Archive for April, 2011

Attractive Sectors Still Point to Bullish Outcomes

Friday, April 29th, 2011

On April 28, we completed the update to our asset allocation rankings. The table below shows investment sectors that remain well-positioned relative to the S&P 500 Index. The results align with the current readings on the CCM Bull Market Sustainability Index (BMSI) and CCM 80-20 Correction Index in that they continue to favor bullish outcomes, especially over the next 90 days. The sectors below correlate well with what we would expect to see in the middle stages of an economic recovery, meaning more upside in the general market typically follows a sector profile similar to what we have today.

Attractive Stock Market and Investment Sectors

We stated that stocks, the dollar, and VIX were not anticipating a negative reaction to the Fed and that is exactly what we got. Some recent economic data that supports bullish outcomes for the broad market (SPY) and economically sensitive sectors:

* GDP has grown for seven straight quarters
* Inventory investment grew by $43.8 billion in Q1
* Motor vehicle sales rebounded sharply in Q1
* Chicago Fed National Activity Index (CFNAI) rose 0.26 points in March

The CFNAI correlates to slightly above-trend economic growth with limited inflation.

Updating CCM Asset Allocation Models

Thursday, April 28th, 2011

Early this morning we updated our main CCM Asset Allocation Model. Thus far, we have reduced the list of 223 liquid ETFs, representing investments ranging from Singapore to the Swiss Franc, down to 115 that we wish to evaluate further. All asset classes, including fixed income, currencies, and precious metals, are included in the list for further consideration. With the S&P 500, Transportation Average, and Dow Industrials all making new 2011 highs, it is a good time to take a step back and look at the total landscape of investment options.

Complete Text of Fed Statement

Wednesday, April 27th, 2011

From Federal Reserve

Release Date: April 27, 2011
For immediate release

Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.

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 will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Outlook for Stocks Remains Favorable – Fed on Tap

Wednesday, April 27th, 2011

We noted before the open on April 26 that stocks, the dollar, and VIX were not signaling a negative reaction to the scheduled Fed activities of April 27. During the trading session on April 26, the S&P 500 made a new high, the dollar dropped 0.20%, and the VIX fell 0.95% - all the existing trends remained in play.

As shown in the chart below, the S&P 500 finally followed the small and mid-cap indexes by making a new high (compare blue arrows). Some traders and money managers have been waiting ten weeks for a new high, which means some pent-up demand for stocks may have been released yesterday and could carry through for a few more days. The higher low (compare green arrows) forms a positive sloping trendline (green) which is bullish.

In an April 27 article, Bloomberg noted the following relative to what we can expect to hear from the Fed:

Chairman Ben S. Bernanke, who gives his first press conference today after a meeting of policy makers, has signaled he wants to ensure the U.S. economy has achieved self-sustaining growth before the Fed starts to raise borrowing costs and trim its $2.69-trillion balance sheet.

The Federal Open Market Committee will release its statement at 12:30 p.m. in Washington at the end of a two-day meeting. After prior meetings, the FOMC released the statement at 2:15 p.m. Instead, Bernanke is scheduled at that time to meet the press, and the Fed will release economic projections of policy makers, three weeks earlier than its practice since 2007.

The Fed will probably confirm that its $600 billion of Treasury purchases, dubbed QE2 for the second round of quantitative easing, will end as planned in June. All 83 economists in a separate survey predict the Fed will keep the main interest rate in a range of zero to 0.25 percent, its level since December 2008.

Stocks, Dollar, and VIX Not Anticipating Negative Reaction to Fed

Tuesday, April 26th, 2011

Experience tells us the best approach to this week’s Fed trifecta (meeting, statement, and press conference) is (a) to be patient, (b) wait for the news to come out, (c) monitor the market’s reaction, and (d) make any adjustments to our allocation if needed. From a contingency planning perspective, it is helpful to study the markets for clues that may foreshadow the reaction to Wednesday’s Fed statement and press briefing.

