Cautious Bullish Stance Appropriate – Accumulate the Stronger Seasonal Sectors

Monday, August 20th, 2012

by Don Vialoux, TechTalk

Economic News This Week

FOMC minutes for the July 31st /August 1^st meeting are released at 2:00 PM EDT on Tuesday.

June Canadian Retail Sales to be released at 8:30 AM EDT on Wednesday are expected to increase 0.1% versus a gain of 0.3% in June.

July Existing Home Sales to be released at 10:00 AM EDT on Wednesday are expected to increase to 4.55 million units from 4.37 million units in June.

Weekly Initial Jobless Claims to be released at 8:30 AM EDT on Thursday are expected slip to 365,000 from 366,000 last week.

July New Home Sales to be released at 10:00 AM EDT on Thursday are expected to increase to 368,000 from 350,000 in June.

July Durable Goods Orders to be released at 8:30 AM EDT on Friday are expected to increase 2.5% versus a gain of 1.3% in June. Excluding transportation, Goods are expected to increase 0.5% versus a decline of 1.4% in June.

Earnings Reports This Week

Equity Trends

The S&P 500 Index added 12.29 points (0.87%) last week. Intermediate trend changed from down to neutral on a break above resistance at 1,415.23. Next resistance is at 1,422.38. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking.

Percent of S&P 500 stocks trading above their 50 day moving average increased last week to 81.40% from 80.20%. Percent is intermediate overbought, but has yet to show signs of peaking. Percent has reached a level where an intermediate peak above the 80% level normally leads to at least a short term correction.

Percent of S&P 500 stocks trading above their 200 day moving average increased last week to 73.40% from 70.60%. Percent remains intermediate overbought, but has yet to show signs of peaking

The ratio of S&P 500 stocks in an uptrend to a downtrend (i.e. the Up/Down ratio) increased last week to (289/128=) 2.26 from 1.92. The ratio is intermediate overbought, but has yet to show signs of peaking.

Bullish Percent Index for S&P 500 stocks increased last week to 70.00% from 67.80% and remained above its 15 day moving average. The Index remains intermediate overbought, but has yet to show signs of peaking.

The Up/Down ratio for TSX Composite stocks increased last week to (139/81=) 1.72 from 1.46. The ratio is intermediate overbought, but has yet to show signs of peaking.

Bullish Percent Index for TSX Composite stocks increased last week to 60.57% from 56.91% and remained above its 15 day moving average. The Index remains intermediate overbought, but has yet to show signs of peaking.

The TSX Composite Index gained another 199.00 points (1.67%) last week. Intermediate trend changed from down to up on a break above resistance at 11,936.16. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains negative.

Percent of TSX stocks trading above their 50 day moving average increased last week to 69.92% from 66.26%. Percent is intermediate overbought, but has yet to show signs of peaking. Peaks near the 70% level normally lead to at least a short term correction by the Index.

Percent of TSX stocks trading above their 200 day moving average increased last week to 48.37% from 40.65%. Percent continues to trend higher.

The Dow Jones Industrial Average gained another 67.25 points (0.51%) last week. Intermediate trend is up. Next resistance is at 13,338.66. The Average remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains negative.

Bullish Percent Index for Dow Jones Industrial Average stocks increased last week to 86.67% from 83.33% and remained above its 15 day moving average. The Index remains intermediate overbought, but has yet to show signs of peaking.

Bullish Percent Index for NASDAQ Composite stocks increased last week to 53.69% from 52.42% and remained above its 15 day moving average. The Index continues to trend higher.

The NASDAQ Composite Index gained another 57.74 points (1.81%) last week. Intermediate trend is up. Next resistance is at 3,134.17. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index has changed from negative to at least neutral.

The Russell 2000 Index added 18.34 points (2.29%) last week. Intermediate trend is down, but turns positive on a break above resistance at 820.44. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index has changed from negative to at least neutral.

The Dow Jones Transportation Average gained 130.83 points (2.58%) last week. Intermediate trend is down. Resistance is at 5,290.06. The Average moved back above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains negative.

The Australia All Ordinaries Composite Index added 91.02 points (2.12%) last week. Intermediate trend is down. Support is at 4,033.40 and resistance is at 4,515.00. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains neutral.

The Nikkei Average gained another 271.06 points (3.05%) last week. Intermediate trend changed from down to up on a break above resistance at 9,136.02 on Friday. The Average remains above its 20 and 50 day moving averages and moved above its 200 day moving average last week. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index has changed from negative to at least neutral.

The Shanghai Composite Index slipped another 53.92 points (2.49%) last week. Intermediate trend is down. The Index remains below its 50 and 200 day moving averages and fell below its 20 day moving averages last week. Short term momentum indicators are trending down. Strength relative to the S&P 500 Index remains negative.

The London FT Index added 0.91 (0.02%), the Frankfurt DAX Index improved 75.89 points (1.09%) and the Paris CAC Index gained 31.67 points (0.92%) last week.

The Athens Index added 21.04 points (3.40%) last week. The Index remained above its 20 and 50 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains slightly negative.

Currencies

The U.S. Dollar Index added 0.05 (0.06%) last week. Intermediate trend is up. Support is at 81.16 and resistance is at 84.10. The Index remains just below its 20 and 50 day moving averages. Short term momentum indicators are trending down. Stochastics already are oversold.

