Friday, March 25, 2011

All Paths Lead Toward 13,000

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

In Libya Like Egypt, I offered the following two scenarios for stocks.

Scenario A (in light blue on the chart below) - Stocks have a rough morning on Monday but the selling does not accelerate and the market begins to gather itself after the Fed meets on Tuesday. New 2011 highs are seen in April.

Scenario B (in light purple on the chart below) - Stocks open lower on Monday, accelerate during the day and close below the lows of last Friday, March 11. In that case, the 4-5% pullback ends up being 7-9% and we see a bottom by the end of March. From there, new 2011 highs are made later during the second quarter.

So now we know that scenario B is occurring with A already being eliminated as you can see in the chart below. So far, the market seems like it really likes the purple path as it sold off almost exactly to the bottom of the arrow and has now bounced smartly.

So, why am I not totally convinced? I don't like the fact that there have been so many up days that have seen all of the upside at the open and the market spent the rest of the day going sideways. That's not really strong conviction from key players. When I am bullish, I like when stocks open down or flat and spend the day rallying to their highs in the final hour of the day. But maybe I am being too hard on the market.

While I continue to believe that the stock market will see more new highs next quarter, (how could you not with the continued torrent of liquidity being pumped in by Bernanke & Co.) I do not have a strong opinion (as hard to believe as that is) that it's straight up from here. Rather, as you can see from the final chart below, I offer two possible paths with the same outcome.

If the green path appears to be favored by the markets, we should see lots of choppy moves in the coming week or so before breaking higher. In this case, we will likely stick with our current portfolios, which were increased to maximum equity exposure last week to go along with the maximum commodity holdings we’ve had all year. If the orange path takes hold, there may be some short-term trading opportunities. As always, we will take it one day at a time and see what the markets bring us.

FYI, I will be on CNBC’s Worldwide Exchange on March 30 from 5:35am to 5:55am.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz
Heritage Capital LLC

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