WSW – Friday, April 3, 2009

This Week

This week started with selling on Monday (and at the end of Tuesday) but ended with a very nice run to the upside. Last week I said: “I expect some seesaw action as this battle ground area gets worked out.” Well, that happened on Wednesday when the market opened low and headed straight up. The charts on this posting are very large. On a Mac with Safari, “CTRL” and a mouse click lets you open them in another window for better viewing. Other browsers, YMMV…

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. I have also added EWO, an emerging Europe Austria fund and EWW for Mexico.

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 this week. The normal ‘roll down on Friday’ tryied to happen, but ended to the upside if only a little. A very positive feature!

Last week I also said: “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.” And that is exactly what we got with a very nice entry point at the open on Wednesday for XOM (Exxon) and CVX (Chevron). But for the oils with a foreign home market and for COP (Connoco / Phillips) with a substantial overseas holdings, the best entry was Monday mid day. Wednesday was only a couple of percentage points higher, but it’s worth watching to see if this pattern repeats.

PCZ is a Canadian oil and PBR is Petrobras, in Brazil. PBR is a significant part of the EWZ and other Brazil funds, so buying (or selling) pressure in those funds can move it a little out of sync with the rest of the oils. STO (Norway), E (Italy), and RDSA (Royal Dutch Shell) moved similarly to the other oil majors (they are not on this chart) with STO and E having their lowest point on Monday but RDSA on Wednesday. My guess is that it depends on how much U.S. presence a company has. The Canadian tar sands companies (IMO and SU) along with the South African Synthetic Oil Company SASOL (SSL) also had their low on Monday. Total (TOT) moved somewhat half way between the two behaviours.

10 Day Hourly Interval Oils

So what happened?

After a long run to the upside, the market makers have tried to push the market down (covering shorts) and ended with a bull run on their hands.

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. MDY the mid-cap medium sized companies is also doing well. This chart shows Tech breaking out from a “bottom roll” in a flat SMA stack. QQQQ is a buy at this point (which implies that companies like Apple (AAPL), Research in Motion (RIMM), Intel (INTC), HP (HPQ), and others ought to be worth a look / race.

What do the indicators say?

First, look at DMI. It is ‘blue on top’ (DMI+) but the black line (ADX) is down below 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 rather 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. DMI is a lagging indicator and at this point I would expect the ADX (black line) to slowly trend up above 25 in the next few weeks (it has flattened and started to turn upward). We’ll see. But with MACD above zero and with a nice upward slope, the bet is to the positive side and a continued bull market run for a while.

And what of Slow Stochastic? It had you exit Friday a week ago, and re-enter this last Thursday on the gap higher open. This reduced your risk, but also reduced the total gain a bit. The ‘trade out’ is weakening and the ‘hold stocks’ is strengthening. 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, but they are trying, and their isn’t much downside available to the shorts. Last week I said: “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.” Well, that lasted all of Monday and Tuesday. Wednesday shot out of the gate and Thursday was a gap open higher. At this point, I am shifting to ‘market neutral’ on the SPY and DIA. (That implies a rolling bottom trade range eventually resolving to the upside; which further implies short covering and bottom fishing action by others, which further implies that there is trade action available in some of the more beaten down sectors like housing and finance: trade the “dead cat bounce” in those sectors but don’t trust them, yet.)

There was soft volume on the Friday rise of SPY, so it lacked conviction. Not really surprising in an unexpected move. ROC (Rate Of Change) said to get back in (if you were out) and momentum said to stay in the whole time. I expect we will continue this kind of ‘rolling higher’ next week, ending about April 15th with the IRA money being ‘all in’.

What sectors won this week? Looks like short covering to me, in many cases. They are likely OK to start bottom fishing. Take a look at hotels, casinos, recreation, travel. There are still some ‘recession trade’ sectors like training and autoparts. Here they are:

24.15%  Gambling	  
14.85%  Hotels	  
14.33%  Recreational Services       
14.15%  Auto Parts                         
14.05%  Media Agencies                 
11.12%  Footwear                           
11.12%  Recreational Products        
10.79%  Mortgage Finance              
10.71%  Automobiles and Parts      
10.41%  Travel and Tourism	          

The short cover trend was despite bad news this week (in particular, a very bad employment number – but that’s a lagging indicator.)

