Chris Ciovacco's  Instablog

Investors Are Wise To Remain Flexible: The bearish spin on unemployment is obvious. The bullish spin is weak employment means low interest rates which is good for asset prices. Another possible spin by the bulls is "sell the rumor (weak employment) and buy the news (Friday's report)". Ultimately, it matters how the market (in the collective minds of participants) chooses to spin it, not how we at CCM choose to spin it. Nor does it matter how any one individual, one columnist, one market guru, one money manager, one firm, or one talking head chooses to spin it. The market sets asset prices, not individuals or gurus. You'll hear a lot of "the highest unemployment rate in 26 years" in the next 72 hours. Keep in mind, 26 years ago was 1983, another period of negative investor sentiment. Sentiment is a contrary indicator – markets do well when people are pessimistic. Stock market performance from 1983 to 2000 is shown below to stress the importance of keeping an open mind as you read all the gloom and doom articles in the coming days. An open mind means open to bullish and bearish outcomes, despite negative sentiment. An open mind, means remaining flexible enough to react to bullish or bearish conditions as new information comes to light, both via the news cycle and the market's reaction to the news.

In the last two weeks, in Reflation Supported By Stocks, Commodities, and Oil, and Gold, Recessions, Bonds, and 1987, we hypothesized that recent bullish moves in gold, oil, and the CRB Index were evidence of successful "reflation" of asset prices via monetary and fiscal policy. This week, we can add copper and emerging markets to the bullish evidence list. From a fundamental perspective, the desire to hold copper is based on economic need (you want to make a product), and inflation protection (you want to own hard assets rather than paper currencies). 

Last week in Gold, Recessions, Bonds, and 1987, we stated that:

As investors try to make sense out the of relentless bullish moves in asset prices, we will touch on a few timely topics: 

Common sense and prudence say stocks must experience a significant correction soon. Unfortunately, waiting for a correction to participate in the current stock rally has proved highly frustrating for many market participants. While it may not be what investors sitting on large cash positions want to hear, market history says a significant correction in stocks may not occur until 2010. Understanding and respecting that each individual needs to make their own decisions relative to market entry points, an open-minded review of the historical cases presented below may allow some to be more receptive to the possibility of bullish and correction-less outcomes for several more months. How things unfold in the coming months remains to be seen, but thus far the current rally has followed the new bull market script very closely.

In the context of an established and on-going bull market, it is common for traders and value investors to look for a pullback toward the 200-day moving average (red line in chart above) as a logical entry point for new purchases. What may be frustrating them in the current environment is that new bull markets, especially after significant bear markets, may not correct back toward the 200-day for an extended period of time. As shown in Table 1, in four similar instances, a significant pullback did not occur on average until 270 calendar days after the original cross of the 200-day moving average.

Table 2 uses the S&P 500’s July 10, 2009 cross of the 200-day to estimate hypothetically when a pullback might begin, assuming the market behaves in a similar manner relative to history. A typical path in 2009-2010 may not produce a significant pullback toward the 200-day until the spring of 2010.

Sometimes being able to see concepts illustrated on a chart can help us in our decision-making process. The following charts show how long new bull markets stayed above their 200-day moving average before beginning a significant correction back toward the 200-day (shown in red).

Global stock markets remain in a state of positive fundamental and technical alignment.  In this article, we will explore: