View from the Top

We triggered an algorithm buy signal last Friday morning at 4208 on the S&P 500 index. Given the consolidation in most indices, they are nearly all firing long out of volatility squeezes, a positive boost to a normal pivot higher from a correction. In this case, we were coming off the 80-day cycle low last Tuesday. From all appearances, this will be the final rally before the 18-month cycle peak begins to influence the markets.

With the indices firing long out of these volatility squeezes, a number of stocks are following suit and breaking out of bases. Viewing a scan last night, themes include travel and leisure, industrial (infrastructure beneficiaries), and retail. Some examples (without recommending the same) include Southwest Airlines (LUV), Williams-Sonoma (WSM), Caterpillar (CAT), and Deere (DE).

Seemingly, technology and growth stocks are suffering from profit rotation into the new “value” themes, as we can observe the NASDAQ 100 lagging the rest of the market. We have experienced this push/pull rotation several times since the new year commenced. You need to adjust your sails accordingly. I also believe that the NASDAQ 100 and growth stocks generally are losing ground as investors lock in substantial trailing profits and capital gains in anticipation of capital gains tax increases.

The Founders Group focused on the S&P 500 futures as our vehicle of choice for now, as the index is the best compromise of the current themes. With the futures leverage, we can achieve all the return we need. Of course, you can use the S&P 500 Index ETF (SPY) as a straight cash investment or options on the SPY as an alternative to the futures, depending on your risk tolerance.

Nothing has changed much in the big picture. Inflation continues to present as the sovereign debt crisis builds to a crescendo. On a positive note, however, many global economies (including Europe) have not even opened up yet, so there is more recovery growth ahead of us.

We will use a 5-day EMA as our stop line for now. I will issue a sell signal if we see a material close below the EMA. My target for the S&P 500 this week will be 4280, at which point I will reevaluate our position. There is a plausible target of 4500 before this last rally leg finishes, but we will see how it goes.

A.F. Thornton