Archive for December, 2010

2011: Housing, Jobs, Stocks, Commodities, and Dollar

Friday, December 31st, 2010

As the global economy shows continued signs of a sustainable economic recovery, there are two notable areas lagging behind; employment and housing in the United States. Continued trends in these areas could lead to renewed weakness in the U.S. dollar, which in turn could help boost stock and commodity prices. From a December 26th Bloomberg article:

A wave of foreclosures waiting to reach the market means home prices will remain under pressure in 2011, representing a risk to household finances. Rising equity values and an improving job market will probably help offset the damage, ensuring that confidence and spending continue to climb. “The inventory overhang is so big, with foreclosures looming, it’ll take five years to absorb the supply,” said Paul Ballew, chief economist at Nationwide Mutual Insurance Co. in Columbus, Ohio. “The consumer is feeling better although there is still a high level of caution and anxiety.”

According to a December 29th NPR article:

Mark Zandi, chief economist at Moody’s Analytics, says in 2010 the labor market was running hard, but going nowhere. The economy needs to generate about 150,000 jobs a month, Zandi says, just to keep up with population growth and people re-entering the workforce. It didn’t do that in 2010. “It wasn’t negative. We weren’t hemorrhaging jobs,” he says. “But in the context of 10 percent unemployment, standing still isn’t all that great.”

In general, a weak U.S. dollar is favorable to stocks and commodities, with the benefit of the doubt going to stocks in emerging Asian countries since their debt burdens are small relative to developed nations. The short-term outlook for the U.S. dollar is somewhat mixed presently with the bulls having the upper hand over the last seven weeks. Recent action in the U.S. dollar, aided by growing concerns about ongoing weakness in housing, has left the door ajar for the dollar bears. The dollar is also under assault from the Fed’s quantitative easing program (a.k.a. money printing).

On December 17th, we noted the dollar had recently completed two of the three steps usually associated with a change in trend. As shown in the chart below, the dollar has been unable, thus far, to complete the third step, which is to close above 81.19. Recently, the dollar has made a lower high, which leans bearish (compare point A to point B). The Rate of Change (ROC – see bottom) indicator also tells us the recent push higher was lacking conviction from buyers (compare A1 to A2 below). As of the close on December 30th, nothing was settled from a very short-term perspective.

U.S. Dollar Index - technical analysis blog

For now, the dollar sits in a technical no man’s-land from a short-term perspective. A close below 79.29 would increase the odds of a resumption of the greenback’s longer-term downtrend. Should the bears regain control of the dollar, it would continue to favor commodities such as copper (JJC), silver (SLV), oil (USO), and agriculture (DBA). Significant weakness in the dollar may be followed by a resumption of leadership by emerging market stocks (EEM) relative to U.S. stocks (SPY).

With a six-to-twelve month time horizon, favored sectors for 2011 include energy (XLE) and materials (XLB). Strength in these sectors tends to be associated with periods of weakness in the U.S. dollar. From a bullish perspective, we could see strength in energy and materials, coupled with strength in the dollar, if U.S. growth, housing, and/or employment surprise on the upside, but that may be an ambitious scenario. Our 2011 outlook for stocks does not rule out better than expected economic outcomes in the first of 2011, based on recent technical deveopments.

We will continue to monitor the U.S. housing and labor markets along with relative moves in global currencies. Markets have a lot of moving parts; keeping an open mind, paying attention, and remaining very flexible are sound practices for all investors.

Update: 2011 Outlook for Commodities Remains Positive

Thursday, December 30th, 2010

Given a basket of commodities, as measured by the CRB Index, is up a healthy 9.72% this month, it may be a good time to revisit the longer-term outlook. While the daily chart of the CRB is showing some signs of short-term fatigue, the outlook for the next three-to-six months still appears to be encouraging.

On December 8th, with the CRB Index trading at 315.62, we published the following chart and comments in Outlook for Commodities Remains Positive:

BEFORE: As of December 7th

CRB Index as of Dec 7, 2010

If we think of the above chart as the “BEFORE” chart, the chart below is an updated version showing the CRB’s progress since the chart above was published on December 7, 2010.

