The stock market has enjoyed an impressive run during the summer of 2012. After bottoming at 1266 on the S&P 500 Index at the beginning of June, it has since bounced steadily higher. What has made the summer stock rally particularly notable is that it has occurred despite mounting signs of a weakening global economy, the uncertainty associated with the U.S. fiscal cliff at the end of the year and the ongoing threat of full blown crisis in Europe.
So what then has propelled stocks higher in recent months? It has been hopes that either the U.S. Federal Reserve (the Fed) or the European Central Bank (ECB) would launch another major balance sheet expanding monetary stimulus program to address these concerns. Whether either the Fed or the ECB actually implements such a program in the coming weeks remains to be seen and will continue to be the subject of extensive debate.
In the meantime, the stock market appears to be showing some signs of fatigue following it’s recent “hope and sugar” rally over the summer. Most significantly, stocks as measured by the S&P 500 finally arrived this Tuesday at the previous peak of 1422 it had set back in early April. But from the moment this level was reached, stocks have since been in retreat, falling by roughly -2% through the remainder of the week.
This latest development in stocks is notable because it is starting to resemble what is known from a technical analysis perspective as a “Double Top”, which is a bearish reversal pattern where a price trend begins to move sustainably lower after hitting resistance at the previous peak. This can occur in part as those last investors that purchased at the first peak have the opportunity to at least break even if not lock in incremental gains on their trade upon the arrival at the second peak.
It will be important to monitor whether this indeed is a double top in the stock market or simply a long overdue consolidation of recent gains. It should be noted that the stock market does enjoy a variety of strong technical support at current levels including its 20-day, 50-day and 200-day moving averages as well as several upward sloping trend lines. And many technical readings remain solid including Relative Strength and Momentum. But if we experience unexpected developments on the geopolitical, economic or policy fronts in the coming weeks, all of these readings could quickly come under heavy pressure. And whether such a downside sell off would present a fresh opportunity to establish new long positions in stocks or would instead suggest standing aside until conditions stabilize would depend on the specific catalysts driving the stock market lower.
These are the opportunities and issues that will merit close attention in the coming days and weeks. I will be posting more on these topics and others as events unfold along the way.
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.