Archive for October, 2009

$SPX – SharpCharts Workbench :

Wednesday, October 28th, 2009


Well, we had an interesting day in the market. Fear and near panic prevailed to send equities and (in particular) corporate credit down. We are now oversold (but not significantly) on most of the technical indicators I follow.


This chart, however, is the McClellan Oscillaor, which shows that the market is the most oversold since the March lows. We all know where the market went after that.

I’d look for a bounce soon, but I think we are really in for a repeat of the same pattern we had in June/July: a consolidation of the recent run before the next leg up. There is a lot of dollar buying and equity selling right now, but that is just short-term trading. The dollar bear market is firmly in tact and will be dictated by the US Treasury and Federal Reserve weak dollar policy. In the near term, this pull back in the equity market is a buying opportunity, however at some point the weak dollar policy will be hugely negative for the stock and bond market. That , however, is not now.

As usual, though, we are protecting against the downside. There is always the possibility that we could pull back to the 200 day moving average. That would not break the market trend, but it would represent a fairly standard bull rally pullback of 15+%. So, we have stop losses set (some of which have begun to hit with the current pullback to the 50 day moving average) and will generate some cash – no big deal as we can redeploy it for the next leg up.

However, as we move into 2010 we will be watching to see if the trends change. There is always the chance that we could see a double dip recession. But, that is for some future discussion. Until then, we will be working out way through the haze.


US Dollar Rally Smacks Stocks, Oil and Gold

Tuesday, October 27th, 2009


We’ve had a few big days of rallying in the dollar that have coincided with a bit of a pull back in stocks, oil and gold.

On the chart above, I have the price action in the dollar graphed out with the 13-day and 34-day moving averages. You can see that the red line (the 34-day moving average) has acted as the upper end of the downward trend in the dollar since the end of April. All the way down during this bear market, the dollar would sell off to a level below the 13-day moving average (the blue line) then rally up to the 34-day moving average. Today, we hit the 34-day average.

Will this moving average contain the rally much as it has for months? That’s a great question. Much of what will happen in all the markets this week will be determined by the Treasury Auction, as discussed in yesterday’s post. Today, we had the 2-year auction which went better than expected. My concern is still the 10 year and 30 year auctions which have yet to take place.

So, why is the dollar rallying? Higher yields make bonds more attractive in a relative comparison to stocks. We could be seeing a bit of movement into shorter term bonds from the stock market as some people are locking in their post-March gains. If that movement is by foreigners, they would need to buy dollars to buy the bonds, moving the price of the dollar up. Its just speculation as those statistics are not available, but one thing seems clear to me: the beta driven stock and bond market moves have run their course and we are on the cusp of a change to an alpha driven move.

What’s the difference? A beta move is one where the entire market moves up without consequence to individual investment fundamentals. Its the kind of move where index funds do well as they benefit from an overall lift in the market without the need to be able to discern between “good” and “bad” stocks and bonds.

An alpha driven move is one where the entire market (stocks or bonds) treads water or drifts lower, and the only way to move a portfolio up is by owning the “good” stocks and bonds. Alpha means that a professional money manager that knows what they are doing can have a significant impact on portfolio performance.

I’ll hopefully be writing more about this in coming weeks, particularly after our next Investment Strategies newsletter is published. But for now, we need to watch the treasury auction, particularly the 10 year and 30 year maturities to see if the world is willing to loan the US money for the long term and at what price.

We are definitely in a new era as the planet’s largest debtor who has to have the rest of the world buy our debt to keep solvent. At some point, our lenders will balk at providing us funding at low rates as our ability to repay (ie, repaying debt using a deteriorating currency that returns less than 100 cents on the dollar to the lender) will come into question and much higher interest rates will be demanded.

Steven Hess, Moody’s lead analyst for the U.S.A., said this late last week on Reuters TV (and reprinted in the Investor’s Business Daily):
“The AAA rating of the U.S. is not guaranteed. So if they don’t get the deficit down in the next 3-4 years to a sustainable level, then the rating will be in jeopardy.” No doubt leading to higher rates.

Good times…


Watch For Treasury Auction to Dominate the Week

Monday, October 26th, 2009

10 Year US Treasury Bond Yield

30 Year US Treasury Bond Yield

This week will be an important week for the funding or our country’s spending agenda. We have the auctions for the longer-term debt this week, and if the last auction is any indication, yields (and our country’s expenses) are headed higher.

