Archive for January, 2010

I Wonder…

Sunday, January 31st, 2010

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Well, its been an ugly period in the market. You can see that from the chart above, we broke through the 89 day moving average in decisive fashion. This is technically an ominous sign. We have had several stop losses hit over the past seven days and if the selling continues, we will have some more. One thing that concerns me is that the selling is happening on rising volume and our trend indicator (the ADX indicator) is showing that the downturn is picking up steam (that rising black line with the big gap between the red and green lines).

But, there is some good news: our short-term directional indicators shows that we are oversold in a big way and that we are due for a bounce. The RSI below 30, the Full Stochastics below 20, and the Oscillator (NYMO) significantly below the 0 line. I’d look for the market to move back up, probably on low volume, and then the selling will likely resume.

What you can’t see from just looking at the broad S&P 500 average is what is happening with the rest of the market. On the chart above, the Advance Decline line is showing that there is a lot of damage being done to individual companies that is being blended by the broader market to look better than it really is. On the chart below, you can see the year-to-date performance of the S&P 500 compared to the Russell 2000 Small Cap Index and the NASDAQ 100 Index, Gold, Gold Miners, Oil Service Companies, and Emerging Markets. I’ve chosen these because they are the favorite areas for institutional investors.

What’s pretty clear is that the institutional favorites that are the most widely held and that have had good earnings and great prospects as the economy recovers – are getting killed by the selling.

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But, the question is who is doing the selling. Given that the selling is predominantly in the institutional favorites, and that if you look at individual companies within these groups you see what looks like a flat out assault on them by someone, it looks suspicious.

I wonder why, when these companies were reporting strong earnings, the GDP numbers reported this week were better than expected, and the unemployment numbers were improved, the selling picks up steam. Its almost like the traders in NY are trying to make a statement.

So are they upset by the proposed regulatory changes designed to deal with “too big to fail” institutions ending proprietary trading and limiting the size of deposit-taking institutions? That we have a new $90 billion tax intended to curtail bonuses? The a new world-wide fund is being proposed that they will have to pay into which would act to deal with future financial messes like the current one?

Who knows – it just seems irrational to me – like something designed to prove a show of force, like a push back against the proposals. I’m not a conspiracy theory person, but something just doesn’t seem right. The selling seems to be happening in the face of improving fundamentals.

Or maybe, its not irrational at all. Maybe the traders have taken the view that if these changes are imposed, corporate earnings will suffer. Maybe they have decided that these regulations and taxes will impede future economic growth because the assumption of risk by the institutions that provide the capital for it will be decreased. Maybe the improving fundamentals are not likely to continue improving:

>the improved GDP numbers came mostly from an inventory rebuilding process in corporate America that will not show up in future quarters;

>the improvement in the unemployment statistics could be temporary since people that stop looking for jobs are no longer considered unemployed in the calculations; and

>corporate earnings estimates for coming fiscal years could be overly optimistic if the GDP and unemployment assumptions are faulty.

All of this is speculation, but I have to develop some theory that we can invest with – in the short term we will keep the remaining stop losses in place and institute new ones with the likely bounce we’ll see (based on the short-term directional indicators discussed above). Unfortunately, we didn’t have stops set on several companies with the best fundamentals and prospects – and some of those have been hit hard. But they will also be the ones that bounce the best.

Yes, the market went up very fast with no real correction in the up move. Yes, we have had stop losses in place to protect many positions against a down move. Yes, valuations were stretched as prices moved up prior to earnings – but that happens in every recovery as stocks discount the recovery in advance.

The real question is this: will the second half of the year see continued economic improvement or a move back toward a double dip recession. The odds are still with continued slow improvement given the vast monetary stimulus in place and likely to continue. If this scenario is the one that comes to be, then we should see the stock market reflect that and continue its move higher. If the speculation about the traders above is right and the new regulations and taxes cause the economic recovery to falter or stagnate – or if the monetary stimulus is removed and we head into a double dip recession – then you will see significantly lower stock prices.

Right now, we are going with the first scenario and will be using the anticipated bounce to add additional stop losses, and if we see a move back above the 89-day moving average in the broader market we’ll probably add to positions that have the best prospects to prosper in an economic recovery. That’s the plan for now.