CRB Index as of Dec 29, 2010

Our December 7th comments expand on the relevance of the MACD indicator shown at the top portion of the charts shown above. If the CRB Index were to move to 350 sometime in the next few months, it would represent an additional gain of 5.83% from the December 29th close. Keep in mind, the comments above relate to the next few months; short-term pullbacks are always a possibility. A bullish outlook for commodities dovetails nicely with the positive outlook for stocks in 2011.

Breadth/Fed Stimulus Encouraging to Bulls

Tuesday, December 28th, 2010

The disappointing housing news of December 28, 2010 gives the Fed more cover to complete the full allotment of QE2 bond purchases, which in turn should help boost weak dollar assets like gold, silver, and copper. From a Bloomberg story:

A wave of foreclosures waiting to reach the market means home prices will remain under pressure in 2011, representing a risk to household finances. Federal Reserve policy makers this month said “depressed” housing and high unemployment remained constraints on consumer spending, reasons why they reiterated a plan to expand record monetary stimulus.

Using charts from the close on Friday, July 23, 2010, we posted the following chart on Monday July 26th with the S&P 500 trading at 1,115. Since we posted the chart below, the S&P 500 has gained 12.8%. Here are the comments from July 26th:

One of the best ways to monitor the health of any rally is to look at the number of stocks participating, which is referred to as market breadth. Wide participation is a sign of a healthier rally; one which has higher odds of continuing for more than a few days. How does market breadth look as of Friday’s close? pretty good. The Summation Index (shown below) is an intermediate-to-longer-term measure of market breadth. The Summation Index has made a higher low and recently closed above its 35-day moving average for the first time in eighty-eight calendar days. Both occurrences lean bullish for the intermediate-term.

Chart as of July 23, 2010 Close:

2011 Investing - Market Breadth Similar to June/July 2010

Fed money printing also increases the appetite for stocks. Below is an updated version of the Summation Index as December 27, 2010. Look at past circumstances highlighted by the green arrows at the top and middle portions of the chart. Note the S&P 500’s performance following these potentially bullish signals. The blue arrows on the right side of the chart show the current situation relative to market breadth.

Chart as of December 27, 2010 Close:

2011 Investing - Market Breadth Bullish in December 2010

The attempt at a bullish turn in market breadth (summation index) aligns well with other potentially bullish developments outlined in our 2011 Investment Outlook (Part I, Part II).

2011 Stock Market Outlook and Video Part 2 of 2

Friday, December 24th, 2010

As we kick off 2011, there are plenty of things for investors to worry about, including budget imbalances in developed nations, high levels of bullish sentiment, and a fear of rising interest rates. As of late December 2010, the market’s technical profile remains healthy relative to the outlook for the next few months, something we expand on in the video below.

From Wall Street’s perspective, the positive drivers for stocks in 2011 include:

  • The recent extension of the Bush Tax Cuts.
  • Little in the way of double-dip talk.
  • Positive outlook for the economy and earnings.
  • Favorable market seasonals and cycles.
  • Many companies have large stores of cash.
  • Consumer confidence is picking up.
  • The Fed’s desire to inflate asset prices.
  • Consumer balance sheets have improved a bit.
  • Stock valuations are not excessive (from the perspective of many).
  • Low CPI inflation.

Part II of our 2011 stock market outlook expands on some of the concepts above with an emphasis on (a) what could derail the bull, and (b) the S&P 500’s technical profile. The technicals are discussed in a manner that can be understood by both professionals and investors who have limited experience with market charts. Copies of the charts reviewed in the video, as of December 23, 2010, are below the video player. A larger version of the video player can be found here.

Part I of II can be found in Risk Assets Respond to Quantitative Easing.

2011 Investment Outlook - Stock Market Blog

Investing in 2011 - Investment Blog

2011 Stock Market Predictions - Stock Market Blog

2011 Investment Outlook - Stock Market Blog

Stocks Well-Positioned for First Half of 2011

Thursday, December 23rd, 2010

As we have mentioned in the past, weekly and monthly charts are very useful to longer-term investors. Daily charts are important, but they are better aligned with the shorter timeframes of traders. Using the same logic, monthly charts are more important to us, as investors, than weekly charts. Keeping in mind we have not yet reached the end of the month (charts could change), the monthly chart of the S&P 500 aligns well with other factors which lean toward the bullish camp for the next six months.