I’ve posted the charts of the 10-year and 30-year treasury yields above. You can see two important things on these charts:

1) yields began to increase as a result of the slack demand at the last auction a couple of weeks ago: that was due to two things: (a) after several months of falling yields as the world’s economies faltered – and we enjoyed a flight to safety benefit to our funding – the recent pick-up in economic activity has made other riskier asset classes more attractive, and hence treasuries less desirable; and (b) as this country takes on more debt, China has specifically stated our debt – particularly the longer-term debt – is not attractive to them; and

2) the moving averages are very important: you can see that the 34-day is moving up about to cross over the 13-day (one of the key signs in my investment process of a turn in the market) and even more important, the yield itself has crossed above both moving averages and is rising faster than either.

Look for higher yields on our debt which the current budget does not factor in – meaning that our deficit could potentially be greater than initially anticipated.

This is not dollar friendly nor inflation friendly.


Buy The Dip Continues

Thursday, October 22nd, 2009


Well, we’ve returned to the pattern that has become very familiar to us over the past few months. Early day selloff as follow through to previous day down market, then the under-invested step in to buy the dip. You can see it in the first hour of trading – and if you went back to many, many previous trading sessions you would see the same thing.

I’ve said it many times before – this is the strongest rally I’ve ever been a part of, and as long as there are under-invested people that have not participated in the rally since March, cash will continue to flow into this market and push it higher.

At the present, its safest to move with the crowd than against it. It won’t last forever, but its good while it does.

(note: did you ever play the game with your friends where you tried to identify which character you were in Animal House? Three guesses who most of my friends said I was…)


Program Trading Takes Us Down

Wednesday, October 21st, 2009


(sorry that the image isn’t larger – its a cut/paste from my daily monitoring software and a larger image isn’t available)

It’s been awhile since we saw a day like today, where we were positive until the last hour then the selling wave hit.

Very likely, we had several program (or automated) trading modules kick in. Could be that some use a key metric, like oil closing over $80 per barrel (remember my note the other day about how oil over $80 means that it exceeds 4% of GDP – which puts downward pressure on economic activity). Once those programs kicked in to start selling, others followed suit based upon the speed of the move down or whatever other metric the quantitative traders use in their programs.

In any event, we are back below 10,000 on the Dow and we will have to wait to see what tomorrow brings. Fundamentally, the only things different from last week are: (1) better than expected earnings reports from several economically sensitive companies – which generally signals better times ahead for the economy; and (2) oil closing above $80 for the first time in a year, which slows the economy.

The economy can grow in spite of $80 oil, it just doesn’t grow as fast. For those readers of this blog, you know that we anticipate a slow growth recovery based upon deleveraging and unemployment levels. Oil at these levels just means that instead of 1.5% growth we could have fractionally lower than that. In either case, it is not the 3% growth our economy used to experience.


The Market Continues Its Move Up

Monday, October 19th, 2009


To see a full size of this image or to play with the graphing yourself, just copy/paste the link below into your browser:$SPX&p=D&st=2007-06-01&id=p44098465403&a=175243096&listNum=1

So, we have another up day…Ho Hum 🙂

This is truly the strongest uptrend I’ve ever seen. It is unbelievable. We are just on the cusp, in my opinion, of beginning to draw in all of the people that said – after the crash – that they’d never invest in the market again. Now, they see that they’ve missed a > 50% move in the market and want in to try to recapture some of the money they lost in the crash. Most of them acted irrationally and sold at the wrong time – now the real question is are they being irrational wanting to get back in after this big move.

Generally, I’d say that after a 50% up move following a crash, we are due for a major retracement. However, this chart says we are headed to 1120 on the S&P 500 (a 50% retracement of the entire bear market, not just the post-Lehman Brothers crash).

What are the tells? (1) the Price Volume Indicators show we are in a strong uptrend; (2) the moving averages and their relationship to each other show we are in an uptrend; (3) the cash flow into the market continues; and (4) overhead resistance in the form of buyers remorse is almost negligible (see the volume by price bars along the left side of the chart).

