WSW – Friday, May 8, 2009

The market This Week

First, my apologies. Here it is Monday Morning and I’m just now getting the proper content updated on this page. I got sidetracked into finishing up my “not running out of stuff” page and then Mothers Day took precedence. The good news is that unless you are a day trader, a one day lag isn’t important; also the update will be a bit “fresher” since we have an hour os so of the Monday Morning open to evaluate as well (it’s opened down. Not a surprise after the length of run we’ve had. Almost over due. In fact, in my brief entry from Friday I’d even stated that we ought to expect a dip – to buy more. So a major goal now is to assess the best re-entry point and to decide if this is a big dipper or just a little dip ;-)

Taking a look at a multiyear QQQQ chart with weekly interval, we see what a market looks like in a Rocket Ride off the bottom into a technical bull market. MACD is crossing over the zero line with the “mouth” between the red and blue lines pointed at about a 45 degree angle up. DMI / ADX with blue on top. Nice. The only worry is that with the speed it has moved, at some point it will return to the moving averages from the topside on the daily chart. So watch for that as an entry point if you are not already in. For those who caught this ride, be prepared to trade out / in if this rally falters (and you want to trade) or just hold tight if you are a long term investor.

QQQQ is on the cusp of a technical bull market call.

Last week I said:

With parts of the stock market now technically in a bull phase, it is ever harder for a pull back to ‘new lows’ to happen. The broad market might take a small dip, but is most likely to have a slight wobbly sideways into the 200 day SMA. If the broad market starts to run to the upside, hang on to your hat! Watch for more sectors to come up off a bottom and establish a new bull run, though it will take a while to get to “sector rotation”.

It does look like we’re getting that “small dip” today. Watch it for a day or two to see if it’s a good entry.

What does the 10 day hourly chart say is happening now?

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!

What I said last two weeks still holds:

“This was a crazy choppy sidways traders market. A bunch of sound and fury signifying nothing. So we have to selectively pick individual stocks and sectors to win. Welcome to a battleground market… “

We have QQQQ going flat this last week and even fading downward some. Watch it for an entry (as MACD crosses back to the upside and DMI gets “blue on top” again on the 10 day chart.)

SPY has had RSI pull back from the near 80 point. This implies a rally that’s getting old and it going to have a pull back in the next couple of days. To me, that implies that we’re going flat to sideways for the next couple of days (at best) and perhaps dropping a few percent. MACD and DMI as of this morning both say to be “traded out”.

The big news on this chart is the strength of the foreign markets. This is almost certainly due to the dollar fading rather than their markets rocketing up… but gain is gain.

Also last week I’d said:

“Watch Mexico for an entry as the short sellers decide to exit that trade. I’ll likely shift some of my (prior) FXI and present EWZ money into EWW as soon as the MACD and DMI show an upturn with some legs to it.”

That trade worked nicely if you got in fast (which unfortunately I didn’t – life happens and I got distracted doing other things, so I’m still sitting in cash for that chunk of my portfolio. OK, missed the trade, so I wait for the next trade…) “Think In Cash” is an OK thing to do. There is always another train leaving the station. What is NOT OK is to be married to a falling stock position and not notice or not get out. Sitting in cash isn’t ideal, but it’s not bad. You want your errors to be “sitting in cash” errors not “sitting in plummeting stocks” errors…

And this is a great example of the time criticality of trading. If you are going to trade on an hourly chart, guess what: You MUST watch the chart AT LEAST hourly. All day. Every day. IF you can’t do that, you must move out to a longer time horizon. Daily charts must be checked daily to trade that trend level. Can only check once a week? Guess what, you can’t day trade and will have trouble trend trading a daily chart… So picking your time frame specifies your attention level; and vice versa.

The 10 day hourly asset class race:

10 Day Hourly Interval Asset Class Race

10 Day Hourly Interval Asset Class Race

Last weeks evaluation still holds:

“Shows copper, wood, oil, agricultural goods, basically the recovery resource play back on with the shorts being down and emerging markets continuing to be the place to be.”

I’d only add to that the observation that SH shows a small uptick (short has a day trade available, or alternatively, it’s saying that a ‘re-entry’ is coming soon as the short day trade ends.)

