Stock Chartist

More Stocks on the Move

noreply@blogger.com (Joseph Meth) — Sat, 07 Nov 2009 14:53:00 +0000

I did a little market researching this weekend and visited two, outstanding but dramatically different retailers: Whole Foods and Ikea. And even though they cater to two different clientele, I found one thing they had in common: both were filled with shopping families lugging their kids and totting bags full of stuff. It sure didn't look like these stores were suffering much from the 10.2% (or close to 17% as some say when you add in those who stopped looking) unemployment.

At the end of October, I inserted some chart projections and outlined the following game plan:

"If the market successfully bounces around 1018, there's a possibility it could then lunge ahead .... for a final gasping 10.5% gain to 1125..... The 1125-1150 range of significant for several reasons: 1) it's been mentioned by many analysts as the high for the year and 2) it's on the extension of top boundary of that channel....Violating the 50- (and 200-) day moving average wasn't calamitous in July (the market then proceeded to surge ahead by over 25%). Another big, though not as extreme, move may follow this violation. Simultaneously, the 200- may cross the 300-dma and the 300-could turn up paving the way more gains later."

The market did touch an intra-day low of 1029.38 (pretty close to 1018, wouldn't you say) a couple of days later and has since jumped to 1069.30. Even with a consolidation or correction anticipated just over the horizon (I can't tell just yet how severe or deep it will be), it's might also be prudent to replace some of the stocks that you're pruning some of the losers out of your portfolio with better performers just in case the bull market surprises us all and continues moving higher and longer than expected. If there's another 6-7% left before a correction begins (or, if I'm wrong and the market continues heading even higher) then what sorts of stocks might lead in addition to the precious metals, energy and other groups or stocks mentioned here previously.

Last July, I outlined a screen called "Stocks on the Move" and presented a spreadsheet of 135 stocks meeting the following criteria:

Price per share > $15
Price percentage change today > 0.5%
Relative Strength Indicator today > top 50%
MoneyStream Surge for past week > top 50% (proprietary to Telechart grew out of joint venture with a large regional brokerage firm to develop a price/volume indicator. The result is an indicator with much the same objectives as OBV and is interpreted in the same way you would interpret OBV. Generally, you look for divergences.)
EPS percentage change from 4 qtrs back > top 50%
Volume surge over past 5 days > top 50%

Since then, those stocks have appreciated, on average, the marginally more than the S&P 500 Index (12.9 vs. 12.0%). However, relative to the high price during the period (July 22-Nov 6) the group's performance, on average, more than doubled that of the Index (25.0%). If STEC, DRIV and ICON had been excluded from the original group, the groups average performance had been appreciably better than the index (for an updated spreadsheet of these 135 stocks, click here).

A new "Stocks on the Move" screen now produces a list of 107 stocks, of which only 7 stocks were on the previous list (the list is on the second tab of the spreadsheet). Of the total, only 39 stocks are trending such that the moving averages are aligned in a Bull Cross (P>50DMA>100DMA>200DMA>300DMA) and the 300DMA has turned and is now rising. Based on these technical indicators, these 39 might have the best chance of smallest impact of any market correction. A short list of these stocks might include:

AMZN
ATHN
BIDU
DGIT
GG
IAG
LL
MELI
SYKE
TEVA

Another Basket of Speculative Low-Priced Stocks

noreply@blogger.com (Joseph Meth) — Thu, 05 Nov 2009 04:15:00 +0000

I don't know how many of you were readers back in the depths of November 2008 and February 2009 but I floated the idea of assembling a basket of low-priced stocks, something I called "Perpetual Call Options". Well, it seems that there's a lot of truth in the saying "timing is everything" (or "don't fight the tape" or any others of the many sayings around Wall Street).

Back then my thought was that there were just too many stocks that had been beaten down by the extreme general pessimism everywhere in the air and that while one or two of those companies might fail (ala Lehman, GM or CIT), they wouldn't all disapper; some would eventual recovery and their prices would rise sufficiently to offset the ones with losses. Here is a recap of the results of both lists (click on image to enlarge):

The market is up 19.8% since February 9, the day I wrote about both the second (coincidentally, the market was at approximately the same on both dates). Over the same period, both of the lists have appreciated over 60%. As expected, three of the stocks in the November lists declined since November but the gains on the others more than offset those losses. Likewise, three of the stocks in the February list underperformed the market but, here too, several others did significantly better that the market.

Others gave a pejorative label to the strategy, they dubbed it the "dash for trash" - the strategy of buying low priced, high volatility stocks, with barely any regard for the fundamentals in the hope that market momentum will cause them to appreciate. Well, guess what, if my sample of two is any example, it worked.

But I'm not like another blogger elsewhere who continually writes "I bought them (yesterday, last week, or whatever) and just sold 'em (yesterday before the close) and pocketed a huge profit" (sound familiar TK?). Unfortunately, I was too conservative myself and only bought and still have a couple of them. I wish I could say my picks were based on skill but it really wasn't. The selection was made when the market was a very depressed and-remember-stock selection was like shooting fish in a barrel.

As the market moves into a new phase, will the "perpetual call" or "dash for trash" strategy still pay off? Are there any stocks left that are suitable for another highly speculative basket? Interestingly, there are still over 1400 stocks (about 30% of the total) under $5 and around 2400 (almost 50%) under $10. So why do we always chase after the likes of JPM, PG, AMGN, AAPL or AMZN.

With the economic productivity numbers coming in today better than anyone expected, some are now talking about a real burst in profits as volume begins to build faster than people costs across the economy. It's the sort of environment where the stocks of survivor companies, those have been left behind for dead, can start shining again because they're starting from a low profit base, low valuation and low stock price. The upside potential is great and the downside ... well, they're not far from zero now.

If you put an equal small dollar amount ($1000 for 625 shares of stock selling at 1.60, for example) in each of about 10 highly speculative stocks together a small basket you might wind up in 6-9 months with the basket having grown in size, much more than had you put that same money into SPY. You probably will get some duds or failures but you'll also have one or two stars.

I trolled the charts of stocks under $2, stocks that look they're making an effort to start heading up. I came up with a typical list of random stocks:

Stop! Before you go out and buy these stocks, memorize these caveats:

The stocks were selected randomly and not based on any fundamental analysis (or rigorous technical analysis either).
Success on the prior lists above are no guarantee that any other list of "perpetual call options" or "dash for trash" will produce equal results or positive results at all.
This discussion is more about a tactic rather than about specific stocks. There is a large universe of stocks to pick from and you should make your own selection.
You know your own tolerance for risk so, if you do something like this, you have to decide on how large the basket could be and how many stocks in that basket to spread the risk.
Many low-priced stocks are thinly traded so you should set the price you're willing to pay and use limit orders.

Most importantly, the two "baskets" I described above were started at the beginning of one of the best bull market recoveries in stock market history (over 60% in 7 months). Basket 1 above actually took a large loss between November to February and only started appreciating as the market recovered. There's no need to hurry and put something into place because the best time to launch a strategy like this is at the beginning of a bull market trend. It's perhaps best to stick this in the back of your mind and pull it out after the consolidation.

US Dollar Index (DXY), Gold (GLD) and the S&P 500 (SPX)

noreply@blogger.com (Joseph Meth) — Tue, 03 Nov 2009 01:05:00 +0000

Several days ago, in "Managing Portfolios Today With Three Indicators", the first indicator in the list of three indicators impacting today's market listed was $US. You've heard the talking heads say this and you read other blogsters write about this but have you seen the relationship presented graphically. I haven't so I thought I'd research it and bring the results to you.

The charts below are the value of the S&P 500 Index (.SPX) and the price of the gold etf (GLD) in both cases compared against the US Dollar Index (.DCX) which measures the performance of the Dollar against a basket of currencies: EUR (Euro), JPY (Yen), GBP (Pound), CAD (Canadian), CHF (Swiss)and SEK (Swedish).

Each panel contains trading over the past three trading sessions for the S&P; you should note that currencies trade 24-hours/day so you'll see gaps between the Dollar Index on one day and it's value at the opening of the US market's the next day. The Dollar Index is the blue line; the S&P Index and GLD are the multi-collar (or tan) lines.