However, near-term, we are in an overbought state and due for some consolidation. Maybe in the 5% range – my best guess is that it will look a lot like the last few consolidations: a few days of grinding sideways after earnings reports end, then a big down day or two, and the buyers will show up to push us up. We could easily hit the 50% retracement level and move through it give lack of overhead selling pressure. This is probably the best chance those on the sidelines will have to get back in.

Earnings have been on the whole very good: tech and cyclical earnings show that economic activity is beginning to pick up. We are soon going to get GDP reports from the emerging markets and I’d expect that they will be very positive and lead to further gains in those markets.

For what its worth there’s something happening here…so enjoy this video of the Buffalo Springfield from the Monterey Pop Fest, 1967


Oil Breaks Out Above Resistance

Sunday, October 18th, 2009


Doing my normal Sunday afternoon review of the markets and noticed that Friday was a breakout day for oil.

You might remember this chart from several days ago when I noted that oil was bumping up against the 38.2% retracement level and that it was acting as resistance to further up moves, but that the chart kept making higher lows in an uptrending direction.

Friday, we had the break through resistance. Will it continue up from here? Remember my rule: for a breakout to hold you have to close above prior resistance for three trading sessions or you need to close above resistance by 3%. We could easily see a move below the resistance line again, but that would be OK as long as we have a higher low along that uptrend line and move back above resistance in due course.

Assuming all of that happens, where could oil be headed?

From a fundamental standpoint, for new production to be profitable, the break even point is $70. So, there is a market need for oil to remain above $70. However, above $80, it puts a constraint on growth in our economy as energy costs exceed 4% of GDP. This is the classic push-me-pull-you and will likely represent the core of the trading range until the economy is well into recovery.

However, from a technical standpoint (technical meaning the price action that represents the psychological aspect of the traders in the market) we have the 50% retracement level or $91 per barrel. However, I’ve drawn a circle around a mid-day high point from last October around $85. That will likely act as interim resistance before we get to $91 – if we do. Demand is still weak, even though low levels of gasoline inventories surprised the market this week causing the push above resistance.

So, I still believe the trading range is between $70 and $80, but expect that we could certainly see a technical spike up which would probably resolve to the downside and move back to the primary trading range until economic conditions dictate increased demand (or we hit the point where Mexico transitions to an oil importer from an oil exporter – which is predicted to occur within the next year or so – and we have reduced supply).

Never a dull moment!


The Law of Unintended Consequences At Work

Sunday, October 18th, 2009

* From The Wall Street Journal

* OCTOBER 17, 2009

Cash for Clubbers
Congress’s fabulous golf cart stimulus.

Thanks to the federal tax credit to buy high-mileage cars that was part of the stimulus plan, Uncle Sam is now paying Americans to buy that great necessity of modern life, the golf cart.

The federal credit provides from $4,200 to $5,500 for the purchase of an electric vehicle, and when it is combined with similar incentive plans in many states the tax credits can pay for nearly the entire cost of a golf cart. Even in states that don’t have their own tax rebate plans, the federal credit is generous enough to pay for half or even two-thirds of the average sticker price of a cart, which is typically in the range of $8,000 to $10,000. “The purchase of some models could be absolutely free,” Roger Gaddis of Ada Electric Cars in Oklahoma said earlier this year. “Is that about the coolest thing you’ve ever heard?”

The golf-cart boom has followed an IRS ruling that golf carts qualify for the electric-car credit as long as they are also road worthy. These qualifying golf carts are essentially the same as normal golf carts save for adding some safety features, such as side and rearview mirrors and three-point seat belts. They typically can go 15 to 25 miles per hour.

In South Carolina, sales of these carts have been soaring as dealerships alert customers to Uncle Sam’s giveaway. “The Golf Cart Man” in the Villages of Lady Lake, Florida is running a banner online ad that declares: “GET A FREE GOLF CART. Or make $2,000 doing absolutely nothing!”

Golf Cart Man is referring to his offer in which you can buy the cart for $8,000, get a $5,300 tax credit off your 2009 income tax, lease it back for $100 a month for 27 months, at which point Golf Cart Man will buy back the cart for $2,000. “This means you own a free Golf Cart or made $2,000 cash doing absolutely nothing!!!” You can’t blame a guy for exploiting loopholes that Congress offers.

[you can find the rest of this article at the WSJ online and get their opinion on this – I’ve just excerpted the news parts of the editorial]