The “stuff trade” of oil, metals, etc. being up also tells you what you loose by being in cash (especially US dollars). Sitting 10% in cash for the last week cost me the value increase in those other goods. About 5% that I’ve missed (so 10% at 5% is all of 1/2% on a total portfolio basis). I’m OK with having missed out on a 1/2% available. (It was worth that to not spend every day glued to the terminal while being in cash and “having a life” for those things that I needed to get done. Don’t beat yourself up for what you “missed” – that leads to greed and late entries into trends just before they roll down and cost you money…)

SPY  S & P 500 US stocks
GLD  Gold
EEM  Emerging Markets
FXY  Japanese Yen
JJC  Copper
SHY  Short term bonds 1-3 year
USO  U.S. Oil
DBA  Agricultural basket
SLV  Silver
WOOD  Wood / Timber

So what happened in the Tech Market relative to world markets?

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

Notice that for QQQQ the SMA stack has completely rolled over to the “bull” configuration. Fastest on top, slowest on bottom. Price is returning to that SMA stack from the topside. This is a bull run. Buy the dips when price returns to the SMAs.

Slow Stochastic called the trade out and has not yet shown a trade back in. (The MACD on the 10 day hourly would be a faster trade timing indicator). What this chart tells you is that if you “missed the run” you will get a chance to hop in shortly. If you caught the run, don’t panic out now. Pick your time scale and stay with it. MACD is red on top, but the slope is still shallow (that is, the “mouth” of the MACD is NOT pointed down at 45 degrees, it’s more sideways, and MACD overall is well into positive territory.) So we have an ongoing bull run, but with a short trade down (DIP! Get ready to buy!).

We still have a ‘Tale of Two Markets’ with the small caps and emerging markets in the lead and the large cap US in the rear (not so surprising given all the goverment manipulation in the big cap banks, car makers, and energy sector – you don’t need to take on that Minstry of Stupidity risk, pick a different sector or a different country…) So this QQQQ chart looks nicer than the SPY chart. (And emerging Europe – EWO Austria looks better than QQQQ and Brazil EWZ is spectacular!)

Notice the pattern to EWZ? It tends to dip about week 3 or 4 of the month lately? Those patterns tend to persist over time, slowly mutating. There are valid reasons for this. Options expire on the 3rd Friday of the month. Mutual fund and retirement fund money tends to come in the end of the month. So options pull back to the mean “return to the mean” while shortly after that the payroll deduction money puts in a surge to the upside. At this point I’m out of EWZ and waiting for the reentry about a week from now. (But I’m a rabid day trader. In my spouses account, I’m sitting on the EWZ position as a longer term investment. You must decide “WHO AM I?” and act accordingly. The right answer for “Buy or Sell?” depends on “Who am I?” and “What do I want?”. So in one account I sold, in another I did not sell… and both are the right answer…

OK, lets take a peak at the Bonds Race. Here we have the long term bonds, TLT, rolling down whlie the shorting bonds, TBT, is taking off. It could easily be folks taking money out of bonds to buy stocks, or folks abandoning the dollar long duration bonds for gold and other currencies. But this sure looks like time to get out of long government bonds to me. TIP (inflation protected) took a little dip, too.

So, IMHO, it’s time to get out of bonds and start moving into commodity plays, recovery stocks, selected real estate, and non-U.S. oils, financials, and large cap stocks. But what’s been winning in the actual market?

What sectors won this week?

47.38%  Full Line Insurance
37.96%  Life Insurance
30.69%  Banks
25.70%  Platinum & Precious Metals
19.60%  Tires
19.17%  Coal
19.09%  Financials
17.14%  Gambling
16.74%  Asset Managers
15.74%  Consumer Finance

For some reason I can’t get excited about tires. But clearly I should. Up again. What is that, five weeks now?…

OK, the financials recovery has spread out to the insurance companies. The Platinum trade is heating up on the expectation of an economic recovery and FUTURE car sales needing catalysts. Gambling / recreation makes a bit more bounce on a “where not dead yet” basis and the consumer finance group comes along with them. Asset managers got a bounce, partly from good news flow with Fast Money picking a couple of asset managers as good buys.

Putting the pieces together

Finally, my “Rorschach Race” (under the “Racing Stocks” tab up top) looks like the shorts have been losing money while India and Brazil are rising nicely. China too, though with more volatility. SPY is now on the edge of a bull market trend with the SMA stack rolling to the topside.

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

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 on the edge of a formal swap to the bull side, that’s getting old, but is defining a fairly healthy market recovery.

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

Stock Indicators – what and how

What about Brazil?