S&P Index vs. US Dollar (click on chart to enlarge): Sure enough, there is a pretty distinct inverse correlation these between the value of the dollar and the US market (most clearly seen in last Thursday trading). Today, the market had a terrific first hour and a half of trading as the Dollar Index was declining. But at around noon, the Dollar Index starting rising and the market starting falling. It continued until 2:10 when both reversed direction. Is the tail (dollar) wagging the dog (market) or the other way around?
I'm sure the reasons are complex and convoluted but there's no mistaking the fact that as the dollar's value drops, US stocks become more valuable because of the large percentage of profits made overseas, because its less expensive for foreigners to buy stock in US companies .... all the above reasons and more.
Gold vs. US Dollar Index (click on chart to enlarge): Underlying worldwide supply/demand factors (industry and jewelry usage, sovereign demand) impact the price of gold and gold is also traded around the clock so the relationship between Gold and the US Dollar Index, although inversely correlated, is less direct.
Each time the US Dollar index increased, the price of GLD (in $US) went down and vice versa.

Granted, three days offer only a peak and more data over longer periods are needed for sound economic or academic conclusions. But when I looked at the same data others have been looking at, I clearly see the relationships.

Editorial Comment: I feel somewhat unpatriotic but, for the sake of exports, our stock market seeing higher earnings, improved ability to pay our debts to foreign holders (in cheaper dollars), and improved export opportunities I'm rooting for a weaker $US.

The biggest risk will be in the importation of inflation through higher worldwide commodity prices (expressed in the lower valued $US Dollars) and higher cost of all the cheap goods we've come to expect flooding our retail stores. It may be a simplistic, short-term perspective but a weaker Dollar may actually help rejuvenate our industrial sector by reducing our reliance on imports.

What do you think?

Stock Market Road Map

noreply@blogger.com (Joseph Meth) — Sat, 31 Oct 2009 21:10:00 +0000

Has a consolidation correction actually already begun and we just don't realize it?

We've been in an uptrend frame-of-mind for so long, that it's sometimes difficult to fathom that something might have changed or that the current market just isn't what we've grown pleasantly accustomed to over the past seven months. But my sense over the past several weeks is that something has changed. Besides the nearly 3% drubbing the market took on Friday and the whipsawing swings of sentiment on Wednesday and Thursday, are being broken and there's increased risk of moving averages being crossed.

So let's zero in more closely than usual, step by step, on the market's recent action to see if we can distill out clues to whether the market is possibly in the early phases of an emerging chart pattern or whether the uptrend is still intact so we don't feel like we're wondering aimlessly:

End of Month Patterns: This is probably the first time you will have heard this but the Sept-Oct had a distinctive bend to them this year. Instead of following historical precedent as the "worst months of the year", September and October (and to a lesser degree August) had awful end-of-month cycles. The last 7 trading days of September plus October 1 and the last 9 trading days of October turned in 3.9% and 5.62% declines; the final 3 days of August plus September 1 likewise saw a 3.2% decline. The first portion of both months showed respectable gains. If November follows suit, Monday won't be good but the remainder of the month to around Thanksgiving could deliver a sizable gain.
Trendlines: I've inserted an upward sloping channel by connecting the pivot points (points where balance of power flipped between buyers and sellers) at the beginnings and ends of those end-of-month declines discussed above. Since Friday's close violated the bottom support trendline, the obvious question is where will be the next low. My guess is that Monday, November 2, could see an intraday low at a key level, 1018, another 1.7% decline, since that was the intraday low on October 1 and a level the market gaped through in August. It seems to be an important play area for the market. [Coincidentally, my Elliottician friends are quick to point out, 1014.8 is a 38.2% Fibinacci retracement level between the 1098.74 close and the 879.13. A bounce at this level with conviction will support a continuation of the trend.]
If the market successfully bounces around 1018, there's a possibility it could then lunge ahead following the September-October routine for a final gasping 10.5% gain to 1125, with the sidelined cash finally being put to work before year-end. The 1125-1150 range of significant for several reasons: 1) it's been mentioned by many analysts as the high for the year and 2) it's on the extension of top boundary of that channel.
Moving Averages: Although the 50-DMA was violated last week, the 100-DMA is still intact and will probably remain so in the near term.
Violating the 50- (and 200-) day moving average wasn't calamitous in July (the market then proceeded to surge ahead by over 25%). Another big, though not as extreme, move may follow this violation. Simultaneously, the 200- may cross the 300-dma and the 300-could turn up (as described in "Mark These Dates .....") paving the way more gains later.
A Reversal Formation: If the market does bounce around 1018 either Monday or Tuesday, then the level becomes an important element, along with the October and November peaks in defining a pattern that could dictate the course of the market during the first half of 2010. Will these precursors become the early phase of a reversal or merely the beginning of a consolidation pattern. We'll leave predictions like that for economists (and stock analysts focusing on fundamentals); for chartists, all we can do is anticipate and be prepared to react when it happens.

Some inquisitive readers may question "What happens if you're wrong? How will you know if you're wrong?" Agreed, this is pure speculation but it's a plan, a map, and we use maps to help us know where we are and find our way to where we want to go. If the map indicates a turn but the road goes straight or if it indicates straight but the road has a bend then .... we know we're in the wrong place and we have to change our course.

That's the same with this fictional market road map for the next couple of months. Rather than a prediction, it's a plan of action for managing risk and measuring expectations. As of Wednesday next week, we'll know whether the risks are higher and plans and actions have to change or, if we're lucky, we'll see higher prices by Thanksgiving.

Managing Portfolios Today With Three Indicators

noreply@blogger.com (Joseph Meth) — Thu, 29 Oct 2009 01:34:00 +0000

I don't know how many of you are full-time traders, how many self-manage your portfolios on a part-time basis or how many visit here only periodically to get a different take on the market, something that you can take back to your financial advisers just to let them know you're looking over their shoulder.

But I spend most of my day with my Fidelity trading platform (Active Trader) running on one screen and my charts or whatever else I might be working on, reading or playing (I'm a mediocre chess player) on another screen. Furthermore, as the day progresses, I have either Bloomberg or CNBC running muted over my desk so I can see how the market is doing and watch for any major news headlines. Periodically during the day, I calculate how closely my portfolio tracks, percentage wise, the S&P in the hope that it does better than the benchmark index (either gaining a greater percentage or losing less of a percentage).

The reason I tell you this is that I find that my portfolio rarely ever moving opposite the benchmark. They usually move in tandem, it's only a matter of degree. So managing my portfolio is rather simple. It's essentially a cash, or risk, management decision: how much do I want to have at risk given what I see happening in the market and only secondly in what types of assets it should be invested. In short, the portfolio management decision is essentially a market timing decision. I spend most of the time trying to figure out whether the direction of the market's trend has changed (the answer I share with you).

As an aside, I went to an MTA (Market Technicians Assoc.) meeting last night and heard an excellent presentation by Frank Teixeira, of Wellington Funds and the manager of John Hancock's new Technical Opportunities Fund that I'd like to share with you. One of his points that obviously resonated with me, is that more and more institutional investors are disappointed with Index funds or the notion that "there's always a bull market somewhere" and it's only a matter of finding it. They're disappointed in "buy-and-hold" since the strategy since 1999, a long ten years, has led to returns only marginally above break even. Given the two market crashes since 2000, the objective now is managing risk and the tactic is to consider cash a safe default investment.

He also said that the world of investment alternatives has greatly expanded with the introduction of all sorts of etf's and adr's. There's no way one person can become familiar with all industries, all commodities, all interest rate trends, all currencies around the world. But the worldwide search for investments can be narrowed by using technical analysis (studying trends) and looking at charts. Human behavior, as represented in price trends (charts), is the same around the world for all assets.

