Archive for January, 2011

Million Man March Leaves U.S. Market Vulnerable Short-Term

Monday, January 31st, 2011

Since large institutional investors (hedge funds, pension funds, sovereign wealth funds, etc.) are the primary drivers of asset prices, it pays to keep an eye on them. The market’s ‘big boys’ seem to be focused on this Dow Jones News Service report:

Widespread anti-government protests in Egypt have lifted crude prices sharply higher the last two trading sessions. On Monday, protesters called for a general strike and said they planned a “million man march” Tuesday to mark one week since the start of the upheaval. Though Egypt is not a major oil producer, the continued protests stoked fears that shipping traffic at the Suez Canal, a key energy transit route, could be interrupted or that the unrest could spread to major oil producers elsewhere in the region.

Our guess is a “million man march” has the potential to turn into a violet scene on Tuesday. Large market players seem to agree as they basically have sat on the sidelines as of 2:50 p.m. ET. Trading volume is down approximately 27% vs. the same time on Friday on both the NYSE and NASDAQ.

From a technical perspective (another way to track big market players), the S&P 500 is flashing several short-term bearish divergences. Compare the slope of the green line for price to the slopes of the orange lines in the indicators. The orange slopes show a market that is still susceptible to selling in the short-term. These conditions can be easily cleared, but they should not be ignored.

Investing Blog - Stock Market Divergences - Bearish Short Term

The market may find its footing soon, but we prefer to be patient with any cash. We will also maintain a watchful eye on our holdings until the technical weakness shown above is no longer present.

With All Eyes on Egypt, Market’s Steady This Morning

Monday, January 31st, 2011

According to a Wall Street Journal article posted this morning at 8:35 A.M. ET:

CAIRO—A coalition of opposition groups called for a million people to take to Cairo’s streets Tuesday to ratchet up pressure on President Hosni Mubarak to leave. American and other world leaders were intensifying calls for an orderly transition to a democratic system as demonstrations against Mr. Mubarak’s administration continued into a seventh day.

It is good to see the markets appear calmer based on this morning’s futures. However, what matters is how we close out the day. The CCM 80-20 Correction Index slipped back to 1,140 on Friday, which improves the risk-reward outlook on all timeframes, except the shortest of two weeks.

Stock Market Blog - CCM 80-20 Correction Index

On Friday, the CCM Bull Market Sustainability Index (BMSI) ticked down to 3,730.

Investing Blog - Stock Market Risk-Reward - Ciovacco

We May Raise Some Cash Today

Friday, January 28th, 2011

CCM Clients: We have been reviewing all client accounts in the light of today’s selloff and the problems in Egypt. We do not want to overreact, but given the extended run in the markets and the high volume in today’s session, we feel it is prudent to begin slowly raising some cash. The proper way to reduce risk is to sell a portion or all of your weakest position(s). In our case, the logical area to raise some cash is in our emerging markets holdings. Odds are good we will do some limited selling today. If needed, we will continue to reduce risk over the next few sessions. We are monitoring the situation and our investments very closely. Our comments above relate to risk management. We have little reason to believe the bull market is nearing an end.

As EU Ponders Greece, U.S. Markets Continue To Hold Up

Friday, January 28th, 2011

Before the Open: Recent action in the U.S. stock market highlights the frustration of trying to wait for a pullback before investing your cash. Despite elevated levels of bullish sentiment, high rates of unemployment and budget woes in numerous countries, stocks have been able to hold their ground in early 2011.

One possible stumbling block for stocks and risk assets is the continuing debt saga in Europe (another is Egypt). According to this morning’s Wall Street Journal, discussions are underway on a possible plan that would allow Greece to buy back debt with help from the European bailout fund:

Since late last year, European governments have been discussing plans to beef up Europe’s new, emergency-financing mechanism, the European Financial Stability Facility, to lend money to euro-zone countries in need of cheap loans. Under the scenario now being discussed, the EFSF, which has a triple-A credit rating, would borrow from the international markets and lend money to Greece. An alternative scenario would involve Greece issuing the debt directly, but backed with a guarantee from the EFSF.

Since the S&P 500 remains the global standard to monitor risk, market internals back in the United States help us monitor the health of the risk trade. Markets appear to be trying to gather themselves after a recent correction scare. Concerns remain, but the short-term outlook appears to be improving.

Healthy markets have broad participation with a high percentage of stocks advancing as the major indexes advance. Participation is referred to as market breadth. The two breadth indicators below show market internals that are trying to right themselves after stumbling recently.

Stock Market Blog - Stock Market Breadth

Notice when breadth improves (see green lines / top portion of chart below) the stock market tends to perform better (see bottom of chart). The right portion of the chart shows the most recent turn in market breadth.

Investing Blog - Summation Index Turns Up

Both CCM market indexes have hovered around similar areas in recent days. The CCM 80-20 Correction Index closed Thursday at 1,537, keeping it in the risk-reward range shown below via the arrows.

