WSW – Friday, April 17, 2009

This Week

The caution that lead last weeks posting is still valid today, so I’m going to repeat it:

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 moved through 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 both the 50 and 75 day SMAs (which have both gone to zero slope). 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 over 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).

This week started with the price falling on Tuesday and Wednesday morning, then running to the upside through Thursday and Friday. On the 10 day chart it looks like stair steps rising to the right. That’s what you want to see.

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. We also have 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!

EWZ went flat for the week, while EWW, Mexico, actually outperformed! That needs a bit more investigation.

What About Oils?

10 Day Hourly Interval Oils

XOM  Exxon Mobil - Largest, U.S. / Global
COP  Conoco Philips - U.S.  with Russian exposure
CVX  Chevron Texaco - U.S.
PBR  Petrobras - Brazil
PCZ  Petro Canada
BP  British Petroleum
STO  Norway
E  Eni Italy
TOT  Total - France
RDSA  Royal Dutch Shell
IMO  Imperial Oil - Canada Oil and Oil Sands
SU  Suncor - Canadian Oil Sands
SSL  Sasol - South African Synthetic Oil Company

They had a flat to down week, especially the U.S. oils, probably based on the announcement that the EPA has decided CO2 is to be regulated (so folks dependent on carbon consumption can look forward to more costs).

So what happened in the Market?

After a long run to the upside, the market came through options expiration Friday with some volatility and short covering, but still in a bull run (though weakening and getting a bit old.)

Recent months - A Tale of Two Markets

Recent months - A Tale of Two Markets

QQQQ  Nasdaq 100 mostly Tech companies
DIA  Dow Jones 30 Industrials
SPY  S & P 500 largest companies in the U.S.A.
MDY  Midcap  (Middle sized in terms of market capitalization)
RUT  Russel 2000 - a collection of 2000 companies from small to large.
EWZ  Brazil fund
EWA  Australia fund
EWO  Austria fund
EWW  Mexico fund

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 on the rise of SPY. ROC (Rate Of Change) has gone flat and momentum says stay in.

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:


16.50%  Full Line Insurance
13.92%  Tires
9.64%  Paper
9.64%  Forestry & Paper
9.01%  Platinum & Precious Metals
7.91%  Specialty Finance
7.59%  Home Construction 
6.38%  Hotels
6.32%  Recreational Services
5.98%  Travel & Tourism

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. Maybe I ought to be… this is two weeks with tires up.

Finally, my ” Rorschach Race” (under the “Racing Stocks” tab up top) looks like the shorts have been losing money.

EWJ  Japan fund
SHY  Short term bond fund
SPY  S & P 500
EWZ  Brazil fund
FXI  China fund
SH  Short S & P 500
RWM  Short Russel 2000
EPI  India fund
EWQ  France fund
EWP  Spain fund
EWG  Germany fund

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.

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.

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 has gone flat.

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.

The market This 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.

Stock Indicators – what and how

What about Brazil?

In this run Brazil broke out to the upside with greater strength for the last few weeks. 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. But is the run getting old?

Brazil the EWZ ETF vs the BZF currency ETF

Brazil ETF vs Currency Race

A word on REITS – Real Estate Investment Trusts

Taking a look at “The REIT Race” is interesting. It looks to me like a buying opportunity. Some of these REITS had a spectacular week.

Conclusions and Likely Actions

The metals and miners took a pause this week, along with some of the emerging markets and oils. A lot of the action was in consumer cyclicals and economic recovery plays along with short covering in financials and real estate.

I will likely cut my copper position back to about 1/2 and think about repositioning some of my ‘winners’. I’ll post an update here, probably Saturday, after I’ve done a more detailed review.

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...
This entry was posted in Wall Street Week... and tagged , . Bookmark the permalink.

4 Responses to WSW – Friday, April 17, 2009

  1. pyromancer76 says:

    I am following your posts each Friday with great interest. Thanks for the analysis and information.

    A couple of questions: 1) How do we figure in disinflation for the markets, which I noticed for the U.S. for the first time? and 2) How do we interpret no new regulations for the financial industry from the Obama administration + Dems?

    Regarding disinflation, airline tickets have been decreasing in cost and, of course, gasoline prices are down. Not a big deal; I am looking forward to food prices declining. I noticed that here in L.A. there is a bidding “war” on houses, so perhaps the real estate decline has reached a bottom.

    Regarding the financial industry (I noticed they were the first big money to fund Obama before he was even running for president), I think it is irresponsible not to reinstate regulations (plus some mechanism to enforce regs) at the same time that massive amounts of dollars (our taxes) are given to the failed companies/CEOs. I think: Payola; one of the many corruptions of this corrupt administration (not that I think the Bush admin was much better — I see Obama as a continuation of Bush re what global financial corporations want).

    At the same time, I remember the fall of Japan (1992?) from global economic leader and its recession/depression during the next decade. I remember American commentators complaining about how the Japanese banks would not get rid of their bad debts and that this failure would ultimately sink the Japanese economy. Now others (including myself) are saying the same thing about American banks; let the failed institutions go through bankruptcy so we can figure out what is an asset and what is not. But in my historical memory, Japan saved its economy and protected its people by taking at least 10 years to normalize (?) its bad assets. Could we say the same thing about Geither’s (including Paulson and Bernanke) dithering about any decisive financial actions + regulations. My gut tells me that failed bankers (corporations) are being given carte blanch to do whatever the h they want to do with our money! Any thoughts?

  2. pyromancer76 says:

    P.S. Don’t forget that article on GISSTemp!!! Many are asking.

  3. E.M.Smith says:

    I’m working on it. I even have a working title:
    “The Data-go-Round”. I intend to follow a GIStemp data item for a location from USHCN and GHCN and see what happens to it as it transits the code…

  4. pyromancer76 says:

    The sooner the better! I like the title. Incidently, do you, does anyone (e.g., those on WUWT), also compare with the Tokyo Climate Center, JMA. Today I looked at their temperature anomolies for Dec 08 to Feb 09; they reported high temperatures in wide areas from Japan to Pakistan. Would their data have any relevance to that of GISSTemp? And are they or are they not “scientifically reliable”?

Comments are closed.