The Fed’s recent press release contains an important time change related to this week’s statement:

In 2011, the Chairman’s press briefings will be held at 2:15 p.m. following FOMC decisions scheduled on April 27, June 22 and November 2. The briefings will be broadcast live on the Federal Reserve’s website. For these meetings, the FOMC statement is expected to be released at around 12:30 p.m., one hour and forty-five minutes earlier than for other FOMC meetings.

From a fundamental perspective there are reasons to be nervous about the approaching end of the Fed’s second quantitative easing program (QE2) and possible policy changes to begin mopping up some of the liquidity in the financial system. As we originally presented on March 14, the chart below shows the stock market’s negative reaction to the completion of QE1.

For those who doubt whether the end of QE2 is a significant event, the chart below shows the S&P 500’s performance after Ben Bernanke’s August 27, 2010 Jackson Hole speech, which basically told the markets QE2 was on the way.

The table below shows where top-performing investments congregated post QE1 and after the Fed signaled QE2 (8/27/10 to 3/9/2011). The stark contrast between the left and right columns below tells us it is very important to look for a possible shift in risk appetite between now and the completion of QE2, which is scheduled to end in June.

The April 26 Wall Street Journal contained several articles about the end of QE2. The Journal highlighted our concerns as follows:

So far the Fed has bought $548 billion worth of Treasurys under QE2, according to a Barclays Capital tally, with maturities ranging from 1 1/2 to 30 years, and inflation-protected securities as well. The buying has made up more than 85% of the net $638 billion of bonds the government sold between November and March (Article).

“When QE2 ends in June, then $1.5 trillion worth of check-writing per year basically disappears,” says William Gross, who oversees the $1.2 trillion portfolio of Pacific Investment Management Co. “It will be a big event.” (Article)

Given all of the above, you would guess the stock market, dollar, and VIX would be sending signals foreshadowing a shift in risk appetite. While these signals may still emerge in the coming days and weeks, thus far, no such signals exist.

The stock market had an opportunity to “beat the Fed rush, and sell off early” on April 18 when Standard and Poor’s (S&P) moved to a negative outlook on U.S. debt. As we noted on April 19, the market’s sell-off following the S&P announcement was not as bad as it appeared. Since the low of 1,294 on April 18, the S&P 500 Index has tacked on 41 points.

Shifting to simple support and resistance, the monthly chart of the S&P 500 below shows a market that has held above several key levels during the March pullback and following the S&P’s negative shift on U.S. debt. As we noted back on March 22, a move toward 1,400 on the S&P 500 is not out of the question.

We have shown the longer-term chart of the S&P 500 below several times in 2011. The market bounced off the upper pink trendline early in the year in a bearish fashion (see orange arrow). Since then, stocks have clawed their way back from the March 16 intraday low of 1,249. The S&P 500 is now knocking on the upper-pink trendline’s door for the third time. This bullish resilience is impressive in the S&P’s debt wake and with the end of QE2 in sight.

When the markets are sending mixed signals or an advance appears questionable, as the current one does, it is helpful to take a step back and examine things from a longer-term perspective. The monthly chart of the S&P 500 below tells us to respect the possibility of bullish outcomes despite our Fed-related concerns. The top portion of the chart shows the Relative Strength Index (RSI). The S&P 500’s monthly RSI remains in a bullish trend channel. RSI has also recently cleared a point of possible resistance. If we compare point A to point B, we see RSI has exceeded the level at point A.

Staying with the chart above, the bullish pink trendline from the March 2009 lows was established near point C. The trendline has thus far been able to act as support for prices near point D. A bearish break of the pink trendline in the coming days and weeks could open the door to a pullback below 1,249.

If we look for bearish clues in the currency markets, nothing jumps out in an obvious manner foreshadowing a possible “safe-haven” rally in the U.S. Dollar. One clue that may, emphasis on may, help us prepare for a possible change in trend is the presence of divergences between an indicator, such as RSI, and price. A bullish or positive divergence occurs when price makes a lower low and an indicator makes a higher low. Bullish divergences often are followed by rallies. As of the April 25 close, there are no divergences between the price of the U.S. dollar and two indicators commonly used to spot divergences, RSI (see top) and MACD Histogram (see bottom). This does not mean that the dollar will not or cannot rally; it simply means there is nothing currently present suggesting that a rally is imminent.