Stock Market Blog - Ciovacco Capital 80-20 Correction Index Risk Reward

Similarly, the CCM Bull Market Sustainability Index remains in bullish territory closing Thursday at 3,745. A move above 4,071 would be concerning relative to increasing odds of a market correction.

Stock Market Blog - Ciovacco Capital Bull Market Sustainability Index Risk Reward

Will Gold Respond to the Fed’s Pledge to Keep Printing?

Thursday, January 27th, 2011

Tuesday’s Federal Reserve statement (see below) contained no big surprises. We expected them to reiterate their intention of completing all the bond purchases as outlined originally in the second quantitative easing program (QE2). The Fed’s hope is that rising asset prices will increase confidence, and in turn lead to more spending and more hiring.

For those who were expecting the Fed to water down QE2 as a result of improving economic data, you may be underestimating the role of asset prices in the Fed’s decision making process. As we explained on October 29, 2010 in Quantitative Easing and Asset Price Inflation:

QE attempts to flood the global financial markets with fresh cash in an attempt to reinflate asset prices. When the stock market goes up, people and businesses feel more wealthy, and are thus more apt to spend, invest, and take risks (in theory). Rising asset prices can improve the asset side of impaired global balance sheets, which the Fed hopes can rekindle the wealth effect.

When we made the comments above the S&P 500 was trading at 1,183. Today, the stock market stands 9.55% higher despite commentary from many that QE2 would have little effect on the markets. The important portion of the Fed’s January 26, 2011 statement is below:

Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

Gold responded to the Fed by jumping 1.0% on Wednesday. For now, gold remains in a short-term downtrend shown via the orange lines below. The recent break of the upward sloping green trendline means what “once was support may now act as resistance” (see green arrow).

Gold What to Watch - Technical Analysis Blog

From a bullish perspective, we would like to see the black MACD line (see top) cross above the red MACD line. A move above the zero line in the Rate of Change indicator (ROC shown at bottom), especially with a steep slope, would also hint at the lower orange trendline stemming the recent decline at least for a time. As of Wednesday’s close, we believe a little patience is needed prior to adding to our gold holdings. As mentioned yesterday, we are in the process of updating our asset allocation models.

Update to Asset Allocation Models

Wednesday, January 26th, 2011

As of 2:00 pm ET, today’s advancing vs. declining issues looks healthy and even trading volume is above yesterday’s levels, which is especially relevant since we have a Fed announcement at 2:15 pm ET (volume tends to be light before a Fed statement). The important things are (a) how the markets close today, and (b) how they behave through mid-day tomorrow.

The market recently has been a good market to hold positions, but not necessarily a good market to add to your exposure based on the extended run in risk assets. We are also managing some short positions for some relatively new clients (shorts were transferred to us). Recently, being patient with shorts has also made some sense since a few signs were pointing toward a possible pullback. That assessment may change should the market close over 1,191 on good volume and positive breadth.

Given what we know presently, we have decided to update the CCM Asset Allocation Model. The last step of the process includes reviewing daily, weekly, and monthly charts for the most attractive investment alternatives. We should be able to complete the update by mid-day on Thursday, which will allow us to better assess the market’s post-Fed reaction. The positive developments, from both a technical and fundamental perspective, highlighted in our 2011 Stock Market Outlook remain, for the most part, intact.

Can the Fed Vault the S&P 500 Over 1,291?

Wednesday, January 26th, 2011

CCM Clients: As mentioned yesterday, I was in Tampa in meetings for the last three days. I am back in Atlanta now. It may take a day or so to catch up on emails. The top priority, as always, is to monitor the markets and manage client accounts.

It was refreshing to see the more respectful atmosphere at last night’s State of the Union address, especially when compared to the partisan, and almost childish, environment during last year’s speech. It remains to be seen if our elected officials can make any meaningful progress on important issues, such as the deficit.

With a Fed statement coming today at 2:15 pm ET, the early part of the trading day will have a muted significance. The S&P 500 closed yesterday at 1,291.18, just below the 1,291.96 level we highlighted on January 19, 2010. The figure below is updated as of Tuesday’s close.

Stock Market Important Levels To Watch - Investment Blog

We will have to monitor the big picture closely should the S&P 500 be able to reach either 1,315 or 1,326. Both levels may offer a logical area for a pause of short-term pullback.

The CCM 80-20 Correction Index closed Tuesday at 1,374, an area which historically has yielded average to above average risk-reward ratios for investors. A move above 1,591 on the 80-20 Index would improve the odds of bullish outcomes over the next six months to a year. The 80-20 Index does not currently sit at levels which put us on high alert for a correction.

Stock Market Blog - Ciovacco Capital 80-20 Correction Index Risk Reward

Similarly, the CCM Bull Market Sustainability Index remains in bullish territory closing Tuesday at 3,745. A move above 4,071 would be concerning relative to increasing odds of a market correction. Our comments made Monday relative to today’s Fed statement still apply.