The Euro added 0.42 (0.34%) last week. Intermediate trend is down. Support is at 120.42 and resistance is at 126.93. The Euro remains below its 50 and 200 averages, but remains above its 20 day moving average. Short term momentum indicators are trending higher. Stochastics already are overbought.

The Canadian Dollar added 0.18 U.S. cents (0.17%) last week. Intermediate trend is neutral. Support is at 95.76 and resistance is at 102.05. The Dollar remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking.

The Japanese Yen fell 2.07 (1.62%) last week. Intermediate trend is down. Support is at 124.12 and resistance is at 128.77. The Yen fell below its 20, 50 and 200 day moving averages. Short term momentum indicators are trending down. Stochastics already are oversold.

Commodities

The CRB Index added 1.67 points (0.55%) last week. Intermediate trend is up. The Index remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index has turned neutral.

Gasoline dropped $0.11 (3.65%) when the futures contract rolled over. Gasoline remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains positive.

Crude oil gained another $2.39 per barrel (2.56%) last week. Intermediate trend is up. Crude remains above its 20 and 50 day moving averages and just below its 200 day moving average. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains positive.

Natural Gas fell another $0.06 per MBtu (2.15%) last week. Intermediate trend is up. Resistance has formed at $3.28. Gas remains below its 50 day moving average and fell below its 20 day moving average last week. Short term momentum indicators are trending down. Strength relative to the S&P 500 Index has changed from up to at least neutral.

The S&P Energy Index slipped 0.78 points (0.14%) last week. The Index is testing resistance at 544.25. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains positive.

The Philadelphia Oil Services Index gained 0.97 (0.42%) last week. The move above a reverse head and shoulder pattern continues. The Index remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains positive.

Gold slipped $4.00 per ounce (0.25%) last week. Intermediate trend is down. Support is at $1,526.70 and resistance is at $1,642.40. Gold remains above its 20 and 50 day moving averages and below its 200 day moving averages. Short term momentum indicators are neutral. Strength relative to the S&P 500 Index remains neutral.

The AMEX Gold Bug Index added 4.88 points (1.13%) last week. Intermediate trend is down. Support is at 372.74 and resistance is at 464.76. The Index remains above its 20 and 50 day moving averages. Short term momentum indicators are trending higher. Strength relative to gold remains positive.

Silver added $0.01 per ounce (0.04%) last week. Intermediate trend is down. Support is at $26.10 and resistance is at $28.44. Silver remains below its 200 day moving average and above its 20 and 50 day moving averages. Short term momentum indicators are trending higher. Strength relative to gold remains neutral.

Platinum jumped $68.90 per ounce (4.92%) last week following labor strife at Lonvin, the world’s third largest platinum mine. Strength relative to gold turned from negative to positive. Platinum moved above its 20 and 50 day moving average.

Palladium jumped $23.75 (4.00%) last week. Nice breakout on Friday on a Leibovit Volume Reversal! Strength relative to the S&P 500 Index had turned from negative to positive.

Copper was unchanged last week. Intermediate trend is down. Support is at $3.24 and resistance is at $3.56. Copper moved back above its 20 and 50 day moving averages on Friday. Short term momentum indicators are neutral. Strength relative to the S&P 500 Index remains negative.

The TSX Global Metals and Mining Index eased 8.48 points (0.97%) last week. Intermediate trend is down. Support is at 781.13. The Index remains above its 20 and 50 day moving averages. Short term momentum indicators are trending higher. Stochastics already are overbought. Strength relative to the S&P 500 Index has been negative and showing early signs of change.

Lumber gained another 6.89 points (2.29%) last week. Lumber remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains positive.

The Grain ETN slipped $0.22 (0.35%) last week. Units remain above their 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index has turned negative.

The Agriculture ETF added $0.23 (0.46%) last week. Intermediate trend is up. Units remain above their 20, 50 and 200 day moving averages. Short term momentum indicators are overbought and showing early signs of peaking. Strength relative to the S&P 500 Index remains negative.

Interest Rates

The yield on 10 year Treasuries increase 16.7 basis points (1.01%) last week. Short term momentum indicators are overbought, but have yet to show signs of peaking.

Conversely, price of the long term Treasury ETF fell another $4.10 (3.26%) last week.

Other Issues

The VIX Index fell another 1.29 (8.75%) last week. It broke support at 13.66 to reach a five year low. Short term momentum indicators are oversold, but have yet to show signs of bottoming.

Earnings reports to be released this week are unlikely to have a significant impact on equity markets.

Economic reports this week are expected to be neutral/positive this week. Next major event is the Jackson Hole Economic conference where Benanke and Draghi are scheduled to speak.

Macro news heats up this week. China and the Eurozone release their PMI reports on Thursday. Mid-east tensions continue to ramp up.

Short and intermediate technical indicators for most equity markets and sectors are overbought, but have yet to show signs of peaking.

North American equity markets have a history of moving flat to lower in mid-August. September historically is the weakest month of the year. Seasonality turns positive after mid-October.

Cash on the sidelines on both sides of the border is substantial and growing. However, political uncertainties (including the Fiscal Cliff) preclude major commitments by investors and corporation. The selection of Paul Ryan as the Republican Vice President candidate has boosted Romney’s ratings on the polls, but the polls continue to show a tight race.

