WSW – Friday, March 13th, 2009

Intro

OK, I’m no Louis Rukeyser (and IMHO, no one ever will come close.) I can only tell you what I see in the weekly activity. But I hope that in some small way I can reflect a little bit of the greatness that was Lou through what I learned watching his show (almost from the start and certainly to the final show). Even if my mirror is dirty and scratched, I hope it sheds some light.

This Week

This week was a very nice run to the upside. One of the best weeks in a very long time. Financials, in particular, stopped their plunge and many moved smartly to the upside. IMHO, this was largely due to the Obama speech where he finally stopped being Mr. Gloom and talked up the economy a bit. He even made a statement that carbon dioxide cap and trade would not be implemented in such a way as to strangle the economy. We’ll see what actually happens on that last point, but clearly someone was whispering in his ear.

Committing Merger

But wait, there’s more: We actually had some takeovers. There were mergers in the drug and biotech fields. (Merger activity means 2 things: 1) someone sees some real value, and 2) they can get funding to make the buy.) There was also the unexpected spectacle of not one, but two major U.S. banks announcing that they actually made a profit so far this year! (BAC Bank America and C Citygroup). If this keeps up who knows what might happen; perhaps even the government deciding to stop nationalizing things. ( I own some BAC, unfortunately I bought it long enough ago that the 86% run up this week still leaves me with a significant loss… “If you are early, it’s called being wrong! – emsmith” And finally, GM General Motors announced that they were not expecting to need more government money. Next thing you know they might even announce the intent to sell cars. Imagine!

The biotech mergers have caused a buzz about drug and biotech stocks, but when I Race Drugs and Biotech I’m not impressed. It’s the usual mix of individual movements driven by individual drug patent expirations, news releases, and takeover announcements. Hard to get ahead of anyone on that. I think I’m going to stick to my general attitude that biotech is good for trading on a fast indicator (like the oddly named Slow Stochastic) but not investing.

Cell phones reported earnings recently and in hard times folks are moving to discount plans. This lead to a jump in PCS and LEAP. That Sprint may actually be fixing some of their problems gave it a boost. CEL in Israel is at least holding flat and providing a 12% dividend. Many of the other cell providers are not doing as well, being in downtrends of bouncing sort of flat. I own a bit of CEL and VZ for their dividends. I’m considering a trade in PCS, S, or LEAP.

Covering Shorts & Energy Issues

So we saw a lot of hedge funds and other short sellers buying in stock to cover their short positions (and maybe just a little bit of actual retail buying.) Also this week, gasoline, heating oil, and nuclear all finished about flat on the week, though oil & coal were both up. Natural gas, however, slumped on the week. So industrial natural gas demand must be down (given the cold weather, heating demand ought to be high) and production is up from many new shale plays. There is also an OPEC meeting coming this weekend and oil tends to rise into those meetings. Oil assets are cheap now, but won’t stay that way. For long term holdings, buying some oil now looks fairly cheap. (I own PBR Petrobras – the Brazilian oil company, PCZ PetroCanada, and two oil & gas Canadian trusts: PWE, PGH with large dividends. On CNBC “Fast Money” they were advocating COP and XOM, but I’m not so sure the U.S. Congress will leave the domestic oil companies alone. I will be adding an energy company “race” to the “Racing Stocks” tab up top over the weekend and we’ll get a better idea what the various companies charts look like.

Buy What China Buys?

There also were significant moves in the copper miners (with FCX looking especially good) and in the “engineering companies” like FLR Fluor and FWLT Foster Wheeler. From this I would suspect that China is shopping; both for metals and for coal electric plants and other facilities. Their was an odd case of a Chinese leader expressing hope that the U.S. would maintain the integrity of the currency (since they hold about a $Trillion of U.S. paper…) which leads me to believe that they will be spending more to buy basic assets with persistent value as fast as they reasonably can. They funded a $10 Billion expansion plan by PBR just recently. So we have a clue. Ask yourself: What would China buy? And buy it. I have some PCU Southern Copper along with a bit of FCX. I will also be looking more closely at coal mines and other miners in my sector review this weekend.

As we look at charts, if you want more detail on indicators, I have a posting describing them in more depth.

