Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

TAM's Morning Cup Of Jo: May 7, 2012

|Includes:IWM, SPDR S&P 500 Trust ETF (SPY), WTI

Click to enlarge

"Adversity is a severe instructor set over us. It wrestles with our strengths and nerves to sharpen our skills. This antagonist is our helper. The conflict with difficulty makes us acquainted with our object of being and compels us to consider it and in all its relation to our choices. Adversity is our bludgeoning mentor who is never wanted but always needed." - Edmund Burke

"Now What?" Orange Whip Anyone?

Last week's (4/30) commentary asked the questions 'Is it over, was that it? and… Is everything back to normal?' Then we likened it to a hurricane as if standing in the eye, or just at the edge or even possibly needing to become prepared based on warnings. But most importantly; do not to fall prey to the "Boy who cried wolf" story. Otherwise stated… take your umbrella when uncertain about clarity of the sky. But geesh… who woulda thunk? Worst week of the year; especially for the lil' sis' (RUS) losing 4%.

During Friday's selloff (or watershed - never stopping throughout the day) there were no shortages of pundits disputing what caused this. Seems to me - of course only from my own slightly-jaded opinion - who cares who is right? The real questions asked should have been, "Who helped investors before it happened?", not after it occurred. So let's just say it was weak U.S. Employment, or the French Election coming over the weekend, or Earnings from various companies… okay, never mind. There are too many choices to pick just one - not dissimilar to when my family goes to the local chocolate shop; and again - who cares? There is one thing we can say for certain; it wasn't caused by Oil.

In the February 27th 'Jo' we penned a piece about WTI (West Texas Intermediate - light sweet) and its technical base forming. As such, we pontificated that a break above $110 would most likely send shivers down the backs of all investors as pundits would have been clamoring about the implications of $110+ Oil on GDP. And yet, since we authored that snippet, WTI and the SPX have been trading in parity, not contrary - evident in Friday's WTI 4% and SPX 2.5% harmonious selloff.

SPX Oil Daily Chart

Click to enlarge

Regardless of causes, harmonious relations, or even the orange whip investors are being delivered; the question at hand is… "Now What?"

Over the last year - since we've been discussing the 2011 Channel of Indecision (CID) (which you're probably sick of hearing about) - we've switched our market stance quite a few times. Since June 2nd it's been five, to be exact. That's a lot considering we are a Cyclical Trend (1-4 year) investment shop. Hence there's been quite a bit of confusion on where we stand. Thus, we thought we'd provide some clarity - which is very humbling to say the least.

Transparency - the good, the bad and the ugly - is the only true way to deliver comprehension of action.

SPX Weekly

Click to enlarge

This chart shows the SPX on a weekly basis going back to September 2002 (nearly 10 years). As such, we outlined the Cyclical trends (within the Larger Secular Consolidation Trend from our 100-Year Market Theory). {Which has just been completed with the latest data from 2011} Starting from left to right it is easy to comprehend the bottom of the technology bubble from 9/02 to 3/03 in the form of a Cyclical Channel. Once complete (break above channel and previous cyclical bear - not shown) the new Cyclical Bull began and ran until the end of 2007 when it finally broke trend after creating another Cyclical Channel. {Albeit at the top of the Secular Channel}

After which came the 2008 Debt Debacle and Massive Downtrodden. At the bottom (2009) we struggled with the Cyclical Channel's design and generated what we thought was the most technically logical base and corresponding Cyclical Bull (GREEN). This seemed to fit exactly as the market fell in mid-2010 and held, based and regained right on target. By feeling confident in this line we began to notice the 2011 Channel of Indecision (we know, we know…. Enough!) and changed our stance from bullish to market neutral accordingly.

When this channel was broken (8/2/2012) it unquestionably corresponded to the once believed Cyclical bull. The following week we penned an article stating this is most likely the 3rd Cyclical Bear market within the markets 12 year plus secular consolidation; again shifting our stance to bearish from market neutral.

All was good - until 1/10/12. Egg on our face is an understatement. This is when the market surpassed the downward "though-to-be" new cyclical bear trend (RED). As this occurred, much to our dismay, we admitted our faults and shifted back to a market neutral stance from bearish. The reason for the neutral, not bullish, was due to simply re-entering the CID. Following along, after 3 attempts, the market broke topside of the May 2nd highs and entered into fertile ground - at least since the 2008 selloff 4 years prior. This caused our last change of stance from neutral to bullish (with caution). The caution comes from yet having a confirmed and successful retest of the break above resistance; which leaves us where we are today.

We don't mind being wrong as long as it meets two very simple metrics. First, error on the side of caution not recklessness. Second, be wrong for the right reason. If we were wrong because we didn't do our homework, or because we were careless, or just simply because we didn't give a crap about risk and were only chasing returns; that would be different. But if investors can learn to stand on preservation vs. growth as they watch some of the parade march by, the long run will much more pleasurable.

It is undisputed we were wrong on our new "Cyclical Bear Market" call. But if the weight of evidence gave us probabilities, based on 100-Years of data, that indicated risk was high - we'll make that call all day.

One final note… If the market, as shown in Friday's piece, does break this slightly upward sloping Head & Shoulders neckline, we will again shift stance to market neutral. As one of our clients once told us, there is no place for Hubris or Pride in investing.

We hope this helps and finds you well.


Stocks: SPY, IWM, WTI