Dow Jones Industrial Average, S&P 500: Stock Rally Near Probabilistic Sweet Spot

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February 18, 2014 4:02pm NYSE:DIA NYSE:SPY

bearbull21Chris Ciovacco:  While Janet Yellen signaled last week the Fed’s taper game plan was still in place, recent economic data has the markets thinking a taper pause could be seen later in 2014. The terms “inadequate demand” and “slow growth” speak to increasing


odds the Fed may alter their taper schedule. From Bloomberg:

Federal Reserve chair Janet Yellen is generally taking the right approach in continuing efforts to boost a tepid U.S. economic recovery, former U.S. Treasury Secretary Lawrence Summers said in an interview airing today. Summers, who had sought the post Yellen assumed on Feb. 3, said on “CNN’s Fareed Zakaria GPS” that inadequate demand and slow growth remain the greatest threats to the economy and that the Fed’s bias toward expansion is “broadly the appropriate orientation to have.”

Bulls Have Sweet Set-up

Markets are where investors cast their future economic perception ballots. The current rally has reached the point where the last few votes have shifted the balance slightly in the bulls’ favor. Charts are a polling mechanism that allow us to monitor the temperature of the voters. Point A in the chart below shows the last time the mix between buyers and sellers reached a probabilistic sweet spot. The S&P 500 posted some nice gains after point A; what happens after point B remains to be seen, but the set-ups are similar.

This week’s stock market video covers the probabilistic sweet spot concept in more detail. It also covers risk management and the current read on market leadership.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.Video

Video

It’s All Greek To Me

While the European Central Bank’s unlimited three-year loan program and the Fed’s printing press changed the dynamics in Europe, the concepts described in this 2011 European Debt Crisis Explained video will likely move back into the market’s focus at some point since can-kicking and band aids were applied to swelling global debt problems.However, the band aids have taken Europe off the imminent crisis list, allowing for improvement in the markets and European economy. Sunday brought some more encouraging news on the balance between revenue and expenses. From The Wall Street Journal:

Greece’s primary budget surplus for 2013 will be nearly double its target, the country’s prime minister said Sunday. Antonis Samaras said the primary budget surplus, which doesn’t take into account interest payments, will exceed €1.5 billion ($2.05 billion), compared with an upwardly revised target of €812 million. The apparent improvement comes a year ahead of schedule and after years of tax rises and spending cuts demanded by international creditors in exchange for two bailouts worth a combined €240 billion. Athens wasn’t expected to achieve a primary surplus until the end of 2014, according to goals set by the European Union and the International Monetary Fund.

Investment Implications

Regular readers know our approach frowns upon forecasting and instead focuses on the economic and technical evidence in hand. Since no economic report, chart, indicator, or moving average provides accurate signals all the time, diversification is needed. One way to diversify your monitoring system is to look at multiple time frames. The first chart in this article was a daily chart; the next charts take weekly snapshots of investor conviction. The first chart is from 2011 and the second from 2014.

Based on improvement in the market’s profile, our market model made two incremental buys on the equity side last week (SPY) and one incremental cut on the bond side (TLT). The terms odds and probabilitiesspeak to uncertainty about future outcomes. Therefore, we will enter next week with a more bullish, but flexible stance.

This article is brought to you courtesy of Chris Ciovacco from Ciovacco Capital.


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