"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."
~ United States Constitution, Excerpt from Article 1, Section 10 ~

A quick glance at most of the headlines recently and the primary focus seemed to be either calling a near term top in domestic equity indices or a focus on the Greek debt situation.  Why is anyone even paying attention to what is going on over there?  Until the ISDA declares a default where the underlying Credit Default Swaps (CDS) are triggered, it is all just noise.

The ECB has broken the rule of law by placing itself as the senior creditor ahead of private creditors, the Greek government is trying to pass retroactive legislation to trap private sector creditors holding out of the PSI, and the leader of Greece was not even elected by the people of Greece – how much more manipulation and insanity do we need to monitor?

Similar to the price action since 2008, central banks around the world control everything from financial markets to the ascent of political leaders.  These same political leaders help central bankers and planners control policy and decision making at the highest government levels in Europe and around the world.  It would seem that the United States should change the motto from "We the People" to "We the Bankers."

However, there is one particular asset class that even the central bankers have a hard time controlling.  While they can impact short term price action through direct currency manipulation initiatives, in the longer-term gold (GLD) is likely to move in only one direction – higher.

The price action this week reminded market participants that actions such as the Greek bailout come at a cost.  Quantitative easing and/or printing money (depending on what one wishes to call the practice of producing fiat currency out of thin air) has a direct impact on the price of gold.

Many financial pundits argue that gold has no utility, but what they fail to recognize is that gold is the senior currency to all other fiat currencies.  Silver (SLV) is also a form of currency and is senior to all other fiat currencies as well.  While one can draw the utility of gold into question, the idea that gold is the senior most currency to all other fiat currencies is not new.

The Constitution of the United States of America, which is over 200 years old, refers to gold and silver as forms of payment.   Looking back thousands of years the Romans used gold coins as a form of currency.  The idea that gold and silver are currencies is certainly not a grandiose thought or a stretch of historical concept.  Trying to depict gold as a worthless asset depends on your view and consideration of fiat currency.

There are those that would argue that the Federal Reserve of the United States is not actively manipulating economic conditions domestically or abroad.  For those that view gold as a poor investment or hedge against currency devaluation need to consider the charts illustrated below.  Take a look at the chart below:

Total Asset Growth of the Federal Reserve System – 1915 – 2012

It is rather obvious by looking at this chart that the Federal Reserve has actively sought to enter domestic and foreign financial markets.  The surge in balance sheet assets serves to prove how far the Federal Reserve Bank is willing to go to maintain markets which seemingly are only allowed to move higher over time.

This chart is bearish for nearly any form of paper backed assets.  The above referenced chart is long-term bearish for the Dollar (UUP) and Treasuries (TLT) and long-term bullish for physical gold and silver.  As the Federal Reserve continues to debase the U.S. Dollar in concert with other central banks' monetary easing programs, gold and silver prices over time are destined to move higher in virtually every form of fiat currency.

During the same time frame that the Federal Reserve has seen its balance sheet grow exponentially, the rapid rise of M2 money supply is staggering.  The long term chart of M2 is compared to gold futures in the charts presented below.
M2 Money Stock
 
M2 Money Chart

Gold Futures Monthly Chart

It is rather obvious what has happened to the price of gold as the M2 money supply has grown.  The idea that the Federal Reserve has not already destroyed a significant amount of the purchasing power of the Dollar can easily be refuted by the two charts shown above.

In the short-term, gold and silver could suffer from a pullback, but in the intermediate to longer term it is unlikely that we have seen the highs of this bull market for either metal.  As long as central banks around the world continue to print money and expand their balance sheets gold and silver will remain in a long-term bull market. The daily chart of gold futures is presented below.
 
Gold Futures Daily Chart

As can be seen above, it is not out of the question that we could see gold pullback to test one of the key moving averages in coming days/weeks.  However, I expect the key support area to hold in the event of a sharp selloff.  Ultimately, I expect to see a breakout over the resistance zone in the days/weeks ahead.  However, I would not be surprised to see gold consolidate or work marginally lower from current prices before breaking out to the upside.

Right now the primary threat in this fledgling gold rally is a short-term spike higher in the U.S. Dollar. The primary catalyst which could drive a flight to the Dollar involves the sovereign debt situation in Greece and the Eurozone as a whole.

While the short-term price action may be bearish, the intermediate to longer term time frames are quite bullish for metals as central banks will continue to race to debase their currencies.  Quantitative easing in the U.S. and around the world will become pervasive and gold prices could potentially soar in value.  The data from the Federal Reserve Bank itself suggests that they are indeed increasing the money supply.  As time has passed, the money supply and gold have seemingly grown in lockstep with one another.  Surely inquiring minds do not consider this mutual relationship between gold and the money supply to be purely coincidental.

As further evidence that the Federal Reserve continues to use quantitative easing to manipulate asset prices through direct entry into financial markets, a chart of the velocity of M2 clearly depicts that the velocity of money is declining.  I am not an expert regarding macroeconomic data, but if the velocity of money is declining to 1960's levels would it be a stretch to say that we may be going through a period of stagflation?  The chart below illustrates the Velocity of M2 Money Stock courtesy of the St. Louis Federal Reserve Bank.

Velocity of M2 Money Stock

For those unfamiliar with the term velocity of money, it is simply the rate of turnover in the overall money supply.  The velocity of M2 is expressed as the number of times that a Dollar is used to purchase final goods or services which are included in the total gross domestic product.

Conclusion

The short term technical picture in gold is a bit suspect due to overhead resistance and recent U.S. Dollar strength.  However, the longer term macro factors that impact the value of the U.S. Dollar and precious metals are all telling us the same thing.

As time wears on and central banks do even more to prop up the broader economy and failing financial institutions, it is without question in my mind that gold and silver will both benefit handsomely from these decisions being made by central bankers from around the world.

Ultimately, I am very bullish of gold and silver in the intermediate to longer-term, but in the immediate short-term frame gold could consolidate or pullback before breaking out to the upside.

Courtesy of Chris Vermeulen, www.GoldAndOilGuy.com

"Anticipate the difficult by managing the easy."
~ Lao Tzu ~

The peculiar vocabulary and concepts inhabiting an options trader's thoughts are often the source of confusion to visitors to my world.  I have often pondered that learning to understand options is a lot like learning a foreign language.  When you arrive in the country whose language you seek to learn, you need a functional vocabulary immediately.

In order to be able to understand my world, I thought it would be helpful to discuss a bit of my language since it is helpful to grasp a few basics.  I want to touch on some of the basic concepts necessary to form the basis for a functional language we can use to communicate concepts underlying a rational (hopefully) thought process leading to trade design and management.

In ruminations to come we will return to these fundamental concepts and begin to understand their function in the dynamic world of an options trader.  The nuances of their specific structures are beyond the scope of this blog.  We will return to consider these factors in virtually every trade because they re-appear each and every day in my world.  For today, just shake their hands and remember their names.

One point not often discussed is the way in which options are priced.  The quoted option price is in reality the sum of two separate components. These are referred to as the intrinsic and the extrinsic portions of the premium.  I think of these as steak and sizzle respectively.

For example, let's say AAPL has closed at around $395.  The January 390 call has 41 days to expiration and could have been bought for $18.90.  Of this sum, $5 represents intrinsic premium and $13.90 represents extrinsic or time premium.

This is an important distinction because it is the extrinsic premium which is subject to time decay and change due to variations in implied volatility.  We will get to a discussion of implied volatility in a later missive.

The intrinsic premium is subject to change solely due to changes in the price of the underlying security.  There is no sizzle in the intrinsic premium; you can buy the option today, exercise it to buy stock, sell the stock, and pocket the $5.  Of course, your trading career will not last long with that sort of trade, but my point is that the intrinsic premium has an easily calculable true value.

The situation with the extrinsic premium is quite different.  The value changes not only with time to expiration but also with the constantly changing implied volatility.  It is for this reason that an option trader must be very careful with this extrinsic component.

Depending on the specific option under consideration, extrinsic premium may represent all, a portion, or a trivial amount of the entirety of the option premium.
Another important concept is that of the "moneyness" of an option.  An individual option can be classified in one of three categories of "moneyness:"

* At-the-money
* In-the-money
* Out-of-the money

At-the-money options by definition consist of a single strike price.  Both in-the-money and out-of-the-money strikes usually contain several individual strikes within their groups.

In our example of AAPL, the at-the-money strike is the 395 strike.  The in-the-money strikes consist of all calls with strike prices below 395 and all puts with strike prices above 395.  The out-of -the-money strikes consist of all calls above the 395 strike and all puts below the 395 strike.

Obviously since the price of the underlying defines the category into which an option is classified, the category into which an individual option fits is fluid and changes dynamically with the price of the underlying asset.

The reason for taking the time to discuss in some detail this classification of "moneyness" is that there are important reliable characteristics of each type of option.
 At-the-money options characteristically contain the absolute greatest dollar amount of extrinsic premium.  In-the-money options have the least amount of extrinsic premium.  Out-of-the-money options consist entirely of extrinsic premium, and therefore only contain sizzle . . . no steak can be found there.
 
Because the functional characteristics of these three categories of options differ, it is a basic strategy to combine options of different "moneyness" to achieve trades with the best probability of success and the highest risk/reward scenarios.

For example, buying an in-the-money call and selling an at-the-money call gives birth to a call debit spread, a high probability trade structure for the trader who is bullish in the underlying.

Later will cover the stealth concept of option trading, implied volatility.  Failure to understand the impact of this variable is the most common cause of beginning options traders' failure to succeed.

Courtesy of JW Jones, http://www.optionstradingsignals.com

On July 10th 1997, the stock was trading as low as $3.16. From $3.16 to $526+ is an increase of 16,554.75% in 15 years time.  The chart is starting to look like a bubble in the making, as price is starting to go parabolic.

AAPL Long-Term Chart

When we take a look at past bubbles, we can see that Apple has now reached the top 3 of all "Bubbles".  Only eDigital and the Poseidon bubble did even better, with returns of 45,400% and 34,900% respectively…

History of Bubbles

Could Apple go even higher?  Sure!  Imagine it would rise to $1,000 per share.  It would then have gained 31,545.57%, which would be close to the Poseidon Bubble.
 In order to beat the eDigital Bubble, AAPL would almost have to triple to over $1,437.80.