Stocks Well Positioned for 2011 - Monthly  Chart

The Relative Strength Index (RSI), shown at the top of the chart above, often foreshadows moves in price. It is a positive sign that RSI has broken above the trendline from 1996 and the trendline from 2007. If these bullish signals hold into New Year’s Day, it would paint a favorable picture for the first half of 2011 in terms of risk and possible reward. If conditions change, we need to be open to a different outlook, but for now the bulls have some reason for continued optimism.

S&P 500 Reaches 1,256

Wednesday, December 22nd, 2010

With the S&P 500 trading at 1,124, the headline of the November 5th posting on Short Takes was S&P 500 May Be Headed to 1,256. On December 22nd the S&P 500 Index closed at 1,258.

Stock Market Sentiment Not A Barrier To Further Gains

Tuesday, December 21st, 2010

There are currently several reasons to be concerned about the stock market, from debt problems in Europe to slowing technical momentum. However, if investor sentiment is currently at the top of your list of concerns, you may want to bump it down a few notches.

Stock market sentiment relative to a bullish or bearish outlook can be used as a contrary indicator for stock prices when it reaches extremes. If you follow the markets closely, you have run into an article or two making the case that a correction or bear market is imminent based on the current state of extended bullish sentiment.

We, like many familiar with the power of using sentiment, have been concerned in recent weeks. Since the longer-term outlook from a technical and fundamental perspective still appears to support higher stock prices over the coming months, we decided to ask the man who literally wrote the book on stock market analysis. Robert W. Colby, CMT (, author of The Encyclopedia of Technical Market Analysis, was kind enough to give us his perspective of the current state of the Investors Intelligence Bull/Bear Ratio. Here is what Mr. Colby had to say:

On advisory service sentiment, there were 56.8% bulls versus 20.5% bears as of 12/15/10, according to the weekly Investors Intelligence survey of stock market newsletter advisors. The Bull/Bear ratio stands at 2.77, which is between one and two standard deviations above the long-term, 20-year mean. This is not overly excessive bullish sentiment in the second year of a bull market. Bullish sentiment tends to rise in November and December. The ratio was as high as it is now or higher in Decembers of each year 2003, 2004, 2005, and 2006, and none of these “high” readings led to bear markets. The 20-year range is 0.41 to 3.74, the median is 1.54, and the mean is 1.61.

The VIX Fear Index fell below 8-month lows to 15.46 on 12/17/10, reflecting diminishing fear among options players. VIX is near its 3-year low of 15.23 set on 4/12/10. Before we take the current level of VIX as a sell signal, however, we might consider that VIX was as low as 9.89 on 1/24/07, nearly 10 months before the final tops in the price indexes. VIX is a market estimate of expected constant 30-day volatility, calculated by weighting S&P 500 Index CBOE option bid/ask quotes spanning a wide range of strike prices for the two nearest expiration dates.

Mr. Colby also forwarded a copy of the chart below. We added the green boxes and lines, which show periods where sentiment rose from depressed levels to elevated levels similar to what we have today. The Bull/Bear ratio is shown at the top and the Dow Jones Industrial Average is shown at the bottom. Notice how stocks were able to continue to post gains after the highlighted periods of extended sentiment.

Investor and Advisor Sentiment Bull-Bear Ratio - technical analysis blog

We took Robert W. Colby’s chart (above) and calculated the market’s historical risk-reward profile for the cases highlighted with the green boxes from 2003, 2004, 2006, and 2009. As investors, what we should care about is how the market behaved after similar circumstances in the past. We need to examine the magnitude and frequency of the bullish outcomes relative to the magnitude and frequency of the bearish outcomes to better understand the risk/reward profile of the current market as it relates to sentiment. The table below shows the S&P 500’s performance between two weeks and six months after sentiment rose from very depressed levels to a bull/bear ratio of 2.77. Roughly 80% of the outcomes for stocks were very favorable; roughly 17% were unfavorable (but not enough to warrant selling), and about 4% of the cases resulted in losses on the S&P 500 of 3% or more. That actually looks pretty bullish (lots of green below). The S&P 500 was higher in all four cases six month later.

