Thursday, September 30, 2010

MACD Crossover Imminent

Thus far this year there have been three occasions when MACD crossed over and Momentum turned negative. In each case, the equity markets experienced a meaningful decline (see chart for examples*). We are presently poised for a fourth occasion. Interestingly, October will likely produce lots of conflicting data for both bulls and bears.

For the bulls, earnings season will be more than satisfactory. The aggregate macro economic data produced in the third quarter plus the fact that the confession season has passed with little bad news suggests that earnings will meet or slightly exceed consensus expectations buttressing the bulls' case. On the bear side of the ledger is the emerging traditionally-thinking investor angst that the Republicans won't win either house of Congress, thereby knocking out the gridlock-is-good beam from the bullish structure.

Investment Strategy Implications

Because there are no external divergences, any market pullback in October will likely be minimized with many country/sector/industry/company specific cross currents occurring. Internal divergences on their own are a sufficient reason to lower one's equity exposure somewhat but insufficient to ring the bearish bell too loudly. That time will likely come after the pullback followed by a failed rally followed by the OMG-the-Republicans-didn't-win-either-house introduction to the bear of 2011.

*click image to enlarge

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