Finally, my ” Rorschach Race” (under the “Racing Stocks” tab up top) looks like the shorts did not make much money this last 6 months unless they traded in and out regularly. It looks like the short side is getting worn out as a “play” and that argues for stocks to be headed up for a while. FXI – China is a leading candidate, per the chart. Though it also shows that sitting in cash or near cash was probably the least traumatic and most comfortable strategy (only beaten by rabid swing trading the short side; not an easy game, or very good stock picking… a harder game.)

Context

One thing I learned from Lou: Context matters. So what is our context? Let’s look at the S&P 500 largest stocks in America compared with some other kinds of assets; a 1 to 3 year maturity bond fund, oil, gold, Yen. We are in a bear stock market. On the decade long scale, it’s clear:

Asset Class Races

Asset Class Decade Race

What else did I learn? Calibrate your ruler, or in this case the dollar. Oh, and Gold can be a nice counter cyclical asset.

So what is this chart? It shows a comparison of a few different assets over a period of a decade. One is gold (GLD), the other is a very short term bond (SHY) then we have a basket of the S&P 500 (SPY) and a line for oil (USO) and the Japanese Yen. The Yen line is there to remind us to “measure the ruler”… Mostly we work in U.S. Dollars, but inflation and Federal Reserve Bank actions make any currency a “rubber ruler” so we need to measure it against something. Gold is a good long term choice, but in time frames of a decade or less can be driven by emotion and panic, so even gold is a bit of a rubber ruler. Using both of them lets us have some idea where ‘real value’ lies. Oil? Energy underpins so much of industrial activity and profitability that it’s good to keep an eye on it as a general economic indicator.

Asset Class Review

So what do we see:

Another Lou Lesson – there are more than stocks. Watch bonds.

SHY – this came into existence as a “ticker” (a tradable Exchange Traded Fund or ETF) just a few years back, but you can see that 1 – 3 year and shorter bonds / bills are very stable. They don’t drop (in dollar terms) but they don’t go up much either… In bear (falling) stock markets, you want to be in bonds; but in bull (rising) stock markets, you don’t want to sit in bonds and miss the market rise. It’s a good basic U.S. Dollar ruler. So how “rubbery” is it?

FXY- the Japanese Yen is a fairly stable currency, at least for now. I could just as easily have used the FXF Swiss Franc, but the result is about the same. This ETF only came into existence a couple of years ago, but you can see that it has gone up as the SHY sat stable. The dollar has fallen against the Yen. At least over the last year or two, it would have been better to have been out of the dollar (though that may not hold going forward; we’ll have to look into that later). Notice that the Yen had more bounces to it than SHY. Currency trading has some timing needed to buy the bottom of the bounces… Looking at the currency 10 day race in the Racing Stocks tab I noticed that the Brazilian Real was moving up smartly this week. Perhaps someone buying resources in Brazil?

GLD – Gold. GLD has gone straight up (with seasickening volatility) since that ETF came into existence about 5 years ago. Clearly there is some panic with folks rushing to gold. But can you stand the volatility? Timing an entry here looks tricky, but you could make (or lose) a lot on that timing. More on this in another posting. But clearly the YEN with GLD say that the dollar is not very shiny right now and folks are having a bit of panic.

USO – U.S. Oil. What does this ETF tell us? It, too, is a fairly new fund (yes, I could have plotted some proxy, but this is something you can buy and sell – a real “ticker” – and covers the time I care about). We see the oil price spike during the overheated economic boom, then we see the crash in the market meltdown to a recession. Commodities are like that. If folks are not buying cars and driving, you don’t need as much oil, steel, copper, aluminum, etc. etc. On another day we will put up the commodities against each other and you can see the match. For now, what we care about is that oil is saying “slow economy”. You should also notice that oil can spike up and down with vicious speed. Price inelastic commodities are like that.

Finally we come to the actual proxy for the stock market.