The Bottom Line

Equity markets on both sides of the border have had a good ride since their lows set on June 4^th. The Dow Jones Industrial Average is up 10.3%, the S&P 500 Index has gained 12.0% and the TSX Composite has increased 7.9%. Investing in equity markets has become less attractive. Accumulation of seasonal trades on weakness continues to make sense as long as the seasonal trades are outperforming the market. Sectors in this category include agriculture, energy, leisure & entertainment, software and gold. A cautious bullish stance appears appropriate.

Tom Rogers’ Weekly Elliott Wave Blog

Following is a link:

http://www.tomrogers.net/signpost.htm

Special Free Services available through www.equityclock.com

Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.

To login, simply go to http://www.equityclock.com/charts/

Following is an example:

ETF News

The latest weekly update on ETFs in Canada to August 17^th is available at

http://www.etfinsight.ca/

Leibovit Volume Reversal Signal on Palladium

More information on Mark’s services is available at http://www.vrtrader.com/login/index.asp

Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.

Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc

Horizons Seasonal Rotation ETF HAC August 17^th 2012

Copyright © TechTalk

Tags: Activity Index, Advance Decline Line, Amp, August 1, Bank Of Australia, Board Minutes, Bullish Percent Index, Bullish Trend, Canadian, Canadian Market, Cap Index, Chicago Fed, Consumer Sentiment, Consumer Survey, Decline, Don Vialoux, Durable Goods Orders, Earnings, Economic News, Existing Home Sales, Head And Shoulders, Industrials, Initial Jobless Claims, Intermediate Trend, July 31st, Market Benchmarks, Market Performance, Market Strength, Momentum Indicators, Months Of The Year, Moving Averages, Nbsp, New Home Sales, Reserve Bank Of Australia, Resistance, Retail Sales, Russell 2000, Sales Numbers, Seasonal, Seasonal Trades, Seasonality, Sectors, Signs, Stocks, Transportation Goods, Uptrend, Us Dollar Index, Weighted Index
Posted in Markets | Comments Off

Being Prudent is Boring … but Prudent

Wednesday, April 25th, 2012

Even in a downtrend since late March, the market is not making it easy for those awaiting this pullback.  Selling bouts are met with oversold bounces quite quickly, and the action is not consistent in one direction for that many days in a row.  The S&P is back above the key 1370 level this morning, after breaking the key 1370 level yesterday.  And since it’s key that is leading to a lot of choppiness.  But bigger picture we continue to see a market under distribution, and what appears to be a ‘head and shoulders’ formation being created on the senior indexes.  If you are unfamiliar with the term, please google it.

Yesterday I mentioned we had two key points of support – that was last week’s lows of 1365 and the previous week’s lows of 1357.  Both came into play yesterday as the market ultimately bounced just above the latter level and finished just above the former level.   If 1357 were to break, the next key level is 1340.  But for now, as noted – the buyers keep pushing the market back above 1370 on each dip.  However each rally is on light volume, while each selling bout is on heavy – hence all the distribution days.

I’d also point out that we are having a sector rotation under the surface even as the major indexes are down less than 5%.   Just about the entire momentum growth stock universe is taking turns getting hit.  And some of it is very random – take Ulta Salon (ULTA) today.  I cannot find any news, so unless something pops up later today I have to assume some big boys are liquidating as volume is huge.  But this is exactly the type of action that can rip away a lot of your money as you search for ‘relative strength’ – pile in, waiting for a bounce day like today, only to be punched in the face.

Today we popped a bit in the broader market on some housing data but in the big picture that data remains quite weak… I think it was more of an excuse to simply get an oversold bounce going.  Yesterday’s gap (137.87) has not yet been filled but we saw the gap down post Good Friday took about a week and a half to be filled and then some chop, and then back down.   So no one should be surprised to see a run to fill this gap later today or tomorrow morning (with Apple’s blessing).  At this point with a long series of distribution days in the market we need to see a true change of character to feel like these moves up are anything but head fakes and frustrating moments for the bears.

Obviously key events are Apple earnings tonight and FOMC Meeting and Bernanke quarterly update Thursday.  But Europe has not gone away, even though the market some days act like it after their markets close.  I don’t think the path is much different than it has been repeatedly the past few years – things will downgrade, people will sit on their hands until it gets really bad, then people will panic as the situation worsens, and then Germany or the central bank will step in to kick the can.  Markets will surge on the kick the can for however long that can stays in the air.  We’ll rinse, wash, and repeat  - until we do it again.  It’s Groundhog Day as their system is broken due to lack of autonomy for each country or the ability to print their way out of messes ala UK, Japan, USA.  See Iceland for an example – they defaulted on much of their debt, devalued their currency like mad and are back to growth.  You never hear about them anymore since they had the independence to do such things.

Tags: Amp, Big Boys, Big Picture, Bounce, Bounces, Bouts, Choppiness, Day Like Today, Excuse, Google, Growth Stock, Head And Shoulders, Indexes, Light Volume, Lows, Momentum, Pullback, Rally, Relative Strength, Sector Rotation
Posted in Markets | Comments Off

586 Billion Caution Flags

Thursday, April 5th, 2012

by Market Anthropology

Over one month ago I constructed the following chart that described the two previous occasions where the largest market cap company in the world went parabolic. Not surprisingly, on both occasions it marked the beginning of the end of the run in equities.

