Archive for December, 2010

Merry Christmas!

Thursday, December 23rd, 2010

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You may get another blog post or two before year-end or this might be the last – but I wanted to wish all readers of the blog a Merry Christmas and Happy New Year!

The photo above is my dog, Trip, a 55 pound 4 1/2 year-old wirehaired pointing griffon. He is a perpetual motion dog and I was shocked that the photographer was able to get him to be still long enough to get this photo.

A couple of my friends commented that he is a doppelganger for Max the Dog from the Grinch cartoon. You can be the judge:

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So, whether Max or Trip, we both wish you a happy and safe holiday season, and a profitable 2011 in the markets!

Mark

Border War Game (Oh, and a Look at the Market)

Wednesday, December 22nd, 2010

I wanted to give you a quick update on the market before I head to some friends to watch the annual Border War Illinois Vs. Missouri Basketball Game. I was feeling good about my Illini until watching the embarrassment at the hands of unranked UIC – never a dull moment.

Not unlike the market – see for yourself in the annotated graph below:

S&P 500 Annotated

You can see that I’ve drawn a horizontal line on the graph that represents what was the upper resistance to the market. You can see that we tested it, couldn’t sustain my 3-day rule and backed off. Then retested it and soared right through.

The liquidity in the market from the printing of dollars by the Fed isn’t making its way into the productive economy so it is making its way into the investment markets. As long as the liquidity flows, there will be an upward bias to the market.

You can see I’ve drawn a couple of blue circles and some orange boxes on the graph (appropriate I guess for where my mind is) to show you two things I want you to take from this:

(1) The blue circles show you the short-term indicators I follow and that they are flashing that we are due for a pullback; and

(2) The orange boxes show you that intermediate term indicators I follow which point to the intermediate trend in the market being up.

This tells me that you can put some money into the market now, but there is a chance it will come down a bit (remember that the short-term indicators adjust themselves either by price or by time – meaning that the market could go sideways for a bit and the indicator would come down just like if prices fell).

However, with the intermediate term indicators showing an uptrend, any down or sideways movement will be bought by under-invested market participants. The psychology has changed and people are dip buyers now based upon the Fed’s stated objective of pushing the stock market higher in order to produce a wealth effect that will generate consumer spending as a means to eventually increase employment.

Agree with it as policy or not – you can’t fight what you see. You just have to be nimble enough not to get caught when the liquidity drys up.

Here’s to a great night of basketball and for those of you that want to see a glimpse of The Chief, here is a video for you to watch:


Click Here to watch The Last Dance on YouTube

Mark

Housing Stocks Turn Higher

Monday, December 20th, 2010

Is it the chicken or the egg?

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You can see that lumber is in a serious inflationary price rise. In the graphs at the bottom you can see the housing index ETF’s are also beginning to show some strength.

Are housing stock prices forecasting an end to the housing crisis because low mortgage rates will increase the demand for new homes which will drive up lumber prices? Are lumber prices increasing because low mortgage rates precede inflation? Lot’s of questions, very few answers at this point.

What you can see though is lumber is going higher which will eventually make its way into the prices of anything made of wood. If its the liquidity that the Fed is pumping into the system, then we will see it in other commodity charts besides housing.

I also thought you might like to see a Retracement view of the oil market in an effort to answer our question:

West Texas Intermediate Crude

I’ve drawn in the lines that represent the top of the oil market a couple years ago and the bottom shortly thereafter. We are currently bumping up against the 50% retracement of the move from top to bottom.

Lumber and oil are two critical inputs into the global economy – and both are moving higher. So let’s see what copper is doing:

Copper

It has not only retraced the entire move from the top to the bottom, it is now higher than the 2008 top.

All commodities are on fire from a combination of demand from the growing economies in the developing world and the printing of money by the US, Japan, and the European Union.

So far the CPI and the PPI are not showing any inflationary pressures:

Consumer Price Index

Producer Price Index

It will be critical to watch the PPI as prices will rise first at the producer level before they move into the the consumer level and show up in the CPI. When I start to see something, I’ll shine a light on it for you here on the blog.

Mark

Imagine a Breakout in Small Caps

Thursday, December 9th, 2010

small-cap-index

This chart updates one that I posted a few days ago, the march higher in small caps continues as we are now sitting at the resistance line. If we are able to break through the resistance line and retest it as support, that is the traditional time from a technical standpoint that you want to increase your allocations to small cap stocks.

Traditionally, you set a target after the breakout based upon the magnitude of the move from the low to the resistance line. In our case, the move started at 600 on the index with resistance at 772. So, if we can close above resistance at some point, stay above for three days or move 3% above it, retest 772, then you calculate your target as follows:

772 + (772-600) = 884 Target Level = 14.50% potential gain from breakout to target

I am focused on the small and mid-cap portion of the market as I previously wrote because I think the more entrepreneurial areas of our economy should outperform the larger cap less flexible areas – particularly those small and mid cap companies that have developed an export stream to the high GDP grow areas of the world. Am I a dreamer here? If so, I’m not the only one.