AAPL Targets Based on Other Bubbles

Is it possible?  Yes… AAPL is trading at historically low price-to-Forward Earnings levels, as can be seen in the chart below.

If instead, AAPL would be trading at a Price-to-Earnings Ratio of let's say 30, and we assume profits would remain flat over the next 2 years, then Apple would be trading close to the $1,437.80 level.

In addition to the low Price-to-Earnings valuation, AAPL has a war-chest of $97.6 Billion (of which $64 Billion is off-shore), which it could use to make acquisitions, pay dividends, buyback shares, buy patents, and so on, so Apple has a lot of possibilities to grow even further.

AAPL PE & Price Chart

To put things in perspective: During the Tech Bubble, Cisco Systems (Ticker: CSCO) was trading at an insane 150 times Forward Earnings:

CSCO PE & Price Chart

Apple's gains dwarf those of Gold and Silver, even though those two assets also had a very impressive run since the beginning of the 21st century:

AAPL vs. Gold & Silver

Courtesy of Willem Weytjens, www.profitimes.com
 

Though being in the strongest sector(s) won't necessarily save you from the effects of any short-term pullback, we still want to keep studying the relative performance of each major sector since these trends are bigger than a short-term 'swing' from the market.

With that in mind, a couple of interesting leaders have emerged since late January… technology (XLK), and energy (XLE).   On a recent-relative-strength basis, those two are hot spots.

If you're more of a bargain hunter though, and would rather step into a group that's been less-than-loved lately but is starting to heat up again, consumer goods is the answer.  Some major Consumer Products ETFs are (XLY) (XLP) (IYK).

With the exception of gold (GLD) and utilities (XLU), consumer goods stocks have been the worst since late November, but have finally started to perk up again as of the beginning of this month.  Sometimes it's easier to make up lost ground than it is to fight your way into new territory the way technology and energy stocks will have to soon.

Sector Performance Comparison since November 25th

Here are the Top 10 Holdings of the 3 Consumer Goods ETFs listed:

SPDR Consumer Discretionary (XLY)

SPDR Consumer Staples (XLP)


iShares Dow Jones Consumer Goods (IYK)

As always when examining ETFs, looking at the holdings and diversification is interesting — note how the concentration in Top 10 holdings varies from 45% to 65% just among these 3 consumer products ETFs.  And also note how much is concentrated just in the Top 4 holdings in XLP and IYK — roughly 40% of XLP is in (PG) (PM) (WMT) and (KO) and 37% of IYK is in (PG) (KO) (PM) and (PEP).

Looking at how these ETFs have performed versus the S&P 500 ETF (SPY) since the market bottomed in early-October 2011 — XLY has outperformed the SPYders, whlie IYK and XLP have lagged the broad market gains by about 50%.

Trade Well,

Price Headley

The rally now stands at 12.9% since the December 19th close, which is getting to
'uncomfortable' proportions.  Yet, as Keynes said, "The market can stay irrational longer than you can stay solvent."  Bullish momentum aside, how much gas is really left in the market's tank?  We'll poke and prod things below, right after a look at the key economic data.

Economic Calendar

Last week was loaded with economic numbers, so well just hit the highlights. In order of appearance…

* Retail sales (with cars) was weaker than expected, up 0.4%.  Retail sales excluding autos from the tally was better than expected, up 0.7%.

* Industrial productivity and capacity utilization – two 'biggies' for the market's long-term trend – weren't encouraging.  Production for January was flat with December, while capacity utilization actually fell back to 78.5%.  It's too soon to be alarmed yet, but this is something we want to keep tabs on.

* Unemployment claims continue to drop…. a lot.  New claims fell to a multi-year low of 348K, while ongoing claims fell to 3.42 million, which was also a new multi-year low.

* The construction industry is busier too.  Housing starts jumped from an annualized rate of 689K for December to 699K. Issued permits were up from 671K to 676K in January.

* Inflation is under control.  Producer inflation was only up 0.1% last month, though on a core basis (minus food and energy) was up 0.4% last month.  For consumers, prices rose 0.2% on a core as well as a non-core basis.  The annualized inflation rate now stands at 2.93%.

Economic Calendar

The coming week is clearly going to be a light one, though an important one for the real estate market.  Existing home sales will be unveiled Wednesday.  Look for more of the same… an annualized rate of 4.63 million.  New home sales will be announced open Friday, and the pros are looking for the rate to increase to 315K.

S&P 500

Usually we go with a daily chart of the S&P 500 Index (SPX) (SPY) below, and then follow with a weekly chart.  This week we want to paint the bigger picture first with a weekly chart, and then drill into the daily.

The fact is, though the S&P 500 is feeling overbought;  it hasn't yet reached its absolute current ceiling.  That's around 1370, where the upper 20-week Bollinger band (gray) as well as peak from last May was.  Versus Friday's close of 1361.23, there's still a little more room for the bulls to move.  The question is, will they use it?

S&P 500 – Weekly

So does the daily chart show us anything different?  Not really – the market's still trapped somewhere between 'solid momentum' and 'this is crazy'.

For the S&P 500, that means the index is still above the 10-day (red) and 20-day (blue) moving averages, and below the upper 20-day (gray) and 50-day (orange) Bollinger bands, moving at a well-paced (read 'sustainable') clip.  It seems hard to believe, but as long the S&P 500 can stay in the zone without overheating or breaking down, this bullish trend can stay alive.

Take a look, but be sure to keep reading for some thoughts on the CBOE Volatility Index (VIX) (VXX) (VXZ).

SPX & VIX - Daily

Our concern as of last Friday (two Fridays ago) was that the VIX – for the first time in a long time – was pressing into its upper 20-day Bollinger band (orange) as well as the VIX's 50-day moving average line (purple).

An encounter with the upper Bollinger usually means a downside reversal from the VIX is on the way, and is therefore bullish for stocks.  The same goes for meeting resistance at the 50-day moving average line. Y et, it wasn't clear if the move up and into the moving average line and Bollinger band this time around was going to result in a downside move from the VIX, or if this was just the beginning of a move above the 50-day moving average line and upper 20-day band line.  If it was the latter, then this was the beginning of a bearish move for the S&P 500… provided the SPX's 20-day moving average line also (finally) at 1335.6 also failed to act as a floor.

Well, we're still no closer to an answer.

Though the VIX did peel back from those key ceilings on Monday of last week, both were tested again on Wednesday and Thursday.  And once again, both lines sent the VIX lower again, and the market rallied accordingly. 

Here's the thing – last week's effort from the VIX to punch through the upper Bollinger band line and/or its 50-day average was the second time in the last several weeks we saw such fear and worry.  The bulls ARE getting nervous here in a way they haven't since November.  It hasn't been a problem (bearish) yet, but the market's complexion IS changing even if the momentum hasn't yet.

We still ultimately need to see the VIX make a couple of closes above the 21.00 area (above its recent resistance levels) before we can fully say a pullback is underway.  But, we're closer to that move than most traders may realize.

Trade Well,

Price Headley

This is somewhat of a things that make you go hmmmmmm exercise, but let's examine this 1356 number for a second here.  The S&P 500 hit 1356 this week and put on the brakes and reversed down to 1341 in a possible terminal top move.

1356 actually has Fibonacci relationships.  If we take the last major rally which was from the Summer 2010 lows:

[BigTrends Editor's Note -- There also is a Fibonacci level at SPX 1361 that we're been aware of for some time.  This is a 76.4% retracement of the 2007 1576 market high to the infamous 666 March 2009 market low.  However, given that we tested this area previously in 2011, a breakout above this in 2012 is certainly very possible.]

1010-1370 (May 2011 highs) = 360 points
.786 of 360 is 283 points
Take 283, add it to the 1074 October lows…. you got 1356/57
That would mean this last rally so far is .786 of the 2010-11 rally.
Also, 1356/57 is right in my 1352-1376 pivot ranges for a Major 3 top as well

Evidence is mounting for a good sized correction here is my point.
Possible count, though many will argue not valid:

Wave 1- 666 to 1221- 555 points
Wave 2- 1221-1010- 211 points, .38% of 1
Wave 3- 1010-1370 360 points, .61% of 1
Wave 4- 1370-1074- 296 points… 38% of 1-3 (A bit more than 38%)
Wave 5- 1074-1356 .786 of 3

SPX Chart

Only rule violation here is Wave 4 would have delved into wave 1, which is a no-no for most E wavers.  However, I would argue that 4 often does delve into the wave 1 arena and legitimately, but that is a topic for another article.

Nonetheless… pay attention to the Fibonacci relationships… if anything they may be warning of 1356 as an interim high and top with correction starting.  This would either be a 4th wave down with the 5th and final wave up left… or we topped at 1356.  A drop below 1337 will confirm a correction at minimum to 1310 and then 1295 ranges.

Just food for thought…we have been lightening our positions and raising stops in our trading. 

Courtesy of Dave Banister, themarketrendforecast.com

On the fundamental side, the US economy appears to be slowly growing, while the Europe debt worries seem to have abated this year (or at least the negativity regarding news from Europe has abated) – and with low valuations for stocks in general, this provided the backdrop for gains in the markets.

In general the technicals are still strong for stocks, so don't be too quick to jump in the bearish side and miss out on more potential upside.  However, there are some reasons to be concerned … or at least aware of the possibility of a healthy pullback in the markets.

My main concern stems from the recent moves in the CBOE Volatility Index (VIX) (VXX) (VXZ), see the chart below.  Since the beginning of February, the VIX has been moving steadily higher — this despite a market that is basically flat with bullish undertones during this time.

As we've previously discussed, the VIX measures the activity of option traders.  A rising VIX means option premium is being purchased due to the supply/demand nature of option pricing and market making — especially in an environment where the market hasn't yet shown a big volatility spike.  And this option buying is generally in Puts.  In my view, the VIX has often become more of a "smart money" indicator in recent years, rather than the good contrarian indicator it was during much of the 1990s bull run.