I added Apple for contrast, considering it was now the largest market cap company in the world and had also exhibited parabolic price signatures.

Roughly six weeks later, Apple has now firmly left the parabolic stage and has gone straight to the vertical (see Here) horizon. What was a 20 year performance record of 2900% in February – quickly became over 4000%.

I find it interesting and noteworthy, that after yesterdays once again buoyant bid – Apple has pulled up next to Microsoft’s market cap high from 2000 of roughly 586 billion. The following chart has striking balance, albeit a pronounced head and shoulders top – when expressed through the relative performance of the SPX and MSWORLD indices.

Regardless of public opinion, both the informed and the ignorant – a move such as this is unsustainable for Apple and very likely marks a historical highpoint for the company for some time. With that said, and as proven on a daily basis since early December, markets can remain irrational much longer than most suspect.

It should be noted that both previous successors to the title of World’s Largest Market Cap (that went parabolic) – certainly did not go bust, but maintained a leadership position within their respective industries. Their valuations simply matured and loss the enormous momentum drive that propelled them to unsustainable growth trajectories.

Unless of course it is different this time…

Copyright © Market Anthropology

Tags: Anthropology, Beginning Of The End, Cap Company, Daily Basis, Different This Time, Growth Trajectories, Head And Shoulders, Highpoint, Leadership Position, Market Cap, Msworld, Performance Record, Public Opinion, Relative Performance, S Market, Six Weeks, Spx, Successors, Unsustainable Growth, Valuations
Posted in Markets | Comments Off

“Please move into gold,” urges Richard Russell

Thursday, January 12th, 2012

Since its precipitous decline of more than $350 from August to December last year, gold bullion has regained almost $100 of its loss. The yellow metal two days ago managed to climb above its 200-day moving average in what appears to be an upside break from a mini inverse head-and-shoulders pattern.

Source: StockCharts.com

I remain bullish on the fundamental outlook for gold for, among others, the following reasons:

• Stress in sovereign debt markets.
• A likely recession in Europe (and commensurate quantitative easing in whatever form).
• L0w real interest rates.
• Central bank buying.
• The least bullish positioning of investors in gold since 2008. (Also see yesterday’s post “Gold bounces off most oversold level since ’08 – buying time?“)

Having said this, I believe gold has more consolidation ahead before resuming its bull market. Pull-backs during this period should be used for adding to positions.

I often get asked what Richard Russell, 87-year old writer of the Dow Theory Letters, nowadays says about the outlook for gold. In short, he sees a world “economic train wreck” ahead, and views gold as the “last man standing”. A few of his comments are below.

“For a decade I have been urging my subscribers to move into gold – either physical bullion or otherwise. Now I am at it again PLEASE MOVE INTO GOLD. Those who think gold has lapsed into a bear market simply do not know what they are talking about. Gold has simply been correcting in an on-going bull market.

“This is a time when almost every central bank in the world is grinding out paper currency, grinding it out by the car-load. This is a time when people are searching for safety. People are frightened and confused. Where is the land of safety?

“There is only one safe asset on the planet: that safe asset is gold. Uninformed people believe gold is just a commodity. Wrong, gold is absolute money. Gold alone is the world’s only completely safe currency. Gold has no counter-party against it, and no central bank has ever found a way to create gold.

“Almost every nation on earth has indulged in the same kind of fiscal madness. To cover the insane spending, nations have had to create an almost endless amount of fiat currency. This avalanche of “money” has steadily reduced the buying power of almost every currency. The result is that it takes increasingly more paper currency to buy one ounce of real money – gold.

“Gold may now be ending its latest correction. If I am correct in this, gold is in a buying zone.”

The long-timer has spoken!

Source: Dow Theory Letters , January 11, 2012.

Tags: Bear Market, Buying Time, Car Load, Commodity Gold, Cou, Debt Markets, Dow Theory Letters, Gold Bullion, Head And Shoulders, Head And Shoulders Pattern, Last Man Standing, Money Gold, Moving Average, Paper Currency, Pattern Source, Precipitous Decline, Recession, Richard Russell, Sovereign Debt, Train Wreck
Posted in Markets | Comments Off

World Stock Markets – Multiple Head & Shoulders at Play?

Tuesday, May 3rd, 2011

The interesting pair of chart patterns below comes from technical analyst Chris Kimble, courtesy of dshort.com.

Kimble said: “Even though America and Europe are thousands of miles apart, their stocks markets are acting much the same. Could line (1) be the neckline of a short-term ‘bullish inverse head and shoulders pattern? Watch line (1) closely the next few days, per is this a fakeout or a breakout.”

Source: dshort.com, April 27, 2011.

Tags: Acting, Chart Patterns, Chris Kimble, Europe, Fakeout, Few Days, Head And Shoulders, Head And Shoulders Pattern, Head Shoulders, Line 1, Neckline, Stocks, Technical Analyst, World Stock Markets
Posted in Markets | Comments Off

All That is Gold Does Not Glitter

Wednesday, January 26th, 2011

by John Thomas, Mad Hedge Fund Trader

In the wake of gold’s panic inducing $105 sell off, players across the hedge fund universe are reassessing their relationship with the barbarous relic. What started out as a long term commitment is suddenly morphing into a short term fling, or maybe even a one night stand.

