The SPY (S&P 500) closed above its 40-week moving average Monday. If the SPY can hold above its 40-week moving average; it might trigger long-term technical buying into to the market. The 30-week and 40-week moving averages (M.A.), act as a ceiling if the price is just below, and a floor if we can close above them.

We are above the 30-week M.A. though, by just a bit.

Friday we had an opportunity to close above the 40-week M.A. but could not. The trend in the last week was strongly up but we also appear to be tired. To LOTM’s eye, it looks like we will need a pause or pull back first before the SPY can close and stay above its 30 and 40-week moving averages. A decisive close above the 40-week (or 200-day) could create a panic buying spree into year-end. Headline news plays a big role, but in general the market has been moving higher since early October. If we have more positive headline news we could really blow out to the upside going into year-end!

Do not ask for logic in this. Technical traders have their disciplines and a decisive breakout above the 40-week (200-day) moving average will force them to buy. Look back in time (chart below) to other price crossing of the 30 & 40 week moving averages for a historical perspective.

It is hard to know what to do these days, one soothsayer says 1000 point down is coming, another say’s 1000 point up before the end of the year! Both have good track records. The truth is, no one knows what would happen with a default of debt from Europe. One thing is for sure, governments around the world are trying hard not let a default happen. The big question is, will they succeed? More importantly, what is the cost if they succeed or don’t?

The printing presses are at work so it would appear that an increase in the inflation rate is on the horizon. In my mind, that is what will happen. The result if they do not succeed is deflation or depression. I have seen the U.S. come close to financial collapse before, but it was within the US or limited to a specific country or region. This is new, and it is a direct result of globalization. We are living in interesting times.

I have attached some links to very good articles discussing both the good and bad coming out of the current situation. I suspect we will muddle through this with higher inflation being the outcome. Run-away inflation? That I do not know. Only time will tell.

Positive:

World Power Swings Back to America – By Ambrose Evans-Pritchard, International Business Editor, The Telegraph – 23 Oct 2011

The Negative:

The Western World Is ‘Finished Financially’: CIO – 30 Nov 2011 – By: Antonya Allen Assistant Editor, CNBC

Central Banks Signal Financial System Concern, El-Erian Says: Tom Keene

By Cordell Eddings and Tom Keene – Nov 30, 2011

 In summary, as I said above, I think we will muddle through. That is what we do. Buy companies you like long-term even if you are trading short-term. Lock in some dividends while the rates are high. The biggest sleeper risk? US Treasuries. Why? Because interest rates are artificially low, and sooner or later, Treasury prices will go down as interest rates go up. This is the time to be moving into more risk, because prices are cheap, and the price for safety in treasuries is high.