SPY – The ETF that holds stocks from the S&P 500. Why use it? Because (depending on what time period you choose) between 70%+ and 80%+ of professional money managers fail to beat the S&P 500. There is no magic in this. It’s the 500 biggest companies in America. If your company is failing, you leave the group pretty quick (automatically cutting your losers – and losses…) while growing “surprise technologies” rapidly grow into the index from the bottom. With companies, size matters and bigger companies typically do better. Finally, it’s diversified across 500 companies in a broad set of sectors. One CEO doing a “perp walk” is not going to damage you. So you have three very powerful things working for the S&P 500. Diversification, Size and Selection.

But it’s chart looks pretty bad. Notice that there are two thin lines near the colored price bars? Those are Simple Moving Averages. It’s pretty easy to spot the bull market (price on top of SMA20 and SMA40 stack) vs bear market (price under SMA20 under SMA40). You can also very easily pick out market tops (price and moving average stack cross over to the downside) and bottoms (cross over the other way, though timing a buy [entry] at the exact bottom is a bit tricky and you tend to spot them after they have already moved a fair amount. But we can easily see it’s a bear market right now.

But the market went up this week?!

Yes. Look at that chart again. Notice how far price tends to get from the moving average before it ‘snaps back’? Especially in bear markets it can run down quite a ways? Now look where we are. Way under the moving averages. A brief run up back to those averages is likely. We will look more closely at timing this just a bit later. For now, just eyeball that chart for a bit. Ask yourself “Who Am I?”. Are you an adrenaline junky with a need for speed? Trade oil. Are you a mom who just want’s her christmas money to be there in December? Buy SHY. Are you looking to invest a college fund and can take a 5 year or 10 year horizon with some volatility? SPY has potential. Know Yourself. This is critical. It is also why I can tell you what I do for me, but unless I know you, I can not give you any advice for you. The trade or investment has to match the person and the market.

Finally, that line at the bottom, volatility. That is how much stock prices bounce around at any given time. This chart has weekly price bars, so the range of one bar is from the high to low for that week. Notice that in bull markets, volatility is low, while in bear markets it is high. We just had one whopper of a lot of volatility! That argues for a bit of a ‘local bottom’ and maybe a relief rally. But that’s on a 10 year scale. How about in a shorter term?

OK, a bit more depth on SPY:

S&P 500 1 Year

S&P 500 1 Year

OK, we zoomed in the time frame to about a year with daily price bars. Now we can see a bit more closely what’s happing right now. We are using a faster moving average stack too. We already know it’s a bear market, we now want to know what’s likely in the next week or two. What’s the trade in a falling market trend. I’ve put FXY on the chart as our calibration for the dollar rubber ruler. It shows some recent dollar strength. I’ve also put on EWZ, the Brazil ETF. It will often move with the U.S. market, but with more vigor (in both directions…) So what do we see?

A bear market rally headed back to those moving average lines. You can ride this for a couple of more days (most likely) but get nervous as the prices get back to the SMA50 level (50 day moving average – this is a ‘day’ chart and each price bar is one day.) How about those three indicators at the bottom?

Stock Indicators – what and how

We will take them from bottom to top. The DMI is the slowest. It is there to remind you where you are coming from and that it isn’t over until it’s over. Next up is the MACD, that gives slightly time lagged trade indicators. At the top is the RSI, that often gives an idea what is coming, but can say “down is weaking” and you take it as “buy now” and forget that DMI said “down may be weakening, but it’s still down.”

So lets look at each of these, top to bottom this time:

RSI touching or near the 20 line is usually at or near a local bottom. As it oscillates from 20 to 50 you are bouncing along a bottoming process. Right now it’s slightly pulled off that 20 bottom. We ought to have a short term tradable up run. When (and it is a “when”) this rally falters, probably at the SMA50 line, watch the RSI. Back to below the “near 20” it reached at the start of this month? We’re not out of the “doo” yet. But if the next dip is less low, like, oh, 30 or 35 and goes back up above that 50 line it’s been bouncing off of? That is very positive and argues for an extended run up.

