WSW – Friday, March 27, 2009

This Week

This week was a very nice run to the upside. Then we had a ‘failure to advance’ leading into Friday’s slide. After all the run up, and being at the moving averages, a slide is typical. I expect some seesaw action as this battle ground area gets worked out. Oils ought to drop until Wednesday morning when the oil inventory report comes out. Given the way the oils look (double bottom, crossed moving averages to the top side) and given that oil is back over $50/bbl, oils ought to resolve to the upside on Wednesday. (It would take a truly horrid inventory report to change that.

A surprisingly better than expected home sales number lead traders to think maybe the consumer isn’t completely dead yet and may be someone is actually going to buy something – so a broad number of consumer stocks rallied.

Here’s a 10 day houly chart of the Dow 30 Industrials (DIA), the S&P 500 (SPY), the Nasdaq tech companies (QQQQ), the Russel 2000 (RUT), and both a Brazil fund (EWZ) and an Australia fund (EWA). It also has a ‘short fund’ (SH) on the chart so you can see what being short this market is doing right now.

10 Day Hourly Interval Broad Market

10 Day Hourly Interval Broad Market

This is a live chart, so my comments will describe how it is now, but in a week it will be showing new data and a new week. Since I think it’s more important to be in touch with what the market is doing NOW than to preserve the historical chart, this is, IMHO, a reasonble choice. Just don’t be surprised if the chart I describe is not the one you see a few weeks from now!

The market had a spectacular bull run the prior week and this week carried it forward, but all the net gain was on Monday, we’re ending this week in a roll down on Friday. The daily chart shows the indexes in a flattening trend. At this point the chart says day traders ought to be out of the market or even short. Folks with a long position with gains might want to use a put option to protect those gains for a few days. I expect we’ll wobble back and forth a bit, eventually resolving to the upside (watch the indicators for an entry call – DMI+ on top, MACD with blue on top

So what happened?

After a long run to the upside, the market makers have sold a lot of their inventory and satisfied the immediate excess demand, they may even have had to “short” stock (sell what they do not have). At the point where demand is slackening, they can short some extra volume to “run the stops” and cause prices to drop to trigger stop loss orders that sell them back some of that stock at lower prices.

Recent months - A Tail of Two Markets

Recent months - A Tail of Two Markets

I’ve put just the interval from the last few months on this chart, and plotted the Nasdaq 100. Here we see a tail of two markets. Clearly Tech, like Brazil and Australia, is outperforming the broad market. This chart shows it in a “bottom roll”. So far, not making a lot of net progress to the upside, but not dropping either.

We have started “weaving” with the moving average stack. This usually happens a few times at a major market bottom, then resolves smartly to the upside. And what do the indicators say?

First, look at DMI. It is ‘blue on top’ but the black line is down toward 20. Below about 25, that black line says the trend is not very strong, trading will make more money than holding a position. The price will be more of a sideways sin wave than stair steps. In that case, the Slow Stochastic is a better trade indicator, while the MACD is better in strongly trending markets. But DMI says this is still a bull run. So does MACD.

And what of Slow Stochastic? Even after the sell down today, it has not called a exit. It still is weaving sideways at the top, not headed down. This is fairly bullish! So Tech will be likely to hold up better in the next few days than the broad market. Not too surprising, really: No automakers, no banks, nobody taking government money waiting to be socialized, no oils with the Obama cloud over their head. And the weaker dollar makes their exports more attractive. Tech has bottomed. Buy the dips. Just like Brazil and Australia (and other resource countries).

SPY and DIA (the Dow Jones 30) are still not calling a bottom yet. They are trying, and their isn’t much downside available to the shorts, but the chart still says to use “bear market rules” – caution first; and that means we can expect a sell down for a few days next week. It could turn back to the upside fast, especially if the government says something good, but after the run we’ve had, some backing and filling is likely.

There was no spike of volume on the Friday downturn. ROC (Rate Of Change) and momentum both say to stay in, DMI says it’s still a run up, but it lags rather a lot. So I don’t expect this downturn to last long or go far.

What sectors won this week? Well, they were not as hot as last week, but here they are:

Aluminum                      26%
Furnishings                   24%
Travel and Tourism            19%
Specialty Finance             17%
Automobiles                   17%
Home Construction             16%
Business Training             15%
Recreational Products         15%
Asset Managers                15%
Consumer Electronics          15%

Asset Managers moved due to the government announcing a public / private plan to sell the impaired mortgages. A process likely to bring them new business. I would not expect a repeat move like this, but the longer term chart ought to be consulted.

