The cyclical bull market, which began in March 2003 (or October 2002 by some estimates), within the structural bear market, that began in March 2000, was fueled by monetary policy. The FOMC began an easing cycle in January 2001 when it lowered the Fed Funds Rate from 6.50% to 6%. The FOMC continued to lower the Fed Funds Rate, until it reached 1% in June 2003, and kept there for a year. In June 2004, a tightening cycle began. The Fed Funds Rate reached 5.25% in June 2006 (to neutral from accommodative), and then the FOMC paused in August for the first time in over two years. Consequently, there has been a great deal of speculation that the tightening cycle is over (a restrictive stance won’t be taken) and perhaps an easing cycle will begin in 2007.
Below is a daily chart of NYSI (red line and right scale) and SPX (black line and left scale). NYSI made lower highs, while SPX made higher highs over the cyclical bull market. Currently, NYSI is near the top of the downtrend line, which indicates SPX is near an intermediate-term top, although NYSI pinpoints lows better than highs. Below the price chart is the NYMO 50-day MA, which is at a level similar to recent SPX intermediate-term tops. However, sentiment indicators, including the CPC 50-day MA (above price chart), which fell from an all-time high, and AAII and ISEE (not shown) show a great deal of pessimism, which is SPX bullish. It seems, almost everyone is expecting SPX to fall.
So, monetary policy and intermediate-term technical indicators are market bearish, while sentiment indicators are market bullish. Also, mid-September through much of October is historically the weakest market period. Consequently, there are major mixed signals. Nonetheless, the intermediate-term uptrend will turn into a downtrend at some point before the end of the year, if it hasn’t turned already. Given December and January are bullish months, there may be an intermediate-term downtrend in September through November. However, sentiment indicators suggest an SPX trading range, although a quick rise to 1,350 and/or a capitulation below 1,200 shouldn’t be ruled out. Unfortunately, there’s little clarity at this point.
Free chart available at http://www.peaktrader.com Forum Index Market Forecast category.
Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.
Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time and over time. This methodology has resulted in excellent returns with low risk over the past four years.
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