Having said that, the key to where the market will be next March can be found, I believe, in essentially three areas: 1) the foreign exchange value of the $US, 2) monetary policy as reflected in interest rates and 3) the US economy as reflected in the S&P 500 index. [The only thing that has a significant impact on our portfolios but we have no way of predicting or monitoring is what Congress does with income taxes.] Here are the relevant charts:

$US: If this were a stock chart you wouldn't consider anything in the price action to indicate that a bottom has been reached and that a reversal pattern is being formed. If this were a stock, the only safe assumption would be that, at best, the downward trend remains in tact and, at worst, it will remain at current levels for a while (a couple of months) before turning back above 78.
20+ Year Long-term Treasury Rates: When interest rates increase, bond prices fall and vice versa. If this were the a stock's chart, I would sell or short it. Moving averages indicate that longer-term trends have turned down (how could they not have from the historically low current rates) and there's higher interest rate (lower bond prices) since the chart depicts a possible head and shoulder pattern. [A caveat is warranted here. Treasury Bond ETFs are relatively new so there's no history of how the ETF will perform over a wider range of interest rates.]
S&P 500: This is what we're all interested in. If the neckline of the inverted head-and-shoulder that everyone now believes was the bottom is the mid-point of the move from bottom to top (a standard technical charting conventional rule), then the full extent of the bull market run could be to 1328. But the full move can be divided into two, separated by a period of consolidation. We could no be seeing the beginnings of that consolidation (given that volume supporting further upside is waning as indicated by OBV diverging from price).

Bottom line? We are in or very near a consolidation. It's best to reduce exposure to risk by increasing cash relative to investments (I'm currently at 10% and plan to increase to 25% at the next opportunity). Looking at the above exchange and interest rate trends, I will look for investments that take advantage of those trends. But until the market indicates otherwise, the correction should be short with another leg up possible sometime in 2010. As Teixeira said, this first phase of the recovery has seen "a rising tide lifting all boats"; the next phase will see much more divergence among stocks, between the leaders, the average and the laggards.

Each Zig or Zag Is Not A Direction Change

noreply@blogger.com (Joseph Meth) — Mon, 26 Oct 2009 23:03:00 +0000

If you listen to the "talking heads", everything sounds like a turning point, a change of direction, a crises, a screaming news story "Extra". But every zig or zag does not make for a change of direction in the market's momentum.

Remember how you got swept away like many of the rest of us with euphoria last Monday, October 19, as the market crossed the same level going up as it did a year ago when it cratered along with Lehman, it actually nudged across 1100 intra-day but closed at 1086.48. And now, 5 days later, CNBC stirs the pot by bringing out Doug Cass to announce, again, that he's shorting. [Interesting, though, Cass has been shorting since August as this SeekingAlpha article of August 30, some 7.5% lower than last Monday's high, entitled "Doug Kass Goes All In Short".] A zig last week and a zag today. Even though I've been saying the market's close to a top and today wasn't pretty if you're in the market like I am, I don't believe the momentum trend has yet changed and I don't believe last Monday will be the high-level market for this rally.

On the Friday before that high, October 17, I wrote "Begin Pruning, Trimming and Weeding Your Portfolio". I followed that up with two more articles last week about the market sending signals that it's tired and wants to take a rest. I listen to the market but I don't believe it says that you have to dump everything overboard just yet.

I'm still hoping the market will shrug off the psychological barrier represented by round numbers like Dow 10000 or S&P 1100 (the Lehman level a year ago) and make a final push through November to the mid- to upper-1100's. As I've described before (see "Ascending Everest: the Mid-Station Rest Camp", that's were the real resistance is. In the same way that we didn't jump all in until the market hurdled some key benchmarks on its way up, there are a number of hurdles that it has to trip over on its way down before we call it quits. On the other hand, we were going to buy after a correction that never came last summer, so we must also be on guard against waiting for a blow-off top that may never come to sell into.

Last week in "More Evidence We're Approaching a Top", I pointed to the rolling 12-month returns as an obstacle to moving much higher. Here's some more evidence that upward momentum is beginning to wane.

If you think back to April and May, we were looking to volume in the form of OBV (On-Balance Volume) as evidence that the bottom had been reached. That indicator is now pointing to a divergence. For the first time since the rally began in March, OBV failed to make a new high as the index inself was making a new high (click on image to enlarge):

It's not time to jump yet but it is another signal that momentum might be changing direction and that a correction might be coming soon.

More Evidence We're Approaching a Top

noreply@blogger.com (Joseph Meth) — Fri, 23 Oct 2009 15:43:00 +0000

I bet you think the above graph is my EKG as I look at the market's gyrations. It's actually an oscillator, a momentum indicator that measures the market's gyrations, on a rolling basis, in terms of each month's prior twelve-month return. The chart above covers the past 81 years from January, 1929 to January, 2010 (click on image for larger and sharper view). Prior to 1939, the data is the DJ-30; data after September, 2009 are based on my assumptions (to see the spreadsheet with data, click here).

You often hear or read about Fibonacci lines, arcs or fans that many say tell you that a move in the market or stock is over-extended because it has reached a critical benchmark like a 50% retracement. But there are few measurements that are linked to a time dimension, like 12-month returns; the above chart does.

I think it's an amazing picture. What I find most amazing is its regularity. Usually, after the market has several back-to-back exceptional 12-month runs (where returns over the previous 12-month exceed 25%) it is followed by several back-to-back months of negative 20% return.

Conversely, when the market has a sharp sell-off, or negative back-to-back 12-month returns of over 30% (see 1932, 1937, 1974, 2002, 2008), there follows a bounce back of 25-30% returns. It's fairly regular and predictable.

What does this mean for us today? I appended a couple of hypothetical scenaria through June, 2010 to see what the graph would look like (the red lines at the right). Case 1 assumes the Index will remain flat (in practice fluctuate in a narrow range around...) yesterday's close of 1057; Case 2 assumes the Index will continue to move ahead and peak at 1125 in February and retreat moderately back to 1075 by June, 2010. The result is a spike equaling 1983's spike out of that recession and the 1997 bounce.

In any event, nothing continues growing forever. Moves much beyond the extent of repair that's already been achieved is inconsistent with market history going back to the Depression. That's not to say there will be a significant decline sometime in the near future. The other possibility is that the annual changes moving forward will decline to the point that somewhere in 2010, the market will be no higher and, yes, possibly lower than 1080 (I spelled out two possible forms the correction might take in "Two Market Consolidation Models: 2004 and 1933-35"). But I feel technical evidence is showing that we're quickly approaching the top of these climb.

Fuel for the Cold Winter Months

noreply@blogger.com (Joseph Meth) — Wed, 21 Oct 2009 13:54:00 +0000

I've written here recently about the oil & gas complex as possibly the last group to breakout of long-term reversal patterns (see "Mysterious Happenings in the Oil Patch"). Cousins of the group that might be particularly interesting since we're approaching the winter heating months are the fuels used to heat our homes and workplaces: UNG (Natural Gas ETF) and UHN (Heating Oil ETF). What do these charts look like; I'm including OIL (Oil ETF) for comparison purposes (click on charts to enlarge):

UNG: Due to what many say is over-production and the unavailability of storage capacity for the excess, natural gas prices have tumbled. But the price of UNG has fallen even more than the underlying commodity due to short sellers. Prices have begun to firm (note the small cup-and-handle formation that began in August) and there's a possibility of a short squeeze as sellers start to cover which could drive the price back up to the first resistance trendline at 18.
UHN: If you live anywhere other than the sunbelt and use heating oil and haven't locked in your rate for the winter, then you might want to consider buying a winter's worth of this ligthly traded ETF (so if you do trade it, use only limit orders). It's hard finding a more perfectly formed ascending triangle reversal pattern. The characteristic of this pattern is that it very clearly depicts how buyers come in to the stock and overwhelm the sellers at higher and higher levels. They run out of steam at the resistance level but, the theory is, at some point in the near future as the bottom trend line continues to approach that resistance, a breakthrough will occur.
OIL: Not surprisingly, OIL has a pattern similar to UHN. If one breaks out, the likelihood is that the other will too. The interesting thing about OIL is that many drillers, service, refiners and marketing firms have clearly formed reversal head-and-shoulders, double-bottom and, yes, ascending triangle, patterns and are ready to breakout when the big money is ready to come in from the sidelines.

So whichever of the Oil & Gas participants interests you the most (yes, don't forget the large integrated international firms like COP, XOM and CVX) putting some money to work in this sector is prudent.

Mark These Dates .....

noreply@blogger.com (Joseph Meth) — Tue, 20 Oct 2009 01:02:00 +0000

Mark these dates on your calendar: November 17 and December 3. What's happening? These dates could mark when the market clearly steps out of a "bottom recovery" and, after what I hope will be only a brief consolidation, into unqualified bull mode.