The short covering trend continued (Furnishings, Homebuilders, financials) and resources (drop it on your foot and it hurts) moved as a broad move in the Aluminum companies (added to the ‘racing stocks’ tab.

The short cover trend is most likely driven by the continued good news this week (in particular, housing starts was higher than expected – folks are buying a few homes again…) and folks buying homes are likely to be buying cars and furniture, too. Heck, some of them might even take a vacation this year, so the rental cars & travel agencies got a short cover rally.

The resource trend is driven by the general expectation of economic recovery and China buying resources. The resource play is early in it’s cycle and most likely has plenty of room to run to the upside. If folks are starting to buy cars and homes, aluminum and copper will be part of the product.

Specialty finance has a lot of 5 letter tickers in it. (one and two letter tickers are major companies, three letter tickers are major exchange traded stocks. Four letters are Nasdaq and by the time to get to 5 it is typically “pink sheets” – thinly traded stocks with little information and few listing requirements, or foreign stocks with a minor trade here. I didn’t recognize any of the names and it just looked like an odd mix. The Consumer Electronics list looked a little better, but not enough to get my interested.

Autos was lead by a China maker, BCAHY, followed by the Ford Preferred stocks: FPRA and FPRS. After that was Volkswagen and then GM and Ford common and a gaggle of various GM preferred shares (yet another reason not to buy GM common – a half dozen or more preferred shares feeding at the earnings trough ahead of you…). I may add some FPRS to my F holdings.

What Is Our Context

Let’s look at the S&P 500 largest stocks in America compared with some other kinds of assets; a couple of month maturity bond fund, oil, gold, Yen. We are in a bear stock market, having a bull run, but with other currencies and asset classes telling us the dollar is falling.

Asset Class Races

Asset Class Recent Race

What is this chart? It shows a comparison of a few different assets over a period of several months.

SPY       The S&P 500 ETF
GLD       Gold ETF
USO       Oil ETF
FXY       Japanese Yen currency fund
SHY       1 to 3 year U.S. Treasury Bond fund
FXE       Euro currency ETF
SLV       Silver fund
BZF       Brazilian currency ETF
EWA       Austria ETF
WOOD      A wood and paper products fund

So what do we see:

SHY – Shorter bonds / bills are very stable. 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.

EWA – Australia and as we saw in an earlier chart: EWZ Brazil, are off to the races. Even EWC, Canada has joined the run.

FXY, FXE, BZF – the Japanese Yen, Euro, and Brazilian Real all flattened against the dollar, with the Euro even dropping a bit. The currency trade is loosing some steam.

GLD – Gold and SLV – Silver both have flattened with the currency trade. They will be event driven as treasure actions work or fail. This week the auction went well. The miners will work better since their profits will continue to rise with the present high metals prices, even if the metals prices don’t rise from here.

USO – U.S. Oil. What does this ETF tell us? This week all the energy commodities were flat, except natural gas that dropped. I may exit my natural gas holdings, the glut of gas does not seem to be easing.

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

SPY – The ETF that holds stocks from the S&P 500. A nice bull run but in a bear market, but it has halted at the moving average stack to ‘slug it out’ and see if the bulls or bears win. The “safest” think to do is sit in cash, watch for the resolution. If it resolves down, wait for another bear market rally trade. If it resolve up, wait for the stocks to return to the SMA stack from the top and buy in. I’d rather find a rising market or sector and be in it…

The indicators:

RSI says be worried. We are over 50 line in a bear market, inflected down.

MACD says don’t worry yet. Still pointed upward with blue on top and crossed over the zero line into positive territory. But the slope has gone flat. Watch for a crossover to the downside to step aside.

Finally we look at the DMI. It is saying that we are in a positive run (blue on top) and the trend is weakening (black line headed to about 20 and both blue and red lines in the less than 25 range. That range (under 25) says to trade using the Slow Stochastic rather than just sit in a flat churning stock. But that also depends on your attitude: trader or investor.

But one positive note: On the DMI Blue and Red have both inflected sideways. This happens when a trend exists, but is not changing much. Probably and weakness will be short and shallow.

But the market went up this week?!

We snapped back to the moving averages on the daily interval chart, but still have a ways to go to reach the moving averages on the 10 year – weekly interval chart. Until the bear market is confirmed over, you must assume that you will fall away to the downside from that touch of the moving averages on the daily chart, but if we break through them to the topside, the next stop will likely be the moving averages on the 10 year chart.

