FMX | Connect – www.fmxconnect.com - (Reported 6/01/2010)

The following is an excerpt from the Commodity Trader’s Chart Book by Dan Wantrobski.

 Wash…rinse…repeat… U.S. markets opened lower today against a floundering euro and global  pessimism regarding well, take your pick…. But as expected, we are seeing some stabilization off the lows this morning, as oversold conditions continue to influence short-term trading. Our broader call remains intact, as we enter our new ‘home on the range-’ which will likely consist of  a much more muted trading range in the years ahead. This is the new normal as we see it for stock traders and investors- at least until the next secular cycle emerges (which in our opinion will require low valuations, high pessimism, a rebirth of  the credit cycle, and demographic trends in order to take root).

A comparison to the past two secular bear markets through the eyes of the S&P 500 adjusted for inflation (via the CPI) reveals the typical tail-end of a cycle once the midpoint / crisis has been reached:

If our long-term cycle theory is accurate, then the S&P is very likely to see choppy waters in the years ahead- all while remaining beneath the peaks of the last two major market tops (2000 and 2007). In the chart above, we plot the secular bears of 1929 (blue), 1966 (red), and 2000 (our current bear, green) adjusted by the CPI index to analyze both duration and amplitude in terms of cyclical trends. The data reveals that 1. we are nearing the tail-end of our current bear cycle; 2. our current bear market most closely resembles that of the 1929-1942 period (which makes sense as that was our last deflationary cycle); and 3. the muted trading range we can expect going forward will vindicate neither the bulls nor the bears- in other words, no new highs, and no material new lows / Armageddon scenario (fans of the show Lost will recognize this as ‘purgatory’).

Within this context, shorter-term trading strategies, risk management tactics, and asset/sector allocations will likely make a big difference in how a portfolio ultimately performs. True, we do believe that the markets are setting us up for another major ‘buy and hold’ cycle (the next inflationary secular uptrend), but we feel that this may still be several years away. An aging Boomer population which will require more current income will simply not have the luxury of locking up funds in a long-term buy and hold strategy, in our view. In fact, that in and of itself may have ripple effects on the U.S. equity markets- relegating them to a trading range as funds are pulled out of higher risk / return assets in exchange for income and safety. Those that have excess reserves will no doubt pick up major bargains as the stock markets forge a final trough- but will have to do so against pervasive bearish sentiment- a feat that is easier said than done.

In light of our current position within this secular framework, we are still looking for the oversold U.S. stock market to converge with its declining 50-day moving average in sessions ahead- and as we pointed out on Friday of last week, we would overweight stocks against the dollar and the long-end of the Treasury curve- as relative strength studies point to an impending ‘mean reversion’ in terms of performance. We would also consider such an overweight against gold, but note that such a stance is likely to be shorter-term in nature, as gold remains within a secular uptrend in our view.

The S&P 500: 1091.88

The S&P still looks poised to trade towards its 50-day moving average (red line). That indicator currently resides near 1161 and is declining. Oversold technical indicators (MACD, stochastics, and RSI- bottom) all suggest we could get a bigger bounce ahead, though keep in mind that we still tread lightly while the index trades below a declining 50-day MA.

Full Credit to:

Dan Wantrobski, CMT

Janney Montgomery Scott LLC

-----

About FMX: FMX Connect is an information, data, and analytics portal for Commodities. The portal provides an all-in-one package including essential market data, independent third party research, industry news, and commodity trading tools. FMX Connect provides efficient, effective, and thorough data that bridges all aspects of commodities onto one screen. The Result; A user friendly application for hedge fund traders, OTC brokers, individual investors, and industry participants
-----
Note: The information presented, while from sources generally believed to be reliable, is not guaranteed and may not be complete. FMX | Connect makes no representations or warranties regarding the correctness of any opinions or information. Past results are not necessarily indicative of future results. Nothing in this report should be construed as a representation to buy or sell shares, futures or options, which contain considerable risks. For internal client distribution only. Any reproduction, re-transmission, or distribution of this report without permission is prohibited. Media correspondents or reporters may not quote any one page or section in its entirety and must attribute all quotes, ideas or concepts herein. Copyright FMX | Connect, ©2009-2010. All rights reserved.