02/25/2010: Clients should have received email notification with a link to a detailed update today. Two charts below relate to the short-term outlook.

02/24/2010 - Clients: We are working on a detailed update which outlines some intermediate-term concerns related to asset prices in the next few months. At this point, the concerns relate to monitoring conditions in several markets. The concerns may be alleviated in the coming days and weeks, but we want you to know why we may err on the defensive side in the intermediate-term. We will notify clients via email when the update is complete (either today or tomorrow). As mentioned yesterday (see 02/23/2010 entry below), some short-term support does exist above 1,094 on the S&P 500.

02/23/2010 - After The Close - Clients: As mentioned this morning before the open (see below), we have concerns about the sustainability of the recent rally in risk assets. Consequently, we did some selling today in most accounts with the objective of reducing some risk. We will continue to monitor all markets and all our positions. We will reduce our exposure to risk assets further should conditions warrant.

02/23/2010 - Before The Open - Clients: When the S&P 500 hit 1,044 on February 5, 2010, we said the odds were good that if we were patient, a rally of some significance should give us the opportunity to reassess our risk under more favorable conditions. Yesterday, the S&P 500 closed 6% above 1,044. It is possible that we are now at a point where the current rally may be on the verge of a reversal. It is too early to call, but it is not too early to be concerned. We have monthly, weekly, and daily charts prepared to help us monitor all our positions. It is possible that we will reduce risk in the coming days by selling into recent strength. A day or two of gains would most likely eliminate our concerns. While the window for patience is still open, it may be closing. We are watching things very closely and will reduce risk if needed.

02/22/2010 - Before The Open: The Summation Index is derived from the number of advancing and declining stocks in a given market (breadth). Healthy markets have broad participation. Weakening markets have narrow participation. Thus far, the move off the recent lows in the S&P 500 has occurred on positive breadth, which is bullish. A turn down in the Summation Index, especially in an area where markets face overhead resistance, would be a cause for concern in the short-to-intermediate-term. It is best to monitor the markets with an open mind about both bullish and bearish outcomes.

02/18/2010 - From Bloomberg:

Feb. 18 (Bloomberg) -- The Federal Reserve Board raised the discount rate charged to banks for direct loans by a quarter point to 0.75 percent and said the move will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs. The Fed Board said the outlook for policy remains "about as it was at the January meeting of the Federal Open Market Committee." The central bank also cited last month’s statement, which said economic conditions are likely to warrant "exceptionally low" levels of the federal funds rate “for an extended period." (Full Story)

02/17/2010 - Before The Open:

02/12/2010 - After The Close: With an almost universally bearish outlook among market professionals, the NASDAQ was able to finish the day in the black. It made its intraday low around 9:40 a.m., just ten minutes after the start of the trading session. It is very difficult to find anyone with anything good to say about the markets, which is often a backdrop that leads to unexpected gains. There is no question that debt problems around the globe are a serious issue, but markets, no matter how bad things seem, very rarely move down in a vertical manner without a countertrend rally or two. Some more good news: the S&P 500 finished the week at 1,075, well above last week’s low of 1,044. NOTE: The chart below is a one day chart of the NASDAQ showing Friday's trading activity in ten minute intervals.

02/12/2010: From MarketWatch:

HONG KONG (MarketWatch) -- In a surprise move late Friday, China's central bank increased the amount of funds banks must set aside as reserves, the second such move this year. (Full Story)

02/10/2010: Markets tend to have symmetry over short periods of time and long periods of time. The blue parallel lines (see below) are all based on the negative slope of the line connecting the October 2002 lows and the March 2009 lows. They can help us focus on possible turning points. The pink lines show important weekly highs or lows that occurred in 2008 (during the bear market). The market bottomed last week at what appears to be a good candidate for a short-term low. Last Friday’s low was 1,044.50, which matches well with the high of 1,044.31 that occurred the week of October 13, 2008 (Point C in chart). Notice how the blue and pink lines intersect near 1,044 (two possible forms of support). As mentioned yesterday, a push down toward 1,015 to 1,025ish is also a possibility in the very short-run, but that does not appear to be the highest probability outcome, although another leg down would not be a surprise in what is now a very tentative market.

Shifting gears to possible upside targets; we get intersections of blue and pink lines near 1,098 (Point B) and 1,133 (Point A). We were above 1,098 last week, so the odds of a break above that level are reasonable. It really depends on market breadth and the conviction of buyers; something that appears to be shifting in a negative manner in recent weeks. Any advance on weak market breadth (number of stocks participating) would most likely be met by sellers at both 1,098 and 1,133. Unless breadth picks up, we now see a move to 1,200 as a lower probability scenario in the intermediate-term. In a normal economic recovery, a move back toward 1,133 would be a logical outcome. Given the weak state of global affairs, sellers may step forward closer to 1,098. It is important that we keep an open mind in the short-run.

Our strategy remains unchanged in terms of considering the possibility of reducing risk in the face of what could be a weak short-term rally (it will come at some point). On the contrarian side of the ledger, most market observers have little confidence in stocks making new highs in the short-term; that alone is a reason to keep the unexpected outcome within the realm of possibility. Markets can move higher than we think in the face of pessimism (“climb a wall of worry”). A move toward 1,145 or above 1,150 works well within the context of upward sloping trend lines (see chart in 02/10/2010 entry).

We continue to believe that we may have started a multi-month corrective process that would unfold in a stair-step down-type manner. This means rallies will occur, but they may be followed by lower lows in the weeks ahead. We can reassess the probabilities in real-time based on the health of the market’s internals.

02/10/2010: Markets are concerned about Greece and Fed’s plans. Given the state of the economy, employment, and the markets, the Fed is nowhere near the point of the first rate hike or major shift in policy. Nevertheless, any talk of Fed moves, no matter how far out into the future, spooks markets in the short-term. If the Greece deal can get done, the Fed’s plans will be yesterday’s news. We have oversold markets with the possibility of good news (Greece deal) coming soon. We may see one more “I cannot take it anymore” selloff in the coming days, but as shown below, Friday’s low of 1,044 is holding for now. We are updating daily, weekly, and monthly charts of all our positions in order to best monitor the health of the next rally. If we see weak market internals, we will consider cutting back on our exposure to risk in a more favorable climate.

02/09/2010 - Before The Open - Clients: Our strategy remains unchanged in the short-to-intermediate term. Yesterday's declines came on low volume, which often occurs as short-term selling abates. The odds have increased that we are in a multi-month correction. Even if that is the case, corrections, and even bear markets, will experience countertrend rallies. Even if the worst case outcome is in front of us taking the form of a new bear market (still not likely), a countertrend rally of some significance should present itself sometime in the next few weeks. Lower lows sometime in the next few weeks are also possible, but that would only increase the odds of an oversold bounce of some significance occurring. At some point the sellers will exhaust themselves and a rally with ensue. We cannot stress enough the importance of remaining patient in the short-to-intermediate term. During the next rally (it will come at some point), we will assess our risk in more favorable conditions. If market internals look weak during the next rally, we will consider selling into strength to reduce some of our exposure to volatile holdings. The odds are favorable that sometime in the next few weeks, stocks will be higher than yesterday's close, but if we are not patient, it will do us no good.

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Chris Ciovacco
Ciovacco Capital Management

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