Chris Lau - Seeking Alpha

Monday, May 18, 2009

Notes from "Trade System Guru" Newsletter

Matt Blackman wrote about the market Yin and Yang in his weekly newsletter. Important sections in bold. Market participants keep asking two questions. "Is the market going to keep rallying" and "Is it time to take profits?" Some are even trying to predict where the market will be longer-term (say beyond this summer).

The market has rallied about 35% from the March bottom. The market is still about 43% from its high reached in 2007. With these figures, I turn to charts.

I am spending less time using technical charts to estimate short-term prices. However, if investors who bought at the peak want to break even (or reduce their losses), then 1000-1200 on the S&P 500 might be a good area for investors to sell. Those who bought at the bottom might want to sell at current levels. They might use charts to lock in profits with the S&P somewhere between approximately 850 - 930.

As discussed last week, this is a double-sided market. On one side there are corrective forces at work to bring valuations of numerous asset classes back down to earth after years of ‘bubblenomics’ driven by cheap money and highly stimulative monetary policy. On the other side, the tremendous amount of liquidity being that continues to be pumped into economies around the world in attempts to lessen the pain and reflate the bubbles.

One lesson the Presidential Cycle teaches us is the almost unbounded efforts in which governments employ to get re-elected and the subsequent impact those stimulative efforts have had on markets. Bears cannot afford to ignore this undeniable fact – at no time in history has the amount of cash currently being pumped into the economy been greater and the cost of money lower. This is bound to have a stimulative impact on stocks. And based on the latest news out of Washington, the generous programs being offered seem to continue without end (see the latest program outlined in the “Treasury Offers Incentives” article below.) But in spite of this generosity, foreclosures hit another new high last month and the number of U.S. homes with mortgages worth more a increased to 20.4 million or 22% of the total residential properties (houses, condos and co-ops) of 93 million homes.

Until earnings begin to recover in earnest and consumers begin to spend with confidence, any rally from here will be difficult at best. The question is, is the government prepared to continue to spend taxpayer dollars until then and if so, how big will the bill get in the meantime?