S&P 500 … Top … or Fake Out?

November 18, 2009 by: Chris

Count me among those who thought that the stock market was heading into a free-fall back in July when a nasty head-and-shoulder top. Turns out that I was not only wrong, but horribly wrong.

OK, not horribly because I did not go short. I was only less-long. Which is acceptable to a student.

What has the market done since then? It has made higher highs and higher lows. This is certainly a bullish development. However, the market is forming an expanding wedge formation, which is bearish. In a world and market filled with mixed signals, what is an investor to do?

Take a look at this chart:

spx1118

That Money Flow indicator is not very exciting. That would certainly indicate a divergence. However, there is a confirmation of the uptrend in the On Balance Volume. While I am not a fan of the volume level in general in this market, I do see a breakout in the OBV. If a trend reversal were happening, you could expect to see a dip in the OBV.

What does this all mean?

I am probably not the one you should be asking. I was wrong back in July when we got the fake out. I have been wrong ever since. I was looking for a retest of the 666 low. I do not know if we will get that. In other words – you may have missed out on your chance at Doug Kass’s ‘generational low’.

So do not ask me what is going to happen next.

But since this is my blog I’m going to tell you anyway. Stay away. I was wrong, but I had my reasons. I might be right one of these days.

From my current investment perspective, this means keeping most of your 401k in the money market option and bond funds. I would not commit new money into stock funds. I would not be completely out of the stock funds, but I would be at 10% or less. I think we are close to the highs for the year, and there is much more risk to the down side than there is opportunity to the upside.

So says the beaten bear.