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.

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.

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.

By Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. As a registered investment advisor, CCM helps individual investors, large & small; achieve improved investment results via independent research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions. When looking at money managers in Atlanta, take a hard look at CCM.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

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