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Stock Market Remains Vulnerable Short-Term

On November 9th, in the Dollar, Euro, Gold, Silver, and the VIX are Poised for Reversals, we outlined numerous concerns related to the elevated odds of short-to-intermediate term reversal of the "risk-on" trade. The elements remain in place for a market correction. However, the door remains open to higher highs in stocks. A high volume down day on Friday with declines of greater than 1% in the major averages would increase the odds of a one-to-three week pullback. The markets look weak, but not to a point where additional upside can be ruled out in the short-term. We need more information from Europe, breadth, volume, and the charts. Regardless of where we go in the short-term, the odds of a pullback of some type are increasing. Based on the information we have in hand, any correction should be followed by higher highs later in 2010/early in 2011.

The relative strength index (RSI) of the S&P 500 has moved out of "overbought" territory (>70). The April 2010 peak shows when a market moves from an RSI of 79 to and RSI of 61, in a relatively short period of time, it tells us to (a) be patient with cash, and (b) monitor events closely over the coming week.

S&P 500 Peak

The comparison to the April highs is not shown to insinuate the current market with follow the same path, but rather to illustrate the current market sits in a vulnerable state until we get more information or the condition is resolved in a bullish manner. If RSI closes today below 61, then the odds of a higher high will drop in the short-term, and the odds of further corrective activity will increase.

S&P 500 Risk Reward Analysis

The CCM Bull Market Sustainability Index (BMSI) has not made a new high since Monday. More importantly, the CCM 80-20 Correction Index has not made a new high since October 8, 2010. Both occurrences are indicative of a weakening market - both have raised yellow flags for the bulls. Our concerns outlined on November 4th in Debt Concerns Could Dampen Inflation Trade still apply as we close out this week and head into next week. We believe the Fed's quantitative easing program (analysis) will help push asset prices higher (QE investing resources) in the intermediate-term.

 

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