On what do I base this? On the fact that the last of the slower moving averages, the 200-day MA, will cross above the slowest moving average, the 300-day MA on November 17. At that moment, each of four moving averages will be perfectly aligned from slowest (at the bottom) to the fastest (at the top) with the Index above them all - a perfect bullish alignment.

And what happens on December 3? That's when the 300-day MA could begin trending up for the first time since January 3, 2008, nearly two years ago. If it does, the last obstacle to declaring the recovery's end will have been cleared.

The above assumes that the market continues growing at about the same rate as it has since Labor Day, or approximately 6% per month, or 0.3% per day. If that happens, the S&P 500 will hit 1198 the Monday after Thanksgiving and the 300-day moving average will hit a low point a few days later, turning up from that point forward.

Why is the 300-day moving average's turning up so important? Moving averages are momentum indicators and incorporate the market's action over the preceding 300 days. It takes a lot of effort to overcome the impact of over a year's worth of lower closes and, once having achieved it, significant effort (a huge move down) would be required to reverse the momentum's direction. As a matter of fact, since 1963 (the extent of my database), a turn in the 300-day moving average has usually been followed by an extended move (either in time, percentage or both) in the direction of the turn.

I consider the direction of the 300-day moving average to be a confirmation of another momentum indicator we heard much about this past June and July: the Index crossing above of its 200-day moving average. Granted, the Index has risen sharply since then (about 27%) but the move has consistently been susceptible to being called a Bear Trap rally. Once the moving averages are aligned and all have turned up, there can be little question that a Bull Market is in progress.

Some will claim that I flip-flop and inconsistent. How can I one week say that I'm pruning, trimming and expecting a correction within days and weeks of say that the market is likely growing into a bull market. I don't feel being inconsistent at all. Consolidations happen all the time in bull markets and there's no better place to have one than the market transitions from one stage to another.

As a confirmation of the market's continued internal strength, here's an update of the indicators you've seen here before (click on table to enlarge):

The number of new highs continues to increase (1-year highs now at 510, or 10% of all stocks) and the number of stocks with Bull Crosses (the alignment described above that the Index could achieve on November 17) has grown to 1002 or nearly 20%. Meanwhile, the number of rollovers (that's stocks making new lows) is still less than 20 and stocks with Bear Crosses (the inverse of Bull Crosses) is 199, a mere 3.9%, and many are local and small regional banks.

The alignment of moving averages evidences that the correction could come soon (December to early 2010) and when a correction does arrive it might not be long nor deep. Again, no one can predict the future but, at least, that's what our operating assumption will be until the market tells us otherwise. "Sell in May and go away" and the "September-October worst month" scares were hollow. Hopefully this perverse market doesn't surprise us again by turning traditionally strong months into weak ones. We'll just have to stay alert and nimble, reacting quickly to any surprises it may throw our way.

Ascending Everest: the Mid-Station Rest Camp

noreply@blogger.com (Joseph Meth) — Mon, 19 Oct 2009 01:26:00 +0000

The market ride since March sometimes feels like a trek out of a valley in the Himalayas. Nearby peaks are clearly visible but we're already starting to feel winded and slightly dizzy from the lower oxygen at these higher elevations.

So far, the climb has been exhilarating but nothing like the climb to the top. [Please, don't get literal on me and ask what happens after you reach the top. I'm only using a metaphor and will need to come up with something else, for example "flying like an eagle", after reaching the top.].

In any mountain climb, it's necessary and appropriate to rest and regain strength at a mid-station in preparation for the final assault on the peak. Let's look at where we've come from and get a fix on exactly where we are in order to gauge where we might be headed (click on image to enlarge):

Some technicians visualize sloping trendlines but I focus on the horizontal elevations marking support and resistance levels. These lines are conceptual rather than real or concrete; they indicate where a struggle between bulls and bears, buyers and sellers, demand and supply has taken place in the past and may, in all likelihood, be repeated in the future. It's where the equilibrium of a struggle has been broken with one force taking over control from the other and reversing the previous trend of momentum.

Because that struggle takes time and extends over a range of prices, it's more appropriate to consider "zones" rather then points. In the above chart, the peaks in 2000 and 2007 are represented by the blue dotted line where bears were victorious over bulls and began the downward momentum of the Tech Bubble and Financial Crises Crashes. The lower solid red trendline marks the bottoms where bulls were victorious, successfully turning momentum around leading to subsequent bull market moves.

Between those two are other areas, marked by circles, where equilibrium was broken and momentum reversed leading to consolidations, recoveries or corrections. These zones, marked by dotted red lines are at approximately 950, 1080 and 1150. What makes these levels important is that the reversals (support or resistance) recurred several times over the past ten years.

What makes me feel uneasy is that by entering the zone between 1080 and 1150, the market is closing in on the same mid-station as that of 2004 in the ascent from the Tech Bubble Crash. The 1150 elevation zone has seen a reversal five times since 1998 so there's a good probability that we'll see a reversal somewhere around that zone again sometime between now and early 2010 (for a further description of what that consolidation might look like, see "Two Market Consolidation Models: 2004 and 1933-35" and "Comparing Labor Days in 2003 and 2009").

That rest camp is a mere 5-7% away. Could the market zoom right past that level and head to the next congestion at 1260-1270? It could but the odds are against it.

Begin Pruning, Trimming and Weeding Your Portfolio

noreply@blogger.com (Joseph Meth) — Fri, 16 Oct 2009 17:31:00 +0000

Readers here know that I've long thought that the market was going to run into resistance, start to consolidate this long bull market somewhere around 1100-1150. For example, in the discussion section of my Facebook page, I wrote on August 5, "I see a run up from current levels starting around Labor Day that will carry Index to a 2009 high of 1150, or up 15% from current levels." On that day, the index closed at 1002.72; Wednesday's close was 1096.56.

We're only 5.5-6.0% away from that mark, only a couple of good trading days as sidelines money makes a mad dash in the form of a blowoff top, a "steep and rapid increase in price followed by a steep and rapid drop in price", according to Investopedia. If it happens, there will be even more confusion and mixed signals than Cramer's double message (sell if you have profits; buy if you still have funds on the sidelines).

You'll hear talking heads start declaring the market might even climb all the way back up to 1350-1400. There will be talk of corporate spending on the increase, employment starting to rebound, the second wave of defaults (option ARM mortgages) not being as bad as first feared, the commercial real estate crises begin averted and a growing concensus that a weak dollar actually reducing the market's P/E by the higher foreign profits it produces.

But rather than being too doctrinaire, I'm beginning to think that now might actually be a good time to start "pruning" your portfolio. Begin trimming stocks you added during the run up since March-April that haven't performed that well; if they have grown less than the market has while you've owned it, they probably won't do better than the market in the future. Rebalance the portfolio by reducing the exposure in stocks that have significantly out performed the market and now represent too large a percentage of the portfolio.

Rather than thinking of these moves as "selling" the market, clearly a defensive move, view it as an offensive strategy, beginning to prepare for next leg. Funds generated through this "housecleaning" can either be held as cash or you can add to those remaining positions that are still working nicely and have room to grow (i.e., not bouncing up against resistance in the form of trendlines or moving averages).

Now is the time to start the process. If you wait until the market actually starts topping off you'll be confused, befuddled, fearful of missing some of the action, leaving money on the table. In the same way that we cautiously took incremental steps rather than jumping all the way at the beginning as confirming signs presented themselves, we have to begin taking incremental steps as we approach the top.

Rather than picking low hanging fruit, we're trimming the bush and prunning the tree of dead branches. Now is the time to start cleaning up to prepare for the next season.

REITs and Energy: New Darlings

noreply@blogger.com (Joseph Meth) — Mon, 12 Oct 2009 00:16:00 +0000

I have to travel again this week so my posts might be sparse. In the meanwhile, though, I recommend you take a look at a group that appears to be in the last stages of completing very distinct bottom reversal patterns: REITs.

Remember the "perpetual in-the-money call option" strategy of last November and February? It might be appropriate for resurrecting it and applying it to REITs. For example, here are some low-priced, high-volatility REITs; construct for yourself a basket (to spread the risk, a small, equal amount invested in each of 4 or 5) and there's a good chance you might make a nice return even if one or two go further down in price:

These currently all sell for less than $10 and many still pay nice dividends.