So this steady move higher in the VIX makes me a little suspicious that some bad news or profit-taking in stocks could be ahead.  However, the selling could be contained and actually healthy, so once again don't be too quick to turn away from the bullish case.  Keep an eye if the VIX approaches 22.5 and 24/25 as those are key levels where it certainly could head back lower.  Overall, a VIX under 20 (which it is not currently) and heading towards 15 (or even possibly lower) sets the backdrop for further stock gains in 2012.

VIX Daily Chart with SPX

The reason we say to be cautious about getting too bearish here is the overall very strong nature of the market, especially since late-January.   See the S&P 500 Index (SPX) (SPY) chart below.  Daily Percent R has remained consistently in bullish territory this whole time, and all pullbacks have been contained within the 20 day Exponential Moving Average (purple line).

So a pullback to the 40 day Exponential Moving Average (red line) and/or the Bottom Acceleration Band (aqua), both of which are uptrending around the round 1300 level, wouldn't be surprising at this point.  But if any downside is contained there or higher, that could actually end up being a healthy springboard for further market upside.

SPX Daily Chart

Something else to keep an eye on is the pause we've seen around the SPX 1350 level — that area capped the market in 2011 and there is a key long-term Weekly Fibonacci level right around here as well.  So we've faced some logical resistance around these levels. 

Now the question is what the recent VIX trend higher means and can the market absorb a small healthy pullback and resume its uptrend, breaking through that resistance.  At this point that seems the most likely scenario to play out in the coming weeks.

A little backstory:  Lin led his California high school basketball team to a state title, but wasn't recruited by his hometown Stanford for college basketball.  He basically had to squeak his way into the Harvard basketball program (certainly not a traditional powerhouse).  After 4 good years at Harvard (graduating with an Econ degree), Lin went undrafted by the NBA and basically was the last man on the bench/first cut for a couple of teams.  Until recently when the New York Knicks were in need of a point guard.

Given the opportunity to start for the Knicks, Lin has set New York City and the basketball world alight.  5 straight wins and great point guard statistics has led to him setting NBA records for players in their first career starts.  And he is becoming the most buzzed about sports figure in America, Asia and other spots around the world.

From a motivational perspective, there are so many concepts to be gleaned from the amazing Jeremy Lin story.  Never give up, strive to keep improving, take your opportunity when it is offered, etc.  But also from the investment/trading/economics/business perspective there are a few things that can be paralleled:

The rise of modern social networking and global media can allow someone to become nearly a worldwide "household name" in an incredibly rapid amount of time.   This has implications for companies, products, technology and marketing going forward into the future.  Globalization is here to stay and companies that can/do reach multiple countries with their footprint will likely benefit the most.  McDonald's (MCD) is an example of this type of company. The major ETF for trading the Chinese market is iShares FTSE China 25 Index ETF (FXI).

Headlines from New York to Asia in a little over a week!

Obviously the personal story of Lin is a testament to hard work, perseverance, and utilizing intelligence (his "basketball IQ" appears very high).  But it also shows the short-sightedness and inability to think "outside the box" of many corporations (in this case the colleges and NBA teams who overlooked his potential to help a team win).  It took 1 coach who had little to lose who took a chance on an untraditional player.  This goes along with the investing/trading tenets of looking at things from a contrarian perspective and not being afraid to try out new indicators/methods/etc. 

The use of Bill James-inspired Sabermetric statistics in baseball (see the book and movie Money Ball) is also another example of this oversight.  Personnel people in various sports had always done things the same way … there was big resistance for years to employing new computerized analytics in evaluating player/team performance.  But the sabermetric/statistical approach has finally spread throughout the world of sports from baseball into European soccer/football and beyond. 

And the similarity between technical analysis/charting/rules-based trading and sabermetric/statistical sports analysis is fairly obvious.  For years the mainstream financial world said they ONLY used fundamental analysis and would NEVER use technical charting, despite any evidence that "the chart tells the tale".  Now, after 10+ years of a choppy trading range, one sees charting and volatility analysis on CNBC every day.

Sports lessons are often good analogies for trading because of the defined win/loss nature and the clear concepts that can be gleaned from them.  The rapid, astounding success of Jeremy Lin is just another example of this.  Beyond what we've discussed here, you certainly may see implications for yourself, your career, your investing, etc.  There is much more we could write about this developing story, but just the first week+ has already made interesting history.

If you are utilizing active investing and rules-based trading in your portfolio, this book is a must read … and is a good re-read as well.  Certainly one of the classic canons for traders (along with other books such as the Market Wizards series and Extraordinary Delusions and the Madness of Crowds).

Let's have a quick reminder of some of the timeless lessons from Livermore:

 "I absolutely believe that price movement patterns are being repated.  They are recurring patterns that appear over and over, with slight variations.  This is because market are driven by humans — and human nature never changes." 

"A prudent speculator never argues with the tape."  Another version is "“I don’t know whether I make myself plain, but I never lose my temper over the stock market.  I never argue with the tape.  Getting sore at the market doesn’t get you anywhere.”

“Don’t take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don’t be an impatient trader.”

“Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul.”

“Professional traders have always had some system or other based upon their experience and governed either by their attitude towards speculation or by their desires.”

“I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.”

“Experience has proved to me that real money made in speculating has been in commitments in a stock or commodity showing a profit right from the start.”

"In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be. The thing to do is to watch the market, read the tape to determine the limits of the get nowhere prices, and make up your mind that you will not take an interest until the prices breaks through the limit in either direction."

“If you can’t sleep at night because of your stock market position, then you have gone too far. If this is the case, then sell your position down to the sleeping level.”

“It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let this thought be written indelibly upon your mind.”

It's really amazing how well the lessons from Livermore hold up as tenets for modern-day trading and active investing.  The logical basis of technical analysis/charting ("reading the tape"), letting winners run and cutting losers short, proper mental psychology for successful trading, patience and waiting for confirmations and setups, the trend is your friend, the best trades often go your way right away, don't double down or dollar-cost average on losing trades, use a systemized approach — all of these concepts and so many more were experienced and analyzed by a successful trader nearly 100 years ago …

We're actually leaning towards the latter here, and will explore the reasons why below.  First though, let's take a step back and take a top-down look at things, beginning with the economy.

Economic Calendar

There wasn't a whole lot in the lineup for last week, economically speaking.  But, we did get a couple of biggies…..like consumer credit, for instance.

For the second month in a row, the rise in total consumer credit levels swelled way beyond expectations.  This time, rather than growing by the anticipated $8.5 billion, it grew by $19.3 billion (versus November's $20.4 billion).  Like November, a huge chunk of it stemmed from more student loans, but last month also saw a big pop in the amount of auto loans.  For better or worse, revolving (credit card) credit wasn't a big piece of the increase – it only grew by $2.8 billion, which brings it up to a total of $801 billion.

The other biggie came on the unemployment claims front; initial claims fell from 373K to 358K, but ongoing claims rose from 3.451 million to 3.515 million.  Still, both are 'trending' lower, and point to modest progress.

The only other item of interest last week wasn't actually that interesting… the Michigan Sentiment Index. It fell from 75 to 72.5 (preliminary reading).  It's not a great economic indicator though – particularly when viewed one month at a time – so we're not sweating it.

Economic Calendar

This week is another big one for economy-watchers. Here are the key items to watch for:

* Tuesday:  Did January's retail sales (with or without autos) really grow firmly?
* Wednesday:  The underestimated/underwatched capacity utilization and industrial productivity indices are both expected to show modest increases.  Though most investors don't know or care, the direction these two data sets are moving shows tremendous correlation with the market's overall trend; if they both rise again, that's a huge win for the long-term bulls.
* Thursday:  Initial and ongoing claims, as always.  Look for levels comparable to last week's.
* Thursday:  A wave of real estate/construction data starts with Thursday's housing starts and building permit numbers for January, though no dramatic changes are expected.
* Thursday:  Producer inflation is expected to be 0.3% for January (or 0.1% on a core basis).
* Friday:  Consumer inflation is also expected to be 0.3% for last month (or 0.2% on a core basis).  The 'inflation rate' is 2.96%, and trending lower.

S&P 500

Our apologies in advance for the heavy mark-ups on this week's chart. It's a necessary evil, as there's a lot going on right now, and all of it matters.

First and foremost, note that the S&P 500 (SPX) (SPY) is still in a bullish trend.  The primary floor of that trend is the rising 10-day moving average line (red), though the 20-day moving average line (blue) has acted as a floor as well.  Until the 20-day average, currently at 1323, is snapped, then any discussion of a pullback is purely a hypothetical one.  That being said…

While we've been talking at length about the technical resistance that upper Bollinger bands tend to offer, so far, neither the upper 50-day Bollinger band (green) nor the upper 20-day Bollinger band (gray) have actually prompted a pullback.  Yes, both have contained the rally, but neither have actually stopped the rally.  The SPX has simply been pushing each of them upward since early in the year, with no end in sight.

On the flipside, as was noted above, the S&P 500 has advanced 11.3% since mid-December.  More than that, the index is up 15.7% since November 25th, and has only suffered one significant dip (of 4.4%, in early December) during that time.

In other words, we're likely to be due a correction.  What better time for it to materialize than now, right when there's so much pent-up profit-taking potential?  Take a look.

S&P 500 & VIX Daily

The pullback we're talking about doesn't have to be a bull-market killer.  All it has to do is cool off the buying frenzy and inject some healthy pessimism into the increasingly-complacent minds of traders.  A 4.0% dip from last week's close of 1342.64 would likely do the trick, or maybe something like December's 4.4% dip on a close-to-close basis would be sufficient.

Here's the cool part about that projection – it's largely setting up that way anyway.

See the convergence of the lower 20-day Bollinger band (gray) and the 50-day moving average line (purple) around 1285. Both are natural technical floors for the market.  Now, compared to last week's peak close of 1351.95 (Thursday), a dip from that high close to the 1285 area would be a 4.7% pullback… roughly the same size as the December pullback.

Point being, there's already a natural floor in place to halt a selloff before it gets out of control; the bulls don't have a lot to fear.  In fact, a pullback would be a healthy event at this point, serving as a virtual 'reset; of waning bullishness.

