The Turn has Begun

The recent action in the $USD and $TNX (there are several $USD & Bond charts on that same list) paint a good picture of what the market is expecting and preparing for around the FOMC meet on Jan 26-27. With the $USD being fairly valued around 76-77 and the absence of the carry trade taking pressure off too, it has become a flight to safety for at least the short term again. Bonds have been preparing for this for a the last few months too, but seem setup for another decent bounce off support around the FOMC meet. In the past, stocks rallied as you would expect with bonds, but this time it might be different especially given the valuations and recent deterioration in the technical view.

(live link to the chart above)

Sector Analysis - 2003/Present Comparison

It is interesting to note that in early 2004, $TRAN underperformance increased significantly well ahead of the broader market and long before $WLSH corrected back below its 200 day sma.

The only real laggard here in this chart is the $XBD, which may catch up real soon around this earnings season.

Possible Weakness Ahead for the $XBD

Here is a link to a candleglance of stocks in the $XBD (except ETFC)

Link to the chart above on my Public List at StockCharts

If 2004 is any guide, it was about this same time of that rally when the Broker Dealers started to underperform greatly. All the recent M&A since we came off the lows is a good indication that the there was real value out there and many were positioning for future economic recovery, but that activity is likely to slow down now until next year. Financials in general have been down due to recent legislation proposals that are not favorable to them, so, IF, those are resolved favorably, then MAYBE that sector will rally again and catch up with the broader market.

(this has nothing to do with the $XBD, but had to make note of it)

As far as the $SPX goes, the lows from last week will be watched VERY close next week. If they are not taken out, then there is a good chance the rally holds and maybe makes a slightly higher high next week.

The $VIX 30 minute chart made some interesting divergences last week as the market was hitting the top and bottom end of its range. Even though the $VIX made higher lows as the $SPX was testing the 1150 resistance on Thursday (a bearish sign), it did make lower highs as the $SPX was testing the low end around 1130 on Friday (a bullish sign). I have to say this leaves room for upside especially if the $VIX makes a lower low than it did on last Thursday as $SPX tries to break 1150 again. If the $VIX does that then the setup will be obvious for a breakout to 1164 soon especially if $VIX then makes a lower higher again as $SPX pulls back from 1150 again! Caution is evident in the charts and since many floor traders look at Gann Theory, it is good reason to expect this kind of caution to be appearing in these indicators.

A Stock Pickers Market

This is the case now more than at anytime since March. Also I will be doing some more sector vs market analysis comparing the present with the 2003-2004 bull market. Some Gann theorists are expecting 1150 to be the high of the year, while others still expect more upside. I am in the camp that it is not cut and dried and impossible at this point to know for sure what will unfold for the rest of 2010. But I also think that by March the outlook will be much clearer and thus, my focus will be on measuring the strength of the market technically and fundamentally.

ACAS vs DJUSFN

Live link to chart above

I am sure you have seen a chart of the Dow Jones Industrial Average since 1900 thinking that the market is in a similar time as 1929, and that the final lows are not in yet for the major indices. (In case you haven't seen any long term historical charts of the major indices, try going to StocksCharts * com website and look for the link "Historical Charts" on the right side of the webpage) While that is possible, it would seem more likely that the next few years or more will be similar to the 1066-1082 time frame due to lack of sufficient natural resources of all sorts, and limited capacity to lend by financial institutions. We have already seen a major downsizing of the major corporations of the world in preparation for an extended period of slow growth. So, until they start to make preparations to expand back to the levels they were at in 2007, then I think it is reasonable to expect an extended range bound market for the foreseeable future.

Also, many will be pointing out a massive H&S top forming in the $INDU when it returns back to 11,000 in 2011 while at the same time others will be calling for a rebound back to 14,000. So where will all the sideline money find a home for the short term? I expect more will flow into the large caps again, mainly the Dow and the larger ones in the S&P, the S&P 100.

Next 2 FOMC meets are the most important of them all

It has been a while since i posted here, but still updating charts on the public list at StockCharts.com
I have been focusing on individual stocks more than the indices, since the markets are moving at a snail's pace these days.

Live link to chart above

Please take time to vote for my charts using the link at the bottom of that webpage.

Its your money!