As money on the sidelines continues to try find stocks that haven't already been propelled to what many consider unsustainable prices, they may also begin pushing up the oil and gas, solar and various alternative energy stocks like coal and uranium. Here, too, clear bottom reversals have been formed and stocks are about to break, or have broken, out (see "Mysterious Happenings in the Oil Patch" and "SOLR: A Winner When Clean and Alternative Energy Heats Up"). Whether its part of the weak-dollar trade along with precious metals, energy stocks of all sorts (including the oil service stocks) are starting to heat up again.

Even as the market edges closer to a consolidation, a much needed midstream pause, there are still stocks that could have room to grow.

Five Stocks Making All-time New Highs

noreply@blogger.com (Joseph Meth) — Wed, 07 Oct 2009 23:05:00 +0000

Life used to be so simple 9 months ago. All stocks were on sale for rock bottom prices and hundreds, if not thousands, were in the starting gates waiting for the starting gun (if you remember the analogy. All we had to do was find stocks that had formed clear reversal patterns, pick the ones with the highest volatility and buy a bask full of them and we would make a huge profit with little risk.

But finding stocks with momentum or a potential for momentum is harder now. Few stocks are still forming reversal patterns and the risk is that they breakout just as the broader market or, more correctly, the stocks that have been driving the market up to now, start running out of steam. [See yesterday's report on media stocks.]

Alternatively, we could hitch a ride on the stocks that have had huge runs over the past four or five months and hope they aren't the ones who'll run out of steam first. Remember, for example, Diedrich Coffee, Vanda Pharmaceuticals or Dendreon?

As a true chartist, I much prefer looking among stocks making new highs and the more significant the new high the better (for example, all-time new high is better than 2-year which is better than 1-year new high). Here are several that meet the criteria:

CERN
NPK
PETS
CHKP
MNRO

But I give you these with a word of caution. Keep your thumb on the market's pulse and make your own assessment as to its health and strength. Any guesses in which life cycle stage the market is in now?

I think the market is transitioning from the accumulation to the mark-up stage. That transition will be completed and the exciting mark-up stage will be launched after the consolidation correction we will have to contend with, probably most of next year (see "Two Market Consolidation Models: 2004 and 1933-35"). Or in which emotional stage it's in?

I feel we've just experienced a huge relief rally, are waiting for a test to see whether "it's for real" and then the market will move into the "optimism" state.

Since the easy pickings are over, the easy money has been made, market timing is again going to be important. If you buy stocks today, even if they're breaking out to all-time new highs, don't get wedded to them. The market has to mature and it's about to experience some turmoil as it evolves into the next stage.

Another Laggard Industry Group Coming to Life: Media

noreply@blogger.com (Joseph Meth) — Wed, 07 Oct 2009 01:10:00 +0000

"Dash for the Trash", that's what CNBC called the market run-up this past summer. If you recall, I called it "shooting fish in a barrel". Besides stocks in the huge Oil & Gas complex, another Industry Group that seems to have lagged behind this past summer and seems to be now trying to catch up are stocks in the Media-Periodicals and Broadcasting Groups.

We all know the story of why traditional print and broadcast media is "dead" and some have wished them their R.I.P. Fundamental Analysts list such handicaps as 1) lower subscription revenue due to competition from online entertainment, 2) high costs, like paper, 3) low ad rates due to slow economy and decline in subscribers, 4) consumer preference for to entertainment on demand and choice.

But some of the stocks in these two groups seem to be stirring. They appear to have formed reversal base patterns (true, they weren't very far away from $0.00) and, because there aren't very many stocks left that haven't had huge percentage gains from the depths, these may come back to life.

Here are a few with interesting charts (click on symbol for chart):

MNI (McClatchy)
LEE (Lee)
AHC (A.H. Belo)
NYT (NY Times)
BCI (Gannett)
TVL (Lin TV)
SBGI (Sinclair)
CETV (Central European)
CBS
TV (Grupo)

As you know, I think we're getting close, both in time and level, to an interim market consolidation so might be a little late to make major commitments to this group. But because they're mostly high volatility and many have low prices there might be a little juice left to squeeze out of them.

The list is assembled strictly based on a review of the charts; no researched was performed on their financial health. If you're interested, perhaps you should assemble your own "etf", or pool, of a number of the stocks to reduce the risk of any one of them failing while you own them.

Market Extremes Turn Coppock Curve Unreliable

noreply@blogger.com (Joseph Meth) — Tue, 06 Oct 2009 00:34:00 +0000

It's been a while since we touched base with Mr. Coppock and his Curve. If you remember, it was one of the indicators that signaled that the market was turning over in November, 2007 and one of the indicators that gave me confidence that we had hit bottom in April (along with the "Reversion to the Mean" indicator in both cases).

So if it was so accurate in calling the top and and the bottom, I was wondering how the indicator would perform if the market did take a tumble in the near future. Actually, the correct question to be answered is "what sort of a drop would it take for the Coppock Curve to again signal a market top?"

To find out, I projected forward from the September close (the Curve is based on monthly data only; see "The Coppock Curve, Another Constructive Indicator") and came up with some disturbing results. They were disturbing but not in the way you might expect. What I discovered was that the extent and rapidity of the market's recovery (50% in six months), either: 1) precluded any risk of a significant market top in the foreseeable future, or 2) the Coppock Curve is an inconsistent indicator and it's being "on the money" concerning both ends of this past crash was merely a coincidence.

Here's what the data reveal (click on image to enlarge):

A relatively flat market projected through June, according to the Curve, increases the chances a decline in the second half of 2010:
A decline to the March-April lows projected to occur by year-end followed by a modest recovery would not cause the Curve to turn down:

We could hypothesize hundreds of other future paths for the market. The bottom line purely from a technical perspective is, however, that last year's decline and this year's recovery have been so dramatic and extreme that a momentum indicator like the Coppock Curve appears to be less reliable for indicating significant changes in the long-term trend. Complacency due to the Curves current unward trend is, therefore, dangerous and to be avoided; other long-term trends should be considered.

I'm not an expert in the Coppock Curve and welcome alternative interpretations from others.

Bear Hibernation Begins in October

noreply@blogger.com (Joseph Meth) — Thu, 01 Oct 2009 23:53:00 +0000

Let me be the first to send out the birth announcements - a new head-and-shoulders top is about to emerge. Or so the bears are soon going to be yelling. Think back to May-July. About every Talking Head on CNBC and most bloggers (except moi) were claiming that the long awaited correction was just about to finally arrive. The only problem was that they all lost sight of the forest because they were fixated on the trees.

We may be looking at a similar chart pattern emerging. It's very early in the game but the sharp eye of experienced chartists will see what I'm talking about (click on image to enlarge).

As you can see, since you've all become great chartists from reading this blog, the market confounded the bears last summer and absolutely ignored what what they claimed was supposed to be a reversal. Now, without the market even yet completing the pattern's head by bouncing off of a would be neckline, talk may again fill the airwaves and blogosphere about declines all the way to the March lows.

Furthermore, to the Bear's glee, this time we've entered October, supposedly the cruelest month of the year for the stock market (if you don't believe me, check out the bear cave at Slope of Hope after you finished reading what I have to say where the head "sloper", Tim Knight, actually titled his post tonight "Our National Nightmare is Over").

But here's an interesting fact the Bears won't mention: the market declined 22.5 point, or 2.21%, this September 1, the worst ever first trading day in September but wound up turning in the best September performances since 1998. October's opening day mirrored that of September with a 27.23 point delince, or 2.58%. The rest of October could mirror the rest of September.

I've marked on the above chart two key support areas: the 50-day moving average at 1021 and a long-term trendline that served as resistance in both November 2008 and all the way back as the peak of the traders' remorse correction after the Tech Bubble Crash double-bottom in June-October 2003. Resistance levels often turn into support and it may be the same case here.

The last remaining Bear Trap is that October, notorious for crashes, is actually a good average month for the market (click on image to enlarge).

In fact, from 1963-2007, the market end October higher than where they began 62% of the time, or 28 years, and declined only 38% of the years. The worst year, of course was the 1987 crash with a 21.8% decline. When you exclude that year, the average performance in October shows a 1.63% increase with the best performance in 1974 of 16.3%. When coming out of Bear market's or crashes (see 1982, 2002, 1974, 1998), October's tend to show some of the best performances.

