WSW – Friday, May 15, 2009

Well that was fun. Update 21 May 2009

Sometimes holiday weekends are strange. This thursday we had the market start to tank early, then recover somewhat toward the close. Then the Japanese Yen rocketed up only to fall back somewhat later in the evening. What does any of this have to do with weekends and holidays?

It was Friday already in Asia. The Yen is used for the carry trade (borrow money near zero interest in one country, invest it in another). We have a holiday in the U.S.A. on Monday, so a big player could be locked out for 4 days (asian market closed our Friday, Saturday, Sunday, holiday Monday) and a lot can happen in 4 days especially when the market run is a bit old and The Ministry of Stupidity has had a habit of weekend announcements.

My take on things is that a “Whale” (giant player) based out of the Middle East or Asia, though possibly in London but using Yen, decided to pack it in for the long weekend. Pulled their U.S. investments and repatriated the money. Not surprising given that the news flow was about the U.K. being ripe for a loss of their AAA bond rating, maybe the U.S.A. too, and inflation likely to be an issue. Oh, the the $ dropping like a rock all week makes a Yen / US carry trade hard to make profit.

What does this mean for next week? I’ll go into that in the Friday posting, but what I’ve seen before is a “change of direction” by the Whale. If they were long before they pull out, they come back on the short side…

So watch out for a U.S. stock market spike down Tuesday. IFF it does, you are fighting a Whale. Don’t.

If by Wednesday the market is still working sideways gentle up; look for what OTHER asset class has moved; that’s where the Whale has gone to play (be it gold, oil, bonds, China, whatever).

The market This Week

This week we had 4 down days out of 5 with some sectors down all week. This is “the dip” I talked about last week:

“ 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 ;-)”

I’m no longer feeling bad about my having sold out of most of my Brazil position a bit early. “Late in, Early out.” is OK. “Early In, Late out” is lethal. (If you buy while it’s still dropping, then sell out AFTER the run up has happened when it’s dropping back to your buy point again, that’s bad. Buying an established up run and getting out before it turns on you is called winning ;-)

So we had the “new money” rush at the start of the month. Now it’s faded and we’ve had the “reversion to the mean” at options expiration (3rd Friday of the month, a bit early this month due to the 1st being a Friday). What’s next? I’d guess sideways for a week, then the next “new money rush” starting about 1/2 way through the last week of the month. We’ll see (and in all cases, let the charts be your guide, not what “you think” or what “I think”. It’s not about you, it’s about “them”. What the folks with a few billion dollars are doing with their money. You may be smarter than them and “righter” than them, but they will move the market, not what you know even if you are right… because it’s not about you and it’s not about what you know, and it’s not even about being right… )

I’ve held positions in many of my winners, even though some of them got whacked hard this week, just because they are long term investments for me, not trade vehicles. Yes, I could trade them (and probably make more money) but there is only so much of me and only so much anyone can watch at any one time. So you don’t beat yourself up for not making every trade. (Down that path is the rabid daytrader never holding any position for longer than a few minutes or hours… that’s not me. “First, Know Yourself”…) So, for example, my Ford and Bank America got whacked on a trade basis. I’m holding them for a couple of year gain of 3 to 5 times over. If I sell now I not only become an involuntary day trader, I also risk having a “gap up” on some good news and I miss the re-entry. Yes, they had a “gap down” on announcments of a secondary stock offering (dilutes my ownership percentage) but that’s an opportunity to buy more, not an “opportunity” to sell at a surprise open down (“sell at the bottom”?…)

So the big questions to ask this week are things like? When to we know the “dip” has ended? If I’m in, do I get out? If I’m out, do I get in? What to buy? What to sell?

General Trends

Generaly trends hold for months to years at a time. At this point, we can make fairly good statements about what those trends are likely to be for the next year (and maybe longer…) Sure, there will be lots of day trade wobbles during tha time; and if you are willing to watch a 10 day 15 minute chart with live data (i.e. not the 20 minute delayed data you get for free from BigCharts) you can trade those ripples. I’d rather get “the wind at my back” and be in those dominant trends. Then if I “miss a trade”, I can recover by doing nothing but waiting.

So what are those trends?

Same things I’ve talked about for the last couple of months:

1) The Emerging Markets are going to lead the recovery and have the best future gains. My favorite is Brazil, but Mexico is interesing and China will have lots of growth. EEM, the broader emerging market is also good (packaging a bit of Russia, Turkey, Eastern Europe and others too) as is India (via individual stocks or the various India funds: IIF, INP, IFN, EPI) .

