WSW – Friday, April 10, 2009

This Week

First a reminder: Check the markets under the Racing Stocks tab at the top! The 10 year SPY chart reminds us we are still in a technical bear market. We are at the 100 day moving average line, approaching from the bottom. Bear market rules say that is the highest risk time (notice that prices fall away to the downside from those moving averages when in a bear market with stock price below 100 below 200 below 300 day Simple Moving Averages – the SMA Stack.) Until we have had that SMA stack rollover to the other side, we are technically still in a bear market and under bear market rules (i.e. trade a rally, don’t trust it; when in doubt, be out. Think In Cash.)

My evaluation of that 10 year chart leads me to think we’ve had the bottom of this bear market (RSI hit 20 / low, volume spiked high, second dip down in prices had a higher RSI, MACD crossed to the high side, DMI / ADX inflected, etc.) but it’s not yet proven (blue DMI+ cross above red DMI- with MACD above zero and prices above the SMA stack; preferably with a ‘retest’ where prices return to the SMA stack from the top side, touch it, and move away upward…)

By definition, that final bull market all clear will not happen until well after a rally off the bottom. So we trade into the rally, then watch for an exit if we need one. For the next few weeks, we can expect a continued battleground between exhuberance (given how much we’ve already rallied) and fear (as short sellers try to drive the market back to the prior low levels). IF you are willing to watch your stocks and trade out on a nosedive in the market, go ahead and hold onto those stocks for a while. If you will not (i.e. you just want to buy something and forget about it for a year) you are taking a lot of risk for now. I’d suggest buying large dividend stocks, REITS, oil & pipleline trusts, BRKA, basically cash cows and managed investments.

On the 1 year daily chart, the SPY has crossed the SMA stack to the topside and even the 25 day Simple Moving Average has crossed the 50 day SMA. MACD is above zero and still ‘blue on top’ while ADX / DMI has blue on top and rising, red below and falling and ADX (the black line) inflected upward indicating growing strength to the move. This all argues for a continued sustained rally. The only big negative I see is that the IRA funding is likely to peter out in the next few days and both market makers and short sellers will be expecting a pullback for at least a couple of days (and they have the financial clout to move markets). We have had a couple of days of market weakness, but they have resoved smartly to the upside. Take a look at the EWZ and emerging markets race. That’s what I expect to see in the American markets, only a bit later and weaker.

This week started with the flat price churning between last Thursday and Friday resolving as a small gap down Monday. Typical “failure to advance” followed by a reversal. Then a sell off Tuesday. Wednesday had a bit of a rise, but not much. Another “failure to advance” this time to the downside. Then came Friday. A really big “Gap Open” higher wiped out all the losses for the week and then some with a spectacular rise into the close.

Why?

Wells Fargo announced surprise record earnings. Yes, a U.S. Bank putting the words “record” and “earnings” together rather than losses. This put the short sellers in full panic and the short squeeze play was on and running hard.

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!

I held my positions through the drop (not wanting to sell and then have to wait 3 days for the cash to settle to buy back in). I’m glad I did. If I’d traded out, it is unlikely I’d have gotten back in at the middle / end of Wednesday when MACD made it’s crossover upward and I’d have missed the gap open higher. The perils of day trading…

EWZ went flat, rather than dropping, mid week, while EWW, Mexico, actually outperformed! That needs a bit more investigation.

What About Oils?

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), TOT (Total) and RDSA (Royal Dutch Shell) are the Europeans. The Canadian tar sands companies are IMO and SU. African Synthetic Oil Company SASOL (SSL) is in South Africa.

10 Day Hourly Interval Oils

That was some move by PCZ on Thursday! The Canadian oils and Petrobras often move up better than the US majors (as this chart demonstrates.)

The market had a spectacular bull run this week, despite 3/4 of the week being a loser! The normal ‘roll down on Friday’ turned into a full blown short squeeze. A very positive feature!

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 Tale of Two Markets

Recent months - A Tale 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? DMI shows an early bull run, MACD says be in and Slow Stochastic says the trade is to be in QQQQ right now. I think QQQQ has bottomed.

At this point, I am ‘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 to the downside and better on the rise of SPY. ROC (Rate Of Change) and momentum both said to get out Monday and didn’t say to get back in until Thursday. Too late. A good example of how trend following indicators can fail and why you need to think too. I expect we will continue this kind of ‘rolling higher’ next week, ending about April 15th with the IRA money being ‘all in’. Then will be a likely time for stepping back from the table to have a ‘rethink’ for a while. We’ll see.

What sectors won this week? They are likely OK to start bottom fishing. Take a look at Autos, Tires, even life insurance. Never invest in an airline… Here they are:


31.20%  Automobiles
20.34%  Tires
19.25%  Life Insurance
17.29%  US Banks
15.94%  Automobiles and Parts
15.04%  Full Line Insurance
13.37%  Consumer Finance
13.17%  Airlines
12.29%  Financials
11.93%  Mortgage Finance

I like the automobiles and parts space, I’ve gone with Ford and their preferred stock, also a bit of TTM Tata Motors. HMC and TM would also be good (as would the german makers but their stocks are a bit thinly traded here).

For some reason I can’t get excited about tires. Maybe because there are so few players to choose between. But it makes for an easy decision. GT Goodyear or pick one of the other 2 big names: CTB Cooper or BRDCY Bridgestone.

Finally, my ” Rorschach Race” (under the “Racing Stocks” tab up top) looks like the shorts have been losing money the last few 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 with Japan (EWJ) and an India fund (EPI) also now winning.

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 stablised to rising a bit.

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, 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 or Yen. Interestingly, BZF is rising against the dollar. Money is flowing into Brazil.