The yellow metal is now down 7.6% from its $1,428 peak set only four weeks ago. The technical analysts among you will recognize the chart as screaming a “head and shoulders top”, which bodes ill for short term price movements. It has definitively broken the 50 day moving average at $1,383, and you can bet that many traders spent the weekend gauging their tolerance for additional pain.

Gold is now facing some daunting challenges. High prices have cause scrapping of old jewelry to quadruple, unleashing fresh new supplies on to the market. Have you received a torrent of “come ons” from websites offering to buy your old gold? That’s what I’m talking about. Rising interest rates are also adding some tarnish, as gold yields nothing, and costs money to store and insure. A panoply of new gold related ETF’s have diverted buying away from the physical metal towards paper surrogates.

It is no longer a secret that gold is one of a few places to protect your wealth from the coming surge in inflation that Ben Bernanke’s printing presses assure. So by now, everybody and his brother are in on the trade with a big fat long position. I am a firm believer in the “canoe” theory of investment management. If too many people bunch up on one side of the craft, the whole thing tips over. Finally, gold failed my “cleaning lady” test. When Cecelia started asking me how to buy Mexican gold pesos, I knew it was time to start entertaining short plays.

Gold has been on a tear for the last seven months, rising by a thrilling 29% in a year, much of it powered hedge fund money of the hottest sort. So a serious bout of profit taking is overdue. With US equities, particularly financials and tech stocks, the flavor of the day, you can count on many of them to take profits on the yellow metal and reallocate to paper assets. The fact that the world is now solidly in a “RISK ON” mode also solidly favors some gold liquidation.

The easy target here is the October support level of $1,320. If we get some good momentum going, traders will start throwing up on their shoes, and we could touch the 200 day moving average at $1,270. My friend, technical analyst to the stars, Charles Nenner, thinks that in a worst case scenario at gold could plunge to as low as $1,000 (click here for my radio interview at http://www.madhedgefundtrader.com/january-10-2011-charles-nenner.html ).

Thanks to the yellow metal’s recent popularity, there are a profusion of instruments with which you can play the downside. You can buy the 1X bear gold ETF (DGZ), or the 2x version (GLL). You can short gold futures on the CME.

I am going to go for the easy money here and try to capture a bite of the down move of the main gold ETF (GLD). With $57 billion in assets, it is the world’s second largest ETF, right after the (SPY). It is ripe for some profit taking. It will be interesting to see if the ETF can handle liquidations on a large scale, whether it might trigger a total melt down in gold, and how many camels you can fit through the eye of a needle.

Mind you, I think gold is still going up long term, and that the old inflation adjusted high of $2,300 is a chip shot in a couple of years (click here for “The Ultra Bull Case for Gold” at http://www.madhedgefundtrader.com/december-31-2010-4.html ).

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

Tags: All That Is Gold Does Not Glitter, Barbarous Relic, Ben Bernanke, Cecelia, Cleaning Lady, Costs Money, ETF, Fund Money, Fund Trader, Gold, Head And Shoulders, Hedge Fund, Mexican Gold Pesos, New Gold, Old Gold, Old Jewelry, Panoply, Printing Presses, Profit Taking, Rising Interest Rates, Short Plays, Technical Analysts
Posted in ETFs, Gold, Markets | Comments Off

Head and Shoulders Pattern in Gold?

Monday, November 29th, 2010

by Bespoke Investment Group

While anyone doubting the ascent of gold over the last ten years has gotten their heads handed to them, the commodity’s recent pattern is beginning to resemble a head and shoulders topping pattern.  While the utility of trading on head and shoulders formations is questionable, look for increased chatter over this developing pattern in the coming days and weeks.

Copyright (c) Bespoke Investment Group

Tags: Ascent, Bespoke Investment Group, Commodity, Copyright, Gold Investment, Head And Shoulders, Head And Shoulders Pattern, Head Shoulders, Last Ten Years
Posted in Gold, Markets | Comments Off

A Kind Word for Ben

Friday, November 12th, 2010

It brings me great angst to observe professional critics – many of them acquaintances and friends of mine – rhetorically beating Fed Chairman Ben Bernanke about the head and shoulders for launching QE2. At the same time, the fact that Sarah Palin has joined the chorus brings me great joy. If what Ben is doing offends both the learned and the unlearned, then he is clearly acting unconventionally relative to orthodoxy. And this is good, very good.

As I wrote on these pages over a year ago¹, acting irresponsibly relative to conventional wisdom is precisely the right approach for reversing an economy facing, or worst yet, mired in a liquidity trap. Indeed, in that essay, I wasn’t so much preaching my own analytical sermon but reciting Mr. Bernanke’s own sermons of 2002–2003, grounded in a sermon he preached (in Boston) in 1999 to the Bank of Japan. In these sermons, Mr. Bernanke was echoing and enhancing the work of Paul Krugman in 1998 and Gauti Eggertsson and Michael Woodford in 2003.

And the bottom line of all these epistles was simple. To reverse the debt-deflation pathologies of a liquidity trap, when private sector deleveraging renders private sector demand for credit inelastic to lower interest rates, especially when the central bank’s short-term policy rate is pinned against the zero nominal lower bound, the central bank should:

• Openly coordinate itself with the fiscal authority, accommodating increased fiscal expansion, for example printing money to finance an economy-wide tax cut.
• Openly encourage higher short- to intermediate-term inflation expectations, via an interregnum of price level targeting, rather than year-by-year inflation targeting, implying that below-target inflation sins are not forgiven, but recovered with above-target inflation rates, until the constantly-growing long-term price level path is restored.