The April 25 Wall Street Journal also commented on the market’s expectations on interest rates, which leave the door open to further weakness in the dollar:

Markets currently anticipate the Fed will move to tighten credit at the very end of this year or early next. The economy, in other words, will remain awash in cheap credit. That view has helped to power the stock market recently.

The VIX is commonly referred to on Wall Street as the “Fear Index”. The VIX tends to rise, and rise rapidly, when the markets experience a period of risk aversion. Like the dollar, there are no obvious divergences on the weekly chart of the VIX to suggest a period of risk aversion is imminent. The VIX may well stage a furious rally in the coming weeks, but divergences are not there to support such a move.

While nothing yet is all that alarming relative to our concerns about a possible change in risk appetite, the tentative move off the March 16 low, the April 27 Fed events, and expiration of QE2 warrant a close watch on our long positions, especially those in energy (XLE), commodities (DBC), precious metals (SLV), and materials (XLB). If evidence of a shift in the market’s tone surfaces, we will monitor the interest in more defensive-oriented positions, such as consumer staples (XLP), utilities (XLU), and bonds (AGG). Unlike the deflationary-scare-induced correction in 2010, the next bearish episode may be accompanied by a spike in interest rates, bringing into question the safe-haven status of utilities and bonds. If we pay attention with an open and unbiased-mind, the market’s longer-term reaction to the Fed and the end of QE2 will become clearer over the coming days and weeks.

Tentatively Bullish Market Awaits Fed – Flexible Stance Needed

Monday, April 25th, 2011

Along with the technical improvements we highlighted on April 21, we have also seen an improvement in market breadth. We often use the Summation Index as a way to illustrate changes in market breadth. Market breadth refers to the number of advancing stocks vs. the number of declining stocks. Healthy markets have broad participation, meaning more stocks are going up than are going down.

The chart below shows the Summation Index as of the April 21 close. Market breadth is shown at the top of the chart below; the S&P 500 is shown at the bottom. Notice how turns in market breadth (green boxes) are often followed by advancing stock prices (green lines).

Stock Market Breadth - Investing Blog

The current advance is one that needs to be viewed in a somewhat skeptical light. While recent price action has been bullish, we remain concerned about:

The extended technical state (based on weekly and monthly data) that was present when stocks found their footing on March 17.

The lack of conviction in shorter-term indicators and volume.

Later today, we are going to dig a little deeper into history by exploring similar technical states found between 1982 and 2011. If the S&P 500 can break above 1,339.46 and 1.344.07, backed by improving technicals and/or more convincing volume, we will feel a little better about the outlook for the next 90 days.

Bull markets can advance further than you would estimate even from extended technical states. We also must respect that price is the most important indicator (it looks bullish). We continue to believe that flexibility is very important in the current environment, meaning a bullish allocation may need to be altered rather quickly given the technical backdrop and Fed meeting/statement/press conference this week.

The CCM 80-20 Correction Index continues to favor bullish outcomes over bearish outcomes, especially looking out three-to-twelve months.

Technical Analysis - Stock Market Blog

Key Levels for Stocks in Sight

Thursday, April 21st, 2011

It appears as if the S&P 500 is going to make a run at 1,339.46 and 1,344.07 sometime in the next few trading sessions. While not all technical indicators have improved, the majority of them are making short-term bullish turns (see chart at bottom of post).

We will consider investing more cash today, but will make the call late in the trading session based on numerous factors, including the news of the day, volume (which will have a holiday weekend drag), and breadth (% of stocks participating in gains).

We mentioned on April 13 that 1,312, 1,313, and 1,314 are important based on three different time frames. The S&P 500 closed on April 20 at 1,330, well-above the 1,312-to-1,314 range. If the S&P 500 can exceed 1,344 in a convincing manner, then 1,400 and 1,440 are not out of the question later in 2011.

