Big Events in Next 48 Hours

10:45am CST

The market has had quite a run since December 20th and there are signs that it is getting a bit long in the tooth and that a near term retracement may be in the cards. Nothing substantial, but a near term correction. This evening we have the State of the Union Address and tomorrow the Fed will announce the results of their two day meeting. With these two big events coming when the market is quite extended short term I think this could set up a sell on the news scenario. I don’t believe President Obama is going to announce anything earth-shattering this evening and I believe that the market could once again be disappointed with no formal announcement of QE 3.0. I still believe that will come but more likely sometime in Q2. The swap lines that the Fed worked out with the European Central Bank have juiced equity markets higher so in their view there is no reason for them to step in with QE 3.0 here (the swap lines were essentially QE 2.5). Had the market continued to come down from the end of the year into this meeting the odds for QE 3.0 would be much higher. As mentioned in my post on 12/31/11 I still see April and July of 2012 being key turning points for the market. I had anticipated a bad first half for the market (with bottoms in April and July) followed by a rally into the end of the year. Now I have to wonder if the market will top in March/April for the 3rd year in a row.

As you can see below the S&P 500 is butting up against the trendline dating back to the May 2011 high of 1371 and has barely made it through the regression line from the March 2011 low. Any correction that the market has from here should not break the trendline from the October low (which means not below 1250) and likely may not even break the trendline from the November low. Also note that the RSI is near the same levels that have produced the major tops dating back to May 2011.

Here is a longer term monthly view of the S&P 500. It is on the verge of challenging the downtrend from the October 2007 high of 1576 and you can see the support that held (the regression from 944). Also note how important the 1220 level is in terms of a pivot level. It has twice marked key turning points since 2006. Coincidentally, two of the longer term moving averages that I watch are right around this 1220 level as well. Those include the 89 week SMA and the 20 month SMA. In the chart below you can see that the S&P 500 is well above the 55 month SMA and the 20 month SMA which is bullish. Even more bullish is the fact that the 20 month SMA has started sloping upward again here in the past few months after really flattening out in September and October, just as it did back in May 2008 just before the market turned to the downside. A break above the upper trendline from 1576 would suggest that it is POSSIBLE that the market could challenge the old highs. Note that I said ‘POSSIBLE”. We will take things one step at a time.

Last Friday we saw silver decisively break through $30. This puts silver into a confirmed uptrend which is generally good for the market. As a general rule, the equity market has had a tendency to move with silver and oil since early-2009. In other words this means that the reflationary efforts of the Fed are proving effective in their eyes as they are avoiding asset deflation. Banks need asset prices to hold up in order to prevent their assets from declining. This is key because they are leveraged so any decline in asset prices really takes its toll on their balance sheets. The government also doesn’t want deflation because they can’t tax it. If asset prices decline, tax revenues decline. The next resistance for silver is the 50 week moving average up around $35-$36.

Near term the market is vulnerable to a small correction but last week the near term bearish case was essentially put to rest. Silver decisively breaking over $30 on Friday just further strengthened the bullish case for equities.

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