2) Resource companies will continue to win. Miners, metals, etc. And with them the resource based economies (and markets) of Australia and Canada (and Brazil and…)

3) The U.S. Dollar is not a secure currency in the long run (given the number being printed) and the present demand for U.S. dollars will eventually fail. There is already evidence that the Chinese are cutting ownership of U.S. dollar assets. Yes, there will be tradable rallies (like the one started today by the Swiss central bank supporting the dollar due to excess demand for their currency…) but the long term trend is not stoppable until the government changes their behaviour, and I see no evidence for them changing.

4) When economies recover, and stock markets with them, Bonds tank. It is time to be getting out of your bond positions. Hold cash if you can’t bring yourself to buy stocks. (And cash does not have to be dollars… You can buy Yen, Swiss Francs, Euros, Reals… FXY, FXF, FXE, BZF respectively or even Aussy dollars FXA or Candian Loonies FXC).

5) Inside the U.S., it will be tech companies, resource companies, and cyclical recovery stocks that win. (Whether they win more than being in emerging markets will vary by company. Best answered by doing your own cusomized races for any particular company of interest. For example, you could race EWZ against RIMM and FCX to see what you like better…

6) As an investor, this U.S. Government Is not your friend. They may be the friend of unions, voters, welfare queens, etc. but not of investors. Governments in general do not do a good job of running companies, this one will be worse. If they are heavily interested in an area, run away screeming. If they “help” (via owning?) GM and Chrysler, it is FORD who will win. If they are going to “fix” U.S. healthcare, look to TEVA or European drug companies for your defensive drug stocks. And if they are mucking around in the bank ownership and management, well, there are some really nice banks in Brazil and other emerging markets ( ITU, BBD ) in addition to Europe and Asia. Notice also that the “senior debt” i.e. bond holders, have had their rights crushed by the U.S. Government every time they have “helped” a company in this cycle; so the bonds of U.S. companies are not a particularly good deal either (if the Government is interested in an industry). So your money does not need to be there. It can go to other companies, other investments, and other countries.

These themes are likely to be with us for months at least, and perhaps for years and years to come.

U.S. Tech, a longer view

Taking a look at a multiyear QQQQ chart, with weekly interval, we see much the same as we saw last week (hey, it’s one “tick” ago on a weekly chart!) Last week I said: “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.” That’s exactly what we got. We’ve touched the 200 day line from the topside. This is now a “battle ground” at the 200 day line. It will likely wobble up and down for a week or two, but will eventually resolve to the upside. A good time to start building (or adding to) positions in tech stocks.

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

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!

This chart shows MACD weaving below the zero line and DMI / ADX lines show RED on top with the black line at an incredibly flat 10 or so. OK, we have a dead flat market for the last 3 days (going into options expiration) with a general downtrend back to the mean at the start of the week. No big surprise. Dip to flat into expiration. Oh, and a glance at SH shows it rising for Monday and Tuesday right into the middle of the pack of the other lines for the 10 day interval. Talk about Reversion To The Mean!

So what’s happening at the longer term?

Looking at a 1 year daily interval chart for EWW and EWZ shows them back at the 25 day moving average (that has been their support point so far in this longer term rally). I’ll likely be buying them next week (probably early Monday, but it will depend on the 10 day hourly chart for my actual entry) Having chosen them as desirable on the long term (1 year daily) chart, and in a ‘dip’, it’s now down to timing the entry via the 10 day hourly. QQQQ and SPY have similar charts patterns (with RSI back at the 50 line – a buy indicator in a rising market…) and MACD weaving sideways with a flatish slope to the opening between the red and blue lines.

OK, we are waiting for a re-entry into a generally established trend in the selected areas that have shown strength. You can watch a 10 day hourly chart or you can just put in a “buy if touched” order above the present prices and ratchet it down each day until the market turns up and ‘buys you in’ to your desired holdings.

Other Asset Classes

The 10 day hourly asset class race:

10 Day Hourly Interval Asset Class Race

10 Day Hourly Interval Asset Class Race

Gold, Silver, and the Japanese Yen held up, everything else rolled over.

So the shorts saw a rally that was a bit old, far from the mean, and just juiced up by the start of the month new money, and shorted broadly. That’s what makes a dip. At some point those shorts will need to cover (and we know they are playing a fast trade game, since we’ve pretty much established a bottom – at least in our selected areas.) So it won’t be too long before we have a sudden open higher. I’d expect a week or so of sideways which can be used to build a position, then a sudden open higher on some good news. Watch for a sudden push down that fails (as shorts try to spook folks One Last Time) as the catalyst to the upside.