Investor and Advisor Sentiment Bull-Bear Ratio - Stock market outlook not bearish

The second line of the table below (see 5.5 months) shows in the four cases studied (2003, 2004, 2006, and 2009) the S&P 500 posted gains three times (75% of the outcomes) and a loss in one case (25% of the outcomes). The average gain in the three positive cases was 7.99%. The loss, five-and-a-half months after the elevated level of sentiment, in the single negative case for stocks was 2.16%. If history produced wins in 75% of the cases and the average gain was 7.99%, those outcomes compare very favorably to the one case that posted a loss of 2.16%. Hence, the favorable risk-reward ratio of 11.12 shown at the far right of the 5.5 month line.

Investor and Advisor Sentiment Bull-Bear Ratio - Stock market outlook not bearish - Sentiment not a barrier to stock gains

The table above tells us the next two to eight weeks have favorable outlooks from a risk-reward perspective based on sentiment. The outlook for the next 2.5 to 3.0 months is favorable, but somewhat mixed. The picture improves again looking out 3.5 to 6.0 months.

To get another perspective of the big picture, we also looked at the current readings of the CCM Bull Market Sustainability Index (BMSI) and 80-20 Correction Index relative to the periods studied above. The results, shown below, also paint a picture where further gains in stocks, and risk assets, seem within reach.

Investor and Advisor Sentiment - CCM Models Also Say Room to Run

Ned Davis, of Ned Davis Research, does his homework. From a recent MarketWatch article:

Needless to say, the disturbingly high levels of bullishness that exist today don’t necessarily doom the market. Ned Davis, for one, is giving the rally the benefit of the doubt until it reverses direction, and he is therefore rated moderately bullish.

Even after performing this analysis, we remain concerned about the current state of sentiment. However, we are far less concerned having a better handle on a few historical cases. With numerous concerns in the fundamental and technical realms, we have moved sentiment down the list of reasons to toss and turn at night. As we stated in our 2011 Outlook, we will continue to give the bulls the benefit of the doubt until we see evidence to the contrary.

Dollar’s Rally Still Concerning for Stocks and Commodities

Friday, December 17th, 2010

As we head into the final two trading weeks of the year, the U.S. Dollar Index has completed two of the three steps typically associated with a change in trend: (1) the black trendline was broken, and (2) a higher low has been made. The third step would be to make a higher high via a daily close above 81.19.

U.S. Dollar Index - technical analysis blog

In the chart of the dollar above, the Rate of Change indicator (ROC at bottom) has made a few higher lows and higher highs, which leans toward the bullish camp. If we fail to see a close above $81.19, the door would remain open for the bears. One possible bearish development is the fact that ROC has not cleared the zero line again.

In our December 15th comments on the 2011 outlook for stocks, and risk assets in general, we presented several charts including the monthly chart shown below. The version shown here is as of Friday’s close. A move to 1,315 sometime in 2011 seems within reason.

S&P 500 Monthly - stock market blog

In the shorter-term, the S&P 500 faces several forms of possible resistance, including the long-term trendlines shown below. As noted, we are making a second pass at the upper blue trendline, which helped stem the market’s gains in April of 2010.

S&P 500 Monthly - stock market blog

Bulls Fight Back on Thursday

Thursday, December 16th, 2010

The CCM Bull Market Sustainability Index (BMSI) closed at 3,745 on Thursday putting it back into a favorable range in terms of the outlook for the next few months.

Below is an updated version of a chart originally presented in Thursday’s 2011 Outlook. The S&P 500 finished at 1,242,87, above A, B, and C below. However, where we finish the day on Friday is more important.

The CCM 80-20 Correction Index bounced from 395 on Wednesday to finish at 480 as of Thursday’s close, which gives the market a chance to build on recent gains.

Risk Assets Responding to Quantitative Easing

Wednesday, December 15th, 2010

Part I of II: 2011 Outlook for Risk Assets

With even the ‘new normal’ crowd upgrading their economic forecasts for 2011, the Federal Reserve prepared to fully implement QE2, and Ben Bernanke leaving the door open for QE3, it is a good time to take a step back and look at the battle between the acceptance of risk and risk aversion.

This article and video provides updated versions of charts we have presented in recent months. The market has had several opportunities, from both a fundamental and technical perspective, to correct in recent weeks, but the bears have not seized the moment. Charts created months ago are leaning bullish, which bodes well for risk markets making higher highs in the months ahead. All charts are as of the December 10, 2010 close. A larger video player is available making it easier to read some of the charts.

