crisis. So, it would appear that a new trend towards higher Industrial prices versus Transports has taken place. We should further note the Industrials hit their absolute peak in 1999, while the ratio continued higher into March-2000 highs.
TRADING STRATEGY: At present, we are positioned bullishly, with an emphasis upon “reflation” given the Fed’s balance sheet is larger than our margin account to bet against it. If we are looking to be long again, we’ll look towards two energy plays: Weatherford (WFT) and Transocean (RIG). On Friday, both these stocks were “higher” on rather impressive displays of strength in a stagnant market – perhaps the late cycle energy plays are the place to be. WFT forged a key reversal higher; while RIG was sharply higher on 4x its normal volume, and on the cusp of a major breakout above its 280-day moving average. We like these patterns a great deal.
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