Archive for March, 2012

S&P Approaching Long-Term Trend Resistance

Friday, March 30th, 2012

The chart below has possible bullish and bearish implications. From a bullish perspective, the blue 9-month moving average is turning up, which often occurs before a significant push higher. From a bearish perspective, the S&P is approaching long-term parallel trendlines from the 2007 highs. Another parallel trendline based off the 2010 and 2011 lows is also just ahead. Intersecting trendlines usually impact price in some way.

In the chart above there are three basic possible scenarios:

  1. Stocks blast through the trendlines and move toward 1,500.
  2. Stocks reverse near the trendlines and correct back toward 1,350, then push higher toward 1,500.
  3. Stocks reverse near the trendlines and we kick off another mini bear market.

If the markets do not show some conviction soon via improved volume, breadth, and some life in commodities, scenario 2 above remains the base case. Given the big picture technical outlook and improved situation in Europe, scenario 3 seems the least likely. However, further deterioration in the Economic Surprise Index and Italian bond yields would improve the odds for scenario 3. The technical backdrop and a recent bullish cross on the monthly S&P 500 MACD tells us scenario 1 cannot be tossed aside, which means we need to remain flexible and open-mined.

Below is an example of one of the trendlines we mentioned during Thursday’s afternoon session. Most of the charts improved between the post at 2:30ish and the close. The key points made yesterday:

Many markets are pushing the bearish envelope today (as of 2:20 p.m. EDT). For example, trendlines going as far back as the October lows are being tested or have already been broken. Markets can step outside of trendlines in a “head fake-like” manner for a day or two, only to rally again in a somewhat surprising manner. That is not a prediction, but something to watch on Friday and Monday. A push by the S&P 500 toward 1425ish remains quite possible as long as we hold above 1391.

Some ETFs we are watching with good intermediate-term strength relative to S&P 500: EWW, KRE, XLF, FDN, XLY, QQQ, IBB, SMH, XHB. Some that may be trying to turn on a relative basis: GLD, SLV XLB, XLP, XLV.

More Taxpayer Funds At Risk In Europe

Friday, March 30th, 2012

If your family’s balance sheet was carrying too much debt, do you think a logical solution would be to take on more debt? Sounds kind of silly, but that is part of the core strategy in Europe. By promising more aid and more taxpayer funds, leaders continue to kick the debt can down the road. In the intermediate-term, the financial markets love bailouts and printed money, which is what’s driving gains in the S&P 500 futures as of 5:30 a.m. EDT. From Bloomberg:

European governments moved to bolster their rescue funds, seeking to shield Spain and Italy from the fallout of the debt crisis without alienating bailout-weary voters in wealthy countries.

Finance ministers neared an agreement to run the temporary and permanent funds in parallel until mid-2013, potentially raising the upper limit on emergency lending to 940 billion euros ($1.3 trillion). Amounts immediately available would range between 340 billion euros and 640 billion euros.

Today’s step will lift the maximum aid sum from 500 billion euros. It involves running the 500 billion-euro permanent European Stability Mechanism alongside the 200 billion euros committed by the temporary fund to Greece, Ireland and Portugal, according to a draft statement prepared for the meeting.

The ECB’s bank lending and bond-buying brings the total to 2 trillion euros, according to one official’s calculations.

Much of the credit for the lessening of market tensions goes to the more than 1 trillion euros pumped into the financial system by the ECB since December. Ten-year bond yields in Spain, for example, have fallen to 5.44 percent from 6.70 percent on Nov. 25.

If stocks can rally for a few days, the strength and conviction, or lack thereof, will be very important. A weak push toward 1,420-1,440 would be concerning. A move backed by better breadth, volume, and some participation from energy stocks/commodities would give the bull a little more juice.

Friday/Monday Should Be Important

Thursday, March 29th, 2012

Many markets are pushing the bearish envelope today (as of 2:20 p.m. EDT). For example, trendlines going as far back as the October lows are being tested or have already been broken. Markets can step outside of trendlines in a “head fake-like” manner for a day or two, only to rally again in a somewhat surprising manner. That is not a prediction, but something to watch on Friday and Monday. A push by the S&P 500 toward 1425ish remains quite possible as long as we hold above 1391. A break of 1,391 would open the door to 1,380. Some technical deterioration has occurred, but nothing too drastic yet. We should know more by the end of Monday’s session.

Formulating Game Plan

Thursday, March 29th, 2012

Today, using our new CCM Market Risk Model, we are examining six corrections that occurred in markets with similar profiles to what we have today. The median drop in those similar cases was 6.65% occurring over 38 calendar days. Nothing yet says a correction has to occur now.

Our goal today is to use the new model to determine simple boundaries to separate shallow corrections, typical corrections, and significant corrections/bear markets. This information will help us answer “should we buy this dip?” Right now, based on the model’s current level the answer is “yes”, but it remains to be seen if that will hold up.

The CCM Market Risk Model (MRM), which we will explain to clients in more detail soon, will enable us to establish some firm rules to keep allocations on track during volatile periods.

Two examples of MRM questions are below:

Is the S&P 500 above its 200-day moving average?
Is the weekly Dow chart on a MACD buy signal?

