Stock Rally Near Probabilistic Sweet Spot

February 18, 2014

Slow Growth Still A Concern

While Janet Yellen signaled last week the Fed’s taper game plan was still in place, recent economic data has the markets thinking a taper pause could be seen later in 2014. The terms “inadequate demand” and “slow growth” speak to increasing odds the Fed may alter their taper schedule. From Bloomberg:

Federal Reserve chair Janet Yellen is generally taking the right approach in continuing efforts to boost a tepid U.S. economic recovery, former U.S. Treasury Secretary Lawrence Summers said in an interview airing today. Summers, who had sought the post Yellen assumed on Feb. 3, said on “CNN’s Fareed Zakaria GPS” that inadequate demand and slow growth remain the greatest threats to the economy and that the Fed’s bias toward expansion is “broadly the appropriate orientation to have.”

Bulls Have Sweet Set-up

Markets are where investors cast their future economic perception ballots. The current rally has reached the point where the last few votes have shifted the balance slightly in the bulls’ favor. Charts are a polling mechanism that allow us to monitor the temperature of the voters. Point A in the chart below shows the last time the mix between buyers and sellers reached a probabilistic sweet spot. The S&P 500 posted some nice gains after point A; what happens after point B remains to be seen, but the set-ups are similar.

This week’s stock market video covers the probabilistic sweet spot concept in more detail. It also covers risk management and the current read on market leadership.

It’s All Greek To Me

While the European Central Bank’s unlimited three-year loan program and the Fed’s printing press changed the dynamics in Europe, the concepts described in this 2011 European Debt Crisis Explained approach frowns upon forecasting and instead focuses on the economic and technical evidence in hand. Since no economic report, chart, indicator, or moving average provides accurate signals all the time, diversification is needed. One way to diversify your monitoring system is to look at multiple time frames. The first chart in this article was a daily chart; the next charts take weekly snapshots of investor conviction. The first chart is from 2011 and the second from 2014.

Based on improvement in the market’s profile, our market model made two incremental buys on the equity side last week (SPY) and one incremental cut on the bond side (TLT). The terms odds and probabilitiesspeak to uncertainty about future outcomes. Therefore, we will enter next week with a more bullish, but flexible stance.

Gold weakens on global cues and lackustre demand