Your trivia for today relates to a movie about the 60’s set in Modesto Calif in which the above song played a part. Many future stars played teenagers that you followed over the course of one night. Name the movie and also the actress in the Thunderbird that proved to be an obsession for one of the main characters. Then, go rent the movie and watch it again – I plan to since I haven’t seen it in years.

Mark

Markets Livin’ On A Prayer?

Tuesday, January 26th, 2010

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Well, as you can see on the chart above, the markets have corrected quickly and strongly. The S&P 500 is hanging onto the critical 89-day moving average waiting for news of the Fed’s monetary policy decision and the potential-but-not-certain reconfirmation of Ben Bernanke as Fed Chairman.

We are right in the middle of earnings season, and earnings have been pretty strong. Unfortunately, traders are starting to look at the political situation in the country as opposed to earnings for trading direction. That happens from time-to-time, but the market got spooked when the President came out and said he was at war with the banks and Senators stated they were planning to reject the President’s recommendation to reconfirm Bernanke. Those big down moves on the chart above coincide with statements from politicians rather than positive earnings announcements.

Investors had a very good year in 2009 to follow up a VERY bad year in 2008. Now that we are in 2010, they are looking for reasons why the market should move back to the lows. Political statements about changing the head of monetary policy to someone presumably more pliable to political pressure and potentially negative policy stances toward the country’s largest industry are enough to cause traders to sell. Oddly enough, if you actually look at the policy statements of the Volker plan for banks, its quite logical in its intent to protect the country’s financial system. The unfortunate part is that the delivery of the message tilted toward populist rhetoric and that kept traders from actually hearing the substance of the message.

If you look at the technicals, the two short-term readings (Stochastics and RSI), they are both in oversold territory, which indicates we should see a bounce up at some point. Unfortunately, the other indicators are mixed (some showing further intermediate downside and some showing no indication at all).

If we can hold the 89-day moving average, consolidate there and let the political blah-blah-blah move past, then maybe we can move back to earnings as the catalyst for stock market pricing. The past few days we’ve had sentiment govern pricing and the sentiment was clearly influenced by the politicians.

I’ve always liked this rock ballad. Its hard to believe that its going to be 25 years old soon. Your trivia question of the day is whether you recall which Presidential candidate used this song as his campaign theme song. I remember it being so, but even at the time I didn’t understand the connection (hint: the candidate is not from New Jersey).

Also, does anyone out there know why they decided that half way through the video they’d switch from black and white to color like a big-hair Wizard of Oz? If so, email me – I’ve always been perplexed by it.

Mark

Stock Market On The Run

Wednesday, January 13th, 2010

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Its been awhile since we looked at the bear market retracement view of the market. Back then, we saw that the market was consolidating below the 50% recovery level of the entire bear market.

Well, as you can see, its broken above the 50% level and is on the run toward the statistically significant 61.8% retracement (or recovery) level.

The post a few days ago discussing the sugar high in the market seems to be continuing. We continue to ride it higher but are keeping our stop losses in place, raising them as we move up.

Your trivia question this evening is whether you can recall the name of this band (and its NOT Boston). The song shows up in several movies and TV shows, but the band is not a household name. They do have another couple of songs that I’m sure I’ll have on this blog at some point.

Enjoy your evening and have fun with the video.

Mark

Yields

Tuesday, January 12th, 2010

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Everyday, people ask me where interest rates are going and what yields will look like six months or a year from now. This is one of the reasons that I published our internal forecast this year. In our 2010 Economic and Investment Forecast, I stated that I thought short term rates would stay low and that long term rates would move higher.

The rationale for this is that the Fed will want to keep short-term rates low so that the financial system can borrow at a low cost and use those funds to invest (in loans or bonds) at higher rates. The wider the spread between the two, the more the banks earn. The more the banks earn, the more capital they will be able to grow through retained earnings. And capital growth is key to the health of the financial system given the huge write-offs from the subprime idiocy.

In the chart above, I’ve included yields across the spectrum, from one month to thirty years. What you can see from this is that year-to-date, short term yields have actually fallen but long-term rates have moved higher. This fits very closely with our forecast and we anticipate that this tilting upward of yields in favor of longer-term yields to continue.

I’ll periodically publish this chart for you to review so you can keep track of the changes in yields.