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? Oil bounced off the bottom and may have entered a ‘trade range’ for a bit. It jumped up at the end of the week. 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 and which I’ve purchased. 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 about to crossed over the zero line into positive territory.

Finally we look at DMI. It is saying that we are in a positive run (blue on top) and the trend is weak but starting to strengthen (black line below 25 but inflected upward) and with blue headed for 30 and the red line in the less than 20 range and falling.

But the market went down most of the week!

We moved through the moving averages on the daily chart, but still have a ways to go to reach the 200 day moving average on the 10 year – weekly chart. Last week I said: “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 hold the break through them, the next stop will be the moving averages on the 10 year chart”. That is what we ought to expect (with some backing and filling). A move to the 200 day line 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. We can see a bit more closely what’s happening 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:

The Williams %R 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 last week.

Below that, the Slow Stochastic had you trade out and miss the bounce back gap open. A nice example of how day fast trades can be risky. A 15 minute interval chart would be needed to properly day trade this choppy market.

Finally, the week is in the context of falling volatility. Given the high volatility we’ve been through (volatility peaks at market bottoms) this argues for a gentile run upward for a while more.

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’. I’d also expect next week to have a couple of down days (Wednesday?)

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. Some of these REITS had a spectacular week.

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. PLD got an upgrade this week to ‘buy’ from a major broker, so I think I’ve been shown right on it.

PLD has some of the best positioned logistics and inventory management facilities on the planet and is selling with an 15% dividend at this price.

There are a couple of Mall REITS that are “way low” like RPT and PEI with very nice dividends. This Friday, PEI had a big spike up!

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. 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”, like copper and resources. Finally, the Emerging Markets race shows China on top on the one year but Russia and Mexico strong on the 10 day. A small amount of FXI or EEM would probably be a good thing. EWW needs a long look. It will also be important to watch for a ‘dip’ next week. A good time to buy more (but if you are completely out of this market, you want to start ‘scalling in’ with buying some positions, even if only 1/4 of your ultimate goal.

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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2 Responses to WSW – Friday, April 10, 2009

  1. pyromancer76 says:

    Thanks again for your willingness to make your economic/financial wisdom public. It takes quite an effort to create these posts. I keep mentally digesting them at the end of each week. I used to keep up on some aspects of markets; perhaps one of these days I will have enough under my belt to engage in a discussion.

    OT. Because I can only find a March 8 post on GISStemp, I am writing to you here. I have been reading Frank Lansner’s post “Making Holocene Spaghetti Sauce by Proxy” on WUWT. I believe two articles should be published together, or, one in one month’s issue of a journal and the second in the following month. The first, should be Lansner’s (with clean-up for English and greater readability). At the beginning of it, “Part Two” should be prominently mentioned.

    What is the title of the second article and who is the author? It is titled something like “The Outlier’s Lies: GISStemp and the Attempt to Destroy Our Minds?” (Oh, well, I guess that title is a bit melodramatic.) It is written by E.M. Smith — in a detective style answering the Qs: How does GISStemp become the outlier over and over and over again? Second, what are “their” most dastardly deeds in relationship to a programmer’s commitment to truth in working with data?

    I would love to see this article. You posted something like I am imagining in a lengthy comment on WUWT.

    Believe it or not, I have further advice! In addition to the article you “should” write, I think you should continue with these GISStruth moments on Anthony’s blog. Make them into a detective serial. I believe abreviated versions of your work belong on WUWT for a large international audience. ClimateAudit is absolutely essential, but it is for the experts.

    I any event, I am grateful for your efforts and your communications.

  2. E.M.Smith says:

    pyromancer76
    Thanks again for your willingness to make your economic/financial wisdom public. It takes quite an effort to create these posts. I keep mentally digesting them at the end of each week. I used to keep up on some aspects of markets; perhaps one of these days I will have enough under my belt to engage in a discussion.

    Yeah, markets take some time to figure out. I think that’s why most folks end up getting spooked out of them at the bottom and pile in at the top. They don’t put in the time it takes to know when to get out or back in; just panic in response to news headlines that always come only at the bottom (or get greedy from headlines of booming markets that only come near the tops…) My very first reliable indicator was a “buy indicator”: When the local (non-business) newspaper has a giant headline like “Stock Market Crashes”: Buy!

    Very reliable, but only comes around about once per decade. This lead to my 10 year weekly chart of the SPY that gives the same call of top / bottom but a bit more precisely ;-)

    OT. Because I can only find a March 8 post on GISStemp,

    I’ve put a copy of your posting in the comments under the GIStemp tab at the top of the page. I’d like general discussions of GIStemp to happen there. Things here move a bit more slowly than on WUWT, but the GIStemp tab will not expire… Folks who are money / trading oriented are not likely to care about the minutia of temperature collection and manipulation in GIStemp…

    And yes, I’ll keep putting up summary replies with pointers to here on:

    http://wattsupwiththat.com/

    In fact, that was why I started this operation. So I could stop retyping the same comments on WUWT and just post links to here! So my intent is that as I build up a library of these critiques, they can be linked to by anyone from anywhere including WUWT. (But I try to moderate my linking from WUWT since otherwise it gets a bit ‘stale’ to the regulars – so a couple of times a month or as the topic comes up, I link to one of the threads here.

    BTW, the GIStemp tab has had 3 x the hit rate in the last 2 days as this article. For reasons I can’t quite fathom, folks don’t care much about how to make money (or not lose money). I originally kept my techniques a secret. Then the more I told folks what I did (and got very little interest) the more I realized I could shout it from the rooftops and not change how people acted, so the tools would keep on working. So here I am, shouting from the rooftops…

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