Archive for October, 2011

What A Month

Friday, October 28th, 2011

S&P 500 Index Annotated

As bad as the September quarter was, October has been a barn burner. As I review accounts, the equity portion of our fully diversified accounts are up on average 17% for the month – with domestic equities up 20%, foreign equities up 16%, and alternatives up 16% – a pretty sweet change from September!

There are some important things I want you to see happening in the market right now, and I’ve annotated them on the graph above. But first, I want to point out that the Triple Bottom Reversal post in the previous blog entry showed we should see a move to the 1290 area on the S&P. We closed at 1285 today (and we have more than met the Rule of Three), which is close enough for me to say that the pattern successfully repeated itself – something I like to see as it helps confirm the usefulness of the sort of technical analysis I use.

In the green box near the top of the graph, I’ve shown you a histogram depicting the numbers of stocks that are trading above their 50-day and 200-day moving averages. When I first started including this, I mentioned that the change in character showed that the market was healing and getting stronger. You can now clearly see that the steady increase in both, giving us a strong change in trend.

In the pink circle in the main part of the graph, you can see that we have moved above the blue 200 day moving average line on the index. This is a critical juncture for the health of the market – you can see that the small candlestick that represents today’s market action dipped down to toward the 200-day line, but didn’t fall below it. Again, our Rule of Three is in place – for this to be a successful move above the 200-day line, it has to close above it for three days or for 3%. We will see what next week brings.

There are two more important positives you should see: (1) Note the red arrow above gray volume bar is strongly above the blue moving average line indicating that there was significant participation in the rally as it picked up steam; and (2) Look at the teal circle at the bottom of the page and you will see that we have a strong intermediate term up-trend indicated by the moving average convergence-divergence indicator.

In terms of negatives, this move has gone up so fast and so strong, we are now near-term overbought which will need to be corrected before we move significantly higher. The Relative Strength Indicator (see the orange circle near the top) and the Full Stochastics Indicator (see the orange elipse near the bottom) are both above the top indicator line.

As I’ve written in the past, these types of overbought situations can correct themselves with time passing or with prices going down. Obviously, we are hoping for time passing and the market to hold above the 200-day line and for this rally to have some legs. However, if I was to guess, based upon the years I’ve watched the market, I’d say we will retrace down to the 1250 or 1260 level and make another swing at moving above the 200-day line.

I also want to point out the purple arrow next to the horizontal volume bars. This represents significant overhead resistance near the August highs and will be an impediment for the market to move to that level – not impossible, but there we need to be some strong fundamental reason for it to do so.

Mark

Triple Bottom Reversal

Friday, October 21st, 2011

S&P 500 Annotated

Back in this post on September 23rd, after the market bottomed for the third time, I said that the pattern we wanted to watch for was called a Triple Bottom Reversal. In general, this pattern historically means that if you are able bounce off a significant support level and move higher to the point where you break through a previous resistance, you can generally anticipate a continuation of the move even higher.

From a mathematical standpoint, you calculate it as a move of 50% of the distance from the bounce point to the point of break through of resistance. The bounce point occurred at 1100 on the S&P Index (see above) and the resistance level was at 1230, so 1230-1100 = 120 X 50% = 60 S&P points above 1230, giving a 1290 target for the current move higher, or about under 5% upside.

How reliable is this historic pattern? Reliable enough for it to be recognized as a pattern. However, for those of you who have been readers here for a while know about my “Rule of 3″ which says that for any move to be valid, it has to stay above resistance (or below support) for either 3 days or 3% for it to be a valid replication of a pattern. Today is the first day we’ve broken above 1230 and the market is not yet closed.

Earnings have been positive, but there have certainly been some negative announcements – for every blockbuster Intel announcement, we have had a lackluster Apple announcement. Interesting times. But, earnings don’t seem to be the catalyst for market action right now – its geopolitical events, particularly of the European kind.

The big move today is likely due to hope that France and Germany will come to some sort of agreement on Greece this weekend. If they don’t, then the market will need some other good news to keep the move above 1230 alive for 3 days if the rescue of Greece turns out to be a fantasy.

Mark

On The Edge

Tuesday, October 18th, 2011

S&P 500 Index Annotated

As you can see on the chart above, the market has moved back to the edge of where we anticipate taking some profits. I have added two things to this graph that I wanted to point out:

(1) if you see the orange arrow at the bottom of the graph it is pointing to volume – the past two days when we had down days, the volume was below average, but today’s strong up day saw higher volume, a good sign that we are seeing some buying interest by investors that sold into the downdraft during September but missed the chance to participate in the recovery; and

(2) At the top, you see the overlayed gold and black histograms – these represent the percentage of stocks in the S&P 500 trading above their 50-day moving average (gold) and 200-day moving average (black) – in the green box I’ve drawn, you see that the gold has really taken off – this is a good sign that the market is getting healthier as more stocks have moved higher in price so that they are trading above their 50-day moving average.

Global Market Performance for October

This is the other thing I want to point out – for those of you who are clients, in your quarter-end statement I included an Investment Commentary discussing how having a diversified portfolio hurt you during the past quarter as the small and mid caps plus the foreign markets and alternative investments all performed significantly worse than the S&P 500 for the nine months ending 9/30/11 – most were down at least twice as much as the large cap index.

In the commentary I mentioned that this is a rare occurrence, and that usually the diversifying asset classes provide some protection to a down market plus additional incremental return in up markets.

