Monthly Model Mania: October

Guy Lerner | October 10, 2011 | 0 Comments More

Before the month gets away from me, I thought now would be a good time to review our trading models.

The SP500 ended last month below its 10 month moving average, and for a widely followed strategy that utilizes the 10 month moving average, this model remains on a sell signal. A trend following model that I have constructed utilizing pivot points also remains on a sell signal. A third model (that is also proprietary) utilizes the 40 week moving average and an inflation filter also remains on a sell signal. All 3 SP500 trend models remain on sell signals. Therefore, any reason to be long the markets would have to be considered a counter trend trade. For price to trigger the next buy signal, the SP500 would have to move about 10% higher from current levels. This may occur before the year is over. However, I cannot imagine there won’t be some backing and filling along the way. Straight down and straight up price moves generally aren’t very stable.

From a trading perspective, the current set up on the SP500 is bullish (although I view it as a counter trend trade within a bear market). This past week prices closed above a key pivot or resistance level, and within the context of bearish investor sentiment, this should yield a bullish outcome.

My Treasury bond model has been positive since March 11, 2011. Following a spike in the long end of the curve to the 2009 all time highs, Treasury bonds really have not done much. In essence, the model says that the fundamentals remain strong but the technicals are poor. Treasury prices have benefited from a weak economy as well as Operation Twist. The Fed’s announcement to buy long term Treasury bonds seem to coincide with the price spike. The economy seems to have taken a back seat to all the news out of Europe. “It’s the economy, stupid!” And I suspect that will have the focus of investors before the year is out.

Gold remains constructive. The fundamentals are very attractive as long as recession concerns are in the news and as long as interest rates are pressured lower (by those weak economic concerns). Furthermore, year over year CPI inflation greater than short term rates is another positive. The recent weakness in gold appears to be due to profit taking and forced liquidation as caused by the recent sell off. Of note, Dollar strength is not a reason to abandon your gold positions; ignore that nonsense.

Speaking of the Dollar, my Dollar Index model is bullish, and this is after a long time in bear territory. Over the past 10 years, a strong Dollar has been a good time to buy gold and a bad time to own equities. Rallies have been seen in equities when the Dollar is in an uptrend, but it is nothing sustainable, and one could suggest that Dollar strength has been seen times of profound market weakness.