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 Paul@investfortomorrow.com.


Until next time…

Paul Schatz
Heritage Capital LLC
http://www.investfortomorrow.com/
http://RetirementPlanningConnecticut.com/

Follow us on Facebook at www.facebook.com/heritagecapital and on Twitter @Paul_Schatz

Libya… Like Egypt?

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

For many, many weeks, I have discussed the stock market's need for a pullback. A short-term cleansing to refresh the rally. Unfortunately, far too many others have been talking about it as well, so the market decided not to accommodate, until it wanted to.

Several weeks ago, I offered that the pullback so many were looking for would probably come out of nowhere with some geopolitical event and would quickly lop 4-7% off the major indices. Tuesday was just that day, following more unrest in the Middle East. This time it was Libya with its big supply of oil. Since I have been writing about this pullback since late last year, I certainly deserve zero in the way of credit for it finally happening. I mean, even a broken clock is right twice a day! Call for something long enough and it's bound to happen at some point.

As I've mentioned before, it's still incredible that the Dow has not closed below its 20 day moving average (average price of the last 20 days) since 12/1 as you can see below. That's historic momentum! I am going to go out on a limb and say that the market will not respond the same way as it did with Egypt and this time it will close below the 20 day moving average in the coming week or so.

But at the same time, I also do not believe this is the start of a real correction (10%+ downside). Corrections typically do not start with a bang like we saw on Tuesday, just one day removed from the high. Instead, more significant declines usually start slow and small, building towards the large down days, like snowball rolling downhill and gathering momentum. When is a snowball and market going the fastest downhill? The second before it hits the bottom. In this case, we could (and should) see some more downside, but I don't think it's anything serious, yet.

I'll be watching for signs of sector rotation among leadership, both positive and negative, along with any indication that the emerging markets are ready to percolate again. As the major US indices have steadily marched higher since December, which you see from the above chart, emerging markets, chart below, weighted towards the big countries like China, India and Brazil, have totally lost their leadership role and unable to make upside headway.

Equally as important, the performance of the high yield (junk) bond market must be closely watched after the single most dramatic bull market run in history. For the most part, as long as the high yield market is confirming the rally and outperforming on the downside, the structural bull markets in stocks should continue, for now.


Feel free to email me with any questions or comments at Paul@investfortomorrow.com.

Until next time…

Paul Schatz

Heritage Capital LLC
http://www.investfortomorrow.com/
http://RetirementPlanningConnecticut.com/

Follow us on Facebook at www.facebook.com/heritagecapital and on Twitter at Paul_Schatz