Yes, those were the pillars of Mr. Bernanke’s academic thinking about liquidity trap macroeconomics, grounded in his own life-time study of the Great Depression, as well as the analytical work of his rock-star academic peers.

Mr. Bernanke is no longer an academic, of course, but the chairman of the most powerful central bank in the world, the custodian of the global reserve currency, operating independently within, but not of, the democratically-elected United States government.

From the Academy to the Arena
While Mr. Bernanke’s academic scribblings – that’s a compliment in the economist profession! – hugely inform his current policy-making framework and maneuvers, the fact is that he is working in the real world, where out-of-the-box thinking is welcomed only when in-the-box thinking is proven manifestly wrong or ineffective. His job is not easy. He is living and working in an arena where, in the words of Keynes, “worldly wisdom teaches it is better for reputation to fail conventionally, rather than to succeed unconventionally.”²

The fact that Mr. Bernanke is willing to take the heat – domestically and internationally, from friend and foe alike – to launch QE2 is testimony to the strength of his convictions as to the purpose of his office. The Federal Reserve was created in 1913 by Congress, which constitutionally has the power “to coin money, regulate the value thereof.”³

Since that time, and especially since 1951, when the Fed negotiated its operational independence from the Treasury, the Federal Reserve’s relationship with the rest of the United States government has evolved, with the Full Employment Act of 1978, commonly known as the Humphrey Hawkins Act, providing Congress’ present mandate to the Federal Reserve:

“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”⁴

Thus, while the Federal Reserve has independence in its day-to-day monetary tactics, known as operational independence, the Fed does not have independence in the setting of the goals toward which its tactics are directed. And this is the way it should be in a democracy. Congress is responsible to the American people, and the Federal Reserve is a creation of Congress.

To its credit, Congress recognizes that democracy is inherently given to wanting the fiscal authority to spend more than it taxes, running deficits: ice cream sells much better than castor oil in getting elected. And this is particularly the case when the entire House of Representatives must stand for election every two years.

Congress – and the Executive Branch, too – would, left to their own devices, inherently, and rationally, favor a monetary authority amendable to printing up money to cover the difference between its commitment to spend and its willingness to impose taxes to pay for that spending. Recognizing this inherent and structurally inflationary impulse, Congress wisely delegated operational independence to the Federal Reserve, effectively saying “stop ourselves from ourselves.”

Tags: Asset Prices, Bank Of Japan, Ben Bernanke, Conventional Wisdom, Epistles, Fed Chairman, Fiscal Authority, Fiscal Expansion, Head And Shoulders, Inelastic, Kind Word, Legislative Mandate, Liquidity Trap, Michael Woodford, Paul Krugman, Paul McCulley, Price Stability, Professional Critics, Qe2, Sarah Palin
Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Misallocating Resources (Hussman)

Monday, July 12th, 2010

This article is a guest contribution by John P. Hussman, Ph.D., Hussman Funds.

Perhaps the best way to begin this week’s comment is to note that in decades of market analysis, I can’t remember a time that I’ve heard many analysts quoting some support or resistance level as being “critical” for the market. Some are eyeing the 1040 “neckline” on the S&P 500 “head-and-shoulders” formation. Others are eyeing the downward trendline that connects the April and June peaks for the index. Still others point to the “death cross” between the 50-day and the 200-day moving average, near the 1100 level, as being crucial. Even Richard Russell – who deserves more respect than most – has put the full weight of his analysis, over the near term anyway, on whether or not the Dow Transportation average remains above the closing level of 3792.89. The object of discussion has increasingly turned to the implications of this particular chart formation or that, as if some magic number or another absolves investors from having to think about the big picture.

All of this suggests that this is a “rent, not own” market being driven by technical traders who uniformly and somewhat predictably pile on to the sell side or the buy side when particular levels are hit. Last week, we observed the obligatory rally to prior support, closed a “gap” in the S&P 500 chart from a couple of weeks ago, and kissed the 20-day moving average. Based on this sort of “critical level” chatter, a move above the 1100 level could trigger a powerful but short-lived burst of short-covering on the relief of the “death cross”, while a move below 1040, and particularly a break in the Transports below 3792.89, would most probably cause all hell to break loose. Simply put, over the very short term, market fluctuations are likely to be driven by masses of technical traders, nearly all acting on precisely the same signals.

The key issue here is the sustainability of these moves. To the extent that an upside breakout is accompanied by a substantial relief in near-term economic concerns (e.g. a move in the ECRI Weekly Leading Index growth rate back to positive territory, or three to four weeks of plunging new claims for unemployment), one might anticipate a positive follow-through over the intermediate term. In contrast, a downside breakout accompanied by further deterioration in reliable economic indicators or poor corporate guidance would prompt a more sustained period of deterioration. Lacking such confirmation from “real” indicators of economic and corporate activity, the immediate response of breakouts or breakdowns is likely to be confined to a short burst of concerted selling or short-covering.