These year end rallies are always good times to reassess financial goals since markets are at a peak very often around then. A look at the long term charts will show that at some point the markets always come back to face reality and fall back to a long term moving average ( the 200 sma usually ).



Live link to the chart above

I've been thinking real hard about whether S&P500 can get over 1120 to 1140-50 by Jan-Mar 2010 and how the Leading Economic Indicators and valuation will play out along with the other headwinds coming in 2010. Also the S&P is still well above 200 day sma and 2011 earnings will probably not be a lot higher than 2010 with the possibility of downward revisions around this next earnings season for Q4. The market will need to be quite convinced that valuation, LEI's, and earnings estimates are inline or it isnt headed over 1150 for sure. Hitting 1140-50 is still on the table, but I figure that at 1110, the market is within 3-5% of any gains that will be made over the next 4 months. It will depend on how S&P holds this 1084-1113 range in early Decemeber but with $USD clearly headed up toward 77-80 (maybe as high as 80-82) it will be tough row to hoe getting there by Jan (not to mention the geo-political front and all the indicators pointing to a top likely being in here). It is quite possible to test those Oct/Nov lows before it breaks over 1120. Prudence tells me to sit back and let it come in before getting very bullish again. It could easily rally back up in Jan to 1120 only to fall back to 950-1000 in Mar-July 2010 2011 earnings not likely to be much higher than 2010 and LEIs all need to move up together, not just a few good jobs reports here and there. It takes all 4 moving up about the same time or we will see a double dip.

Wholesale Trade Report at 10am EST is lagging in that it reports data a month old, but the market is still looking for an improvement there. Last report was not so impressive so I expect today's high may coincide with its release. Also, if futures are only up on the back of a little $USD pull back today, then this rally today in stocks will be short lived. A little pullback in $USD before heading north again should be expected at this point sending S&P back to 1085 by next week or sooner IMHO. A key question raised in the Wholesale Trade Report is: Will sale grow and reduce inventories? This is what will spur business to restock shelves and boost production. IMO We are not there yet, and considering other factors, it is hard for me to see that happening soon, maybe before mid 2010.

Where will it peak?

The recent out performance of the $DJIA is due to the fact that it was undervalued below 10,000. It is still early to get an accurate revision on S&P500 valuation, but I expect it is still overvalued. The outlook for 2010 should be clearer after the Wholesale Trade Report @ 10:00 am Wednesday. Recent options activity suggest the recent move up is purely speculative but I expect the next dip to 1060-1075 will be bought up again quickly. The $USD rally will likely be limited to 80-83 and hence should not have an adverse affect on stocks.

So, unless institutions start selling aggressively soon, the market should continue its drift upward into Jan when the economic picture for 2010 becomes much clearer as indicated by the LEI's. Also we will be at the doorstep of the next earnings season which will paint the picture quite clearly. We could very well see another run up ahead of that earnings season with profits being taken ahead of the reports as we saw in the past because it is hard to imagine them being able to surprise or ratchet up the estimates significantly again. The real clincher will be if earnings for S&P500 get revised lower. In that case, look out below, since there are other major headwinds coming in 2010.

This fits with what I have been saying all along, that is: the best shorting opportunities will be after the January highs are in. be patient and let the market moves play out. They are illogical and overvalued much of the time!

Some food for thought.

The market got a lift on Friday from The Employment Situation Report, also known as the Labor Report, but the next one to watch will be the The Monthly Wholesale Trade Report which is due on the 9th.

In the Monthly Wholesale Trade Report is the inventories-to-sales (I/S) ratio, which is very closely watched. The Durable Goods Report is also watched almost as close and sheds some light on the durable sales figures. Any more good news like we saw Friday could easy send this market higher into Jan 2010. Stay on your toes, and watch the charts close knowing what to expect on the reaction to this next report and you will make some good coin! And don't get married to any one idea or EWT count, that is a recipe for disaster.

Below are links to explanations of other reports

Personal Income and Outlays

Industrial Production

Economic recovery occurs when these four indicators turn higher at about the same time. If the four indicators are not rising, then a normal recovery will not occur. If a complete recovery of these four indicators is far in the future, then the current gains in the stock market cannot be sustained just like in 2001. The market appears to be bracing for this one a little but, since it did not close near the highs Friday even after such a good Employment report.