The wrench in the works is the VIX; does Friday's encounter with its upper 20-day Bollinger band and 50-day moving average line at 22 mean it's moved as high as it's going to for a while (and by extension mean the S&P 500 has moved as lows as it's going to for a while)?

So far, we have to conclude yes, that's the case.  However, we also definitely want to keep an eye on the CBOE Volatility Index (VIX) (VXX) (VXZ) this week just because it's within striking distance of a major cross above both of those technical ceilings.  If the VIX moves above 22.0, whether or not the S&P 500 moves under the 20-day line at 1323 becomes a little irrelevant – it will be a major, and bearish, change of character for the overall market.

Sit tight in the meantime though, as it could take a couple of days for the market to gets its bearings after Friday's unexpected disruption. 

Just for a little extra perspective, here's the weekly chart of the S&P 500 (DIA) (QQQ) (IWM).  It was the second doji week (an open and a close at roughly the same level) in the last three, and continues to hint of indecision.  Notice on the weekly chart, however, that the upper Bollinger band (a 20-week band, in this case) hasn't actually been brushed yet. There's still some room to inch upward here.

S&P 500 & VIX Weekly

Trade Well,

Price Headley

With tomorrow the end of the sixth trading week of 2012 and such an impressive performance in stocks so far (7.39% gain in the S&P 500 Index based on Thursday's close), I decided to analyze the historical market performance over the first 6 calendar weeks of the year to give a unique perspective.

I was looking for correlation between a strong "First 6 weeks" and what the market does on a yearly basis.  The results were strong and surprising, in my view.

Using S&P 500 (SPX) (SPY) weekly data over the past 40 years, going back to 1972, allowed for a fairly large sample size and also a vast variety of bull, bear, and flat markets.

Here is the bulk data below, which shows the gain/loss for the first 6 weeks of the year and for the entire calendar year.  Positive gains are shown with "W", Losses with "L":

SPX Data Since 1972

The bolded "W/L"s indicate the instances where the first 6 weeks did not correlate to the full year performance.  There were only 10 times out of 40 where this occurred — in other words, 75% of the time the performance in the first 6 weeks foretold what the overall market gain/loss would be for the year.

In addition, there were only 2 instances where the market was UP in the first 6 weeks, but ended the year down — (1994 and 2011) — and both of those years had a net yearly loss of less than 1.5% (basically flat).  So this "Up beginning, Down Year" result is only 2% of the overall sample size and 8.6% of the "Up beginning" samples. 

Another way of stating that is that 91.4% of the time over the past 40 years, an Up first 6 weeks resulted in an Up year.  Thus the past data indicates that the strong open to 2012 is very likely to result in a market gain for the year or a "flat" market in the worst case scenario.

Now let's take a look at the 'leverage' that a strong year open means for the full year performance … the average of the 21 "Up 6, Up Year" years was 5.93% gain for the first 6 weeks and 19.20% gain for the year.  This gives us a "leverage factor" of 3.24.  Projecting this to the 7.39% gain the SPX has achieved thus far in 2012 (Friday's trade action notwithstanding), this gives a projected gain for the year of 23.94%.

That would push the SPX to a potential year end target of 1560.19.  This is certainly a higher number than many analysts are forecasting.  But actually, if you take a look at the SPX Weekly Chart below, this would take us right back to the highs of 2007 just before the global economic crisis hit.

SPX Weekly Chart

So you can see that this potential upside target for 2012 would in fact basically retrace all of the losses incurred since 2007.  This is also a logical resistance/pause/reversal area for the markets.

Since we've had such a strong gain in the first 6 weeks, let's also take a look back at the most similar years since 1972 to see how 2012 may shape up (if history is any guide).  There were 7 years where the market gained between 5% and 10% in the first six weeks: 

Note that the similar years (barring 2011) all had market gains of 19% to 31% on the year, which also falls in line with the leverage forecast calculated above.

The 2011 example (5.7% gain in the first 6 weeks, market ended year virtually flat unchanged) is part of the caveat to the overall very bullish tone of this data.  Please note that this "First 6 Weeks" indicator has NOT worked as a harbinger of the overall market performance in the past 3 years.  One could theorize that the "January" or "6 Week" effect may have been too widely known and traded and the market thus bit the "easy money" in the tail.

While in my view think the overall weight of the 40 years of data is strong and we should see a 'reversion to the mean', the fact that this hasn't worked correctly as a market prognostication tool since 2008 is something to keep in mind when you begin drooling over a potential run to SPX 1500+ this year.

The process of creating a system is not easy, that's why I am sharing with you my breakthrough findings on key points to help you create a more effective system.  This is part of the same process that we've used at BigTrends to design the core signals behind our real-time option trading alert programs.  Without focusing too much on the minutia involved in the day to day actions of system design I'll provide you with a template to follow in creating your next system.

* Research – The backbone to any system is quality research, especially in the often zero sum game of options trading — it's crucial to have an advantage on every level you can.  In my view, this is the step where you choose your indicators, normally based on a logical theory or observation of price action.

To create the best system you need primary indicators and supportive indicators.   Similar to your investment team, you need a leader and a support staff, and each contribution should deliver something unique.  For example, using only volume indicators is not recommended — your system would not be diversified and may overlook key signals found from other types of indicators.

* Design – When you choose your indicators you should have an end result in mind.   What is your risk appetite?  Design a system that fits your needs;  trade the right system for your goals.  The design should also consider time frames — similar to your indicators, you should have a primary time frame and a secondary (supportive) time frame for confirmations.  When we design a new system we consider the results goal in relation to the strategies used to reach those benchmarks.

* Results Driven - After researching and designing multiple systems to test, a successful trader will focus on results.  Each system that you test must be scrutinized based on its ability to surpass previously determined benchmarks.  In this step, many traders lose focus and create a false sense of success in their system — they want to believe it is better than it truly is.  A good way to circumvent over-valuing your system is to have a third party evaluate the results.

* Implementation – At this point of the process you should feel comfortable with the logistics of your system.  The system should be a strong performer based on your goals and is now ready to implement.  Most traders treat a new system much like a small child treats a new toy, they are emotionally attached instantly.  You must avoid this. 

Try this:  give the system to another person to trade – this will ensure that you are clear in your rules and trades are managed without emotion.  Finally, your initial implementation should seek to trade smaller position sizes, at least until the system is given the stamp of approval.

* Evaluate & Improve – Set a trial period for live trades, yes that's right, real trades.  Paper trading is important, backtesting is crucial, but live trading will provide proof.  Based on the research and design process you should have expectations for your system… were they met during implementation?  Focus on the best and worse trades during this period and find a common thread to exploit and improve your system.  This process is ongoing, when a system is perfected is usually when it's time to adapt to the market.  That is, the most efficient system is always being evaluated and improved.

There's much more to the science (and art) of building a profitable active investing tool — including utilizing (and creating) technical indicators, optimizing trading inputs, choosing a universe of securities, entry/exit & profit/stop rules, etc.  But incorporating a systematic approach (such as described above) to your trading will benefit your portfolio in many ways.

Trade Well,

Price Headley

With that in mind, let's have a look at the Gold (GLD) price.  The next chart shows Gold in the 1970's.  At the peak, price was trading 118.32% above the 50WEMA, and 170.04% above the 100WEMA.  WOW!

Gold 1970s Chart

Currently, Gold is only trading 7.54% above the 50WEMA and 17.71% above the 100WEMA — so compared to 1980; Gold is NOWHERE near a Bubble.

Gold Current Chart

The same counts for Mining stocks, as measured by the HUI Index (GDX), as it is trading roughly at the 50WEMA and only 5% above the 100WEMA:

HUI Weekly Chart

When we look at the Gold-to-Dow Jones Industrial Average (DJIA) (DIA) ratio, we can spot a nice uptrend, but nowhere near going vertical. 

However, when we look at the last 12 years, we can see that when price was 30%+ above the 200WEMA or 15%+ above the 50WEMA, it was time to be cautious.

On the other hand, when the ratio was 10% below the 50WEMA and 200WEMA, this offered some nice buying opportunities:

Gold/DJIA Ratio Chart

When we look at the following chart, we can see that, as long as the (reversed) Dow Jones-to-Gold ratio was above the purple line (100WEMA), stocks were in a Bull market, while in 2001, they entered a bear market when measured in "real currency" … and will continue to be in a "real" bear market as long as the purple line is not broken to the upside on a sustainable basis:

DJIA/Gold Ratio

I like to make comparisons of assets as I think history often rhymes, so here's another one which I have shown more than once.

It's Gold in 2006 vs. Gold Now, In an overlay study:

Chart 15

If 2006 is any guide, Gold could consolidate throughout the summer, before taking off sharply into 2013.  Of course, that is, as long as the comparison holds. 

Good luck investing.

Courtesy of Willem Weytjens, www.profitimes.com

The chart below shows us the "classic bubble pattern".  [BigTrends Editor's Note:  You may be familar with this chart and our recent discussions of these types of 'burst bubble' patterns.  But remember that bubbles don't occur in every security or index, only occasionally, and that this exact pattern does not necessarily occur at any given time -- but this type of parabolic upside pattern and breakdown has been seen multiple times in a variety of financial instruments since the 1970s].

Classic Bubble Pattern

Most money is made during the latest phases of any bubble, as price goes nearly vertical.  When something goes straight up, I tend to get worried.  All good things come to an end, eventually.  When something goes straight down, I am looking for ways to enter the market, as bad things come to an end as well… Eventually.

Imagine you invest in an asset that has a similar pattern as the one above… When do you sell if you are in a bubble?  How do you even know whether you are in a bubble or not?

The first thing I look at is sentiment. If sentiment is uberbullish, I become fearful.
 If sentiment is uber Bearish, I get greedy.  The second thing I look at is price action.  When I see something is going straight up, I start to worry.

However, sometimes price goes up too hard, too fast.  Below, I will show you a couple of examples:

1) Oil in 2008:
- at some point, Oil was trading 40%+ above the 50 weeks EMA.
- Oil was also trading 63% above the 100 weeks EMA.

