Momentum and Exhaustion

It's in everything in life really -- you have a crush on someone and then something happens to change the momentum in the relationship and you notice every annoying thing about them. President Obama rode momentum and a wave of change/popularity/a desire to create new hope to a Presidential election and now potentially sweeping legislative changes in healthcare, business and international war. The New Orleans Saints are riding the momentum of their offensive to decisive victories (they have scored on the opening drive every game this season and have yet to be challenged by a signficiant, identity defining deficit - much like the 2004 Colts of old).

And so it is with the market - momentum runs things... yes, built on facts and expectations and reports, but its still momentum. And ever since March, momentum has been that government put things in place to provide stability and allow the economy to stabilize. This positivity and optimism led to more and more investors returning to the market and a liquidity of market gains and increases.

Do I think it's all going by the way-side now? No. That's not what I'm saying. What I am saying is that momentum is worth paying attention to for profit-sake. Consider 2 popular momentum indicators... the 20 day and 50 day moving averages. When the market breaks below or above these levels its a strong indicator of things to come. It's a strong momentum trade in other words - one that traders will follow rather than step in front of.

So what's that mean present day... the S&P 500 is approaching its 20 day moving average (which is 1069) and its 50 day moving average (which is 1043). The S&P500 this morning opens around 1080. The last time (a month ago) the S&P broke BELOW its 20 day moving average it then approached the 50 day level and rebounded upward and higher to nearly 1100 (which is when the DOW hit 10,000!). So a standard 5% retracement and then more profit. But what about this time? No one knows, but consider that the big positives of earnings season are likely behind us and that economic reports, while not getting worse, are not showing improvement - only stabilization really (which once was improvement but is now status quo).

So the momentum could just be a sideway stagnant - but if troubling news such as joblosses or bad housing reports creep into the eery Halloween picture - watch out. Cause the train may head south and we may be heading toward DOW 9000.