Let's hope that as the leaves begin to fall, bears begin hibernating until spring.

Two Market Consolidation Models: 2004 and 1933-35

noreply@blogger.com (Joseph Meth) — Wed, 30 Sep 2009 17:08:00 +0000

There's little doubt that the market is due for a correction after this 50%, six-month move off the bottom and it will be soon (whether measured in time or in remaining upside in the Indexes). The only truth is that no one knows what that reversal will ultimately look like.

The "Elliotticians" talk about a huge "Wave 3" coming but I have yet to understand how they know that and what they actually means by it (any of you Ellioticians out there are free to educate us in the comment section). Others talk about a 10-15% correction but don't usually put it in any time frame.

Just before Labor Day, I contributed my opinion to the debate when I wrote in "Comparing Labor Days in 2003 and 2009":

"When the market succeeds in crossing 1035-1040, (a hurdle I think it will easily cross in the next couple of weeks) it will have a clear shot at a 10% surge to 1125-1150 by year-end. There was little resistance a year ago as the market crashed in 26% free fall through those levels in only 10 trading days last September and October! Will the ride back up be any less memorable? I think not; I hope not.
And if it does, what might come next. What might 2010 look like? Let's look at the Tech Bubble Crash recovery, 2003-04, for an answer to that question"

and inserted the following chart (click to enlarge):

Under this view, there will be no spinning out of control into the final wave down to a fiery end of this bear market but instead "Consolidation 1" of the new bull market could be a 9-month pause along the lines of the first consolidation out of the Tech Bubble Crash of 2000-2003.

But there is another model of what the consolidation might look like, one I'm reluctant to even bring to your attention. It's the consolidation after the 1929-33 Crash and it looked something like this (click to enlarge):

We all know the story of the Great Crash but did you know that the move off the bottom that looked sort of like a double-bottom - if anyone had any money and guts left after losing 75% over the previous three years- was 100%? But then the market consolidated in a humungous traders' remorse, horizontal channel that lasted nearly two years.

I wonder how many, when seeing the economic disaster the country was dealing with, believed that the final shoe would soon drop and the market would crash again to test the all-time low in the mid-40's on the Dow Industrials (the S&P 500 hadn't yet been introduced). Actually, the bulls broke the equilibrium stalemate and drove the momentum to the up side for another 72% gain over the next two years.

Two models after huge crashes. Which one will follow this big crash ... or will an new one be fashioned for the record books? More importantly, how will we know when we enter into it and what should our strategy be? More about that later.

SOLR: A Winner When Clean and Alternative Energy Heats Up

noreply@blogger.com (Joseph Meth) — Tue, 29 Sep 2009 09:29:00 +0000

Thomas Friedman had an excellent piece in Sunday's New York Times Editorial Section entitled "The New Sputnik" in which he wrote:

"future historians may well conclude that the most important thing to happen in the last 18 months was that Red China decided to become Green China....when China decides it has to go green out of necessity, watch out. You will not just be buying your toys from China. You will buy your next electric car, solar panels, batteries and energy-efficiency software from China.....Well, folks. Sputnik just went up again: China’s going clean-tech.....China is focused on low-cost manufacturing of solar, wind and batteries and building the world’s biggest market for these products."

The editorial was intriguing and prompted me to look at the sector and I find that the alternative or clean energy groups have lagged the general market but appear to be on the verge of a breaking out. You can get a sense of how the group's been doing through GEX, the Market Vectors Global Alternative Energy ETF (click on image to enlarge):

As beautiful a cup-and-handle formation as you can ever hope to see. Moving averages have turned up and are about to cross the lagging 300-day moving average as volume trends, as measured by OBV (On-Balance-Volume) is also trending higher. Stocks comprising this ETF are a globally diversified group of companies engaged in the production of alternative fuels and/or related technologies.

Another group of companies in the field, those involved in solar energy, are included in KWT, the Market Vectors Solar Energy ETF (click on image to enlarge):

You could call its reversal pattern as a cup-and-handle (dashed red lines) also or as a head-and-shoulders; regardless, it's clearly a bottom that's building towards a breakout. The volume patterns in this chart aren't as compelling so any increased volume associated with a price move above the neckline would be compelling.

These are only two of many ETFs covering various aspects of the space (PWND for wind, TAN for solar, PBW for clean energy, PZD for clean technology) but one place to begin is at the beginning of the pipeline, the manufacturer of equipment for making silicon wafers, SOLR, GT Solar Int. (click on image to enlarge):

SOLR was a 2008 IPO but one can already see clearly a symmetrical triangle consolidation forming in its limited public trading. When the solar and alternative energy space begins to heat up again, which it looks like it might soon, SOLR could be among the winners. To avoid sitting with some "dead money", I'd add the stock to my watchlist, waiting for a breakout move above 7.00, perhaps even 8.00, confirmed by higher volumes before making a commitment.

Will 2010-2030 Equal 1910-1930?

noreply@blogger.com (Joseph Meth) — Sun, 27 Sep 2009 19:38:00 +0000

Sorry to leave you all in the lurch last week and what a week it was. Condolences if you were long commodities, gold and other stocks tied to the $US (as I was) because you probably took a greater than average beating because of some new found strength in the Dollar. But we have our game plan and we're going to stick to it until conditions dictate it should change. Here's the big picture:

While this was a costly week, nothing in the trend analysis indicates a radical change in market participants' sentiment. Volume is still acting favorably, the moving averages continue to turn up and moving towards a perfect bull market alignment (index above all MAs which are arranged from fastest to slowest). And when it becomes clear a correction is at hand, my guess is that it will take the form of a long slightly downward sloping pattern along the lines of 2004 and not the beginning of the second dip of the "W-type" bottom.

But what if you are long stocks tied to a weak dollar as I suggested a week ago in "New Place to Mine for Winners"? Then some news out this afternoon may be supportive of your positions in the coming week. The World Bank's President issued a warning, as reported by Reuters, that

"the United States should not take the dollar's status as the world's key reserve currency for granted because other options are emerging....global economic forces were shifting and it was time now to prepare for the fact that growth will come from multiple sources."

It's unclear as to whether the emphasis should be on the growth of other economies greater than that of the US or that there are other options for a reserve currency (perhaps a synthetic currency, an weighed index, comprised of 5-10 top world currencies into which world currencies could be converted and would be the World Bank's lending currency). What does that shot across the US bow mean for commodity prices (especially gold) priced in $US. Would that mean that the $US would suffer further erosion? It's clear that significant changes are coming and the economy and world trade will look dramatically different in 2030 than it does today.

I love history and one can gain a wonderful insight into future possibilities by looking through the perspective of past realities. If you don't think we'll see significant structural changes, just look at the change that took place between 1910 and 1930, a comparable period known as the Roaring Twenties or the Jazz Age. An economic review of the period in "The onset and persistence of secular stagnation in the U.S. economy: 1910-1990" highlights the following factors:

real growth from 1913 to 1929 was only 2.8 percent as compared with 4.0% in previous century
the post-1910 record has been interpreted as stagnation
laissez-faire capitalism in the United States began a significant slowdown of growth about 1909-10.
the rate of growth of the labor force dropped substantially over 1910-1929 but was pushed aside by a jump in labor productivity
there was much less use of available labor resources in 1910-1929 than there had been in 1890-1910. Furthermore, the labor cost per unit of output declined significantly between 1910 and 1929
decline in investment in business structures was responsible for the drop in total nonresidential fixed business investment demand after 1910

Interesting; see possible similarities?

Update

noreply@blogger.com (Joseph Meth) — Tue, 22 Sep 2009 21:41:00 +0000

Readers, my apologies. I'm out of town so I won't be able to post an update. But from my vantage point, I see the market is still chugging along on its way to 1125-1150, my target for a long while back. From what I hear, the $US declined today (by nearly 1%) and commodity and other stocks closely tied to the dollar rose (GLD up 1.33%, close to making new high) just as I called for in the previous post.

Much to my surprise (and chagrin because I sold many of these stocks after huge run-ups), the financial, auto and truck parts and REITs are still doing very nicely.

