Tuesday, November 9, 2010

back to normal long positions

As you can see from the daily bar chart above the cash S&P 500 has reached new highs for the bull market that started in March 2009 from the 666 level.

The aggressive contrarian trader has maintained an above average long position established at the 690 level. According to the rules set out in chapter 11 of my book the aggressive contrarian should have sold his long position when the 50 day moving average of the S&P turned lower by 1/2 % in mid-May of 2010. But by then the S&P itself was in a position where I thought the aggressive contrarian should be a buyer. I said so in this post and again in this one. So the net result was that the aggressive contrarian would have held his above average long position throughout the April-July 2010 drop.

Now that the S&P is back at new bull market highs and has rallied more than 20% from its early July low I think the aggressive contrarian should cut back his above average long position to average levels. I would not reduce exposure more than this because I think that the S&P has quite a bit further to go on the upside over the next six months.

The conservative contrarian established an above average long position around the S&P 1000 level as I pointed out in this post. As I write this the S&P has rallied for 20 months from its March 2009 low and has advanced 82% during that time. According to my tabulations (which were described in my book) this qualifies as a normal bull market both in duration and in extent. So the conservative contrarian should now reduce his stock market exposure to normal levels too.

Thursday, November 4, 2010

bond frenzy redux

Yesterday the Federal Reserve announced its latest program of "quantitative easing", a program that had been well anticipated by the stock and bond markets. The Fed is going to be a big buyer of treasury bonds and notes over the next 12 months. Today's front page of the New York Times has as its headline story the Fed announcement.

As I pointed out in my last post on this subject a couple of weeks ago, the bond market is in a "frenzy" stage. The chart above shows that 10 year note yields are near their historical low points. In fact,the last two front page stories on the bond market have both occurred while the 10 year note yield has hovered above its recent lows and above its historical low of 2.02% reached in December 2008.

I take this as evidence that the market thinks the Fed will succeed in its goal of fostering an economic recovery. The implication is that bond yields are headed much higher from here.