Market Strength Building

SPY surged this week, rising 6.77 points, 3.3% to close at 209.31.  I wasn't too surprised to see the upward momentum and was anticipating a buy signal on my very short-term indicators.  They turned up at the open and again added to my bullish position as price moved through an expanding wedge formation at the 206 area.

As one can see, we are well on track for making the three-week test of the highs next week.  It will be a holiday week so whether the market will continue surging as we move into holiday season, is still yet to be seen.  With this past week's surge, it's possible that the strength will continue.

Although my daily indicators are not showing increases in volatility, the weekly indicators are. 

A simple weekly chart with price moving against the 4, 10 and 20 week averages show the 20 week average (red) moderating and starting to turn up while the 10 week average (green) is ready to cross over the 20 after price tested this level a week ago.  The four week average is rising smartly.  Looling at these strengthening trends, it would hard to be putting too much on the bearish side, although I do have some longer-term puts in place as insurance, and a possible three month test of the low in December.

Another indicator I am starting to watch is the relationship between the 4 day average and the 20 day average.  I haven't back-tested this thought but am looking at it to add to an Algorhythm should it show some promise as an indicator.  The indicator is just starting to signal positive now, close to a point where I would normally be thinking about taking profits.  As we know, a key to profiting in the markets is cutting losses early and letting profits run. 



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So as mentioned above, I also see the possibility of a three month test of the low occurring next month.

Who knows what words might come out of the Federal Reserve.  I saw some news that they will be having some kind of non-scheduled meeting tomorrow regarding bank reserves.  Something new, revealing the true state of the credit market could change everything in a blink of an eye.  And I suppose that is why I generally do not position myself 100% in any one direction.  While the market sentiment is bullish and the markets continue to rally, the underlying reality of the economy may not be as rosy as some believe. 

The Oil and Gas stock index is well off its highs as the price of oil remains suppressed.  Little discussion has been made about the debt situation of producers, especially those who require oil prices to be in the $100 range to be profitable.  For much of the decade, low interest rates have enabled bad businesses to continue on instead of failing, as they would if the cost of capital was at a realistic rate.

As rates are starting to rise in anticipation of the Fed's possible interest rate increase, capital is becoming harder and harder to come by for marginal producers.  Even Saudi Arabia itself is on watch by the rating agencies as they are facing continuing deficits to finance their society. 

There are certainly interesting times ahead.  As some question, should the market start going down, where would all this money move to?  One way to solve the problem is to open the market some 20% lower, destroying much of the wealth.  This would also destroy much of the debt that is supporting these elevated market prices.  In the end, where could one turn in an age of defaults?  Obviously, the goal of governments and central banks is to not allow this to happen.  Can they hold it off indefinitely?

And then what???

Anyway, have a very Happy Thanksgiving holiday all.  Enjoy the good times while we have them.