Crude Oil Weekly, 2008

2) Nasdaq in 2000:
- at some point, the Nasdaq was trading 50%+ above the 50 weeks EMA.
- it was also trading 80% above the 100 weeks EMA.

NASDAQ Composite Weekly, 2000

3) Chinese Shanghai index in 2007:
- at some point, the index was trading 57%+ above the 50 weeks EMA.
- it was also trading 100% above the 100 weeks EMA.

Shanghai Index Weekly, 2007

4) Cotton in 2011:
- at some point, Cotton was trading 78%+ above the 50 weeks EMA.
- it was also trading 112% above the 100 weeks EMA.

Cotton Weekly, 2011

Every bubble ended the same way: they all came back down sharply.

One bubble that is currently forming in my opinion is the relative price of Natural Gas (UNG) to the price of Oil (USO).

[BigTrends Editor's Note -- the relationship/ratio between Crude Oil & Natural Gas may have fundamental factors affecting it and is also a paired chart when compared to the single index/asset charts shown in this article -- something to keep in mind.]

As we can see in the chart below, the ratio of Oil to Natural Gas fluctuated between roughly 6 and 14 from 1990 to 2009.

However, from then on, the ratio broke out of this range, and is now going vertical.
Recently, the ratio was trading 65% above its 50 weeks EMA and about 90% above its 100 weeks EMA.

Someday, I expect this ratio to come back down.

Crude Oil/Natural Gas Ratio Weekly Chart

However, when we look at the charts below – where I plotted the Silver (SLV) price on the left hand side (another classic burst bubble pattern), and Oil-to-Natural Gas ratio on the right hand side – we can see very similar patterns.

Please notice that this similarity is currently at the point when silver was trading around $31.

Silver had a small pullback and then rallied all the way to almost $50, so if the similarities between the two patterns continue to hold, Natural Gas could still get a LOT cheaper compared to Oil.

That could mean:
- rising Oil Prices
- falling Gas Prices
- a mix of the two above
- rising Oil and Natural Gas prices, whereby Oil rises faster
- falling Oil and Natural Gas Prices, whereby Natural Gas falls faster.

Silver Weekly vs Oil/Gas Ratio Weekly

Courtesy of Willem Weytjens, www.profitimes.com

We'll compare the long-term and the short-term in a second.  First, let's poke and prod last week's exhaustive economic numbers.

Economic Calendar

We got a ton of economic data last week… more than we can discuss in detail.  So, we'll hit the highlights here; all the rest can be found on the calendar below.

First and foremost, unemployment is at least a little less of a problem than it was a month ago.  The unemployment rate fell from 8.5% to 8.3%, and the government says 257K new private (non-government non-farm) jobs were created on net basis in January.  The criticisms of the numbers being touted still exist [accusations that the data we're hearing excludes a big chunk the unemployed pool] — but the fact is, the total number of working Americans is falling, and the total number of unemployed Americans is falling.

But the jobs these people are getting aren't great?  Not so fast – the average hourly wage is higher now than it was two years ago.

None of this is to say things are 'great', because everything is still a struggle.  But, things are at least getting better, even if slowly.

There was other news besides the unemployment snapshot last week, believe it or not.  New as well as continuing unemployment claims both fell.  Personal income was up by 0.5% (versus an expected growth rate of 0.4%), and spending was actually flat (versus an anticipated 0.1% increase).

The dip in spending – despite the rise in incomes – somewhat jives with the dip in consumer confidence;  the Conference Board's consumer confidence score fell from 64.8 to 61.1… a surprising pullback, all things considered.

All the rest is below.

Economic Calendar

Clearly the coming week is going to be less eventful.  In fact, it may be downright boring from an economic report standpoint.  The only item of real interest that we don't really know what to expect with is Tuesday's consumer credit.  It's unlikely we'll see another $20.4 billion increase in fixed loans, but even the anticipated $8.5 billion increase is a big deal.  [Note that almost all of December's $20.4 billion improvement stemmed from student loans. January's may not be much different.]

S&P 500

When it was all said and done, the S&P 500 (SPX) (SPY) rallied 2.17% last week, most of it on Friday following some encouraging unemployment data.  The S&P 500 as well as the Dow (DIA) (DJIA) are teetering on the brink of new 52-week highs, and the Dow actually closed at a new 52-week high close, and the NASDAQ (COMP) (QQQ) is well into new 52-week high territory.

But can the market – and the S&P 500 in particular – continue to march at its current pace?  Trend-followers have to like the direction of things, and are likely inclined to stick with the trend that's in motion.  But, at some point common sense and reality have to kick in, and suggest to the majority of investors that the indices are stretched thin at their current levels.

Just for reference, the S&P 500 has gained 11.5% since the last major low (December 19th).  And, with Friday's surge, the index is once again brushing the upper 20-day Bollinger band (dark green)… which has been containing rallies pretty reliably for a couple of years now.  Note that we didn't say 'ending rallies', but rather, 'capping rallies', meaning the S&P 500 isn't likely to accelerate from here.

That being said, a lack of a bullish parabolic move may be the least of our worries at this point.

Take a look at the CBOE Volatility Index (VIX) (VXX) (VXZ).  Though in a downtrend, it's struggling to push under its lower 20-day Bollinger band (orange) itself.  In fact, the shape of Friday's bar is another hint that – via the VIX – traders are quietly and subconsciously hedging their bullish bets.  Why do we think that?  Although the VIX closed lower, it also closed at the upper end of the daily range, telling us the bearish positions were trickling in late in the day, when push came to shove.  In fact, the VIX has been closing at the upper side of its daily range for most of the last few days; the bulls are getting a little hesitant here, despite the market's ongoing gains.

SPX & VIX – Daily

So what's the prognosis? As we've mentioned a couple of times recently, your timeframe is everything.

In the short run, even the die-hard bulls have to be getting nervous here.  The S&P 500 is not only bumping into the upper Bollinger band – which is where most of the major pullbacks have been starting lately – at the same time the VIX is straining to move any lower.  The kicker is how the S&P 500 is now 6.3% above the 50-day moving average line (purple)… an extreme distance that rarely doesn't result in a sizable contraction.  It's not started yet though.  The triggering event will be a pullback under the 20-day moving average line (blue) currently at 1308.53.  Notice how the 20-day average line acted as a floor and springboard last Monday.

In the long run though, the bulls have done some solid work in getting the market out of the funk of Q3-2011.  We got a key so-called 'Golden Cross last week, which is a cross of the 50-day moving average line above the 200-day moving average line.  With all of the last eight Golden Crosses, the market has higher six months later.  So, if you're not thinking like a long-term bull here, know that you're betting against the odds.

Earnings Scoreboard

Just a quick update on how Q4-2011 earnings season is going… in a nutshell, earnings have been as mediocre as expected.

With 273 of the S&P 500's companies having reported, bottom lines are up a mere 3.5% on a year-over-year basis.  When removing the finance sector from the equation though, the improvement ramps up to 8.2%.  Only 60% of the surprises have been positive (less than the typical 67% to 71%), while 30% of the surprises have been negative (more than the 19% to 21%).  The 'mets' rate is pretty much inline with the norm of just under 10.0%.

Trade Well,

Price Headley

Here was the original chart in 2009:

Jobless Claims & SPX

Let's revisit this indicator to see how it has held up since that time:

Jobless Claims & SPX, Current

You can see above that right at the beginning of 2010 the rate of decline in jobless claims slowed, and this also coincides with the end of the very sharp upward slope on the market trend.  However, the general trend in claims has been consistently lower since 2010 — and this is line with a generally higher market trend since that time.  Certainly the SPX has had more ups and downs but the overall trend has been higher.

From here the major concern on the jobless claims chart is what will happen when/if we reach the 2007/2008 claims levels — assuming the downward trend continues.  This coincides with the SPX approaching the 2007/2008 highs around the 1500 level, which is the clear major overhead long-term resistance on the chart.  Of course, that's still about 13% higher from here, so there is some more upside potential before we reach the crucial levels.

Just a reminder that the normally the jobs report comes out every Thursday at 8:30 am EST.  It is released by the Dept. of Labor and is available here.
 

The Elliott Wave Principle focuses on the behavior of humans and how that behavior impacts the stock market.  Rather than acting in an unpredictable manner, Ralph Nelson Elliott (in the late 1920s) noticed that the market actually ran in repetitive cycles – which were a result of investors' reactionary behavior to outside influences. 

The principle was published in Elliott's books The Wave Principle and Nature's Laws – The Secret of the Universe.  Elliott believed that humans are rhythmical beings, so all human decisions and actions could be predicted in rhythms.  So basically, we have a stock principle based on human behavior.

While Elliott's Wave Principle is based partially on the Dow Theory and incorporates Fibonacci, it expands on the belief thanks to individual wave aspects that Elliott uncovered.  According to Elliott, an impulsive wave follows the main trend – and it is comprised of five other waves, a pattern that runs infinitely (these are wave degrees).  Each impulse wave is followed by a corrective wave, which occurs in threes – creating a five/three pattern.

Robert Prechter et al are among the biggest proponents of Elliott Wave theory.  The long-term record of such analysis is a bit spotty though — they have called some big market moves very well, yet also been on the wrong side of some gigantic long-term moves.

For those who utilize these techniques, they break down waves into degrees of the pattern, each with its own name.  These degrees are not classified by their form; not by their size or duration.  Therefore, waves of the same degree may have different sizes or durations.  The waves are named:

Grand Supercycle (the longest)
Supercycle
Cycle
Primary
Intermediate
Minor
Minute
Minuette
Subminuette (the shortest)

The Grand Supercycle can take years to complete while the subminuette can take mere minutes to run its course.

Bottom Line:  Elliott Wave (and Wave Theory in general) can be fairly hard to quantify and utilize as a practical trading technique.  Certainly there is a logical basis to the fact that "waves" occur both in nature and the stock market — and the psychological implications of various waves/trends from investor behavior are important, as well.  Wave Theory technical analysis practitioners tend to be "true believers", but testing and measuring indicators for short-term active investing based on these theories/methods can be difficult.

