Naked Hedge Fund

SPY Breakout Potential

The S&P has fought through the potential Head and Shoulders pattern and is setting up for a potential breakout above its YTD highs.
Some charts to show this potential

The new CFA at Bank of America/ Merrill Lynch put out a report today that predicts a 17% gain in the S&P 500 from the current levels. Some of the bullet points from the paper are:

* Slow GDP + low inflation + more saving = Shrink resistant P/E
* S&P 500 EPS recovery to outpace the US GDP recovery
* Overweight: Financials, Energy, Tech and Consumer Staples

Currently on the SPY there is a potential for a head and shoulders pattern, which is considered a bearish pattern and start to a downtrend. There is a simple and clear explanation at ChartPatterns.com The left shoulder and the head have been created and we could potentially rise up to form the right shoulder and then dive. Below on the full post I have a chart showing the potential

What a kickoff to September. Everyone has been harping how bad September is and how the market could finally get some reversal action, but there has been so much talk about it that its more of contrarian play to be long. The bears got some vindication today with a very strong reversal on some relatively large volume as shown in the chart below. The trend line that we have been talking about that was broken yesterday was tested this morning and it rejected the market lower. Also below is a video to put a theme to it all…..

The Chinese markets have been lagging lately and have been a great short play. FXI, which is an ETF with a basket of 25 top Chinese companies, has been keeping its downward trend the last few weeks while the U.S. market (SPY) has been continuing upward. FXI skyrocketed up 92.5% from its March low ($22.69) to its beginning of August high ($43.67). During this same time the SPY has only gone up 55.5%, which is ridiculously good as well but when you compare it to the FXI return the grass definitely looks greener.

Some chart analysis of both.

Below are a couple of charts showing the earnings situations long term. Using data that goes back to 1989, which is the max with the Standard and Poors Data.

Some technical analysis going from short term to long term with a bunch of charts.

With earnings season winding down and the market roariing to new YTD highs the party seems like it will never end. A sobering fact is that each quarter that has past the future estimates for earnings keeps going down. You would think with all the recovery talks that companies would have seen improvement on their horizon, but Q3 estimates were again revised down overall. Does anyone take notice of this? You don’t see any reporting on earnings decelerating still. Are companies finding that the Apple way of earnings estimates is the way to go? Sandbag the estimates then beat them to get everyone’s panties in a twist on CNBC and boom you got a nice rally on your stock price.

Well we are in the 9th inning of 2009 Q2 Earnings season with 91% of the S&P already reported. As expected the street ramped up on some classic lines such as “less bad” and “better than expected” even though the numbers were relatively dismal if you look at the history of earnings.

Howard Silverblatt (S&P Senior Index Analyst at Standard and Poors) had a great quote associated with the earnings that have been coming in:

But getting less worse is different than getting better, and significantly different than being good. Stats can be misleading-Fin’ls are up 244% from Q2′08, but are still down 85.6% from Q2,’07. The lack of charges (write-offs, impairments, layoffs, write downs,…) has helped and is a positive sign, but sales remain key – you can just cut so much and for so long; consumer spending is key, with confidence right behind it.

In the post is a graph showing the earnings table of the past 10 years with P/E ratios and Bullish and Bearish points to consider.

Last Tuesday we mentioned the potential downtrend being established and with this mornings gap down it has gone into downtrend terriotory. Below are some charts showing the move. As far as our sidebar portfolio goes we usually wait a day or two after a trend is established to rotate fully. Keep in mind that this portfolio has only had 6 days with trades this entire year. (Long/Short SPY)