On a valuation basis, the S&P 500 remains about 40% above historical norms on the basis of normalized earnings. The disparity between our valuation assessment and the putative undervaluation being touted by Wall Street analysts is so great that a few remarks are in order. First, virtually every assessment that “stocks are cheap” here is based on the ratio of the S&P 500 to year-ahead operating earnings estimates, and often comes with a comparison of the resulting “earnings yield” with the depressed 10-year Treasury yield. What’s fascinating about this is that this is the same basis on which analysts deemed stocks to be about 40% undervalued just prior to the 2007 top, following which the market plunged by more than half. There’s a great deal of analysis regarding forward operating earnings that I published in 2007, but probably the most comprehensive piece was Long Term Evidence on the Fed Model and Forward Operating P/E Ratios from August 20, 2007.

Tags: Big Picture, Bill Gross, Burst, Chart Formation, Critical Level, Death Cross, Gap, Gold, Head And Shoulders, Hussman Funds, Magic Number, Market Fluctuations, Moving Average, Neckline, Resistance Level, Richard Russell, Short Covering, Sustainability, Technical Traders, Transportation Average, Transports, Trendline
Posted in Bonds, Gold, Markets, Outlook, US Stocks | Comments Off

The Stock Market Barometer: Blowing in the Wind (3/28/10)

Sunday, March 28th, 2010

WEEKLY REPORT (03-28-2010) Blowing in the Wind

“You’ll notice that Bush never spoke when Cheney was drinking water; check it out! – Robin Williams

We are seeing some interesting developments in the markets so I want to jump right into it and save all the social and political commentary for the end. I would first like to focus on the US dollar since it is the hot topic of conversation in the media, and its price movement is subject to a lot of misinterpretation. The general line of thinking espouses a new bull market for the greenback given the fact that the US economy is on the mend. As you know by now I don’t believe the economy has bottomed and I certainly don’t buy into the idea of a new bull market for the greenback. Yes, we are experiencing a reaction and it’s one of the largest to date since the dollar topped in 2001, but that doesn’t mean it’s a new bull market. Whenever you want to see the big picture in a market, it helps to get away from the here and now, and the best way to do that is with historical weekly or monthly charts. Here I have posted a twenty-year weekly chart and I would like you to take a look at it:

The obvious thing that sticks out is the massive head-and-shoulders formation with the neckline coming in at 80.35. This is a formation that took the better part of twenty years to complete and included a bull market top in 2001. Since the top was put in we have seen a sustained move down that produced two lower highs (short horizontal blue lines) mixed with reactions of 10% or more. Today we are in the midst of a third reaction and I am convinced that it will also produce another lower high. Recently the US Dollar Index moved back above the neckline but that happened with the previous reaction as well so you shouldn’t read too much into it. A week ago the US Dollar Index also closed above strong resistance at 81.32 and closed out the week at 81.60. The dollar is not yet overbought on any chart (daily, weekly, or monthly), but it is close. I suspect that sometime within the next week or two the dollar will test strong resistance at 83.35, it will become extremely overbought as it does so, and we’ll see a top in that area. With that said there is still good resistance at 82.41 to overcome and it could also produce a top. Thursday’s intraday high at 82.24 came very close to testing the latter support level and I would look for another test this coming week.

Why is the dollar so strong? I normally don’t concern myself with the “why” behind a movement, but this is an interesting case. The world economy has been deflating for almost three years and, as a result central banks around the world have been printing obscene amount of fiat currencies in an effort to reinflate the economy. The US Federal Reserve is the leader of the pack when it comes to this printing mania. Of course this alone will not produce a rally. What produces a rally is the fact that most debt around the world is denominated in US dollars and deflation reduces income, therefore raising the cost of maintaining that debt in real terms. That’s where the demand for dollars has been coming from and it has offset the significant decline in the foreign appetite for US debt. Of course the world goes about making adjustments, and that is what is happening now. They’ll cut costs, reduce debt, cut back on the consumption of raw materials, and when they are done the dollar will roll over and fall. My guess is that we are almost done with this adjustment process.

Although the dollar has been on the rise and currencies like the Euro has been taken out to the woodshed, I would like to draw your attention to an interesting phenomenon:

The Swiss Franc has given up very little ground and both the primary trend as well as the secondary trend is headed higher. The reason for this is that in the final analysis the Swiss will always protect their principal business, money! The Swiss have been in the money business for four hundred years and will remain in the money business for the foreseeable future. That means they most maintain a strong currency in spite of all the rhetoric to the contrary. Problems within the EU with Greece, Portugal, Ireland, and Spain, as well as the staggering debt load in the US, will continue to drive investors to the Franc for a long time. That’s why I’ve always recommended it to our clients.

Perhaps the most interesting market, and certainly the most misunderstood market is the gold market. The misunderstanding is due to a blend of ignorance and emotion, and it causes investors to buy high and sell low. This type of behavior has always dominated the gold market because it is the only real store of value that exists in the world today. Below I have posted a six-year weekly chart and I would like you to take a look at it:

Aside from the obvious that we are in a bull market, there is one very important feature to grasp, and that is the fact that gold is undergoing a period of consolidation right now. We have seen this before, I have highlighted three such periods on this particular chart, and they all end the same way, with an upside breakout and the gold price moving considerably higher.