I like the hotel space (and hold RCL, CCL, and HST) and it looks to me like HOT (Starwood hotels) and BYD along with MTN (Vail Resorts) have potential. Here’s a hotel, casino, and cruises 6 month race. WYN also looks interesting, but I don’t know much about it.

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, and lost money this month. 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, with EWZ, Brazil right behind. Though it also shows that sitting in cash or near cash was probably the least traumatic and most comfortable strategy, the emerging markets are now beating that strategy.

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 has stabilized a bit and industrial commodities are rising.

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. Notice that SHY has a small roll down in the last few days.

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

FXY, FXE, BZF, GLD and SLV – These all show dollar stability for now. The best movements will be in things not part of the ‘inflation dollar falling’ trade for a while. This argues for stocks as a better asset than gold, silver or Yen.

If you look at the international stocks under the same tab, you will see all foreign markets up despite the dollar being flat. This is a good time to have your money in stocks, with the emerging markets leading.

USO – U.S. Oil. What does this ETF tell us? This week all the energy commodities ran down at the start of the week, then moved to the upside. Coal and the nuclear stocks the most, but the petroleum group was close behind. This continues the theme of a commodity lead recovery. Even WOOD is moving higher. PCL is a REIT in the timber business that we will start to watch. It looks to me like an attempt to drive oil down early in the week failed. I think we’ll be seeing oil higher in the coming year.

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. You would be better off in an “emerging market” not denominated in dollars. Australia and Brazil are my favorite foreign markets, but Canada (EWC), Chile (CH) and several others are also good. China (FXI), Russia (RSX) for the brave and EEM for a broad selection of emerging markets bundled into one fund.

The indicators:

RSI says be worried. We are back near the 50 line in a bear market.

MACD says don’t worry yet. Still pointed upward with blue on top and crossed over the zero line into positive territory.

Finally we look at the dour old DMI. It is saying that we are in a positive run (blue on top) and the trend is weakening (black line headed to below 25 and both blue and red lines in the less than 25 range.

But one worrisom note: On the DMI Blue has inflected downward (and the red line has inflected downward too). This is what it looks like just before a nice run up turns flat. DMI lags MACD and lags RSI by a lot; but sometimes you need to be reminded where you came from… It’s not a new bear run until that blue crosses the red to the downside (though in a short bear market rally you can lose a lot of your gains by then). This looks like a late stage rally to me. I would be cautious, but not out.

But the market went up this week?!

We moved through the moving averages on the daily chart, but still have a ways to go to reach the moving averages on the 10 year – weekly chart. Until the bear market is confirmed over, you must assume that you will fall away to the downside from the daily chart moving averages, but if we hold the break through them, the next stop ought to be the moving averages on the 10 year chart. Watch for the daily chart SMA stack to ‘roll over’ with the fast averages on top.

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. It shows some recent dollar strength. 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 above the moving average lines, and slowing. 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, and it did that briefly at the start of the week. This is a good example of where the MACD says stay the course and W%R is a bit more ‘twitchy’. Similar in function to the MACD but sometimes a bit easier to read.

Below that, the Slow Stochastic says that the trade is to be back in (the crossover of red above blue with the opening pointing up). Day traders ought to be in, investors need to add new money.

Finally, the week is in the context of falling volatility. That usually means the movement is weakening. Given the high volatility we’ve been through (volatility peaks at market bottoms) this argues for a gentile run upward for a while more. Last week I said: “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 an entry.” That looks to have been pretty much spot on.

So what have we got? I think we have a bit higher to run (probably through about April 14th.) At this point I’m pretty sure the bear market is over, but we still need to be ‘in, but ready to trade out’.