I mentioned that this is the traditional methodology because we have the unknown impact of QE2 and Fed policy, but intuitively, flooding our economy with liquidity could eventually increase credit availability plus it devalues the dollar making exports more desirable to other economies. At least in theory. I’ll keep you updated as things move forward with this scenario.

Yesterday was the anniversary of John Lennon’s death, so I thought you might enjoy one of my favorites:


Click Here to watch John Lennon on You Tube

Mark

Gold’s Fall, Jon Stewart & QE2

Wednesday, December 8th, 2010

gold

Gold fell $30 today and it got me thinking about whether we had hit a point where its safe to be a buyer. If you look at the chart above, you can see that I’ve drawn several blue circles on the price graph as well as on the Stochastics technical indicator. You can see that in the first two sets of circles, the price hit the moving average and proved it was a good time to buy as the Stochastics hit the bottom of their range (indicating an oversold move). However, with today’s fall, you can see we hit the moving average but the Stochastics is no where near the oversold level. This generally indicates we may have more downside to go before we hit an oversold level.

I’ve written here that I anticipate a move down to the 89 day moving average as an entry point at some point. Maybe the Stochastics indicator is telling us that we should see that opportunity in this price move.

As I’ve written many times here, the move in gold is directly related to the devaluation of the dollar cause by the Fed’s QE2 activities. In QE2, the Fed essentially prints more dollars and buys treasury bonds with them. The more money in circulation lowers the value of the dollar and pushes up the price of gold as investors buy more to offset the anticipated effect of inflation that comes with a devalued dollar.

Well, this has now hit the mainstream because Jon Stewart reported on it on his show. Check out this video:

Click Here to watch Jon Stewart on Comedy Central

Mark

News Conference Tanks Market

Tuesday, December 7th, 2010

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The President came on TV at 1:30 today to discuss the deal he cut with the Republicans to extend the Bush tax cuts. You can clearly see that investors did not like what they heard. There is still a half hour to go before the market closes, so we could recover some in final minutes – my guess is we do get at least a healthy bounce.

The two year extension is pro-growth but at some point we will need to have a serious discussion in this country about our national debt. Stephen Wellman notes that: “By 2025 (tax) revenue will be able to finance only interest payments, Medicare, Medicaid, and Social Security. Every other federal government activity – from national defense and homeland security to transportation and energy – will have to be paid for with borrowed money. Debt held by the public will outstrip the entire American economy, growing to as much as 185 percent of GDP by 2035. Interest on the debt could rise to nearly $1 trillion by 2020. These mandatory payments – which buy absolutely no goods or services – will squeeze out funding for all other priorities.”

Maybe during the two year extension, we can get a serious debate going to figure out how to avoid the problems noted above. It will be difficult to have pro-growth policies and pro-debt reduction policies without some serious cost cutting. Maybe that is why the Deficit Commission only got 11 of the needed 18 votes to move the Bowles-Simpson plan on to Congress. No one in Washington wants to face the music – yet.

Today is the anniversary of the bombing of Pearl Harbor, so in memory of that day I thought a video from that era would be appropriate (if you are reading this on Facebook, the videos don’t always follow the feed from the blog so I’ve included a link for you to follow):



Click here to watch Cohan\'s \"Over There\"

Mark

Small Cap Stocks Near Multi Year High

Saturday, December 4th, 2010

Russell 2000 Index

I thought you might like to see what’s happening outside the broad market S&P 500 Index. The chart above shows the Russell 2000 Index with a blue horizontal line drawn on it denoting a resistance level as it nears a multi year high.

Historically, small cap stocks outperform large cap stocks, but with greater volatility. The past three months, the broader market S&P 500 Index has outperformed the smaller cap index on a relative basis, but if the broad market has likely made its highs for the year and is stuck in a trading range.

Bill Cara is reporting “that China’s leadership is set to approve a plan to invest US$300 billion per year for five years in the seven strategic sectors, as follows:

• Alternative-Fuel Cars
• Biotechnology
• Energy-Saving Technology
• Alternative Energy
• High-End Manufacturing of hi-speed trains, wind turbines, solar panels
• Rare-Earth Metals
• Super-Computer Technology

This shift from low-end manufacturing of consumer products being sold by the likes of Walmarts to high-end technology, with the country’s ability to pay for the best in R&D and process engineering is going to push the competition envelope. The economies of Europe and North America will be hard pressed to keep up. Particularly troublesome for the Developed Markets is the deleveraging process that the banks in the leading nations will be going through during this period of massive investment by China.”

This could lead to an extended period of relative outperformance by the small cap entrepreneurial oriented companies globally. Our strategic focus has been to historically overweight small and mid cap companies, and this sort of news makes me certain that our strategy has been and will continue to be the correct path.

As the broader market moved toward its highs for the year near 1225, we reduced equity exposure in client accounts by lowering large cap exposure. When we are ready to increase equity exposure again, it will definitely be to carry on with our strategy in the small and mid cap areas of the market.


Click Here to watch Carry On Wayward Son at You Tube

Mark