Do some dd and get a handle on what these reports are really saying, and THEN you will know whether you should choose the bullish count or the bearish count.
Happy & prosperous trading to all!

A Maturing 3-legged Bull

Geez, I just realized it has been almost a month since my last post here. I have been actively trading and most of my updates are done on my Public List at Stockcharts.com and during the day on CiL. Charts have done a great job of pointing to a top soon, but indicators can point to a top for months before even a healthy 10-20% correction. Keeping abreast of developments in the markets regarding sovereign debt to earnings announcements by market leaders is an overwhelming job for the individual trader but is it also important to keep in mind how bull markets behave and transition into the various phases. The market is entering a new phase which is characterized by longer periods between the usual 5-7% corrections, lighter volume, and wide swings within ascending ranges ( 2-3 week sideways, tight bases etc ). Stocks go into long periods being overvalued and less time being undervalued.
The one thing going on now is whether the market truly believes that the bubble will stay re-inflated after all the liquidity that has been provided. The market will get a higher multiple associated with it if in fact it feels that it is deserved and that alone will push prices higher into 2010, albeit at a slower pace. This push higher does not mean the market will hold that higher multiple, but with unemployment and the usual LEIs pointing to a recovery of some degree, the market will rise until just prior to the next major correction that will be brought on by a disruption in credit markets or a geopolitical event or something totally surprising. For now, the market seems satisfied with the movement in the US dollar and feels comfortable with it moving up off the lows lately since it is probably convinced that the rise will not be high enough to hurt equities negatively. Crossing and holding above the 1107 level in the S&P500 represents the market's confidence and willingness to take on risk. Bonds are beginning to sell off recently again and have probably seen the highs for a long time to come. This is just another sign that things are going back to "normal" (if we can call it that).
My short term projection is that somehow the market makes it to those 160 month simple and 200 week exponential moving averages around 1150 by Jan. 2010. After that, I am confident that there will be some sort of larger correction on the back of some crises in sovereign debts, currency, or other unforeseen incident.

Before you sell your gold or trying shorting it, it would behoove you to study this long term chart for $USD first! I will elaborate on it later.

Trade of the month? Within the next 6 months is likely.

At some point in the near future, we can expect bonds to sell off to a lower level as they have been selling into the bond rallies ever since the Fed announced that huge support for the bond market since late last year. Therefor, I am looking for entries into calls on TBT on dips from here on out.
The following charts speaks for itself and is part of the stealth rally that has been going on since March.



I am not saying that all money that is coming out of bonds is going directly into stocks, and definitely not all into US stocks, but the bond bubble has been a long time in the making and is the last big bubble to be deflated. In order to dispel some of the common myths, I thought it appropriate at this time to study the relationship between stocks and bonds. It is not a correlation that is in lock step with stocks like we have seen with the USD lately, but there is a correlation to be observed. Usually, the move in bonds precedes the move in stocks. At first, the stocks may even sell off with bonds but that is the dip that I expect will be bought if/when that happens in the coming months. Higher bond yields will give the bears plenty to gripe about, but in the end, as long as the yield on the UST10Y holds below 5%, I think the economy will continue on the path of recovery.

Look for an extended trading range

I dont see anything that changed the likelyhood that the market is going into an extended trading range with room for a lower low to 1020. Typically when going into an extended trading range, it starts like this followed by a dead cat bounce and then spends several days testing the low end. Then there is the snap-back rally to the previous highs followed by a more gradual decline to the previous lows. With so much talk of a higher USD (pure advertising by the media to get longs back IMHO) to help talk it up for the Fed, this can be expected but the market wont rally in the face if a higher USD short term to 77-79.

Also, this pullback should be a little more and longer than the last few. So 8% and a few more weeks hanging around the low end of the range would make a lot more sense than a sharp rally back to 1100 or +. So far this does not look like it will be a 9:1 upday in volume.

Is it a top yet

For all practical purposes, I must say yes, at least for the short term. That does not mean that the market can't see one more surge to 1100+ on a USD induced rally next week. The indices and various sectors all pulled back to support and the USD still does not want to rally just yet. It all seems like bracing for a dollar rally that may not start until next week or sometime soon after.

