Although we look for fundamental reasons to explain the results that the Fund King System kicks out, occasionally we must cast a glance over the charts to see what they are telling us.

The first chart which stands out as we get ready for the week’s trading is a point and figure chart of the S&P 500 Index. As the leading index for risk assets, we would expect most other risk assets to follow the SPX’s lead in the short term.

SPX Point and Figure

Source: Bloomberg

The beauty of the Point and Figure Chart is that it removes time as a variable and concentrates on the absolute movements and reversals in the market. As you can see at the tip of the big arrow, we are at a crucial psychological juncture for the SPX index. If the market reverses and starts putting red O’s down, market participants are likely to interpret that as a continuation of the trend of lower highs and lower lows. If, on the other hand, it can break through to the 1190/1200 level, we could see a trip back up to the 200 day moving average.

SPX Current

Source: Bloomberg

A word of caution, though. With the Euro Crisis far from resolved and signs that China’s property market is in a cooling mode, the market for riskier assets is still looking at more potential negative than positive developments in this low GDP growth environment (particularly amongst developed economies). Current conditions seem to echo the first part of 2008 when the markets recovered from the initial shocks of what became to be known as the Global Financial Crisis.

SPX 2008

Source: Bloomberg

What should investors do?

The current readings on the various Fund King Systems that we monitor still suggest a cautious stance. That is unchanged since the beginning of May which means that hopefully we have all set aside some cash which is ready to jump on a good opportunity.

As suggested above, we could be approaching an inflection point which would allow investors to participate in a strong counter-trend rally. That strong rally would not be out of place as we approach the back part of the year and into January. However, one should keep an eye on the index vs. the 200 day moving average. Unless we see some movement towards solving the big Sovereign Debt issues that plague the market, the rally should run out of steam as it approaches the 200 day MA mark.

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