Stock Market Blog - technical analysis

Stock Market Blog - technical analysis

The spring 2010 rally was abruptly halted by numerous forms of resistance, including the 190-week moving average shown below (thin blue line). The S&P 500 has recently cleared and held above the 190-week. The chart below was first presented on December 2nd.

A similar concept is shown below with additional moving averages added to the chart. Not only has the market cleared resistance on the far right side of the chart below, but stocks also held at key levels of moving average support in July 2009, July 2010, and September 2010. When we first presented the chart below on October 13th with the S&P 500 at 1,170, we stated:

On the high end, a clean break above the 190-week MA (now at 1,184) and the 205-week MA (now at 1,201), could spark surprising gains to the upside.

In the last seven weeks, the S&P 500 has cleared and retested important levels in the form of the 190, 210, and 275-week moving averages (shown in blue, red, and green below). The longer the market can hold above these levels, the more meaningful it becomes from a bullish perspective. The chart below was originally presented on December 2nd with these comments:

This band of resistance from the three MAs (green, red, and blue lines above) represents a significant test for both the current bull market and the Fed’s quantitative easing (QE) policy. A significant market failure at the band formed by the 190, 210, and 275-week moving averages may indicate global deflationary forces are stronger than the Fed’s printing press. A typical bull market would pause near these barriers, but eventually the primary uptrend would carry stocks to higher highs.

In the monthly chart below, notice how the 70-month moving average (blue line) acted as resistance on the first clearing attempt in 2004; the second attempt in 2004 was successful. The pattern in 2010 is similar thus far. The S&P 500 stalled at the 70-month in April 2010. If the S&P 500 can finish December above the 70-month (now at 1,217), it may open the door to significant gains just as it did in 2004-2007. The chart below was originally presented on October 14th with the S&P 500 at 1,178. These comments accompanied the original version of the chart below:

Prices recently held at the 19-month MA, which supports longer-term bullish outcomes. Notice how the 70-month MA (blue line) held back the first attempt to cross it in 2004. 2004 is a good comparison to the present day since we are in a similar part of the market, economic, and interest rate cycles. The second attempt to clear the 70-month MA was successful in 2004. In 2010, the first attempt at the 70-month MA failed (just like 2004). The market probably will make a second attempt at the 70-month MA before we close out 2010. The 70-month MA now stands at 1,216, which is near other logical forms of potential resistance. Given the relatively low odds of a double dip (less than 25%), the Fed’s near promise to print more money in the form of quantitative easing, and positive technicals, we believe the odds favor a break of the 70-month MA in 2010 or early in 2011.

As the updated version (as of 12/10/10) of the chart below shows, the S&P 500 has successfully cleared the 70-month moving average (blue line). The move becomes more meaningful if it can hold into early 2011.

With the S&P 500 trading at 1,200 on November 20th, we first posted the chart below along with the following:

Whether or not the S&P 500 can hold above its recent closing low of 1,178 remains to be seen, but there is ample evidence in hand to at least leave the door open to higher highs occurring between now and year-end.

The market did hold near 1,178, and as shown below in an updated version of the chart, recently broke out above the blue trendline.

If we take a longer-term perspective, trend channels impacting price since the 2007 highs have also been cleared (see below) opening the door to possible further bullish activity in the first half of 2011.

On a weekly chart, the S&P 500 has cleared resistance at 1,220. The next level to watch on this chart comes in near 1,256, an area where sellers may surface for a time (see chart below).

The next two charts look at areas of potential overhead resistance for the S&P 500. In 2004-2005, the area near 1,246 on a weekly chart acted as both resistance and support. This level may come into play again in 2010-2011.

On a monthly chart, 1,245 also was important to market participants in 2004-2005, which reinforces the need to pay attention near this level in 2010-2011.

The S&P 500 closed on December 10th at 1,240.40 which is very close to three potential forms of resistance shown below. Given the bigger picture, we would expect any pause or correction near 1,240 to be within the context of an ongoing bull market.

This analysis relates to longer-term trends and does not leave the financial markets immune to normal corrections, which can be significant within the context of an ongoing bull market. As long as the key levels outlined above hold, the odds favor markets making higher highs in 2011. If these levels fail to hold, it may signal the deflationary forces in the global economy are gaining traction relative to the Fed’s printing press.