Archive for November, 2007

Technical Indicators Say We Head Higher

Monday, November 26th, 2007

Below is a positive article by one of the technical people I like to listen to. My reading of the technicals, like the NASDAQ High/Low indicator, the S&P 500 Upside Volume indicator, the 30-day advance/decline line, as well as the oscillator I follow, all indicate we are at or near a bottom and should bounce in coming trading days.

I thought I’d include the following since it confirms my reading of technicals I follow with the technicals he follows – and some sound advice about core long-term holdings (oil and commodities – my favorites) and other assets that should have stops and sale orders.

Longer term, I think we are in for some problems with this market. But between now and year end, we’ll use the coming rally to lighten up on non-core allocations and build a cash position in managed accounts.

Mark


Things Are Bad, But Look Between the Lines

By Mark Manning

11/26/2007 4:03 PM EST

Despite swirling negatives, I have not become a long-term bear. I believe the Fed will act to prop up the financials, keeping a floor under the broader market, and panic from individual investors will keep things from getting too dire. November normally marks the start of the best six months for stocks. This period has historically produced the majority of the market gains on average.

However, we haven’t had a great start to the normal seasonal strength. The positive reports from the retailers over the weekend did give the market some short-term strength this morning, but it had already started to fail by midday. If you have been following my columns you know that my short-term and intermediate-term indicators have been negative for quite some time and I have been constantly advising readers to raise cash levels and tighten protective sell stops.

With the intermediate-term trend clearly staying negative, I have been focusing on shorter-term trades in the market along with my longer-term positions in oil and commodities. My long-term indicators are also close to turning negative while at the same time the market looks like it’s ready to produce a short-term bounce.

I’ve been pointing out that my indicators are signaling that the market is very extended to the downside and that the American Association of Individual Investors survey showing investors are as bearish as they were near the lows in March of 2003. That bearish sentiment, along with the combination of declining consumer confidence and the constant worry about the financials and subprime problems, is keeping many individual investors on the sidelines, and buying puts betting against the market.

With all these negatives, many readers have expected me to be more negative on the market. One thing keeping me from becoming overly negative is that the leading stocks in oil and technology have continued to remain strong. I am also seeing way too much negativity among individual investors and many market commentators to think that there is a dramatic amount of downside left in the near term. It also helps me psychologically that I personally have a large amount of cash on the sidelines.

The other thing that leads me to believe that the downside is limited is that the continued beating the financial markets are taking actually may hold a positive catalyst for the market. The reason behind that thought is that the financials are very critical to the economy, and I think the Federal Reserve will do whatever it takes to protect them. In order to do that, they are going to have to continue to inject a lot more money into the financial system. That in turn will lower interest rates and increase liquidity for borrowing. In fact, just today the Fed injected $8 billion of liquidity into the system.

The other indicator that points to lower interest rates is the strength in utilities that I pointed out in my column on Friday. Strong utilities signal that the market expects interest rates to fall in the future. The charts of the five-year and 30-year Treasury yield index are extended to the downside, but they do look like they are going to continue their downward trend. Let’s take a look.

Source: TC2000

The five-year Treasury yield index is close to hitting some solid support in the 3.2% area. I would expect that we may get some type of short-term bounce when that happens, but I think there is a good possibility of testing the 2004 lows around 2.5%.

Source: TC2000

You can see from the chart above that the 30-year Treasury yield index has been in a trading range between 4.2% and 5.6% over the past five years. It now looks like we will probably test that level again in the near future.

Source: TC2000

I have pointed out before that the dollar is extended to the downside and due for a bounce, but the long-term trend continues to be down. The fundamental reason behind this is that when the Fed is injecting liquidity into the financial system and interest rates are in a downtrend, it continues to put pressure on the U.S. dollar.

I think the market will continue to remain volatile and investors need to take their time and keep protective sell stops close on all of their positions that are not long-term investments. However, I do think that we are getting close to a short-term bottom and may see a sharp bounce over the next few weeks.

Financial Deja Vu All Over Again

Friday, November 9th, 2007

The chart of Washington Mutual tells the tale. We are headed for a 1990 style bear market in financials and the leader of the pack is WaMu.

In 1990 to 1994, the banking system saw several banks fail. The crisis resulted from a real estate crash that stemmed from an increase in the capital gains tax that reduced the market values of all real estate holdings – this is a lesson that the congress seems to have forgotten as it prepares to raise capital gain taxes in coming years.

The 2007 to ???? banking crisis also started in real estate. It had nothing to do with taxes, but with lending standards being to easy – too many people were allowed to borrow that were not able to pay back the loans. We are seeing significant levels of defaults on home loans, and write downs of mortgage loan portfolios and mortgage-backed bonds on banks books.

Back in the 1990 crisis, banks bottomed out at single digit P/E ratios and 0% dividend yields (since dividends were cut to preserve capital after the write downs of loans beyond reserves). We are headed there again. Don’t believe all these people that say its a good time to buy banks because they are yielding nicely and you will be paid to wait out the crisis. Many of the banks yielding over 5% will cut their dividends and their stock prices will get crushed as income investors sell their shares.

From what I’ve read, it seems WaMu is headed for extinction – someone will swoop in with an opportunistic merger that their board can’t ignore. It will be either merge or close, and merging will be the only option.

Mark