Most analysts are inexperienced when it comes to gold and they miss this aspect of the yellow metal’s conduct. Actually since the bull market began back in 2001 we have seen five such periods of consolidation, and they should be appreciated for what they are, a signal of higher prices to come. The current consolidation is occurring within a range that stretches from 1,048.90 on up to 1,148.70 and is slowly shrinking, another feature that occurred in all of the previous consolidations. Unfortunately, most investors misinterpret this behavior as a sign of weakness, and having bought at higher prices, they bail out just when they should have been buying.

That’s the inherent sadistic beauty of a gold bull market, you know it’s a bull market, you know the price is going higher, and yet you lose money! In the gold pits human emotions play on investors like no other market on earth. Everybody’s in for the long run and yet everybody is upside down.

On Friday the spot price for the yellow metal closed at 1,107.10 and that was a gain of thirty cents for the week. Yet if my e-mails are any indication, you would have thought that the gold price had fallen through the floor and gold bugs were being force fed to hungry lions. I warned many of you months ago that volatility would increase and that is exactly what we are seeing. As for the immediate future that has so many investors captivated, I wouldn’t be the least bit surprised to see the yellow metal fall down to the 1,048.90 area one more time before turning back up for good and that is reflected in the following Point & Figure chart:

You can see a bearish price target of 1,040.00 and that ties in nicely to the support I mentioned earlier. What happens if support at 1,048.90 fails to hold? Then we more than likely fall down to support at 925.00 which is the bottom band of the ascending primary trend, but if history repeats itself as it has on four previous occasions, gold will hold and head much higher. I will even go so far as to say that we’ll see it start the move higher in April.

Now let’s turn our attention to the bond market as this week investors decided that US debt is not such a good deal. There were two separate auctions this week that went poorly to say the least and that drove interest rates to the highest level since December:

Like so many other markets, we can see the formation of a large head-and-shoulders pattern over a long period of time. Over the last two weeks the bond market sent an ominous signal as it broke down below the neckline and it hasn’t looked back. Most people fail to understand the consequences of such a move as higher rates mean that investors see increased risk in holding US debt and it increases the cost of doing business/servicing debt. This comes at a time when the economy teeters on the edge of a deflationary abyss and higher rates are just the ticket to push it over the edge. For people who are indebted, the rising dollar together with the rising interest rate is a double whammy that most will not recover from.

That just leaves us with stocks. The Dow continues in a liquidity drenched world of its own and that is the primary reason behind the sharp grinding move higher shown in the following chart:

The Dow is climbing at a greater than 45° angle and that is always dangerous as the slightest correction can drive it below the bottom band of the ascending trend line. You can see that in spite of a small gain on Friday, the Dow barely closed above the line. You can also see that the Dow is extremely overbought and yet the RSI and MACD are still pointed higher. Only the histogram is declining. This last week we saw the Dow climb above good resistance at 10,817 and it really hasn’t faltered although

it did fail to hold on to good gains from early morning rallies on both Thursday and Friday. The question as to how high the Dow can go is a good one as there is no further Fibonacci resistance until 11,245, and this corresponds nicely with the 11,250 price target from the preceding Point & Figure chart.

Personally I think the Dow is to be avoided at all costs. For those of you who bought the Dow on the major buy signal two weeks ago, I would think seriously about taking profits at the next new intraday high. With the Dow now sporting a price/earnings ratio of 20, and an average yield of 2.6%, it’s about as expensive as it’s been in a long time. Furthermore volume has not improved telling me that the large investors are still sitting on the sidelines. On the other hand there is no technical justification to sell the market short so all you can do is sit on the sidelines, watch, and wait. We are on the verge of another earnings season and so far profits are the result of cost cutting rather than increased sales. I’ve been around long enough to know that if you cut too deeply into your cost structure sales will suffer, and I believe that’s where we’re at right now. I suspect profits will disappoint and that has yet to be priced in. As usual, patience is required.

In conclusion we continue to be force fed the notion that things are getting better in the United States. Unfortunately, unemployment and housing do not reflect the improvement and since most Americans don’t have much else, they’re mired in the quicksand of debt and sinking deeper with each passing month. New home sales hit an all-time low in February while inventory increased to a 9.2 month supply. This is not a pattern that is con-

sistent with the idea of an expanding economy. Meanwhile real M-3 continues to contract and the signs of a further slowdown are everywhere if one only cares to look.

This week Obama’s health care program was passed by Congress and will serve to exacerbate the problems, and the debt in the US. Obliging millions of Americans to accept a program they can’t afford and won’t help them will only create social ill will. In the end the Obama plan will widen the deficit by trillions of dollars and will cost lives as an inefficient government loses patients in bureaucratic red tape. Right now everybody is being lulled to sleep by the tag team of a strong dollar and a strong Dow, but that is just so much sand in the eyes of the bear. Investors will find out the hard way that there it is not any different this time around. There is no new paradigm and history will repeat itself! As usual the average man on the street will learn this the hard way.

team@thestockmarketbarometer.com

March 28, 2010

Tags: Big Picture, Blowing In The Wind, Cheney, Drinking Water, Economy, Greenback, Head And Shoulders, Head Shoulders, Hot Topic, Massive Head, Midst, Misinterpretation, Move Down, Neckline, Political Commentary, Resistance, Robin Williams, Stock Market Barometer, Twenty Years, Us Dollar Index, Wind 3
Posted in Markets | Comments Off