S&P 500 Could Find Buyers Between 1,010 and 1,040
The markets have entered a mixed position in terms of risk-reward. On the bearish side of the equation, markets remain weak and susceptible to further declines. On the bullish side of the equation, we have some improving risk-reward ratios and possible areas of support relatively close to current levels on the S&P 500. The CCM BMSI closed yesterday at 427, a level which has historically produced a favorable risk-reward ratio over the following year (see green portions of table below).
We have also entered an area where the BMSI is unlikely to fall rapidly in the next few days. In the very short-term, it is unlikely we will see BMSI levels drop into the very unfavorable -165 to -351 range (see red portions of table above). Historically, more often than not, markets have been able to rally from similar technical profiles. That is the good news. The bad news is the S&P 500 could fall further before making any attempt at a rally. As shown below, logical areas for a possible intermediate-term bottom fall between 1,010 and 1,040 on the S&P 500.
We began reducing risk (raising some cash) on August 11, 2010. Our decision was based on deteriorating short-to-intermediate-term risk-reward ratios. Roughly two weeks later, the risk-reward ratios have improved, but the market remains fragile. Our current stance is to possibly make some additional relatively small risk-reduction changes (raise more cash) as long as the market’s profile does not deteriorate significantly. However, we stand ready to take significant and swift defensive action in the event the market’s risk-reward profile reaches unfavorable levels. We remain very concerned about the markets, but some restraint and patience is prudent as long as the S&P 500 remains above (a) 1,040, and (b) 1,010. Similarly, as long as the CCM BMSI remains above -165, wholesale defensive actions are not yet needed. We are reviewing client accounts today and will make some adjustments as needed.
