The chart above is the Fed Funds target rate with the S&P 500 from 1980 to present. I marked the dates where the Fed made their "last cut" (after 3 or more successive cuts). Not all cases resulted in periods of terrific returns, however, '83-''84 seems to be the only period that put in an notably poor performance.
The Basic Materials sector plummeted from my top U.S. Sectors ranks this week, so I decided to take a closer look at each model component. My U.S. sector model is heavily weighted towards momentum indicators, but I have built in several other indicators that act as a counterbalance.
I'm not a huge advocate of chart reading, but it seems the 1400 on the S&P 500 has developed special significance over the past 9 months. From August of last year to early January of '08, 1400ish was an area of support. However, since late January, 1400 has been unbreached. This is nothing more than a curiosity for me - I don't make timing decisions based on "support" or "resistance", but I do find stuff like this interesting.
The S&P 500 has been in a secular bear market since 2000 (8 years). The question is 'how much longer?' The secular bear that began in 1973 took almost 10 years before the market could sustain a break out.
The pink bands represent U.S. recessions as reported by the NBER. Will a U.S. recession put the brakes on rising commodity prices? Or is it different this time? I would argue most of the big exporters to the U.S. are the same nations who are driving demand for commodities and energy, and a pullback in U.S. demand for finished goods will have an impact on commodity prices.
Although the Value Line composite has breached it's 75 day moving average, giving notice of a possible trend reversal, the sentiment indicators are really the driving force behind the strength of my timing model. Sentiment indicators are most bullish when they are rising from the abyss of extreme pessimism, which we saw in early March. The question now is how long will this ascent last before we reverse course?
During the 2000-2003 bear market (above) we saw market recoveries lasting anywhere from one to three months. The 1973-1974 bear (below) produced rallies of similar duration. If you have a short/intermediate orientation, the key to playing these rallies is to be very nimble and execute on your timing indicators quickly. If your orientation is long term, you should be aware the indexes can perform well up to three months, even in the nastiest bear markets.
Yesterday the Value Line Composite Index closed above it's 75 day moving average. The 75 dma of the Value Line is one of four trend indicators in my timing model. If this index can stay above this level today it will raise my model reading from a +1 to a +2, suggesting a 90% allocation to stocks. The S&P 500 is still below it's 75 day moving average.