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

We continue to have a tale of two markets, with big US stocks lagging (SPY, DIA) and emerging markets / tech winning (EWZ, EEM, QQQQ, EWO). You can also see from how abruptly EWZ spiked down compared to DIA why I was so quick to step out of my EWZ position (a bit too early, ought to have used a trailing stop loss rather than thinking it was about me and what I knew…) compared to holding some of my DIA members (such as BAC) as they moved against me. Lesson learned? Stop loss orders would have been a better choice for deciding when to exit in both cases…

Last week I said:

“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. “

Make that two weeks from then ;-) At any rate, the pattern is holding (and will continue to hold – until it doesn’t ;-)

Were Bonds a good idea?

OK, lets take a peak at the Bonds Race.

This shows that bonds won big on the week, especially long term bonds. Clearly, what I said last week could not have been more wrong:

“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.”

I ought to have remembered that when the market dips, bonds rise. I knew that, yet last week I said to expect a dip and get out of bonds. Wrong. OK, so we had a bond rally. I don’t think it will hold, so NOW is the time to get out of bonds… This Time For Sure ;-) (Hey, I have to be right eventually …) Seriously, put a trailing stop loss order behind your bonds and let the market decide when to sell…

What sectors won this week?

4.33%  DJ US Reinsurance Index
3.87%  DJ US Pipelines Index
3.76%  DJ US Soft Drinks Index
3.45%  DJ US Beverages Index
3.20%  DJ US Mortgage Finance Index
2.80%  DJ US Tobacco Index
2.70%  DJ US Food & Beverage Index
2.44%  DJ US Aerospace & Defense Index
2.03%  DJ US Specialized Consumer Services...
1.96%  DJ US Pharmaceuticals Index

Not a lot to work with here. Mostly defensive positions (common in a “dip”) and a bit of short covering in reinsurance I suspect. The worst on the week look to me like a short (bear raid) attack on the sectors up the most in this run:

-14.86% DJ US Automobiles Index
-12.21% DJ US Recreational Products Index
-10.83% DJ US Aluminum Index
-10.49% DJ U.S. Iron & Steel Index
-9.38%   DJ US Railroads Index
-9.27%   DJ US Recreational Services Index
-9.21%   DJ US Automobiles & Parts Index
-8.65%   DJ U.S. Industrial Metals & Mining...
-8.62%   DJ US Marine Transportation Index
-8.59%   DJ US Durable Household Products Index

So I’d make that “down list” my shopping list when this “dip” ends.

Ford, casinos and recreation, metals, transports (rails), ships, consumer durables, and maybe even some tires ;-)

Putting the pieces together

Finally, my “Rorschach Race” (under the “Racing Stocks” tab up top).

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

This shows that the shorts were able to make some money out of this run to the upside (as it got very old, beyond all expectations). OK, give them the week, next week too (for positioning), the week after is the return to the bull run (if it hasn’t started before then…) But as always, let the charts be your guide.

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. Gold, silver and Yen stay the refuge play when avoiding the Dips. Wood, after a spectacular run, takes a pause. No problem, I’m holding PCL for dividends, long term recovery, and besides the trees still grow even if the market doesn’t…

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

Both the currency and stocks look great. Taking a dip, and time to buy more Real Soon Now!

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

So oils took a bath (after a long run up) along with the rest of the sell off. OK, but in the long run the economy will recover and with it oil demand. So make your shopping list now, and put oil on it.

The REITS race – Real Estate Investment Trusts

Shows REITS whacked for the week too, but bouncing off a bottom on Wednesday afternoon. RPT is on my buy list. I’d missed some of the run in it, and now is my chance to get back in… I held my other REITS through this drop (mostly because I’m lazy but partly for the large dividends) and I’m happy to buy some more real estate in preparation for the inflation play in the future.

Conclusions and Likely Actions

What I said last week still holds:

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 – Out Of The U.S. is my acronym for this trade; 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”.
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.

Couldn’t have said it better myself ;-)

If you were in, hang on. If you were out, here is your second “bite at the Apple”… literally AAPL (just a thought 8-)

BTW, heard on Kudlow and Company that the U.S. is now at 45% of the economy being government spending. Since throughout history countries have collapsed whenever that rises over 50%, we are on the cusp here of collapse, via the Socialism Shiny Thing, of the U.S. system. Be afraid, be very afraid. (And invest in Brazil, Mexico, somewhere that’s already gone through this nuttiness and adapted to it already.)

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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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