The world was believed to be a disc until Galileo's research showed it's a sphere. He was almost murdered for this.
The Titanic was believed to be unsinkable until it did the unthinkable and sank, taking 1,500 souls with it.
Real estate was believed to be the one investment that never tanks until it collapsed, leaving thousands of multiple homeowners without a home.
The 2011 QE2 stocks market was believed to lead stocks to new highs until last summer's meltdown buried that hope.
The 2012 quasi QE3 stocks market has rekindled feelings of invincibility as the following headlines show:
CNBC: 'Wall Street rally has the Fed to thank'
BusinessWeek: 'Bernanke-led economy proves critics clueless about Fed policies'
Don't Fight the Fed?
If there's one phrase that marked early trading in 2011, it was 'Don't fight the Fed.' The above headlines convey the same sentiment.
The October 2, 2011 ETF Profit Strategy Newsletter update predicted this rally and the kind of euphoria it would stir up: 'Towards the end of this rally Wall Street may applaud the Fed for launching Operation Twist and QE3 may be considered unnecessary. This kind of positive environment would be fertile soil for the next bear market leg (Q1 or Q2 2012). '
The same update provided this target: 'From a technical point of view this counter trend rally should end somewhere around 1,275 - 1,300.'
S&P 1,300 seemed like a giant leap at the time, but thanks to the Federal Reserve's U.S. dollar liquidity swap arrangement (which basically sends dollars to Europe) and to the ECB's unlimited 1% loans to banks (which essentially amounts to a covert version of QE3), stocks have rallied even further.
The October 11, 2011 ETF Profit Strategy Newsletter update predicted that: 'This rally from the 1,075 low is a miniature version of the March 2009 - May 2011 rally.' The market's relentless climb in 2012 surely is reminiscent of early 2011.
The question is if anything can tear down this liquidity driven 'bull' market or if stocks will continue to rally indefinitely.
To Infinity and Beyond?
Quite frankly, I didn't expect this market to power through as it did. There was an important trend line at S&P 1,328, which I thought would at least stall the market and force a correction. But the S&P did nothing more than take a breather and move above the trend line.
The January 29 (S&P closed at 1,313 that day) ETF Profit Strategy update issued this simplified forecast: 'Prices below the first trend line (1,328) keep the pressure on the down side while prices above the first trend line allow for the open chart gap at 1,353 to be closed and possibly the second trend line (1,365) to be tested.'
The chart below shows the S&P's interaction with the above-mentioned trend lines. The S&P was initially rebuffed by the 1,328 trend line but failed to drop below support, which encouraged buyers to step in and push the index above the trend line. Since then, the S&P has closed the open chart gap at 1,353 and is challenging 1,365.
Striking the Right Balance
Hunting for a top in a liquidity-driven momentum game is a frustrating exercise reserved for those with an iron stomach and stuffed capital cushion, but it could be profitable. After being stopped out previously, the May 2, 2011 ETF Profit Strategy Newsletter recommended to initiate short positions; a trade that paid off handsomely and made up for previous timing errors.
Blindly following the 'don't fight the Fed' concept is also a nave approach to investing that can and sooner or later will be punished, as last year's three 10%+ meltdowns illustrate.
Short-term factors to consider are the following: The Nasdaq-100 (Nasdaq: ^IXIC - News) already rallied to new all-time highs. The Dow Jones Industrial Average (DJI: ^DJI - News) climbed above its May 2011 high. The S&P 500 (SNP: ^GSPC - News) still trades below its May 2011 high. The Russell 2000 (NYSEArca: IWM - News) recorded a new high in April 2011 but has not been able to move above.
The Financial Select Sector SPDR (NYSEArca: XLF - News) is butting against key resistance, which included the 20-month and 200-week SMA. AAPL, the single biggest non-central bank driving force behind this rally is showing weakness.
In summary, there's a giant discrepancy in the performance of various indexes. In addition, the Dow Jones Transportation Average (NYSEArca: IYT - News) failed to confirm the Dow's breakout, creating a bearish Dow Theory non-confirmation.
All of this doesn't mean stocks can't move any higher, but when combined with current overhead resistance, it increases the odds of a correction of some sort. The correction may be minor or may turn into another 10 - 20% meltdown. Either way, blind faith in 'don't fight the Fed' carries some risk right now.
The ETF Profit Strategy Newsletter provides the short, mid and long-term target for this rally and the one trading strategy that allows investors to play both sides of the market with limited risk and maximum up side.
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