The market This Week
Remember that on any stock or ticker I say I’m looking at, you don’t just go buy it. You wait for a stock entry indication to get the best possible entry into the position.
Wall Street Week – Tuesday, July 7, 2009
I took a break over the holiday. Traffic had been rather light and frankly, I was questioning the value of the work I put into this posting each week if folks don’t bother to read it. We’ll see.
My general impression of the market right now is that it’s topped out. The velocity is gone. That is sometimes followed by a bit of a drop, but we’ve already had a horridly low bottom. It is unlikely that we would return to anywhere near that level and we are most likely going to wobble sideways with a slight drift. We are entering “earnings season” until about the end of August. Expect drops before earnings, then volatility after. There will be lots of chances to make or lose money as companies announce how badly or well they have done…
Up to this point I’ve been “momentum trading” by “trend following”. It is very hard to follow a trend when there isn’t any trend… So it’s time to change style.
I have 2 styles running at the moment in addition to trend following.
1) High dividend payout with reasonable security. This is stocks like PGH that sells oil and CEL that is a cell phone company. Folks will not give up their cell phones.
2) Bottom Fishing. Finding stocks with very high inherent value and then riding out the 6 months it can take for them to stabilize and head higher. Retail has been fairly good to me off the bottom and I intend to hold those positions for a very long term recovery. REITS have potential here as well. A visit to the mall this weekend looked like folks where choosing to treat the mall as a recreational destination. Traffic was high and folks were carrying bags (i.e. buying stuff). So Mall REITS are, IMHO, probably a good place to start building a position.
OOTUS (Out Of The U.S.) took a break (and is more volatile that U.S. Markets), but I think it is still working longer term. I’ve tightened my timing to more of a trade cycle just in case. See the racing stocks tab for currencies and for foreign emerging stock markets for the latest moves. When markets have gone flat after a long run up, you want to move to less volatile (lower “beta”) positions while you wait for a new trend to the upside (and thus avoid some of the high beta to the downside if things fall).
Foreign currencies have been a volatile ride to nowhere for the last 2 weeks. No help there. I would guess it was mostly driven by money flows to buy the U.S. Treasuries auctions and some interventions by central banks.
For now, take a look at this chart of VIX – the Volatility Index. Volatility goes “way high” in a crash. We have returned to near normal volatility but we are presently on a small uptick.
VIX - Volatility Index (not a ticker, you can't trade it) VXX - Short term VIX futures ETN (a ticker you can trade) VXZ - Medium term VIX futures ETN (a ticker you can trade) FXY Japanese Yen SH "Short" sell of SPY SPY S&P 500 benchmark
So this says you can expect fairly slow changes of direction from the market, but with a slight downward bias.
Here we can see the “dollar down” trade is old news. Don’t expect much action in the dollar for a while. Trend strength (ADX line) has dropped below 20 and continues to drop. No trend there… That also implies that the “double dip” of rising stocks and rising currencies in foreign markets will now go flat or potentially move against you. Day trade currencies based on price ranges, but don’t commit to a trend that isn’t happening. (That is, buy when a little low, sell when a little high; don’t buy a little high expecting higher…)
Ideas of the Week
This week is about watching the positions I have on and stepping away from any that fall apart.
The Farms – where I bought a small part of HOGS, FEED, CALM and CVGW. The indicators say to be traded out of the Chinese Farms. I’m only in a “small” so I’m holding the position and waiting for a “bottom entry” signal (Williams %R low, RSI spiked down, Slow Stochastic turned up off the bottom) to buy more. This is bottom fishing. Risky. Tricky. Often with drops and wobbles. But it can be a great way to build up long term gains later. The classic “buy low sell high”.
CVGW Calavo Growers - Calif. Avocados and veg. MLP Maui Land & Pineapple - with a tourism kicker... CGLA Cagle’s Inc - Atlanta Georgia - Chickens and feed CALM Cal-Maine Foods - Eggs SAFM Sanderson Farms - Mississippi Chickens & Poultry PGPDQ Pilgrim’s Pride in bancruptcy (trailing Q on ticker) HOGS Zhongpin Inc, - Chineese hog farms FEED Agfeed Industries - Chineese hog farms & hog feed SFD Smithfield - Huge intl. meat & hog producer HRL Hormel - Spam spam spam spam ... and a whole lot more SPY S & P 500 baseline
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, EWW for Mexico and IIF for India.
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!
We see that the markets have generally rolled over and that the foreign markets have dropped more ( India in particular ). The news flow has all been about the bad unemployment report and how their might not be a recovery (and a subsequent crash this October). I don’t buy it… but it isn’t about me, it’s about “them”. They have billions of dollars and they will move the market, not me, and not you. So what we think does not matter. For now, the news flow, and so the market, are to the dismal and downside. Whenever this slump ends, you will have a buying opportunity. Wait for it. Have some cash set aside for that moment and start your shopping list now.
Other Asset Classes
The 10 day hourly asset class race:
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 here we have RSI on the 20 line for the SPY. DBA and some of the metals are also “way low” and their charts ought to be looked at for an entry. The general trade has been to sell “commodities and materials” due to the “no recovery” story. That push will be overdone and RSI will tell you when it’s gotten there. These things have inherent value and that value will win out (and China is NOT going to stop growing and demanding resources). So make your shopping list. Have some materials on it, and wait for your entry moment. Oils move so fast that it’s hard to trade them unless you watch the financial shows all day every day. My solution is to trade some of them, but have a large core holding in a high (monthly!) dividend paying oil trust. Yeah, the dividend moves with oil prices (so the purchase price wobbles too) but it pays and pays and pays… PHG is paying 14.5% while LINE is paying 13.25% and does not have the Canadian foreign tax. I’m happy with that kind of payment… I add more on oil drops and sell a bit at tops, but mostly just hold a large chunk.