Trade Well,

Price Headley

“I believe that banking institutions are more dangerous to our liberties than standing armies.  If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.  The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
~ Thomas Jefferson ~

Well here we are, caught between resistance in the S&P 500 around the 1,330 area and support around the 1,300 price level.  I’ve been expecting a top in the coming days and weeks ahead, but prices just continued to work higher.

One of the things that I pride myself in as a person who trades and writes about financial markets in public is that I am always honest.  If I blow a call I fess up and admit it.  When I have made mistakes in the past, I always try to learn something new from them and I discuss losing trades publicly with readers.

This time is different.  I honestly do not know if I am going to be right or wrong. The price action in the S&P 500 has been showing some bearish indicatinos short term, but a back test of 1,300 or possibly even 1,280 could give rise to a Phoenix.  Granted, the Phoenix is nothing more than Ben Bernanke’s pet, but that is a topic for a different time.

I have scanned through my list of indicators which discuss sentiment based on momentum, put/call ratio, the advance/decline line, Bullish Percent Indicators, and several ratio based indicators and they are all SCREAMING that a top is near.  The interesting thing about the previous statement is that it would have been true a week ago and mostly true two weeks ago, yet prices have continued to climb.

The daily chart of the S&P 500 Index demonstrates the recent price action that has continued to climb the “Wall of Worry” for several weeks:

S&P 500 Daily Chart

The culmination of the massive run higher for the S&P 500 was the dovish comments coming from Ben Bernanke during last Wednesday’s press release and press conference.

The U.S. & European Central Banks are seemingly in a perpetual race to debase their underlying fiat currencies.  The race will not end well.  In fact, this type of situation smells like a Ponzi scheme where Ben Bernanke and Mario Draghi (ECB President) are the wizards behind the curtains.  Their loose monetary policies and forced reflation are synthetic drugs that juice risk assets higher and ultimately Mr. Market will have his vengeance in due time.

At this point, it seems like Ben Bernanke will do anything to juice equity prices higher.  I think his hope is that they will be able to artificially keep the game going until the recovery is on a more sound footing.  However, when the entire recovery is predicated on cheap money and liquidity and is not supported by organic economic growth it just prolongs the inevitable disaster.

As an example, the daily chart of the Dow Jones Industrial Average is shown below.   I would point out that that Dow came within 35 points (0.27%) from testing the 2011 highs.  Furthermore, last week’s high for the Dow was only 1,356 points (10.55%) from reaching the all-time 2007 October high.

Dow Jones Industrial Average Daily Chart

I have argued for quite some time that the economy and the stock market are two different things.  If Bernanke and his cronies succeed in reflating the financial markets and the Dow reaches its October 2007 high in the near term, more retail investors will regard equity markets as being rigged.

Who could blame them for viewing financial markets as a giant rigged casino that stands to win while they continue to lose their hard earned capital?  We all recognize that the current economy is nowhere near as strong as it was in 2007.  But alas, the regular retail investor does not recognize that the stock market and the economy do not portray the same meaning.

One specific underlying catalyst that has gone largely unnoticed by most of the financial media during this sharp run higher in stocks is the total lack of volume associated with the march higher.  The NYSE volume over the past 2 months has been putrid when compared to historical norms.

As a trader, I am forced to take risk through a variety of trade structures.  However, the idea that a crash could be coming seems hard pressed as long as Big Bad Ben is at the wheel.

If the Russell 2000 drops 10%, I am convinced that Ben will be out making announcements that the Fed stands ready to intervene with all of the supposed tools they have at their disposal.  Let’s be honest here, they really have one tool comprised of 3 separate functions which are all a mechanism to increase liquidity in the overall system.  To express this liquidity, the following chart from the Federal Reserve shows the M2 money supply levels:

Current M2 Money Supply

The 3 functions are the printing of currency, the monetization of U.S. Treasury debt (QE, QE2, QE2.5, Operation Twist), and exceptionally low interest rates (ZIRP) near 0 for an “extended period of time (2014).”  Since monetary easing is all that the Federal Reserve has done since the financial crisis began, it begs to reason that the Federal Reserve has no other solutions or tools available.  If they did, they seemingly would have used them by now.

The first bubble they created due to loose monetary policy was the massive bubble in oil in 2008.  Fast forward to the present, and they are currently supporting another bubble in U.S. Treasury obligations.  The bubble that they will create in the future when the game finally ends will be in precious metals. T he precious metals bubble will be building while the Federal Reserve and the U.S. Treasury attempt to keep the Treasury Bond bubble from bursting.

At this point in time, if we continue down this path stocks will not protect investors adequately from inflation should the Treasury bubble burst.  I would argue that the central planning and monetary policy we have seen the past few years continues in the United States and Europe that gold, silver, and other precious metals are likely to begin their own bubble of potentially epic proportions.

As the weekly chart of gold futures illustrates below, gold has recently pulled back sharply and has broken out.  I will likely be looking for any pullbacks in gold as buying opportunities as long as support holds.

Gold Weekly Chart

In closing, for longer term investors the stock market might have some serious short term juice as cheap money and artificially low interest rates should juice returns.  However, eventually equities will start to underperform.  At that point, gold will be in the final stages of its bubble and the term parabolic could likely be applied.

If central banks around the world continue to print money there are only a few places to hide.  Precious metals and other commodities like oil will vastly outperform stocks in the long run if the Dollar continues to slide.  The real question we should be asking is who will win the race to debase, Draghi or Bernanke?

Couresty of Chris Vermeulen, www.GoldAndOilGuy.com

Using data from finviz.com, (be sure to check the financial numbers on these companies on your own before any investing or trading in them) we ran a screen with numerous factors to narrow down the list of stocks:

-Optionable & Shortable
-Market Capitalization Over $300 Million
-Average Daily Volume Over 500k
-Price/Earnings (PE) Ratio Under 30
-Sales Growth Quarter-Over-Quarter (Q/Q) Over 25%
-Return On Assets (ROA) Over 20%
-Return On Equity (ROE) Over 20%
-Return On Investment (ROI) Over 20%
-Gross Profit Margin Over 20%
-Operating Margin Over 20%
-Net Profit Margin Over 20%

This narrowed down the universe to 16 stocks, some of which are very widely known and traded, and others less so.  Take a look at the table below:

You can see that 14 of these 16 names are up year-to-date (YTD), with 11 of the 16 up over 10%.  These are the types of names that will likely outperform during market upmoves.  The current P/E ratios range from 4 to 28 according to this data (this number is something that may require further research due to the idiosyncrasies of an individual quarter).  Remember that these are companies showing over 25% growth in quarterly sales, with strong profit margins to turn those revenues into profits — yet the current P/E ratios are in the "reasonable" range below 30.

Big name tech stocks like Apple (AAPL), Priceline (PCLN) and NetEase (NTES) are among the list, as well as other techs and biotechs including BroadSoft (BSFT), IPG Photonics (IPGP), Jazz Pharmaceuticals (JAZZ), Spectrum Pharmaceuticals (SPPI) and Spreadtrum Communications (SPRD)– but also (and perhaps more surprisingly), there are many categorized under the "Basic Materials" sector. 

Nearly half of the list is among this materials group, with Industrial Metals, Gold, Silver, Oil/Gas, and Copper among those represented.  ETFs that represent those materials sectors include (XLB) (GLD) (SLV) (XME) (XLE) (USO) and (JJN) among others.

Let's do a quick thumbnail on the materials stocks that turned up in the screen, leaving out Leucadia National (LUK) which does have oil/gas operations but is in many diversified businesses:

BHP Billiton (BHP) - Australian diversified mining giant, next interim earnings report due February 8.  Very strong reported profit and return margins.  Dividend over 2%.  Very big float of 2.66 billion shares.

Compania Mina Buenaventura (BVN) – Peruvian mining firm, next earnings release on February 28.  Also has strong reported profit and return margins.  Dividend close to 1%.

Great Panther Silver (GPL) - Canadian based miner, this is a fairly small cap name and low priced stock that barely made it through our screen — always be a bit more cautious and thorough when dealing with stocks below $5/share and also those with smaller market caps.  Next reporting due mid-February. 

Gulfport Energy (GPOR) - US based oil & gas exploration.  Strong profit and return margins, no dividend.  Next reporting due early-February.

Pioneer Southwest Energy (PSE) – US based oil & gas assets.  Limited Partnership founded in 2007, subsidiary of Pioneer Natural Resources (PXD).  Dividend over 7%, but very high dividend yield indicates research needed on the safety of the stream.  Very high profit and return margins.  Next earnings due February 6.

Southern Copper Corp (SCCO) – US based miner.  Very strong profit and return margins.  Dividend yield was over 6%, but the company just announced its latest dividend will be around 0.19 per share (plus a small stock dividend) vs 0.70 per share in previous quarter.  This lowered the yield greatly and caused a selloff in the stock.  This is an example of the risk of playing a stock purely for a dividend stream that may or may not be a safe consistent one.  Earnings due this week.

Silvercorp Metals (SVM) - Canada based miner.  A bit smaller cap and lower priced stock below $10/share.  Good profit and return margins, dividend around 1%.  Next earnings report due February 9. 

All of these names bar PSE are outperforming the market in 2012, as we've seen a rebound in the prices of Gold, Silver, Copper, etc.  However, over 12 months only GPOR & GPL are outperforming the S&P 500 (SPY) – SVM & SCCO being the biggest losers.  See the performance tables below:

GPL – Yellow
SVM – Purple
SCCO – Aqua
GPOR – Red
BHP – Gray
BVN – Green
SPY – White
PSE – Orange

Bottom line, our screen came up with some interesting names.  We were looking for companies with growing revenues & strong profit margins here, but also reasonably priced.  The number of basic materials names on the list certainly stands out — it shows the strong profit margins among many names in that sector, but also incorporates the decline in metals prices.  These companies should be well positioned to benefit and outperform if the 2012 rally in metals has some legs.  The technology and biotech/pharma names on the list may well include some very big standouts as well, but that would be in a different article…

We'll look at what it's going to take to push stocks over the edge in a second.  First we want take a top-down look at things, beginning with the economy.