Brazil the EWZ ETF vs the BZF currency ETF

Brazil ETF vs Currency Race

Gorgeous chart. Only thing wrong with it is the high RSI value and the distance that the price is from the SMA stack. You want to buy when it’s closer to the SMA stack and sell when it gets ‘to far” away. In a major bull market this can catch you out of the stock with it running away to the top side, but the trap is to buy into this kind of chart and have the price return to the SMA stack (scaring you into selling just at the time you ought to be buying…)

The way to handle this is “core plus trade”. So you go ahead and own 1/2 your total desired holdings. When it pulls back to the SMA stack, you buy more, when it gets “too far” above, you sell (or have a “stop loss” order that sells out 1/2 your position when it starts to drop). Using the 10 day hourly chart (or even the 15 minute chart) gives good timing for making those trades, but you must watch the chart all the time…

What About 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

Also no real change from last week:

“Oils continued their run higher, with the Candian’s (especially the oil sands stocks like SU ) pulling ahead. No Obama / Democrat risk to the Canadians and the oil sands have more movement with oil price movements. PBR took a bit of a break, but after the run it’s had, some “catch up” from the other oils is reasonable. I’m holding my PBR and Canadian oils. Adding some IMO, SU, or even SSL might be reasonable, though I worry about the political risk in South Africa these days (with a socialist leaning process going on.)”

The only real change is that PBR has had a big run to get back in line with the others. Oil has had a price spike, and that drives oil stocks up. Why do the tar sands stocks (SU IMO PCZ somewhat) move more? If you can pump oil at $20/bbl and the price moves from $45 to $50, your profit goes up by $5, but that’s a change from $25 profit to $30, or 20% gain. ( 5/25 or 1/5 = 20%). But if it cost you $35 /bbl to make oil from tar sands, that profit percentage change is larger: From $10 to $15. That’s a 50% gain in profit. ( 5/10 or 1/2 = 50% ). And that’s why the tar sands companies (which have a higher cost to produce) move more when oil prices rise (and fall more when oil prices fall…)

So it continues to be a time to own oils, especially those that are not subject to the U.S. Congress present “If it moves, tax it; if it doesn’t move, tax it anyway!” mindset. Just remember that the oil trade is subject to the Wednesday oil inventory report. Buy on late Tuesday or early Wednesday, sell on Friday, is how it usually shapes up. Sometimes a lousy oil report will cause a sell off Wednesday mid day but that is unlikely in a time of economic recovery off of a bottom. (It happens during the falling market of an economic collapse – basically that was last years’ trade).

The REITS race – Real Estate Investment Trusts

Taking a look at “The REIT Race” shows a flat week. I’m holding my positions partly due to the high dividend rates, partly due to the great fundamental value. Remember that a bull market is not straight up. It’s a sin wave at an up tilted angle, so you get stair steps. Up sideways up sideways, etc. Don’t let a trend trading indicator trade you out in the ‘sideways’ part unless you know you will put a “buy if touched” order above the price to buy you back in when the run resumes. (Or you are willing to watch a faster chart, like hourly, to buy back in). It is very easy to miss the 2 or 3 up days, then buy back just in time for the flat. Becoming a bad accidental day trader. Pick your time scale and then stick with it. Day Trade if you will do what that time scale takes. Don’t accidentally day trade part of the time, then ignore the position as an “investment” in others. You get out of phase with the stair steps…

Conclusions and Likely Actions

Watching for a reentry on EWZ, FCX (copper). Still thinking about Mexico and planning to keep most of my positions out of the US (OOTUS is the acronym for this Out Of The U.S. – it is my dominant investment theme for the next few years. Until such time as the U.S. tax and regulatory environment stops killing companies…)

I’ll be evaluating other specific holdings and looking for who keeps going up in a falling “correction”. Retail has gone weak for the week. Time to sell out of those winners, or time to buy more? Decisions decisions… My GUESS is that its a long term hold, but the charts will tell me. Mostly I’m thinking that the Ag commodity, metals, early cyclical stocks are set for better fast gains (time to race retail against commodities!) and the shippers will likely have big gains in an economic recovery, so I’ll be watching “SEA” for a re-entry as well.

I expect it will be about this time next week before I’m ready to toss the sideline cash back in. During that week, you inspect what you are holding for excess risk or weakness and you watch for who is holding up better than the rest on the down days. Strength and conviction of the buyers of a stock shows up most on the down days…

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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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