The MACD – Moving Average Convergence Divergence. Those SMA stacks that cross over each other? This is a modified version of that using faster moving averages. It then takes their difference and plots them. That’s the red and blue lines. When they are above the zero line, it’s a bull run. Below the zero line, bear run. So where are we? Below zero, so it’s still a bear run (but you knew that already!). But look at the cross over of blue and red. That tells you a trade is available. We just had a blue cross over red to the top side! At a minimum we have a tradable bear market rally. (But we need to watch it closely, i.e. daily, since we are still in a volatile bear market and things could fall fast…) BTW, the black blob in the middle is just the difference between the blue and red line flattened to a zero reference. Called the MACD Histogram. Notice it has One Little Uptick at the very end? That’s the crossover of blue above red in the two colored lines… Same information, different picture.

Finally we look at the dour old DMI. The stinker is reminding us it is still a bear market (red on top) and a fairly strong one (black line and red line both fairly large numbers in the 30 to 50 range. But one positive note: Both lines have inflected downward (and the blue line has inflected upward). This is what it looks like just before a nice run up. It is possible for the run to fail and these lines to just turn sideways (red staying on top, market still falling) but the odds are weak. DMI lags MACD and lags RSI by a lot; but sometimes you need to be reminded where you came from… It’s not a bull run until that blue crosses the red to the topside (though in a short bear market rally the trade is mostly over by then).

So what have we got? Most likely a nice bear market rally trade, but a bit early to be putting your money in for the long term. Trade it, don’t trust it.

What about that Brazil line?

So how about that EWZ line? It’s interesting. Notice that during the last few months, since November, Brazil has had a very gentile uptrend while SPY continued a drift down… Brazil has been showing more strength than SPY in this bottoming process. I’m going to put up a chart of EWZ and you can compare the indicators.

Brazil the EWZ ETF vs the BZF currency ETF

Brazil ETF vs Currency Race

OK, what do you think? What do those indicators tell you?

Fine, OK, I’ll tell you what I think…

The price is weaving with the SMA ‘stack’. I call this a ‘bottom weave’ (or if it happens at a top, a ‘top weave’). It indicates some indecision and something of a ‘battleground’ between opposing points of view. It often indicates a change of trend (but sometimes the “shelf” just breaks down into a new drop in an ongoing bear market, so the bear isn’t dead until the 10 year weekly chart says so!). But at a minimum, you’ve got prices rolling on a local bottom and you can trade those rolls. Those bumps in the bottom weave.

RSI – he looks great. In this last dip, only got down to about 30. That’s calling a bottom Real Soon Now.

MACD – It looks great too. Dancing with zero and a crossover to the upside of blue on top. As soon as it’s blue on top and above zero, you have a bull run going. Certainly we’ve got a trade on.

DMI – How’s our dour friend? What? Blue on top? Where’s the pessimism? The black line is low (trend strength is low) but it’s a positive trend? Gosh!

So that’s why I have my money in Brazil right now, with some in the U.S.A., yes; but mostly in other countries. BTW, that BZF line is the Brazilian currency, the Real (pronounced REE-al) it is there to make sure we know what ruler we are using. The Real has been stable relative to the dollar (since the plunge when everyone was panicking out of Brazil) and had a little up tick lately. It is a flat trend, but the EWZ has a slight uptrend in comparison… So the currency is some of the wobble and the stock trend is more steady-up in Real terms. I can live with that.

A word on REITS – Real Estate Investment Trusts

Taking a look at “The REIT Race” is interesting. Clearly right now real estate is in the dog house. It looks to me like a buying opportunity, but it will require careful inspection of the financials. You don’t want to be buying an over leveraged debt bucket who’s about to go bankrupt, still, there are what look like compelling values, at least on the surface. PLD, Prologis, has some of the best positioned logistics and inventory management facilities on the planet and is selling with a 14.4% dividend (the chart says it’s at a bottom too, so I own some) and there are a couple of Mall REITS that are “way low” like RPT and PEI with dividends of 18% and an astounding 33% respectively.

I would expect the PEI dividend might be under threat, so a financial review ought to be done. But eventually this recession will end, and unless they need to issue new stock or wipe out the common, these mall REITS ought to survive. They are priced for bankruptcy, yet retail sales are down only single digits percentages. With my speculative money I bought a little (heck, $350 buys 100 shares of PEI… less than an hour at the craps table at Vegas and lasts longer in play too.) I may be a bit early on these, but the chart says they have possibly bottomed (they are ‘shelving’ sidways at the moment after a ‘dead cat bounce’ and need a confirmed rise above the SMA stack to confirm the bottom) and if the economy picks up at all, I expect Malls and Logistics to pick up fast.

