S&P 500 Rally Continues

6/6/09 (SPY 94.55) The market continues to rally, up 40% off its March low.   The market, despite its whacky short-term ups and downs, remains one of the most reliable leading economic indicators.   Therefore, I am very encouraged.  

Again, using a simple trend-following system, you would have continued to do quite nicely, avoiding the meltdown last year and participating in much of the upside this year.  

The 20-day breakout system triggered a buy signal only 8 trading days after the market put it in its low.   Following this system, you would have entered the market at 80 (I must admit I fudged a little and entered at prices a bit lower, based on the strong technical action, the unremitting gloom in the headlines, and the fact that I felt I had seen this movie before and kind of knew where the plot ended).   Since then the technical action has been very strong:

• no pullbacks into the lower end of the 20 day high-low trading range;
• continued series of higher highs with a healthy base-building period in May;
• breakout from the base the last trading day of May;
• a tight trading range (possible flag) above the point of the breakout.

I am not a big fan of moving averages anymore, since their lag is so extreme that they are telling you more about what the market did than what it is doing.   They are like economists declaring a recession 6 months after the fact.   Useful for confirmation, not so good for action today.  Nevertheless:

• the 50 day simple has climbed above the 150 day simple indicating the long-term trend has changed for the first time in many months;
• the 50 day is above the 150 day;
• both averages are sloping up.

Usually when a chart looks this good there is a pullback to remind everybody that this nothing is simple or obvious for too long.    A pullback to the 50 day or the 20 day low (both at about 88) is highly possible, as the market consolidates its gains.   However, it's just as likely the market will surge much higher, surprising everyone (including me).  Again, we don't have to guess.  Anyone who entered the S&P 500 at 80 can set a sell stop at 88 and would have a nice 10% profit in the worst case.  Not bad for a 2 month trade.  

Longer term investors should be building up their equity positions again if they have not already. 

The world will not end after all.