In the graph above, you can see that this is starting to reverse itself with the diversifying classes beginning to recover faster than the S&P 500.

That is exactly what we would anticipate to happen and why we chose to hold onto those diversifying assets in spite of some panic selling we were seeing in the market.

Mark

Earnings Season Kicks Off

Tuesday, October 11th, 2011

Corporate Profits Vs S&P 500 Index Vs Wages

Earnings season kicked off tonight with Alcoa providing poor results compared to analyst expectations. I’m not sure why they are such a hurry each earnings season to complicate things, but that is how it seems to work out based upon recent history.

Honestly, I believe that earnings overall this quarter will be better than analyst expectations once more companies begin to report.

However, I want to focus on the chart above that comes from the St. Louis Federal Reserve and was put together by Dirk van Dijk at Zacks. If you look at the thin blue line, that represents corporate profits over the past 54 years. It is in comparison to the green line which is the S&P 500 Index over that same time frame. The thing to notice here is the wide disparity between corporate profits and the price of the the S&P 500 Index. Looking at this, it gives me some comfort that stocks are undervalued by comparison to profits and that having a fully invested position in stocks is the correct place to be at this time.

You can see in the 1990’s where stock prices got way ahead of themselves compared to profits and it basically took a decade for profits to move up to make stocks fairly valued. However, even though both profits and prices went down during the recession (the gray bar), profits rebounded strongly but stock prices have not followed and in fact have fallen even though profits are at record levels.

I’ll be in touch with more updates as earnings season progresses, but at this point we won’t worry about Alcoa being emblematic of the rest of earnings season.

Mark

Where Is The Love? Not From The Stock Market

Wednesday, October 5th, 2011

global-markets-ytd

I thought it would be instructive to take a look at the world’s markets year-to-date. Its pretty clear that even though we hear most about the S&P 500, it has been the least hard hit of all the investment markets in the world. The worst performing market we follow is the Brazilian stock market, down 33% year-to-date. Switzerland was down marginally more than our own S&P 500, with the Europe/Australia/Far East Index down just a bit more than that. Our own small cap market down 22%.

Flat out, its been an ugly time to be in the stock market, but as you can see in the chart below, most of the damage has happened since the beginning of July.

S&P 500 Index Annotated

In looking at this chart, you can see that two days ago we bounced off the bottom of the range defined by the mid-day low on August 9th, and have rallied back above the important pink support line. This is a pretty important thing from a technical perspective.

From a fundamental perspective, though, things are a mess. The stock market seems to be pricing in a recession. If you look at projected 2012 earnings, the S&P 500 Index is projected to earn $100 per share (the weighted average for its components). If we are trading around 1120 on the index, that means we are at a P/E ratio of 11, near the bottom of our standard 10 to 22 range, and well below the average of 15.

However, this is the strangest recession call I’ve ever seen. You don’t get recessions when there are such positive things happening as:

1. New car sales for GM were up 20%, Chrysler up 27% and VW up 36% – it doesn’t sound like the consumer is pulling back as they would during a recession

2. The Purchasing Managers Index increased to 51.5, showing that manufacturing activity was on the increase – it doesn’t sound like corporate managers see things pulling back

3. Rail Car load growth is up strongly year-over-year: For the week, y/y carload growth by rail were as follows:

• KSU: +9.2%
• CNI: +3.8%
• BNI: +3.2%
• NSC: +1.6%
• CP: +1.4%
• UNP: +1.4%
• CSX: +0.4%

These are not the sort of things you see if an economy is on the verge of contracting – particularly since four of the five biggest increases of the year have occurred since August 20th.

4. There has been a large gain in the number of newly hired employees if you add up the past three months non-farm payrolls.

5. The weekly jobless report last week showed a significant decline of 37,000 to 391,000 the best number in several months.

6. Sales figures for companies like Nike, Tiffany, Coach, etc., are all strong again showing that the consumer is not afraid to spend.

7. New Home Sales numbers have also seen five months of improvement.

8. In Emerging Markets, China’s PMI came in better than expected and Brazil has begun to cut its interest rates – both signs that each economy has potentially been able to engineer a soft landing that would eventually translate into higher stock prices in the emerging markets.

9. The Baltic Dry Index, which represents raw materials and goods being shipped across the oceans, is also moving significantly higher, indicating that economic activity around the world is increasing (see chart below).

baltic-dry-index

10. From an anecdotal standpoint, I’ve had friends in both Las Vegas and Disney World in recent weeks, and they tell me that both were packed – also not a sign that the consumer is retrenching.

Is this a New Age Recession where consumers and corporate America is improving but stock prices go down? What’s driving the stock market? Is it telling us that the problems in Europe are going to be worse than the average consumer or corporate manager expects and will drive the US into a recession in sympathy with Europe?

At this point, I think that fear and computerized trading have overpowered fundamentals. I really think we are in a bottoming process and that stock prices will work their way higher as earnings season gets underway in a couple of weeks.

We still have a target area to begin to raise cash denoted by the pink box on the chart above, but at this point we are holding on to our fully invested position in the theory that higher prices are ahead once earnings season gets underway. The signs that things are improving just seem too pervasive for me to believe we are at the cusp of a recession.

I’m not feeling the love from the stock market right now, but I sincerely believe that once earnings season gets here I’ll feel it.

Mark