Support for Stocks

With Ben Bernanke’s press briefing coming on Wednesday, April 27, we should remain flexible and open to any and all outcomes. However, our bias in the longer-term should and will remain bullish until we see evidence that contradicts that stance.

Stock Market Technicals Improving Short-Term

Some Selective Redeployment of Cash Today

Wednesday, April 20th, 2011

We invested some limited amounts of cash today. The bulls did make some progress in the form of (a) higher trading volume compared to the previous day, (b) strong market breadth, and (c) improvement in numerous short-term technical indicators.

The current look of the S&P 500 is similar to an inverted head-and-shoulders and/or a cup-and-handle pattern. Both patterns are potentially bullish, especially if the market can break out to the upside (above 1,342). Due to their sometimes questionable win-loss track record, we do not base many decisions on chart patterns, but they are widely followed in the markets. We will see what tomorrow brings.

Tech Wakes Up Sleepy Market

Wednesday, April 20th, 2011

Our sleepy market may be ready to move to the upside. The tech sector is the catalyst on Wednesday morning – according to Bloomberg:

IBM, the largest computer-services provider, boosted its full-year profit forecast, while Intel, the top chipmaker, forecast second-quarter sales higher than analysts predicted. VMware Inc. (VMW) and Juniper Networks Inc. (JNPR), two other business- technology providers, also met or topped analysts’ projections.

Weekly S&P 500 Index

We never executed our second round of sell orders; we will keep them on the back burner for now. The numbers that matter most right now are (a) the recent high of 1,339.46, and (b) the February 18 high of 1,344.07. Today’s pre-market futures are at 1,326.10. From a bullish perspective, one day does not mean much. However, within the context of a bull market, we should always give the bulls the benefit of the doubt until proven otherwise. We will see how things look near the close today and more importantly how they look near levels (a) and (b) above.

Reaction to S&P Not As Bad As It Appeared

Tuesday, April 19th, 2011

What exactly did Standard and Poor’s do on Monday and what does it mean? They moved to a negative outlook on the United States’ debt rating. S&P did not make any changes to or downgrade our nation’s AAA status. The negative outlook means S&P believes there is a 33% chance they will downgrade our AAA status within the next two years depending on how things transpire in Washington.

We do not want to trivialize S&P’s actions, but two years is a long time in terms of market cycles. We may not hear anything from S&P on this topic again until 2013.

Two Years is a Long Time

The chart below shows the trading session for Monday, April 18, 2011. As we would expect, the market opened extremely weak (see left side of chart). The rest of the trading session did not really look that bad. The low of the day was made at 11:05 a.m. (see point A). The pink arrows show higher lows, which established an uptrend for the rest of the day (see slope of pink line near B). The high of the session was made late in the day around 3:20 p.m. (point C). The Relative Strength Index (RSI) for Monday’s trading session is shown at the top. The RSI cross above 50 (near point D) tells us the bulls controlled the session from 1:35 p.m. until the 4:00 p.m. close.

April 19 2011 Trade

The rating of U.S. Treasuries is a very serious issue and one that needs to be monitored closely. However, there is no need to overreact in the short-term. We will see how things play out over the coming days and weeks. Below are some highlights from the Wall Street Journal’s take on S&P’s actions:

S&P didn’t lower its top-notch AAA-bond rating for U.S. government Treasury securities, and their prices initially fell but later rebounded amid optimism that the report could serve as a catalyst to force both sides in Washington to compromise.

This year’s budget deficit is projected to rise to between $1.5 trillion and $1.65 trillion, equal to roughly 10% of America’s gross domestic product, or total economic output.

Treasury Secretary Timothy Geithner has warned lawmakers that their reluctance to raise the federal borrowing limit could cripple the recovery. If no action is taken, the government could default on its debt by July 8. Wall Street executives have called Capitol Hill with increasing frequency in recent weeks, urging it to raise the debt ceiling immediately.

The CCM 80-20 Correction Index highlights a market profile that has improved from a risk-reward perspective looking out two months, but is also tells us this market needs to find its footing soon or the weakness will become more concerning.

April 19 2011 CCM 80 20 Index

April 19 2011 CCM 80 20 Index