Archive for January, 2009

Ugly Day in the Market

Wednesday, January 14th, 2009

Overnight, Europeans came to the realization that the ECB and BoE would likely have to come up with their own version of TARP to save their failing banks. Here is the story from Reuters if you want to read it:

Just copy/paste into your browser.

Market breadth this morning is decisively negative, with > 90% of stocks down.

CandleGlance $NYADCandleGlance $NYHLCandleGlance $NAADCandleGlance $NAHLCandleGlance $AMADCandleGlance $AMHL

We are approaching the bottom of the 825 to 1050 trading range on the S&P 500 index. We should see a bit of a rally off the lows, but we'll need to get past earnings reports this quarter before we move toward the top of the range.


Banks Underperfroming Broader Market

Monday, January 12th, 2009

One of the standards that is important to watch to know whether the market has in fact bottomed or not is how the banking industry is performing compared to the broader market. We have never had a bull market in stocks without the bank index at least performing in line with the broader market.

In a market like we have now where the banks led the broader market down, what we want to see is six weeks of positive out-performance by the banks compared to the S&P 500. When that occurs, we will have a level of confidence that the correction has found a bottom and that the market is on a a generally upward trajectory.

How does that impact our timing model? Great question: the timing model is telling us that currently we have a market where we can buy the strongest ideas on pullbacks, but it doesn't give us any indication whether or not we are simply going into a trading range. It is highly probable that the broader market will be in a trading range for the short to intermediate term until we see the bank stocks start to perform positively.

The chart above shows the relationships of the bank index to the S&P 500. It is pretty easy to see that banks are under performing given the downward trajectory of the line.

Banks will be a screaming buy at some point, but finding that absolute bottom will be nearly impossible. We will be using selloffs and continued under performance to build positions in some of the strongest banks and financial companies because when the turn around finally comes, it should be swift and vertical on the chart.


Walmart Continues to Weigh on Market

Monday, January 12th, 2009

Traders shook off the better than expected unemployment numbers and ended down on Friday, taking oil with it.

This morning, oil is bouncing off the blue support line drawn on the chart last week and there is negative sentiment everywhere, so don't be surprised to see it break through.

The importance of the Walmart numbers cant be over emphasized. Our timing indicator continues to improve showing a buy signal for the broader market, so we continue to watch the GTC trades we have in place waiting to pick up shares of what should be the leaders in a recovering stock market.


Unemployment Rises But So Does Market

Friday, January 9th, 2009

Yes, we now have 7.2% unemployment, returning us to levels last seen near the end of Bill Clinton's first term. There were 524,000 new people added to the unemployment roles.

But, the good news is that many traders were looking for up to 700,000 or even 800,000 newly unemployed, so this is causing a bit of a rally in the pre-market.

The fear of the huge number was rooted most likely in the Walmart earnings miss. The fact that the actual number is less is cause to rally and should keep our timing indicator in "buy" territory.

We've only been able to pick up one equity in our low-bid GTC trades – QCOM. If the good news continues we may have to nudge up our bids a bit – I just missed CELG by a quarter yesterday, which is irritating as it moved up 5% from the low.


Walmart Misses Earnings Estimate

Thursday, January 8th, 2009

Here is some bad and very surprising news: Walmart missed its earnings forecast which they issued mid-way through the quarter. Ouch. They don't do that.

They announced early this morning before the market opens. The futures were all positive for stocks and oil, then turned lower based upon the announcement. Walmart stock is off 10% as I write this in the pre-market trading.

This will have a negative impact on sentiment and may turn the timing indicator back into sell mode. Not good. Once the market opens, we will see if traders shake this off or if it will push the market lower today. If this was any other company, it might not be so bad, but Walmart is viewed as the proxy for the US consumer – if their sales are below forecast then the economy is softer than the economists understand.

We'll be watching this closely. On a positive note, the low bids we put in to buy some equities with the cash we have on-hand might actually hit.


Oil Price Moves Toward Support

Wednesday, January 7th, 2009

Well, early this morning when I was writing the earlier post about oil, it was apparent oil was going to pull back today and I thought it would head toward the $43 area – I just didn't expect it to happen all in one day.

This is typical of the past several months in this market and you'd think such a move wouldn't surprise me. Go figure.

We are at the level I thought we might see a turn higher, now, given the volatility, I'd say support may more likely be at the blue line instead of a bit higher. We'll see. As long as we hold support at that blue line, investor psychology will continue to be positive.


Temporary Dollar Strength, Long-term Commodity Strength

Wednesday, January 7th, 2009

The Associated Press is reporting this quote from President-elect Obama:

WASHINGTON (AP) – President-elect Barack Obama says the nation probably faces huge deficits for years to come, but heavy spending is needed now to spur the economy.

Obama said Tuesday the deficit appears on track to hit $1 trillion soon. Speaking to reporters after meeting with top economic aides, Obama said: "Potentially we've got trillion-dollar deficits for years to come, even with the economic recovery that we are working on."

In looking at investment strategy, we have historically tried to find the over-riding trends that will impact markets for several years. This, if it comes to pass – and every indication is that it will – will have extreme consequences for the dollar, inflation, fixed income investments, gold, oil, and all other commodities.

The dollar will fall against a basket of other currencies. Inflation will rise to levels not seen in years. Fixed income markets will crash BUT yields will go up to the advantage of those keeping maturities short. Gold, oil, and all other commodities will soar in value.

If you look at the Commodity Channel Index in my previous post, you will see that it is already responding to stimulus.

This is a significant piece of news that we will follow closely and act on accordingly.


Oil Likely Bottomed

Wednesday, January 7th, 2009

I thought you might find the chart above interesting. This is the chart of West Texas Crude and it clearly shows that it has broken out of its downtrend of recent months.

You will see the big blue downward sloping line I've drawn on the chart and notice that as we hit 2009, the price broke out above the line and is now touching against the first level of resistance. The price opened today at the resistance level and has pulled back a bit on some profit taking by oil traders.

The breakout is confirmed by the Moving Average Convergence Divergence indicator I follow. You will see the blue oval in the middle chart that is circling the move of the black line as it pulls away to the upside from the blue line.

You will note that I've drawn a blue arrow that is pointing toward the green downward sloping but wavey line. The important thing to note here is that it has curled upward an is set to cross the 50-day moving average. The green line is the upper indicator for the Bolinger Bands – it represents a combination of volatility and relative price levels over a 20-day period. As the upper green band moves higher, you can generally anticipate that the price for West Texas Crude will move higher in coming trading sessions. It is important that it is crossing the 50-day moving average and that gives you an intermediate-term target price for oil around $53.

You can also see the huge move in the Commodity Channel Index that is signaling an end to the bear market within the big blue oval I've drawn on the bottom graph.

The most likely scenario is that oil will pull back a bit, maybe down toward the former restance line (which now is a support line). That will give you a good buying opportunity for oil stocks and ETF's (like USO) to ride the price up to the intermediate-term target of $53. So, if it trades down to the $43 level, you outght to be able to buy the USO ETF and make a +20% profit on that trade.

The combination of oil breaking its downtrend and, as we saw in yesterday's graph, the timing indicator showing that the stock market is likely a buy now, we should have a positive (although volatile and frustrating) first six-months of 2009.