Note: This is part one of a two part write up re-visiting current equity market conditions.
I don't follow politicians too much and I don't really take notice of what they say. They always blab on about nonsense and majority of the time get things wrong. However, if you were to take at least some interest this morning in Asia, you would be reading the front page headlines of various business media outlets informing you that EU leaders have finally come to a solution agreement for the debt crisis. Wow... what a surprise... this was only the 14th time EU leaders have managed to put forward a solution in last 21 months (sarcasm). But is it the real deal this time?
Well that depends on your time horizon. The details are Greece is in voluntary 50% haircut and the EFSF is going to be leveraged un to 5 times towards one trillion Euros. That means, a panic default has been averted for the time being. However, we should all know by now that the only way to fix the problem is in one of two ways: either default by writing down the debt in proper losses or inflating the debt away by making it worthless to the purchasing power. I always argued that global governments will be using the "inflate" strategy, hence why I remain bullish on commodities and bearish on government bonds. And if you think about it, while equities are in a secular bear market, this does not mean they must move down in nominal terms, but rather sideways in a long trading range as they adjust to high inflation rates. I am sure some person will argue that we have no inflation, but that is just total stupidity.
Between September 27th and October 04th, I wrote a two part in depth article focusing on sentiment, breadth, seasonality and technicals of the S&P 500 (Articles: Equities: Sentiment Overview - Part I and Equities: Sentiment Overview - Part II). The first article warned investors who were short equities that sentiment was becoming extremely pessimistic indicating that a rally was coming, while the second article pretty much nailed the bottom on a day arguing that internal breadth was extremely oversold and bullishly diverging. Similar, but not the same occurrences happened at March 09 and August 10 lows.
One of the more important charts I put forward is re-posted above. On October 04th I argued that:
Usually intermediate bottoms occur when the overall index itself makes new lows and yet the Declines do not outnumber Advances, like they did on the first trough. So for example, the recent stock market crash bottomed into 09th of August with 21 Day AD Line hitting a reading of -800. That means over the last 21 days, we have had 800 more Declines compared to Advances on average per day. Now the S&P 500 is making a lower low towards 1040 support area, and yet AD Line is diverging. This is a bullish divergence and it lets us know bears are slowly but surly exhausting themselves.
So here we are almost a month later and the S&P 500 is still at that famous 1250 cross road. The question now stands, what is about to happen next? Has Europe finally solved majority of its problems? Does the equity market have an all clear to now break 1250 resistance? Can we move higher above 1270 level where 200 day moving average sits? Are we now in a sustainable uptrend? Is the market overextended to the upside? Is this a great time to short the market and not trust the Europeans? As you can see, there are a lot of questions to be answered, but before I start putting forward some ideas in Part II, I would like to ask you - the readers of this blog - what your opinion is...