Economic Calendar

A pretty busy week last week, particularly on the real estate front – pending home sales fell 3.5% in December, while new home sales fell from an annualized rate of 314K to 307K.  Part of that can be chalked up to seasonality effects, but part of it can't.

As for unemployment, new claims rose to 377K (from 356), and continuing claims moved up from 3.466 million to 3.554 million.  Though both were higher, both trends are still broadly pointed lower.

The big news was Q4's GDP growth rate; the economy grew by an annualized rate of 2.8% last quarter.  For the year the overall growth rate was only 1.6%, which is weak by all standards, yet better than most were expecting around the middle of the year.  Perhaps more important though, is the current trend.  Fourth quarter was the third straight quarter the GDP rate improved, making it tough to argue that the economy is slowing down.  The data says it is accelerating.

Economic Calendar

The coming week is going to be nothing less than crazy – we've got 26 major economic data items in the lineup, with most of it being important.  We'll limit our look to the most important of them.

The big ones begin on Monday, with personal income and personal spending.  Both were up 0.1% in November, but incomes are expected to be 0.4% better for December, while spending is forecasted to have only grown another 0.1%.

Tuesday's Consumer Confidence should be noted too.  The pros say it's on pace to rise from 64.5 to 67, mirroring last week's increase in the Michigan Sentiment Index score.  It will be the fourth straight increase if it rolls in as expected, and close to the multi-year high levels we saw in the earliest part of 2011.  Again, it is completely at odds with recent pessimistic assumptions.

The fireworks really begin late in the week though, when we get the next batch of employment numbers.  Payroll (jobs) numbers are expected to be positive again, but not as strong as December's growth.  The government says private payroll numbers will increase by 145K (versus a 212K increase in December), while ADP is looking for 175K new jobs to be created last month (versus 325K in December).  Still, the unemployment rate isn't expected to budge from 8.5%. 

S&P 500

The good news is, the S&P 500 Index (SPX) (SPY) is still moving up within the confines of that bullish channel we plotted a couple of weeks ago [see the orange lines on our chart below].  As long as the support side of that channel holds up, the bulls are ok.  Simultaneously, the bulls are getting a boost from the fact that the VIX (VXX) (VXZ) is still pressing downward, into its lower Bollinger band.

Yet, there's still something not quite right about the rally effort in its current state.

We've mentioned the SPX's upper Bollinger band before as a ceiling.  And it was still ceiling this past week as well, as the index bumped into it on Thursday and peeled back without much hesitation.  However, given that the upper band was still rising and the market's broad trend remained a bullish one, it wasn't a problem – the upper Bollinger band was simply a guidepost.

Now, however, things have changed in that regard.  As of last week, the upper Bollinger band is no longer sloped upward. Instead, it's flattened out – a precursor starting to point lower.  It's still too soon to say it's insurmountable, but it's not a step in the right direction.

Nevertheless, the line in the sand we really want to keep an eye on is that lower edge of the rising channel.  It was at 1311 as of Friday, and inches a little higher each day.  If and when it snaps, that'll be the first real sign of trouble in a long time.

SPX & VIX- Daily

Just for a little more perspective, take a look at the weekly chart – same parameters, same settings . The bullish channel is still clear, and the upper Bollinger band is still starting to flatten out.  That's not any different than the view of the daily chart.  It's with the weekly chart, however, that we can see something alarming that we haven't seen in a long, long time…. indecision.

Last week's bar is called a doji, where the open and close are essentially at the same level (1316), and that close is pretty much in the middle the week's high-to-low range.  Generally speaking, it's a sign of indecision, and frequently a sign of a reversal.  To see one materialize after a six week, 8.0% runup only bolsters the likelihood of a reversal. 

Again, it's not unraveling yet.  And the weekly chart itself looks a little less vulnerable than the daily chart does, as there's a little more room for the market to keep rising while the VIX keeps falling.  So, from a trend-watching perspective we have to remain on the bullish side of the fence.  But, this rally is getting stretched very thin here.

SPX & VIX - Weekly

Sector Performance

It's been a while since we looked at relative sector performance, largely because there was no reason to – they were all equally hot and cold between August and December.  Now though, we're starting to see some real (and persistent) leadership emerge.  That leadership, however, is coming from unexpected places.

Ok, the strength of the basic materials (XLB) sector isn't a total surprise.  The economy is still clearly chugging along (see the economic update above), and even the recent lowering of the inflation rate still leaves it at 'inflationary' levels.  So, we can count on more of the same from the materials group.  The other two emerging leaders, however – gold (GLD) and real estate (XHB) (VNQ) - may be surprises.

For gold, the surprise comes in the form of a complete turnaround from a December implosion.  The buyers have been too persistent since January to just chalk it up to volatility though.

As for real estate (REITS), it's not a turnaround of anything.  Rather, real estate has just cranking out progress for weeks now, and the fruits of that consistent labor are finally starting to be recognized.

Sector Performance since November 25th, 2011

Just as a reminder, the relative sector performance analysis is an ongoing thing – not a one-time snapshot to embrace and cling to until further notice.  There was just a little point in looking at it until recently.  Now that leaders and laggards are emerging though, we'll start taking this look on a regular basis.

Trade Well,

Price Headley

I've long been a proponent of the benefit of having a strong currency, in whatever country you live in.  In our case, it is the US Dollar.  While some say that a weaker Dollar allows for our manufacturers to produce cheaper exports (thus boosting our economy and job situation) — in general the benefits of a strong currency far outweigh the alternative, in my view.

A strong currency allows consumers to have a higher standard of living on a relative basis than citizens of other countries … imported products are relatively cheaper.  It also certainly makes traveling overseas cheaper as well.  And as an indication of the general fiscal state and from a psychological perspective, a strong currency is a good thing. 

And don't forget that strong currencies are where "flight to quality" money goes to park itself.  Imagine if the Dollar & US Treasuries completely lost their place as a world pre-eminent safety zone … because currently the money that is parked there often goes right into the US stock markets when the times comes to re-allocate.  That's not likely to happen soon, however.
 
That aside, there really is no definitive long-term correlation between the Dollar and other risk assets like Stocks, Gold, Bonds & Oil.  Despite what some 'experts' would like you to think.  There have been shorter-term correlations throughout history, but they have varied both in strength and duration.

As an example, during periods of a strong Dollar in the 1980s and 1990s both our economy and stock markets were very strong – Bonds also rallied during those times (interest rates dropped).  Meanwhile during those periods Oil & Gold were relatively weak.  Some of those correlations have reversed or slowed since that time period.

Nonetheless, let's take a look at the current scenario vis-a-vis the Dollar and other assets.  Recently the Dollar has shown some strength, mostly due to weakness and uncertainty about the Euro currency (FXE).  On an interesting side note, despite the recent Euro weakness, it still is about $1.30/1 Euro — while when the Euro was founded in the late 1990s  it was anticipated (and traded in) that it would largely be in the range of $0.80 to $1.20 — somewhat 'pinned' around $1.00/1 Euro

We'll be using UUP ETF (green) for the Dollar, SPY (red) for US Stocks, TLT (blue) for US Treasuries, USO (gray) for Crude Oil, and GLD (yellow) for Gold.

The first chart below is SPY vs UUP performance since UUP basically topped in late 2008 — this also was one of the key market bottoms, although it  famously reached a lower panic low in March 2009.  Note that the rebound in stocks we've seen since that time has been accompanied by a generally lower trending Dollar.  This has provided a backdrop for higher stock prices it appears, so keep an eye if the rising UUP breaks above its long-term trendline.

SPY vs UUP Long-Term Chart

SPY vs UUP Short-Term Chart

The shorter-term UUP vs SPY daily chart above shows the strength in the Dollar since late-August.  Note that there really hasn't been a correlation here with the SPYders … as we mentioned, these inter-relationships between different assets aren't set in stone rules.

Next below is the Crude Oil vs Dollar chart — again here we see that UUP has been rallying, but in general there hasn't been a strong correlation or affect from that move on USO prices.  Some say that a rising Dollar makes Crude Oil prices rise, but once again this is not a "permanent" relationship.

USO vs UUP Short-Term Chart

We do see much more of a correlation when we look at the long-term Treasury Bond ETF (TLT) and the Dollar ETF (UUP), see the chart below.  Both of these have rallied very closely in tandem during the time frame examined.  This is somewhat logical as these are often "safety assets" where cash is parked on the sidelines.  Also take note that TLT has outperformed UUP along the way.

TLT vs UUP Short-Term Chart

Finally we examine Gold ETF(GLD) versus Dollar ETF (UUP), below.  Here we do see what looks like an inverse correlation.  The strength in UUP does look to be hindering the performance of GLD.  This relationship does have some historical backing, as some believe that money shifts between hard money assets like gold into soft paper money assets like currency.

GLD vs UUP Short-Term Chart

Bottom line is the Dollar in the form of ETF UUP has been showing some strength recently, mostly at the expense of the Euro (FXE ETF).  But long-term, the Dollar is still relatively weak and is approaching a long-term trendline that could possibly provide resistance.  Certainly news events out of Europe, Asia and economic developments here will have a big impact on 2012 Dollar performance.

Secondly, keep an eye on the correlations between the Dollar and major assets like Stocks, Bonds, Oil & Gold – but remember that none of these relationships are permanent in and of themselves.  Currently we do see a short-term positive correlation between Bonds & Dollar and a short-term inverse one between Dollar & Gold.  Longer-term, there may be an inverse relationship between Dollar & Stocks that bears watching, but that's not certain.

We'll see exactly how much luck the market's pushing in a second, right after we slice and dice the key economic numbers.

Economic Calendar

A pretty busy week last week, and overall, a better than expected one.

As we mentioned in the last Weekly Market Outlook, we were getting two big (and underestimated) numbers for the long-term market on Wednesday…. capacity utilization, and industrial production.  Whichever direction they're pointed, so too is the market [the correlation is amazingly high].

Well, as it turns out, there's more going on economically than the short-term bears care to admit.  Productivity reversed a 0.3% contraction on November with a 0.4% expansion in December, and capacity utilization ramped up from 77.8% to 78.1% last month.  Though not completely back on track yet, this is an important rebound effort.

