YTD, the S&P is higher by just better than 6%, as futures have moved just under 100 points in the last 6 weeks. As I've pointed out almost on a daily basis, as long as prices dance above the 9 day MA (on the daily chart), we could grind higher. However, my stance remains the same -- that a 5-7% correction is long overdue. More than a few traders say "this time is different," but I do not think that is the case. As a trader, very early in your trading career, you learn that past performance is not indicative of future results, but do not ignore history. Those that do are destined to repeat the same mistakes. As one can see on a monthly chart that tracks prices back over 1 decade, the last 2 occasions that the S&P traded above 1500, we did not stay above that level for long.
In 2000, as the bubble was bursting in the equity market, the S&P slid a slippery slope to lose 50% of its value in just over 2 years. It took just better than 5 years to regain those losses as an index, putting the S&P back over 1500 in late 2007, early 2008. While we would like to forget, we all remember the disarray in the global financial system at that time and again, stocks were cut in half with a total loss H/L of 58%. Since bottoming at 666, we have seen an aggressive appreciation with very few bumps in the road over the last 4-plus years. With prices back above 1500 for the third time in 13 years, will this time be different? We are currently 21% above the 100 day MA on the monthly chart.
I have advised investors for several weeks to establish hedges against their stock portfolios, and for speculators to gain bearish exposure. To date, this has been a losing proposition, but the day of reckoning is ahead, in my opinion. Whether it is the State of the Union today, unemployment numbers, disappointing corporate earnings, the debt ceiling, the fiscal cliff or an unknown event at this time, there will likely be a one-off event that the market overreacts to and then selling would follow… just my opinion. Assuming we put in an interim top around the same levels and prices correct just half the previous moves, that puts futures at 1135-1160 in the coming quarters.
Perhaps a biased opinion, but I suggest looking to diversify into Managed Futures before this happens. Non-correlated returns and a way to diversify, transparency, liquidity, favorable taxation in your portfolio… 5 worthwhile considerations.
Risk Disclaimer: The opinions contained herein are for general information only and not tailored to any specific investor's needs or investment goals. Any opinions expressed in this article are as of the date indicated. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.