The Stock market pushes higher and higher, what fool would take a short position against this mighty liquidity pump up, however there are a few dark clouds in the next few months: US Summer is seasonly poor, QE2 ending, earnings are peaking, Greek woes. When the SP500 sinks, historically the US dollar rallies, transports fall and funds rotate out of aggressive stocks to defensive stocks. Let's review these cycles to see what we can expected next.
Dow Transports: If Transports fall, this can lead to a Dow Theory Sell signal.
Defensive Stocks: If folks are bearish, they begin to rotate monies into defensive stocks.
US Dollar: If the risk off trade is the theme, then the commodity currencies and the Euro will fall, the offset will be a rally in the US Dollar. A rising US dollar will wipe millions off the sales revenue of SP500 companies, thus earnings will be lower.
Between 2009/10, many cycles suffered an inversion to price, this was due to very bearish sentiment reversing on massive quantitative easing (QE1) from central banks around the world.
The cycles show all are due for a rollover, it is going to be very interesting in the next three months. No wonder sector rotation into defensive stocks is the current theme in the SP500.
QUESTION: Are the bears about to roar ?
If you concur, SPY puts and bearish ETFs should be on your menu near the end of May 2011.