S&P 500 vs. Capacity Utilization and Industrial Production Index

We also got some good news in the inflation front – there isn't any, or at least not much.  For consumers, on a core basis (excluding food and energy) prices were higher by only 0.1%, or not at all on an overall basis.  Producer price inflation actually fell 0.1% in December, and on a core basis was only up 0.3%.  The annualized inflation 'rate' now stands at 2.96% – very tolerable.

On the real estate front, we're seeing things perk up as well.  Housing starts fell from 685K to 657K for December, while building permits held steady around 680K (at 679K for December).  That's fairly solid anyway, but quite strong given the time of year.

The rest is below.

Economic Calendar

This week's going to be fairly busy too, though things don't get hopping until late in the week.

Thursday's initial and continuing unemployment claims are going to be key.  The trend is decidedly downward, but has been falling even faster than expected of late.  The pros are looking for initial claims to rise from 352K two weeks ago to 375K last week, but that's very much an above trend number.  Ongoing claims are expected to move from 3.432M to 3.55 million two weeks ago, but again, these numbers have been rolling in better than anticipated.

Like it or not (and not just with these numbers), the jobs picture is getting better and better.

Also this week we'll get the preliminary calculation for Q4's GDP.  All indications so far point to an annualized growth rate of 3.1%… a real upgrade from the prior quarter's 1.8% growth.  The improved GDP figure jives with most of the other improving economic data we're seeing though.

S&P 500 Outlook

We were worried about it a week ago, though so far it's been an unnecessary worry.  The concern was that the S&P 500 (SPX) (SPY) was getting overbought/overextended as it inches its way into the upper 40-day Bollinger band, currently at 1328.  We also noted how the index was moving upward within a rising triangle/wedge shape.  Well, that's still going on – the market's just 2.0% further into bullish channel.  And, the upper Bollinger band still hasn't actually been brushed….

….But boy are things getting tight – there's not a lot of room left inside that wedge.

That being said, the wedge itself is becoming more and more of a liability.  As you can somewhat tell, the ceiling and floor of the wedge are not just rising, but they/re also converging.  These 'ascending wedges are nice while they last, but they tend to result in some fairly sizeable [though that's all relative] pullbacks.  Just think of it as a "the higher they fly, the farther they fall" premise.

The situation is aggravated by the harsh reality that there are no other floors in immediate sight other than the floor of the triangle pattern (orange).  If things go sour – as they're apt to – a small misstep could turn into a big misstep pretty quickly, and we could be revisiting the 1270 area or so soon.  Take a look.

S&P 500 – Daily

Oh wait – it gets worse than that.  Did you notice the VIX?  It's made a strong downward thrust over the past three trading days.  The direction is bullish for stocks, but the move is a little bit too intense… it's knocking on the door of its lower Bollinger band at 17.6.

There's a possibility the VIX could simply bump into that lower band and just gently guide it lower (as we saw for a bit back in mid-December).  At this velocity though, paired with the way the S&P 500 is already staining to add the recent gains, a bounce from the VIX seems a little more likely.

Bottom line?  The momentum is still carrying stocks upward, and the volume on the way up of late – contrary to popular belief – has been getting stronger rather than weaker.  That's bullish.  Nevertheless, there's just a little too much pressure at these levels, and we need to bleed some of it off sooner than later.  A blowoff top (a major gain on high volume) would do the trick, though a move under the lower edge of the wedge around 1300 would also flag the beginning of that correction.  Just be ready.

Also, since we showed it to you last week, here's another look at the weekly chart… just for a little more perspective.  Same story though – the direction looks right, but it looks like we're reaching the near-term limits.

S&P 500 – Weekly

Earnings Results, Q4-2011

Though we're just getting started, it's not too soon to start keeping tabs on last quarter's earnings results, just to see if any trends develop.  So far only 77 (15%) of those 500 companies have reported.  Of them, 48 posted an earnings increase, and 26 posted lower numbers; three said there was no change.  The average earnings improvement is 11.5%, while the average earnings decline has been 48%.  The surprise beat/miss ratio is 47 to 22 (with 8 of these companies meeting estimates).  So far, that's actually sub-par.

As it stands right now, the SPX is on pace to earn $23.31 per share (operating), or $22.36 on a GAAP basis.  That's well under the $24.39 forecasted as of the end of calendar 2011.  That forecast was only for an 8.2% improvement as it was, and so far we're not even going to reach that mark.  Then again, only 15% of companies have reported – the number still has some time to increase before the end of earnings season.

We'll keep you updated as things develop, particularly on the sector front.  FYI though, Q4's big winner is supposed to be the energy sector… with an average 21% improvement in earnings.

Trade Well,

Price Headley

So let's look at the charts and see what they tell us about Gold & Silver.  We'll be using SPDR Gold Trust (GLD) for Gold  and iShares Silver Trust (SLV) for Silver.

Note below the long-term GLD trend on the weekly chart, where Percent R remained above mid-levels throughout this entire trend.  This uptrend was broken in the late part of 2011, and we subsequently saw Weekly Percent R move down to areas not seen since 2008.

The question here is whether the GLD uptrend is over for the foreseeable future or will it have a consolidation and possible rebound in 2012 … at this point the jury is out on this, but I would lean towards the second scenario at this time. 

The GLD uptrend never got quite as parabolic as SLV did, although there was some acceleration in Summer 2011.  If GLD had taken off parabolically to the upside to 200/250/300 for example, then a breakdown would have been inevitable, sharp and long-lasting.

This pullback, while certainly the most severe in several years, could result in a consolidation and rally in 2012.  This isn't guaranteed and more downside could be ahead,, but we have seen a nice bounce in recent weeks after the ETF tested it's Bottom Weekly Acceleration Band.  Holding that suport (currently around 150) and also holding above its 40 Week Moving Average (simple and/or exponential), which is around 160, will be important to whether GLD will suffer more downside in 2012 or not.

Gold Weekly Chart

So has Silver been a better choice since Gold broke down?  The simple answer is no.  Even though SLV broke down several months before GLD peaked, it's actually lost twice as much since the GLD top.  See the chart below GLD is yellow & SLV is white.

GLD & SLV Performance Chart

While there is the possibility that Silver may rebound more if/when Gold stages a rebound, at this time we would say to separate these two metals in terms of trading.  GLD looks more attractive for potential rebound players and has also shown less downside volatility.

The Gold story looks far from over and we may yet see another big upside move in 2012 … the parabolic rally that many anticipated has to occur sooner or later, doesn't it?   Maybe it begins this year … but also remember that parabolic upmoves always end badly.   In general terms, it's fine to ride those higher while they last,  you don't want to fight a strong uptrend — but limit position size and take profits quickly along the way so you don't get caught holding the bag when they inevitably correct sharply.
 

Let's take a look at some of the major Asian & Pacific markets using the most liquid & popular ETF vehicles.

For China, we'll use iShares China 25 (FXI) (green in the charts below).
For Japan, iShares Japan (EWJ) (red in the charts below).
For Pacific Region, iShares Pacific Ex-Japan (EPP) (yellow) (this holds Australia, Hong Kong, New Zealand & Singapore shares).
For India, PowerShares India (PIN) (purple).

Despite great differences in the makeup of these various countries and their individual markets & stocks, you can see in the performance chart below that FXI, EWJ and EPP have been very correlated since 2011.  On a net basis, they are all down between 9% and 13% in this time frame.  And while the performance trendlines have shown some periods of one or another diverging, they have tended to revert to a similar mean.

India has been a different story.  Whether looking at PIN or another major India ETF, WisdomTree India (EPI), it has been a clear laggard versus these other regional ETFs.  As you can see below, basically its performance has been twice as bad.

FXI EWJ EPP PIN Performance Since 2011

While we're still early in 2012, there has been somewhat of a de-coupling of these ETFs that I find interesting.  Take a look at the 2012 performance chart below:

FXI EWJ EPP PIN Performance In 2012

Thus far this year the loser has become the winner, with EPI outpacing the other Asian ETFs.  Additionally, while all the ETFs are higher, the correlation between them hasn't been as strong — considering the wider range of 3% to 14% net gains.  Japan has been the laggard thus far in 2012.

Bottom line at this point is that the extremely close performance correlation between FXI, EPP and EWJ may be in the process of breaking down.  This still isn't confirmed over a longer-term period, however.  Less correlation is generally a healthier sign, in my view, as it shows less overall group think and mass accumulation/distribution by large firms.

The other thing to keep an eye on is the possible re-emergence of India stocks in 2012.  PIN has been downtrending since late-2010 and we may see a significant retracement of some of the losses in 2012.

Generally when investors are concerned about the markets they buy Puts for downside protection — and with the forces of supply/demand, the increased buying pressure for Puts makes option premium prices (and the VIX rise).

The VIX was often viewed as a good contrarian indicator for the markets, especially during the steady uptrends of the 1990s and parts of the 2000s.  It would reliably spike on a market pullback and provide a good low-risk entry point for bullish stock positions.

However, in recent years the VIX seems to have become more of a 'smart money' type early warning signal in my analysis.  An elevated VIX has generally meant that risk is also elevated and traders should proceed with caution in bullish trades.

We just saw a significant decline in the VIX below a key level, the first such weekly close below the round 20 level since July 2011 – but a better comparison may be the VIX close below in 20 in October 2010.

Take a look at the VIX Weekly Chart below with the SPX at the bottom:

VIX Weekly Chart with SPX

Note the similarity to late-2010, when the VIX breached 20 after an extended run of high volatility.  This was in the midst of a stock rally, and the rally continued for many months.  The VIX remained below 20 but also the key 24/25 area throughout virtually all of this run.

Round numbers on the VIX are often significant, you can see that 15, 20, 30 & 40 have all been important from a technical basis in recent years.  The 25 area (or actually closer to 24) is also important.  This is an area that contained the VIX on market pullbacks/VIX pops during the previous market rally.  It's also contained upside in recent weeks.

Watch the VIX — keeping steadily below 20 is important, but also if it remains below the 24/25 area without consecutive closes above that number, the bull trend remains intact for the broad stock market in my analysis.