Technically, we have seen virtually every sign for a top, but stocks will continue to take their cue from currencies. There are many moving parts there. For example, Gov. Carney of the BOC spoke of possible intervention. Many traders reacted with short-covering in USD/CAD. Markets will probably continue to heed the BOC threat, so in the short term, I expect to see more of the same in the coming weeks.

So, considering how central banks are in the middle of playing a big game of chicken, it would be reasonable to assume that the USD can make one more last drop before we see some intervention, if indeed it gets to that. We all know the Fed has no choice but to debase the dollar for the foreseeable future (2-3 years).

Be careful since we are at a critical inflection point for currencies. In the past, the USD has rallied in the 4th quarter when at these kind of levels technically and fundamentally.

Playing the next dip?

It could be tricky and will take some nerve to get short ahead of the weekend but my guess is that the markets drop at the open next Monday from whatever level we close at this week.

Market wants to go lower, but it is not convinced yet which direction the US$ is going to take short term.
Things are bound to happen soon there, and probably over the weekend.
The last rate increase from a foreign central bank came over the weekend, and currencies had a big reaction the following Monday.
We will probably see next week follow that same pattern. With US$ at this level, it will be very easy to see it bounce then and stocks drop on a Monday open.
It will take some luck to peg this top, and I will probably reenter short efts before Friday close depending on where we go in the next few days.

Also, valuation is still high at 1100 for S&P, but rising earnings estimates result in raising fair value after this earnings reporting season.
This market is looking forward to 2010 and beyond, and valuations will probably remain high until future expectations come back down

For now, if i see S&P dip to 1082 again today, my guess is a bounce back to 1095 will setup a possible H&S top formation and be a good entry to get short ahead of next week for a US$ rally induced correction.

Top SOON at least for the short term

From what I gather, the S&P may do well to break 1000 next week. I am not expecting much above that and will probably be below the 50% Retracement level I had been hoping for at around 1122 and by mid-week.

What to buy?

Health Care sector is a good place to look as the reform will likely be a windfall for the insurers if/when passed.
Also, as always, I will keep quality bio techs on the buy list when they dip as they always do from time to time.
I hope to elaborate on these ideas in the near future and share a few more as well. Keep in touch.
Don't forget, that even though GS and others have repaid TARP, GS for one still needs to come into compliance with banking requirements per Bloomberg guest early on 10/13.

BBS

These last few weeks have been like running a marathon juggling 2 jobs, let alone trading, but I have been keeping up to date with the markets. Time has constrained my desires to make weekly entries on this blog but in the future, if I ever see a turn in the market coming or significantly change my short or long term views, I will always find time to make a note of it on here. I was a little surprised to see the market bounce off the 50 day sma and hold up around 1060-1080 and was expecting a little more consolidation around the 1010 +/- level for at least 1 more week, but it still looks as if 1100-1150 is still the next target over the next few weeks.
Meredith put a neutral rating on GS today, which probably fits the broader market as well, since it seems the upside is limited to less than 8% as we head into 2010. (Another point of interest on GS is that they still need to come into compliance with banking requirements. So far, the Fed has been keeping rates low in order to make it easy for the banks to repair balance sheets by making it a cinch for them to make money in borrowing at low rates and giving it back out at higher rates.) I agree with Fleckenstein's recent comments on Bloomberg that early 2010 will be the best time to heavily reenter short positions on the market. As I said before somewhere while posting on another blog, I do not expect this market to go down too quickly, and it would seem likely to form a double top around 1125 +/- over a period of a couple months around the end of 2009/early 2010. I know it seems early to make that kind of call, but historically, markets do not make major turns without taking time to put in a top or bottom and my long term chart, 4 $SPX - Weekly Simple Timing System large (that is found in my chart book), shows that. I give precedence to the long term moving averages and give less weight to the short term squiggles when looking for a market turn. It seems to work!
I really must go now, but feel free to leave some feedback. I would be glad to elaborate on what I see in the markets or share views on a particular subject.


btw. Before the market turned on March 9, I told those who were following me at the time on the previous Thursday to expect the final low early in following week and that the market was within 50 points of making a final low. Not bad for having no knowledge of EWT at the time! Remember, many times in the past, markets turned around earnings season and usually soon after getting a good sampling of how they are going to come in. I expect this next turn to be no different and is why I look for the market to rally a bit higher as earnings start to come in this time, and I suspect there will be selling into this strength.

