Most of time, when the SP 500 gets more than 10% above its 200 day moving average,
it gets tougher to make good money on the long side in the months out ahead. That is
because history shows that 10% or higher premiums represent big time overboughts .The
last time the SPX exceeded the 10% m/a premium was in May of this year, and here we are
with the market no higher than back in May when the 200 day m/a oscillator hit its most
recent peak. SPX vs 200 Osc.
Most of the time, when the SPX does get to a big premium to its 200 day m/a, it subsequently
loses all of the premium and, when the corrective process is sharp, can go to a discount.
The SPX has so far worked off most of the recent major overbought situation without a
substantial price correction. The chart I linked to shows a downtrend in the oscillator which
has yet to make a clear bottom, so even though the large overbought has mostly disappeared,
there is still some vulnerability evident.
There are market pundits who are calling for a washout to scare the folks in Washington to
end the circus and produce a compromise that will end the gov. shutdown and resolve the
debt ceiling debate in a way favorable to the economy. Since the "drop dead" date to raise
the debt ceiling is still more than a week away there is clearly time for more brinksmanship
before the denouement or before the cans get kicked down the road for a few weeks. The
GOP is doing one of its scorch the earth routines and is also previewing its campaign for 2014
off-year elections. Obama has a more serious issue -- the very credibility of his presidency.
He needs to stand as firm as he can. Few market players want to sell way down only to have
to reverse the strategy if a "positive" deal is struck. There can be more volatility ahead.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!