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Monday, April 27, 2015

Daily update 4/27 GMO Projected 7 year returns

That was something.  SPX, R2000, and COMPX all had key reversal days today.  QQQ only missed by a little bit on AAPL strength.

A friend of mine did some research on key reversal days and decided they were most effective when retesting a high or low with more then one month in between.  That is the condition we have now.  We also have had an extremely feeble rally up to that retest.  The odds of this being some kind of consequential top have to be elevated.  Breadth was -62%.  This was a very strong reversal as the breadth was +70% at 10 AM.   I know the "taper tantrum" caused by Bernanke in May 2013 was that strong.  The key reversal day that started the bear market in Oct. 2007 was also along those lines.  Needless to say they are very rare.  We also have the sell in May thing coming up to deal with.  Despite making a new high today the number of new highs dropped to 98.  I already mentioned I was having trouble finding positives.  Today sure wasn't.

The futures managed to hold the blue line today.  That line was prior resistance and for today it was support.  We will have to see if it holds up.  One down bar was enough to cause a negative crossover on the DI lines once again.  We are still above the 18 SMA so the bulls could always take charge again tomorrow.   In fact a bounce seems to be the usual response to a key reversal day down.  However, a close below today's low any time this week would likely be a very negative event.

Unlike the Bernanke reversal there appears to be no particular news event for today's action.  Both Asia and Europe were up strong this morning.  The selling started right away in the biotechs and transports.  It then spread to the other indexes later in the morning.  As feeble as this rally has been it would be pretty shocking if we don't end up seeing more downside to come.  The bears fired a shot today.  Lets see if the bulls fire back or retreat.

This chart of GMO projected returns is pretty interesting. 


I guess the best investment looks like timber.  Wall Street always keeps touting the TINA (there is no alternative) trade.  What will investors do if we have a real equity bear market?  TINA also means there is no place to hide.  If we were to suffer another 50% drop in stocks it could be more devastating this time.  Bonds cushioned the blow considerably in the last two bears.  That seems much less likely now.


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