Trying to Put Things in Perspective - P3 or not P3

While I do agree with the main idea that P3 will retrace 50-62% of the rally off the March lows, it is also a matter of when that retracement will be complete. That retracement will probably be the next best buy opportunity.

So far this rally is following the playbook for a typical recession/recovery scenario and I am keeping in mind that it will likely do so until the "Market" is convinced that stocks either reached their full valuation based on future expectations of the strength of the recovery. Barring any unforeseen events, S&P should continue to rally into early 2010 to the 1150 level after October earnings season is over if earnings expectations hold up and especially if they are revised upward again. Markets can and usually do trade in a range of +/- 10% (or more) from the midpoint of fair valuation. So, to see the S&P puillback to 1000 or a little less by late October would be perfectly normal and should not be looked at as the beginning of P3 unless the earnings outlook deteriorates or currency issues arise (which I do not expect to happen ) for example.

So, yes, while I agree that P3 will retrace, it is a matter of how high the market goes first. If 1150 is the final top, then that retrace will likely be back to around the good old 875 level, the breakout point of the V-bottom. Any retracement can take various shapes, and the normal list bearish arguments including "W" shaped recovery, more housing forclosures, etc., will have an effect at some point. There is not doubt that more housing foreclosures will have a negative effect on related sectors, that alone will not be the catalyst for a steep retracement anytime soon. It is too early to call a "W" recovery with LEI's still pointing up. The unemployment/jobs outlook, although bleak, is still in the very early stages of a possible recovery and the market is likey going to wait until the 4th quarter of 2009 at least before throwing in the towel on hopes for an improvement there. Emerging markets are also expeted to continue to be the growth driver for the gloabal recovery. So, I expect the energy sector to help support the earnings outlook for the S&P, while high expetations for an earnings rebound in the consumer sector could be dashed and end up being a dissappointment and drag.

To sum it up for now, I will not be too quick to throw in the towel on this market rally, be it a Bear Market Rally or otherwise and plan to use any coming weakness to add to some long positions and start new long positions in energy and Emerging markets.

more to come .......

THE TOP is ALMOST HERE

Check charts at My Public Chart List (link on the right of this page) for more daily updates and look for notes on the charts.
I do believe S&P could see a 5-10% decline after this next peak in the first 2 weeks of September around 1040-1070. It is a little too early to tell exatly where or when it will peak at this point but I am confident S&P will be back below 1000 at some point before the end of Oct. That is the dip I plan to use to add more long positions to hold into yearend or longer.
I have been adding some gold miners recently since the rally in gold that many were expecting for the last 6 months back to 1000 seems to be ready to get started. I look for oil to follow gold's lead and resume the next leg up for a few months after gold peaks as is the case most of the time. The decline of the US dollar is the main catalyst for this, and has not happened yet, but if it breaks the most recent lows soon, that will be my cue to add some more gold or oil positions.
DGP is a great way to play the gold rally too!
I dont think the decline in the dollar will be of the magnitude that I like to play the etfs like UDN or UUP, but if/when the dollar bottoms around 75-76, I may try a long position in UUP.

Enjoy, relax, and let the charts point the way.

Short Term Bull but not with Blinders on

That seems to be the psychology of the market and is why I expect this market to work its way higher into 2010, provided that several moving parts dont get hung up. Financials, Transports, and Technology so far have begun their move and the rest of the market seems to be in a consolidation pattern that may continue into late October before it breaks out above 1018 to the 1150 target that many are looking for.

Currency outlook

I could write a lot about this topic but keep in mind currency relationships are all relative and dependent on what the foreign bankers and the FOMC decide on policy. That said, it is right to assume that if US$ is going to put in a bottom, it will do it based on Fed rate hike expectations (and foreign bank rate decisions too). At this point there is no reason to expect a bottom in US$ for a few more months at least! ( especially after looking at Fed funds futures not pricing in rate hikes to start until Dec meet at the soonest and ECB being more hawkish as of last meet this week )

There are some other interesting notes on currencies below the charts of the $USD (and some others) on "My Public Chart List" (link on the right of this page). It is not a matter of where a technician draws a line or % of bulls/bears on a currency.