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

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 off in a short cover run at the end of the week, with PLD up 9% on Friday alone and RPT up 35% over 10 days, and PEI up 18% Friday!

PLD, Prologis, got whacked hard when Cramer put it in his ‘sell block’ a week ago 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. PLD has some of the best positioned logistics and inventory management facilities on the planet and is selling with an 12% dividend at this price.

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 (PEI and RPT) ought to survive. They are priced for bankruptcy, yet retail sales are down only single digits percentages. 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 be headed up more slowly with Tech (QQQQ) leading. 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

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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3 Responses to WSW – Friday, April 3, 2009

  1. pyromancer76 says:

    I appreciate your weekly analyses; read them carefully; even send them to a relative for his edification. What do you think about natural gas as an investment at this time?

  2. E.M.Smith says:

    Thank you for the comment. Sometimes I wonder if anyone is getting any benefit from any of this or not. It’s what I do weekly for myself, so I would still be doing it; but it’s nice to know it’s helping someone.

    Per natural gas:

    It’s a problem.

    On the one hand it’s “way cheap” so you would like to bottom fish for it. And with oil rising (and coal on the political bad boy list) it looks like it just MUST go up!

    But on the other hand there are 4 forces pushing the other way. 1) It is economically sensitive – so until DOW, DD (Dupont) and other chemical companies have business pick up a big chunk of demand is missing. 2) We don’t export it. China is buying coal like crazy, but not our natural gas. Watch what China needs to buy, and own it. 3) “Tight Gas” (Breaking hard rocks to let the gas out) technology has brought a hugh quantity on line that was not available before. Supply glut does not make prices go higher. 4) Winter is ending so we’re turning off our heaters and the summer electricity demand isn’t here yet so peaking gas turbine demand is very low.

    So what does it take to make natural gas a buy? One is simple seasonal changes. We need to get closer to summer. Watch the chart for a turn up as the weather warms and electricity demand rises (I would guess about May / June). The other is recovery of chemical demand in America and industrial production. That “has issues” in that I would expect more demand for Chinese chemicals… but some will pick up as our recovery proceeds… but you are looking at a 1 year kind of time window. That still leaves us with tight gas pushing prices down… but over the course of several years that will be soaked up as vehicles convert to running natural gas as a cheap (and PC ) alternative.

    So I own a “tiny” in CHK Chesapeake whose chart looks good and a bigger position in CLNE Clean Energy (T. Boone Pickens company doing natural gas vehicles conversions and building nat gas gas stations – and with nat gas at about 1/2 the price per gallon AND PC on smog, this will grow.) and I own TGP Teekay LNG Partners with a 14.5% dividend who ship LNG in large tankers. You could also look at something like KMP Kinder Morgan Partners with about a 9% dividend in the gas pipeline business (though they tend to just sit there kicking out dividends so they are not much of a trade vehicle, but great for folks who just want a cash cow with low risk…)

    But natural gas will not be rocketing off the bottom any time soon. It will not be back at $15 / unit any time soon and will be in the $4 – $5 / unit for a while after it’s off the bottom… Watch the UNG chart (it’s still below the SMA stack).

    But if you have a multi year time horizon, eventually it will be back to $8 or $9 / unit as folks move away from coal (Obama play) and oil (cost driven). So that’s why I have a little CHK, to keep me watching and adding over time as it moves up in a ‘race’ against the alternatives. Also ECA (Encana) is a good natural gas company, but just laying on the bottom right now waiting for UNG to blip up.

    So depending on what kind of person you are and your needs, you can get a reliable pipeline with fat dividends, a shipper with better dividends (but a price that bounces around for no good reason but gives trade opportunities) and small growth company with a bright future (CLNE) and if you want something for the kids college fund, ECA and CHK will rise over time, but will take a while to build up a lot of speed.

    Hope that helps.

  3. pyromancer76 says:

    I appreciate your generosity, thoughtfulness, and experience. You have my encouragement to continue; it takes time, but this blog should take off, too, something like WUWT. “We” need it desperately.

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