Sorry for the audio quality on this one, but its one of my favorite songs and the video of the band was the best in spite of the audio.

Mark

Year-To-Date Performance Analysis

Sunday, January 10th, 2010

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I thought you all might like to keep track of the year-to-date performance of the various asset classes. So, the chart above will provide you with performance of Large Cap Stocks, Small Cap Stocks, Agriculture Commodities, Oil, Gold, 30 Year Treasury Bond, Treasury Inflation Protection Securities, Corporate Bonds, High Yield Bonds, and the Dollar.

As you can see, the only loser year-to-date has been the dollar as it pulled back slightly from its counter-trend rally in late 2009.

I’ll do my best to post this periodically to help us assess the markets.

So far, everything is performing according to our 2010 Forecast – but with only six trading days in the year so far, that is to be expected.

Today’s video has nothing to do with the blog, but I was just in the mood for the song. Your trivia question is what’s the name of the actor that played Alex (the deceased) in the movie, even though you never see his face. And for bonus points, did you know he owns a casino? Do you know where its located (there is a tie in with another of his movies)?

Mark

Financial Markets on Sugar High?

Saturday, January 9th, 2010

For months now, PIMCO, the world’s largest fixed income manager, has been saying that the economy is on a sugar high from all of the monetary stimulus pumped into it by the Federal Reserve. That monetary stimulus is driving up the financial markets but isn’t making its way into the real economy to generate real economic activity and increased employment.

By now, you should have received in the mail (if you are on our mailing list) the 2010 Economic and Financial Market Forecast that we are using for investment management purposes for 2010. In it, you will read that one of the forecasts was an increase in unemployment, not a decrease as most are expecting. I’ve taken some heat from people who did not believe this, but yesterday we had a big negative surprise in the unemployment report.

My statement in the forecast was based upon the rule of thumb that you do not get increases in employment until you have sustainable 3% GDP growth. Under our forecast, we will have below recent trend GDP growth for the foreseeable future which will keep unemployment high. I won’t repeat the whole thing here as you can easily read the reasons for the below recent trend growth in the newsletter.

As far as the investment markets go, look for the monetary stimulus to continue to provide an upward bias in 2010 – although I’d anticipate at some point this winter we’ll see a bit of a pull back which should kick in some of the stop losses we have in place. We’ll use the cash generated by the stop loss sales to buy into our favored sectors for the next leg up in this bear market rally.

Yes, I still think we are in a secular bear market with a cyclical bullish rally in place. The secular bull market is outside the US – look to the emerging markets like Brazil, Singapore, and South Korea for real bull fundamentals and to developed markets like Canada, Australia, and Switzerland for significantly better fundamentals than the US – is still in place and even though late 2008 and early 2009 were very painful there, the secular bull is still in place there.

Right now, the dollar is in a counter-trend rally (you’ve read ad nauseum here about the reasons for the dollar bear market) and it is near-term putting some pressure on the markets discussed above. But we are using this as a buying opportunity to establish positions for new clients or to add to positions for current clients where appropriate.

So, our forecast dovetails nicely with PIMCO in my opinion. The financial markets should continue to move higher albeit with some scary corrections to work off over bought situations based upon the continued monetary stimulus. When the Fed gets serious about reducing the stimulus, that is when you will likely begin to see a topping of the market and serious chances for reversals to the 200 day moving average on the S&P.

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Right now, that 200 day moving average is at 992 and rising. I’d set that as the bottom of any trading range for the forseeable future with 1250 as the top (you can read about 1250 in the Forecast). Several of the technical indicators I follow are showing that we are a bit frothy at the moment so do not be surprised if we trade sideways or pull back some in the near-term.

Remember, markets can work off over-bought situations with either time or price movements. With money flowing into the market from retirement plan corporate contributions during the early part of the year, this should keep any pull back to manageable levels or just allow the market to grind around within a narrow range until the frothiness is worked off.

That seems to be the most reasonable assessment of the current market situation to me. So, enjoy your sugar high while it continues – and see if you can spot a well known Oscar nominated actress (three times with ne win) in one of her first roles 15 years ago in the video above – and hopefully enjoy an Illini victory tonight – both much better things than facing the cold weather outside.

Mark