Things seem to be moving much more quickly recently. I had originally titled this post "Bad News Everywhere" on March 22, but in just a week, things don't look so bad anymore.
The big news since my last update is that the SPX successfully tested its January high of 1150 and broke the resistance level to set new highs. Unfortunately for stocks, things don't look so good. But in contrast to last week, things have gotten better for the stock market. Last week, there seemed to be a good possibility that the SPX would face a significant reversal; now, while it's likely the SPX will fall back to 1150, it is likely to find support there. In other words, this bull market still(!) has legs. The market had a key reversal day on Thursday, which lends to the short-term bearishness. More disturbingly, sentiment is near record levels of bullishness, which bodes ill for the short-to-intermediate term. Thus, while the intermediate trend is currently bullish (after having broken above resistance at 1150), there are plenty of caution flags that reinforce the belief that this stock market is not for buy-and-hold investors.
And yet plenty of people will be deceived to think that good times are back. The economy appears to be recovering, and people are eager to spend money -- even if the fundamentals are as bad as, if not worse than, 2008, and even if consumers are simply giving themselves more rope to be hanged with. So it may surprise some people that I predict the S&P will rise by another 60 points, to 1233 to be exact, which is based both on an inverse head and shoulders pattern that I mentioned sometime ago from a source I follow, as well as a 61.8% Fibonacci retracement of the S&P's 2007 high. I think this is the absolute ("absolute" being a relative term in this game) highest it will go. If the SPX manages to blow past this number, then the bull market will turn out to be far more powerful than any of us thought -- and it's already shown itself to be a force to be reckoned with. But I think 1233 will prove itself to be a worthy contender at stopping the advance. When might the stock market reach this level? My guess would be within the next two months or so, but when it reaches it is sort of irrelevant; when it gets there, we'll consider our options. In the meantime, we can continue to expect the same slow, relentless drive upwards, punctuated by a minor correction. Close trailing stops on SPY should work pretty well; just remember that the long-term trend is still down.
The dollar actually reached my target of 82, but just barely. With the target reached, the dollar has since declined. It now seems more likely that the dollar will continue to decline from here, at least for the short term. In this case, the intermediate trend is up, but we should expect to see some consolidation from the dollar. In particular, we should pay attention to two numbers. The first is 80, which is approximately where the 50-day moving average is. The second and more important number is 78.25 or thereabouts, as that is both the 200-day moving average and a 50% retracement. I still believe that the dollar will continue to surprise people, but at the moment it seems a decline is in order.
As I mentioned earlier, the situation in gold has cleared up quite a bit recently, and the declining dollar is another piece of good news for gold. The PM sector was formerly quite correlated with the stock market and not as much with the dollar, but lately gold has returned to its usual pattern of being highly negatively correlated with the USD. Since the dollar is likely to fall, this is very good news for gold. RSI and Stochastics are in favorable alignment, and the 50-day moving average is providing support. In addition, the big move last Friday likely marked the bottom. Strong price action in silver also suggests the end of the consolidation is near or has already occurred. Silver and gold stocks have both shown some vigor, and based on their tendency to lead gold, this portends well for gold prices in the near future. Gold has been very quiet lately, but I would not be surprised to see a quick move back to the $1200 level.
Finally, I'd like to comment on something I don't usually mention, US Treasuries. The 10-year Treasury has begun breaking down, as has the 30-year Treasury, which is bad news on several fronts. Falling prices mean rising interest rates, since bond prices and interest rates move opposite of each other. What do rising rates mean? First, rising interest rates will quickly kill any economic recovery. If consumers can't afford 3-4% mortgages and credit cards, there's no way they'll be able to afford a 5% or 6% or even higher interest rate. Second, rising rates are disastrous for the US government. The deficit is already at gigantic proportions, and this is at record-low interest rates. If rates continue to rise, the government will find it impossible to service all that debt. Interest payments will quickly devour the federal budget. Finally, rising rates portend the specter of inflation has returned. Is the deflation/inflation debate about to be resolved? Stay tuned.