The MRM answers 117 questions, many based on “risk on / risk off” ratios (e.g. S&P 500 relative to intermediate-term Treasuries). The MRM can be updated in about 15 minutes each day by answering “yes” or “no” to questions about the current state of the markets. It operates on a scale of 0 to 100, with 100 being the risk-on end of the spectrum. It is easy to use and understand since a reading of 50 tells us 50% of the risk-on vs. risk off signals are bullish. Conditions are more favorable between 50 and 100. Conditions are less favorable between 0 and 50.

We have more work to do in terms of historical analysis, but an example of how the model will be used during a correction is shown below:

85-100: Stay fully invested
65-84: Reduce risk exposure by 10-15%
50-83: Reduce risk exposure by an additional 10-15%
40-50: Reduce risk exposure by an additional 10-25%
0-40: Low risk allocations

The incremental changes to allocations can also work in reverse order as weak markets improve.

Backing Off Risk A Little More

Wednesday, March 28th, 2012

We sold roughly 25-35% of our positions in financials and technology today. We still like these sectors, but the market looks tired. If stocks go higher, we still have a stake. If stocks pull back 5% to 10%, we can redeploy the cash at lower levels.

A short-term scenario where the S&P 500 makes a new high is still a possibility. As we have mentioned recently, we will look to be buyers on any corrective activity especially an episode lasting two to three weeks.

We have reduced risk in three positions over the last two weeks. Our inclination is to hold our remaining positions through any corrective phase since the longer-term outlook has not deteriorated.

One factor playing into the risk reduction decision is the recent trend of relatively weak economic data, which is reflected in the Citigroup Economic Surprise Index below (see blue line on right side of chart).

Sliver Weak, Tech Strong

Wednesday, March 28th, 2012

Technology continues to show leadership relative to almost every other sector or region of the globe. If and when a pullback comes, we will be looking to add to our exposure. However, in the short-run our bias will be to reduce risk/sell into strength if we see a weak push to new highs.

Silver continues to underperform relative to what you would expect to see under these conditions. If you own silver (we don’t), it makes sense to have “cut back” contingency plans within reach. Silver is doing things it has not done since 2001 and they are not good things. We hope to see silver pick up since it would be good for risk and inflation expectations in general, but for now it looks vulnerable.

In the next three days, the market will digest reports on durable goods, GDP, and personal income, which will most likely set the short-term tone.

This morning, we are working on the “false bottoms” portion of the new risk model.

Risk Model & Market

Tuesday, March 27th, 2012

We are still working almost non-stop on the risk model. Since we are building a rules-based approach, it requires a lot of research. It is a long process, but we are very happy with the results so far.

Given the extended run by the market and dual 9-11 daily DeMark counts for the S&P 500, we will be watching things closely over the next three days. We may book some profits. We may do nothing - it depends on what we see. The $VIX is also working on a possible bullish engulfing pattern on the weekly chart - it’s only Tuesday, but it could be a short-term concern for stocks.

We continue to view any extended pullback as an opportunity to add to our holdings (given what we know today).

CCM Models: What’s The Read Now?

Tuesday, March 27th, 2012

Nothing particularly new from the CCM Bull Market Sustainability Index (BMSI) and CCM 80-20 Correction Index; they both say be careful in the short-run, but a correction should represent a buying opportunity. That stance is supported by our still under development risk model as well. Our guess is a 5%ish pullback is coming soon, but there is little evidence backing an imminent turn in stocks as of Monday’s close. 1,420-plus still seems within reach on the S&P 500.

Printing $1.3 Trillion Euros Has Consequences

Tuesday, March 27th, 2012

The European Central Bank (ECB) has injected more than 1 trillion euros ($1.3 trillion) into the banking system since December (yes, since December). As we have noted in the past, politicians can avoid difficult decisions when central banks continually bail out the system via the printing press. From Bloomberg:

ECB President Mario Draghi said after stock markets closed yesterday that euro-area governments should continue to take “decisive measures.”

“No single institution can carry the burden of addressing a set of challenges that are simultaneously economic, financial and fiscal,” Draghi said in Berlin yesterday. “The current stabilization should not make us pause in our responses.”

Mr. Draghi will be pressured to print money again; it is most likely just a questions of when. The markets and banks have stabilized after the $1.3 trillion gift from the ECB, but long-term problems remain, which is part of the motivation for developing a more sensitive risk model.

“Flash crashes” and “Lehman-type events” will likely rear their ugly heads again; it is just a question of when. For now, the German DAX appears to have stabilized again above its 200-day moving average (a good sign if it holds). Global markets remain in “risk on” mode.

Risk Model Up and Running

Monday, March 26th, 2012

We have been working nearly non-stop on the risk model since the close on Friday. We have looked at a few major scenarios: bottoms we would “like to buy”, corrections we may want to ignore (relatively shallow and short in terms of duration), peaks that required some defensive action, and peaks that required significant defensive action. We have seen enough to begin drawing some lines in the sand: (a) leave it alone, (b) pay closer attention, (c) reduce risk incrementally, or (d) move to defensive posture. The current reading is a mix of (a) and (b), with a higher weight on (a). This model is much more sensitive than the CCM BMSI and 80-20 Correction Index, but not overly sensitive.

Regardless of what we want to invest in (dividend stocks, ETFs, commodities, precious metals, bonds, CDs, etc.), the first and most important thing to get a handle on is the market’s tolerance for risk. The risk model is a mechanism to monitor the battle between “risk on” and “risk off”. We have more data to analyze and more scenarios to review, but the model is already in a useful form. Our goal is to have the model generate a daily report based on firm rules.