Stock Market Blog - Ciovacco Capital Bull Market Sustainability Index Risk Reward

The Fed, the Fear Index, and the Dollar

Tuesday, January 25th, 2011

Bloomberg provides some insight into the current two-day Fed meeting:

“The Fed is not ready to let up on its accelerator,” said Gramley, senior economic adviser for Potomac Research Group in Washington. “They are going to be impressed with the fact the economy has gained some momentum, but there are still strong headwinds to growth, and bank lending is quite modest.”

Policy makers will probably affirm their plan to buy Treasury securities through June to reduce long-term yields and spur lending, said Mark Gertler, a New York University professor and research co-author with Bernanke.

With the markets not having experienced a correction for some time and the Fed due to release a statement tomorrow, it is prudent to review some big picture issues. The VIX, or the “Fear Index”, falls when investors are less concerned about volatility or pullbacks. Conversely, the VIX rises when concerns about volatility and possible corrective activity begin to mount.

The chart below is a monthly chart of the VIX going back to 2002. The VIX is at a level where it could logically reverse and begin to move higher, which would most likely coincide with a pullback of some kind in risk assets. Two things we are monitoring relative to the VIX are highlighted in the chart. The parallel blue trendlines in the Relative Strength Index (RSI) have acted as both resistance (red arrows) and support (green arrows) – notice the blue line is at a point where it could provide support for the VIX. A break below the lower blue RSI trendline would open the door for another push higher in risk assets.

VIX Fear Index - Stock Market Blog

The pink line (above) and arrows show areas where interest in the VIX picked up in 2002, 2008, and in 2010. The VIX is currently holding near the pink support line.

Tomorrow’s Fed statement will be analyzed closely by the currency markets. The monthly chart of the U.S. Dollar below leans toward the greenback making a move toward 76, although it may not occur until after a move higher.

U.S. Dollar Monthly - Financial Blog

Like the VIX, the weekly chart of the U.S. Dollar sits at a point where a short-term reversal would be logical. Notice how the candlestick is hanging on the thin pink line.

U.S. Dollar Index Weekly - Investment Blog

The daily chart of the U.S. Dollar Index, shown below, also indicates a move higher bouncing off the green support line is one logical outcome over the short-term. Even if the buck moves higher in the short-to-intermediate-term, the negative slope of the green parallel trendlines remains an ally of the bears.

U.S. Dollar - Look Before The Fed

As outlined in late October 2010, the Fed’s quantitative easing program (QE2) is more about asset prices and balance sheets than interest rates and the economy. In this context, it appears unlikely the Fed will scale back QE2.

CCM Clients: I have been in Tampa since Sunday – I return to Atlanta today. It may take me a day or so to catch up on emails.

S&P 500 Still Hesitating at 1,291

Monday, January 24th, 2011

On January 20th, we mentioned 1,291 as an area of potential overhead resistance for the S&P 500 Index. As of 1:00 p.m. ET, today’s high is 1,291.14. A close over 1,291, especially on a weekly basis, would improve the very short-term outlook for stocks and risk assets in general. Today’s move in stocks is thus far taking place on weak volume, which is not what the bulls want to see all else being equal.

Economic Outlook Quiets Double-Dippers

Monday, January 24th, 2011

When GDP numbers are released this week, they are expected to be supported by the largest increase in consumer spending in four years. Economists surveyed by Bloomberg expect fourth quarter GDP to show an annual increase of 3.5%, a significant improvement over the 2.6% increase posted in the second quarter of 2010. These numbers do not lend much credibility to the calls for a double-dip over the summer. As we stated numerous times, including on July 7, 2010, the data never supported an imminent double-dip. While all forecasting is difficult, economic forecasting based on facts, rather than opinions, is what should be used when making important investment decisions.

Consumer data released this week is expected to show gains in spending which occurred at a 4% annual clip. U.S. consumers, who account for roughly 70% of economic activity, still carry significant debt burdens, but the situation in U.S. households has improved somewhat.

This week also brings a two-day Fed meeting beginning on Tuesday. It is highly unlikely, with still-elevated unemployment levels, the Fed will make any changes to its $600 billion dollar asset purchase program announced in late 2010.

An interesting Bloomberg article, Super-Cycle Leaves No Economy Behind, examines the positive slant on long-term economic growth projections stating:

For only the third time since the Industrial Revolution, the world may be entering a long-term growth cycle that will lift all economies simultaneously, driving bond yields and commodity prices higher. With the economic and investment outlooks “much better” than in recent years, “people are talking about how to get back to business as normal and what comes next,” said Jitesh Gadhia, a delegate to the conference and the London-based senior managing director at Blackstone Group LP, which runs the world’s largest buyout fund.

Numerous problems remain, including increasing costs for food, heavy debt burdens in developed nations, and high unemployment in the United States. With the Fed and other central bankers providing more than ample liquidity, the stock and commodity markets continue to side with the optimistic, rather than pessimistic, outlook for sustainable economic growth.