I will be back late Friday and hope to add a more complete report. In the meanwhile, hold the fort against the bears and

Happy Trading

New Place to Mine for Winners

noreply@blogger.com (Joseph Meth) — Sun, 20 Sep 2009 23:27:00 +0000

It seems as if it were longer but only two months ago I described stock picking then being as easy as "shooting fish in a barrel" since many stocks had formed classic bottom reversal patterns. I even included a spreadsheet of 135 stocks, labeled "stocks on the move" because they met certain specific criteria (click on article above for the criteria); they looked like horses at the starting gate waiting for the bell.

Fortunately, this time I did take my own advice and did buy some for my portfolio because as a group, the stocks have increased 16.7% to their highs during the period and 13.2% to last Friday's close. Of the 135, only 5 declined, 5o increased less than the S&P 500 but 85 went up more (click here for the updated recap). The biggest winners, if you were lucky enough to have picked them were:

What's upsetting and distressing is that only 5 of the 135 are on the Stocks on the Move scan today. As a matter of fact, the scan produced only those 5 stocks. So even though the Index continues to move higher, it's more and more difficult finding stocks that look attractive at this point.

So what is one supposed to do now? Should I swap out my big winners (if you were lucky enough to have bought WYNN, you'd over 60% to Friday) and put the money elsewhere? If I have some cash waiting on the sidelines, is this a good time to buy and, if so, where should I put it?

Good questions and, unfortunately, the answer isn't so good. I'm having a hard time finding stocks where the future reward currently exceeds the attendant risk. But when I do find them, they seem to concentrate in the familiar commodity-based Industry Groups of Energy (see "Mysterious Happenings in the Oil Patch (Stocks)"), Metals, Steels, Coal and Precious Metals.

Does it have something to do with the continued weakness of the $US? Probably, since many were expecting the dollar to rebound when it touched a level that seems to have been support since the early '90's. It didn't hold and the dollar continues sliding to the levels it hit in early-mid 2008:

There's a lot of debate around which is best for the US today, a strong or a weak dollar. We'll let other duck that out. What I've thought for quite some time is that about the only way out of our huge debt position in the hands of other countries is to devalue our way out. What that means is inflation, higher interest rates and higher commodity prices (when expressed in terms of $US). Having said that, some of the stocks (ETFs) where the expected rewards and risks might still be in balance include:

OIL
REA
XME
PTM
X
CENX (or AA)

Plus, of course, the precious metals complex including: SLV, GLD, UGL, DGL, GDX plus the wide range of miners.

Signposts of a Correction

noreply@blogger.com (Joseph Meth) — Thu, 17 Sep 2009 01:16:00 +0000

Regular readers remember the market breadth indicators that frequently appeared here as we attempted to gauge the internal strength of the bottom reversal the market was forming. It doesn't hurt to report on those indicators now that a bull market has clearly developed and the Fed Chairman has declared the recession as being over:

The numbers bear the recovery out. Less than a month ago, at the end of August when the Index was 1020, only 51 stocks were making new highs; today, with the Index 4.7% higher, there were 313 new one-year highs. The number of Bull Crosses (where the closing price is higher than all the moving averages and all the MAs are aligned from fastest to slowest) has almost doubled to 479, or nearly 10% of the stocks in my database.

I went to an MTA (Market Technicians Association) meeting earlier this week and the excellent speaker, John Roque of WJB Capital Group, started off by asking for a show of hands among the 100 attendees as to where they thought we were on a chart similar to the cycle if market emotions that I presented here in "From Shoulder to Bump, Hopefully" of May 29:

You would expect that in a roomful of technical analysts and traders there would be concurrence as to what stage the market was in. About half thought we were at Hope and Relief, a third that we were at Thrill and Euphoria; a handful though the market was in Despondency and Depression. I don't know where you think the market is but, in my opinion we're somewhere between Optimism and Excitement. Yes, the best is yet to come.

All these divergent opinions is what makes a market. For every buyer there needs to be a seller. The only thing that truly matters is whether the buyers' demand overwhelms the desire of sellers to sell and which trend, the power of demand or weight of supply is accelerating the most.

As an aside, I often read Elliott Wave material just to see a different perspective. The recent EW material claims now "the rally is waning. A downside reversal is imminent." Elsewhere, they shout "The Bear Market's Most Violent Decline Right Around the Corner? Meet Wave 3: The Superhero of All Waves". And what is a Wave 3? "There's no mistaking wave 3's characteristics:

It gets to where it's going in a hurry.
It usually catches everyone by surprise, and
You'll know it when you see it."

I've never been very good at Wave counting and find it inconsistent and conflicting (sorry all you EW'ers out there). I need more concrete ways of measuring the market's health. It would be irresponsible to let your guard down in the belief that what's been a truly terrific market can extrapolate out indefinitely into the future. There will be a correction (even if it isn't the catastrophic collapse the EW'ers yearn for). Every coin has two sides and while we've measured market breadth for a bull, so we begin here measuring market erosion for a possible correction.

Interesting, but insufficient for making any sort of determination. But I'll continue updating the stats which, along with other measures will alert us if and when an over-extended market is entering a correction.

Cramer and AAPL (Apple)

noreply@blogger.com (Joseph Meth) — Wed, 16 Sep 2009 00:00:00 +0000

I need to vent to you about Cramer again. I hadn't seen the show for a while but caught him make a fool of himself again tonight. I shouldn't really get so upset because by making no logical sense he actually presented a pretty good case for individual investors, or "home gamers" as he likes to call us, to totally dismiss fundamental analysis and adopt technical analysis instead. You have to follow me on this because it's a beautiful example of why his dictum that you have to "do your homework" is absolutely meaningless and the only things that matter are price, volume, trend and momentum.

What I'm talking about is his red "apple/green apple" (you had to see his show to understand his metaphor) argument about why he was upping his price target for Apple (AAPL) from 200 to 264 (closed today at 175.16). He said his old target no longer applies because of an upcoming change of accounting. As summarized on theStreet.com, the FASB (Financial Accounting Standards Board) accounting change involves:

"how Apple can recognize revenue from its popular iPhone and less popular AppleTV products. Current rules force Apple to recognize this revenue over a 24-month period, meaning that sales today cannot be fully recognized for a full two years. This rule is antiquated and just plain dumb, said Cramer, as it treats Apple differently just because it makes a smarter phone with better software. Meanwhile, rivals like Nokia, which apparently make 'less-smart' phones, are immune to the rule, he said. Cramer said if Apple is allowed to recognize all of its true earnings, those earnings will skyrocket from an estimated $9 a share in 2011 to $12 a share. Given these new earnings, Cramer said his new price target for the company is now $264 a share."

Cramer went on to claim that this is the time the individual investor should get on board "before Wall Street catches on" because most of the analysts "simply look at the 'first call' estimates, and have not taken the time to dissect what this rule means for Apple's earnings.

So "fundamental analysis" tells us, according to Cramer, that the value of a stock should be 30-40% higher merely because the FASB changed some accounting rule? If there were an accounting rule change that, hypothetically, reduced their earnings by 50% would the stock be worth 50% less (remember all the debate about "mark to market" and the impact that rule had on bank earnings)?

Here are the fallacies of his whole line of reasoning:

When there is an accounting change, earnings are usually reported both the old and the new way so those looking at the financial statements can see the impact of the accounting change and reverse out the adjustment from their valuations.
There can be just as valid an argument made, actually more so, that AAPL's price earnings multiple should be reduced going forward from 20 to 15 as there is to keep the PE ratio at 20 and increase the price target from 200 to 264 to reflect for the change in accounting.
For the individual investor, earnings projections and price multiples are theoretical .... something someone uses to justify their decision to buy or sell a stock to an investment committee. The only fact that can be counted on is the last price paid for the stock and how that price compares with the price paid last week, last month, last year.
The only reason AAPL's stock price will reach 264 is if the demand for the shares outstrips the supply of shares offered forcing buyers to pay higher prices. Investors will demand those shares for an untold number of reasons:

liking the products; liking the ads;
giving the stock as birthday, graduation, Bar and Bat Mitzvah gifts;
hearing stories from those who bought the stock 4 years ago at 30 and still holding on to it;
Asian investors who want to own American stocks and the one name they know is Apple;
an investment committee who asks why Apple isn't in the retirement trust fund when they've heard so much about how strong the stock has been
.... and on and on.