Conclusions and Likely Actions

This is probably enough for one posting. I’ll do more over time. But for now, there is a tradable rally and Brazil is looking good. I will be doing a longer look at the drug and biotech space (though the mergers action has likely already happened). Also on the shopping list is more “China related” and maybe a bit of bottom fishing in selected financials (maybe double down my losing bet on BAC? Generally not a preferred strategy, but I’ve used it to get out of a mistake before, if done fast enough.) While you ought never turn a trade into an investment, turning an investment into a trade is just fine. In other words, never hold a mistake longer, but be willing to trade out of a mistake in the best way you can. Finally, the Emerging Markets race shows China on top. A small amount of FXI would probably be a good thing.

Disclaimers, Disclosures, and Where To Get Charts

You ought to visit big charts where these charts are coming from, and try the advanced chart option on a few of your own stock tickers. It’s free, it’s easy, and it is valuable. My only relationship is as a satisfied user.

DISCLOSURE: I own EWZ and the particular Brazilian stocks PBR, CZZ and BAK along with some stocks that are in the SPY index (though I’m not sure exactly which ones, it likely includes some bank stocks like BAC, the turkey, GS along with some retailers like M, JCP, HOTT and maybe one or two others; but I have not done my weekly review of individual tickers I hold so I can’t comment on them one way or the other right now…

Further: I’m not a registered advisor, registered agent, broker, or anything else. I’m just “some guy” trading his stocks telling you what he sees and what he’s doing. You want to do something? Do it because you decided to do it, not because I did something. While I hope you can learn something from what I say and do, you might learn as much or more from “me as a bad example” as from “my sage advice”… I’m just exercising my constitutional free speech right to talk about me and my trades, not giving anyone any personal advice. To do that I’d have to become a registered [something] and that’s more trouble than I care for right now.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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2 Responses to WSW – Friday, March 13th, 2009

  1. pyromancer76 says:

    E.M. Smith, thanks for your willingness to share your efforts and expertise. I appreciate the education — and, yes, I have my own purposes and my own views. They can only be enhanced by what you have lived and learned.

    I don’t think I can pull myself away from California, though. I might be living in a fantasy, but I hope that this too shall pass. I think of my parents living through the Great Depression and then World War II in California — my father fought in the Pacific Theater. What could be worse! At least 15 years “out of” of one’s life. I will try to stick it out here. But if you move to Brazil, please let us know how you fare. The more alternatives, the better.

  2. E.M.Smith says:

    Well, this particular post is about money, not living arrangements! While I sometimes have a thought of moving to a beach in Brazil, it would be at least a couple of years before I could do that (and that decision would not be linked to where my money is invested…)

    So the point about the Brazil chart is only about the Brazil chart and has nothing to do with me. In fact, one of my major mantras when I teach folks to trade is “It’s not about you, it’s about them and what they are buying.” There is a similar mantra of “It doesn’t matter what you think; what matters is what everyone else thinks because they will move the market, not you.

    So if the Latvia chart looked better, it would be shown here, and if Brazil was going down hill, I’d be “talking dirt” about it as an investment!

    I’ll be adding a page that does a “race” of several national stock funds (it is one of my standard comparisons) and whatever is the top line in that chart is the preferred national fund (unless there is some overriding risk, like a new government elected that promises to nationalize everything.) Now for several years the winner has been Brazil and that has colored my opinion of Brazil, but things could change.

    On a personal note, I actually like the idea of Chile due to the wine country and Mediterranean climate and Belize due to the infrastructure and English language. I also have a fondness for the Caribbean islands, though you need a bug out plan during hurricane season… So I wouldn’t read too much into my fondness of Brazil! Heck, I haven’t even visited it yet! I’m still in the “where to retire fantasy” phase 8-) I also have a good friend living in Florida which also has warm beaches and lots of good cheap seafood, so it’s in the running too (even if it is a bit lacking in the ‘exotic’ department…)

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