It Is What It Is...Bullish

By: Chris Ciovacco | Fri, Dec 14, 2012
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As a client or neutral observer, it is fair to ask, "Given the uncertainty related to the fiscal cliff, what do you see that justifies being invested in risk assets right now?" The answer is numerous things; and the vast majority of them side with the bullish camp (as of Thursday's close).


The Charts Don't Lie

The chart below is representative of numerous weekly risk-on vs. risk-off charts used in the CCM Market Model. The graph shows the performance of stocks (SPY) relative to bonds (TLT). When the ratio (dotted line) rises, stocks are in favor relative to bonds (risk-on). When the ratio falls, bonds are in greater demand than stocks (risk-off). As you can see, as of Thursday's close, the ratio was rising (risk-on). The chart compares the June-July bottoming process in stocks to the present day. The annotations are described in more detail below the chart.

SPY:TLT S&P 500 SPDRs/iShs T-Bnd 20+y NYSE/NYSE - RISK-ON vs. RISK-OFF


Bullish Set-Ups - Stocks vs. Bonds

  1. To the right of the green dotted horizontal line, the ratio crossed above the two moving averages shown in blue and red. Follow the green dotted line up and notice how the S&P 500 performed after the ratio cleared the two moving averages (bullish for stocks). Now, look to the right and you'll see the present day market is above both moving averages (leans bullish).

  2. The blue dotted line highlights a "bullish moving average crossover" (blue > red). Today, we have the same bullish cross in place (as of Thursday's close).

  3. The orange dotted line shows where momentum (Wm%R) experienced a bullish centerline crossover (Wm%R > -50). We have the same bullish cross in place currently.

  4. Follow the orange dotted line down to RSI; note a break above RSI 50 was followed by gains in the stock market (see top of chart). RSI closed Thursday at 52.55 or in bullish territory for stocks.

  5. The bottom of the chart shows a bullish MACD cross (black>red) that occurred in late July. Gains in the stock market followed. MACD has not crossed yet, but the blue histogram is ticking up, which is designed to foreshadow a bullish MACD cross (we are close to a bullish cross).

You can make an argument that bonds are skewed due to the fiscal cliff or that one chart does not mean all that much. The counter argument is numerous intermarket relationships have similar bullish signals.


Manipulated And Confused Markets

Are there concerns? Sure, we always have concerns. The major concern is that manipulated markets are confused markets. What would bonds be worth if the Fed was not artificially suppressing interest rates? What would PE multiples and stock prices look like without low interest rates and mega amounts of printing money being pumped in the global financial system?

The confusion of market participants has created a situation where "buy signals" and "sell signals" are occurring closer and closer together as measured in days. We currently have buy signals in place, but sell signals could appear in short order. The concepts of triangles, confusion, and short-durations between bullish and bearish signals are illustrated on this chart of semiconductors vs. bonds. Many markets look confused and have similar triangles.


Maximum Flexibility Required

As noted in last week's video, the triangles and confusion of market participants mean we must be willing to abandon our bullish stance if bearish signals begin to appear. Maximum flexibility will be required to ensure we stay on the right side of the markets. As conditions change, we will try to provide updates via Twitter (@CiovaccoCapital).

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

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Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/