So what happened in the Tech Market relative to world 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
The tech sector is flat. It’s “outperforming” the other markets, but flat is still flat…
Were Bonds a good idea?
OK, lets take a peak at the Bonds Race.
Oddly, yes. But mostly the corporate bonds (LQD) and the long term government paper (TLT) and only by a tiny little bit. But only if you like lots of volatility as the various actions were held. You could park some money in short term paper (less than 2 years), but that’s about it.
2.99% DJ US Brewers Index 2.54% DJ US Soft Drinks Index 2.53% DJ US Beverages Index 2.44% DJ US Aerospace & Defense Index 1.76% DJ US Food Products Index 1.72% DJ US Distillers & Vintners Index 1.62% DJ US Food & Beverage Index 1.52% DJ US Electricity Index 1.50% DJ US Tobacco Index 1.27% DJ US Reinsurance Index
Not much to work with. Mostly the “cocooning” trade. Folks staying home with food, drink, some smokes, and running the lights and video gear. And a bit of government weapons buys (and clicking through that link showned it was mostly odd companies in small niches… again hard to trade). So we’re in “lock down for summer doldrums” mode for new money flowing in.
This is also a time to watch for “sector rotation” . Watch for a roll over, a go flat, or a sector rotation and respond appropriately.
A Broad View
Finally, my “Rorschach Race” (under the “Racing Stocks” tab up top too).
EWJ Japan fund SPY S & P 500 EWZ Brazil fund FXI China fund SH Short S & P 500 RWM Short Russel 2000 EPI India fund EWU United Kingdom fund EWP Spain fund EWG Germany fund
The shorts made money this week.
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.
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
Just sitting in Euros, Yen and maybe a couple of other currencies was the best trade. But not by enough to be compelling.
Things have gone flat. Sell in May and go away. This argues for pulling money back from risky positions. I’m putting new money into those positions with large dividends (as discussed above) and more defensive stocks like HE Hawaiian Electric that has a nice modest dividend and cell phone companies.
Anything more risky is being moved into a “trend trade the ripples” behaviour. In particular, notice that Brazil and India have rolled over harder than most. Those which go up the fastest also tend to go down the fastest…
From here on out, for new positions, it will be harder to find rapid rises from June to September and you want some “dividend juice” if you can get it.
If all this talk of indicators is leaving you wondering what the heck I’m talking about, hit the link in the heading of this section and there is a bit of an explanation.
What about Brazil?
Brazil has ADX below 20, so no strength to the trend. It’s “red on top” with DMI- on top so the trend is down, though weak. MACD is pointed down and crossing zero to the negative side. It’s day trade only land. I’m wobbling in and out on slow stochastic, but my bias is now to be out. Still waiting for RSI and a MACD reversal to say “Hop Aboard” again. The currency has been flat with a ripple, so it’s mostly a drop in the actual prices on the Brazilian exchange.
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
Short sellers are continuing to drive the oils lower based on not much. These are coming back into being a good value. On the 10 day chart, RSI is looking like “entry soon”. If the Wednesday morning oil inventory report is anything other than dismal, I expect oils to rise on short covering. We’ll see.
The oil trade looks to be a busted trade for a while. Time to be in cash waiting for a re-entry.
PSA and HCP both are interesting here (Junk and Health Care – probably both will be with us for quite a while ;-) HCN has a nice dividend, but they have a preferred stock, HCNPRF, that has a better dividend at 9% and has a slight rise to the chart.
The chart shows REITS bottomed, bounced a bit, and rolled down. I’m continuing to hold a small position in REITS with both mall REITS (RPT, PEI) and timber (PCL) along with some logistics (PLD). The best of the 4 is RPT, the safest is PCL, and the slowest but with the most potential (and risk) is PLD. No big positions yet, just a tiny marker. REITS overall are flat and will likely stay there until their ability to finance their debt is demonstrated.
PEI Pennsylvania Real Estate - Mall REIT VTR Ventas - sr. care, nursing homes, hospitals PSA Public Storage - junk storage units BXP Boston Properties - office REIT on BosWash corridor HCN Health Care REIT - extended care, senior care, medical offices HCP Health Care Properties - ex. care, senior living, Dr. offices PCL Plum Creek Timber - lumber and trees REIT SPY S & P 500 broad stock market benchmark RPT Ramco Mall REIT PLD Prologis - logistics
And Other Bottom Fishing
At any given time, you want to be rolling some of your big winners into positions that have a lot of head room. If something has doubled, it is not likely to double again at anywhere near the same rate. If something is down 90% (so it would take a 10 times growth to get back to that point) it is much more likely that it can take a “double” back to just 80% down… That’s a “bottom fishing” candidate.
Well, Aluminum stocks were showing life off of a hard bottom. Alcoa reports earnings tomorrow, so expect a roll down leading up to their report and a fast move after it. Which way will depend on their earnings. Bloomberg has reported a stock pop for AA due to comments made by an officer of the company at a lunch meeting in Russia. We’ll see.
Conclusions and Likely Actions
I’m thinning out all my positions, but especially the OOTUS positions in India, Brazil, metals, miners, and ‘stuff stocks’. I am adding more dividend payers in some other sectors in Cell Phones, Recreation and Utilities. I’m mostly invested, but nervously watching a “double top” failure to advance to the topside in a potential reversal / go flat market. Time to be cautious and raise cash. I’m still watchingNIB Cocoa, JO Coffee and MOO along with some ships to ship it in as potential trades. Oil will likely be volatile (when isn’t it) and giving some trade opportunities.