OK, a bit more depth on SPY:

S&P 500 1 Year

S&P 500 1 Year

We zoomed in the time frame to about 4 1/2 months with daily price bars. Now we can see a bit more closely what’s happing right now. 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. I’ve also put on several of the foreign funds (including a European one, EWO – Austria). So what do we see?

A bear market rally at the moving average lines, and paused. We rode this back to the SMA50 level (50 day moving average – this is a ‘day’ chart and each price bar is one day) and moved through to the 75. That’s a positive thing. Now it’s time to be cautious, but ready. We must punch through those moving averages to make this rally investable instead of a bear market counter trend rally (ready to trade out). But the chart and market action, along with the news flow, are generally positive.

In addition, we can see that the emerging markets are clearly leading the race.

How about those three indicators at the bottom?

Stock Indicators – what and how

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

I’ve added a new one here in the Williams %R. It is presently saying to stay in the S&P 500 (if the blue line crosses below the center line it says to get out). Similar in function to the MACD but sometimes a bit easier to read.

Below that, the Slow Stochastic said that the trade was over, then whipsawed back in, and now is indeterminate. It’s not saying to trade out, but these “double tops” in the Slow Stochastic rarely hold for long (unless a strong trend forms) New money can be added in small chunks (averaging in).

Finally, our drop on Friday was in the context of falling volatility. That usually means the movement down was weak. A weak fall argues for a continued run up next week. I’d guess it will start late Monday or more likely, early Tuesday. Watch the Slow Stochastic for timing.

In this weak a trend (as the DMI black line drops under 25) the Slow Stochastic indicator will give a better indication of when to trade in or out.

So what have we got? Most likely our nice bear market rally trade is over, and it is a bit early to be putting your money in for the long term. Trade it, don’t trust it. I would not short until the bear run is confirmed, but I would buy “protection” for gains in the form of cheap out of the money puts or I would move some money to cash (I’m about 5% cash right now). Watch the fast indicators like Slow Stochastic on Monday to see if we will break through the SMA stack and head higher.

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. And in this run Brazil broke out to the upside with greater strength? 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. My take on it is that Brazil is a winner here.

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 has broken out above the SMA ‘stack’. This is a very bullish sign. I would expect the price to move back to that SMA stack in what is called a “retest” then break to the upside in a strong bull run. Put a “buy if touched” order above EWZ and adjust it down each day to just above the prior day close. When the break out happens, you will be bought in for the ride.

RSI – looks great. In this last dip, only got down to about 35. It’s oscillating each side of 50. That’s a neutral to up indication. Given the recent action, I’d call this a very early start of a bull market.

MACD – It looks great too. Crossed above zero says it’s an active bull trend and running up. When it’s blue on top and above zero, you have a bull run going. Blue flattened a little but the slope is still up and the run is still on. This could chang Monday…

DMI – How’s DMI? What? Blue on top? Where’s the pessimism? The black line is low (trend strength is low) but it’s a positive trend? Gosh! Blue is at 25 and rising. This could be the start of something big.

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 up run lately. It is a flat trend turning upward, but the EWZ has a slight uptrend in comparison… So the currency is some of the wobble but to the upside and the stock trend is more steady-up in Real terms. That’s nice.

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. The REITS took a hit at the end of the week, but some of the retail REITS held up nicely.

PLD, Prologis, got whacked hard when Cramer put it in his ‘sell block’ and a bunch of folks decided to dump it. His assertion is that PLD has a lot of debt to roll over and he doesn’t think it will go well. Given that the Fed just announced hundreds of $Billions to assure liquidity of debt, I think they will succeed. Still, it’s a bit of a gamble. I will probably double my position as a trade as the 10 day chart calls an entry at the end of the rush out, then exit the trade on the rebound holding my original position.

PLD has some of the best positioned logistics and inventory management facilities on the planet and is selling with an 18% dividend at this price ( and the chart says it’s back at it’s bottom price too).

There are a couple of Mall REITS that are “way low” like RPT and PEI with dividends of 20% and an astounding 40% respectively at these prices.

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, $285 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

For now, there is a rally in Brazil and the US market will likely pause a few days after the options expriation then pick a direction. I will be doing a longer look at the drug and biotech space (though the mergers action has likely already happened) along with the wood and paper space. Also on the shopping list is more “China related” Finally, the Emerging Markets race shows China on top. A small amount of FXI or EEM would probably be a good thing.

Disclaimers, Disclosures, and Where To Get Charts

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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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