So what does the picture actually look like?

Without a doubt, Apple has been an unbelievable stock since iTunes and Ipod launched around 2004 and the stock was under 10. But since peaking in December 2007, AAPL has formed what so far is a "bull flag" pattern. All this year, even as the stock doubled, volume has been anemic.

Will the stock be able to pierce the resistance at the all-time high without a significant boost in demand volume [perhaps that's why Cramer came out to pump it up]? Probably not. The stock is extremely extended ahead of its 200-day moving average and the 300-day hasn't turned positive yet. My guess is that it will retreat in sync the next market correction (when the S&P-500 hits around 1080-1125) and the move to new all-time highs will come in and when the bull market resumes .... and not as a result of an FASB accounting change.

Mysterious Happenings in the Oil Patch (Stocks)

noreply@blogger.com (Joseph Meth) — Sun, 13 Sep 2009 19:59:00 +0000

The NYTimes, no charting haven but sometimes interesting none the less, happened to have an article that should be of interest to all who wonder how long this terrific market will continue (and if you're reading this blog but aren't interested then you're in the wrong place). In the article, entitled "Around the World, Stock Markets Fell and Rose, Together", Floyd Norris reports:

The United States stock market has just completed its best six months since 1933. From March 9 to Sept. 9, the Standard & Poor’s 500-stock index leaped by 53 percent........Amazingly, however, the American stock market was one of the least volatile markets in the world in the last year. It was among the best markets when it was plunging, and among the worst when it was soaring. Over all, it ranked near the bottom among international markets......
If history is a guide, the strong recovery may be an indication that better prices are still ahead. Since World War II, there have been eight periods before the current market when the S.& P. 500 managed to rise at least 30 percent over a half-year period — in 1963, 1971, 1975, 1980, 1982-83, 1991, 1997 and 1999. A year later, the index had made further gains in seven of them. The exception was 1980, when the economy went into a double-dip recession and dashed the hopes of investors who had bet on a continued rise in stock prices.

I confirmed these results when I wanted to test the importance of all the conversation concerning how awful September and October are historically and, by inference, predicted to be this year, too. What I discovered, however, was that markets closed higher on December 31 than they did on August 31 in 34 out of 47 years since since 1962. The worst 4 month periods of the 14 that had a lower year-end close were 2008 and 2000, both years in which the market had already been declining prior to August 31. The third worst was 1987 due to the Crash that October. The average gain for the 31 up years was for the 4 months was 6.9%. Exclude the 3 crash years, the decline for the remaining 11 years was a non-staggering -3.8%. So the prospects for the next 4 months based on the past 47 years' statistics is for a strong finish to year-end. (statistics available in spreadsheet form by clicking here)

If you're not in stocks now or have some new money to invest, what should you buy? Banking stocks as a group are up 119% since March 9, Insurance stocks are up an average 86% and Computer Hardware stocks are up an average 82%. If the big money herd has sideline money left to put to work then are they going to buy these stocks or will they put their money to work on some industries that haven't been bid up so much already. My guess is that a good chunk of the money will be put into energy stocks which as a group are up 54%.

Specifically, many oil& gas stocks have formed the same reversal patterns (head+shoulders, ascending triangles, etc.), with breakouts highly likely. Some names include (click on symbols for the charts):

SD (SandRidge)
HLX ((Helix)
HERO (Hercules)
CRZO (Carrizo)
KWK (Quicksilver)
PVA (Penn Virginia
SM (St. Mary)
PXP (Plains Exploration)
COG (Cabot)
CHK (Chesapeake)
APA (Apache)
CEP (Constellation)

This is by no means an exhaustive list, it may not even include some of the best stocks and some of these chart patterns may actually fail. But the list could go on and on because there are so many great looking charts for you to scan through to find the one(s) you like best (in full disclosure, I already own the first two on the list).

There's something going on in the oil patch that's contrary to what you read or hear from the TV Talking Heads (e.g., huge inventories, price pressures). The charts tell a different story as I see it. They tell a story of slow accumulation and breakouts galore coming as we approach year-end. If you missed out on the low priced financials in March and the energy stocks last year now's your opportunity again.

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There was another article in today's NYTimes I'd like to bring to your attention, entitled "At Your Fingers, an Oxford Don". The article extols the benefits of one-to-one tutoring:

"21st-century technology carries the potential to nudge mainstream education back toward the 16th-century vision of one-to-one tutoring. The Internet, high-speed networks, powerful and lighter computers, and clever software for video, collaboration and simulations on the Web all help. Equally important is a maturing understanding of how to use wisely the new digital tools in education. The goal, proponents say, is to open the door to more engaged, interactive and personalized learning."

The article goes on to say that "one-to-one tutoring is the learning method proven time and again to sharply improve a student’s measured performance. A good human tutor can deliver a 'home run'". If you're looking for better stock market results, now you too can get tutoring to improve your chart reading skills. For more information, click here.

A Strategy That's Worked and Its Results

noreply@blogger.com (Joseph Meth) — Thu, 10 Sep 2009 15:09:00 +0000

The reason I haven't been writing as much recently is because I've been busy tending to my portfolio and watching the total balance at the bottom of the screen continually clicking higher. What a wonderful feeling seeing a sea of green and watching its percentage change during the day by usually 40-50% more than the change of the S&P 500.

It's what I've been waiting for and writing about since May, to the dismay of the skeptics whose comments claim that the market will soon be headed south again. Since Friday's close at 1016, the market is up 2% - far from the total 10-15% I'm looking for by year-end but not bad for 3 trading days.

And if you were in some of the more volatile stocks I've written about then you could have seen your portfolio (depending on how many stocks you own and the percentage of the total you put into these volatile vehicles) increase by 3-4%.

Here's a snapshot of most of the stocks I currently own that have performed exceedingly well .... so far:

Some of you are asking "Why so many stocks in an industry group?" or "Isn't it hard to research and then stay on top of so many stocks?" My answer is that actually it isn't. I take a very top-down approach (market and sectors) rather than bottom-up approach (individual stocks). It's also a money management approach of deciding how much to have invested and then making sure that the pool of money that is invested, regardless of the number of individual stocks or industries, continually deliver the sort of return needed to meet the objective (i.e., return 50% more than the S&P 500 and avoid suffering a loss). Here's the process I follow:

First, you begin by "timing the market". Determine what the future direction of the market will be over the next several months and, based on that market timing guesstimate, decide what percentage of your portfolio should be invested now, how much cash should remain and how long before you think you hit the next market target.
Readers here know that my on the bottom was March 19. Each step of the way from that day till now, I've incremental reduced my cash position and increased my stock exposure. There were hurdles and at each step the market has proven itself, my commitment increased. Today I'm essentially fully invested.
Second, identify what you think might be the hottest Industry Groups and commit in a basket of stocks of that Group. The groups change every so often so some rotation is necessary. It looks like the some of the Oil & Gas - Exploration and Development stocks are starting to move.
Finally, assemble a basket of stocks in the industry with: 1) charts where it looks like the stock is going to break out of a base or consolidation, 2) look for some of the more volatile stocks, 3) if possible, select stocks with a high yield. A number of these stocks were found through different scans such as "Bull" and "Golden" Crosses, new high lists, "momentum" and "stocks on the move" scans.

I expect to be able to hold many of these stocks until the market begins to tire at which time a decision will have to be made as to which to stocks to sell, whether to increase the cash position or pick up stocks at that time with excellent chart patterns in anticipation for the market's next move out of its consolidation. As I described in "Comparing Labor Days in 2003 and 2009" a couple of weeks ago, the market's Tech Bubble Crash recovery continued straight through Labor Day until the begining of 2004; most of 2004 was eaten up by a 9 month consolidation. There's no telling whether that will happen again in 2010 but we have time to develop a strategy if it does.

While they haven't performed as well, I continue to own some foreign currency and stock exchange ETFs, along with precious metals, as a hedge against inflation starting to rear its head.

This strategy has driven my portfolio to a 33% increase vs. a 22% increase in the S&P 500 since March 12. Not bad for a day's work. Let's see if we can get another 7-10% market move to the end of the year without losing any of the gains earned so far.

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By the way, if you want to learn more about the technique and discipline, click on the box at the right label "Want to read charts better?"