Archive for July, 2012

Popular Stock Market Indicator Is Bullish

Tuesday, July 31st, 2012

With a Fed statement coming Wednesday, many believe the bulls need a formal announcement of QE3, which may not be the case. The odds are extremely low the Fed does not deliver at least some market-friendly language in their July/August statement. They do not need to announce QE3, they just need to hint at it. QE2 was hinted at in late August 2010, but not formally announced until early November. In 2010, the markets did not wait for the formal announcement (see chart below). As shown via the numerous weekly bullish signals in the remainder of this article, the markets may be following the bullish script from late summer 2010.

On July 30, we showed bullish signals from two easy to use indicators, RSI and moving averages. Today, we show bullish “crossovers” on the weekly charts of numerous markets using an indicator known as MACD.

Since it can give some powerful signals relative to a change in trend, MACD is one of the most widely used indicators by traders and money managers. MACD stands for Moving Average Convergence Divergence, which sounds intimidating. In the real world, MACD is very easy to use.

A bullish MACD cross occurs when the black MACD line moves above the red line. According to Dr. Alexander Elder in Trading For A Living:

MACD crossovers identify shifts in the balance of power between the bulls and the bears. When the black MACD line rises above the red MACD line, it shows that the bulls dominate the market, and it is better to trade from the long side. When the black line moves above the red line, it gives a buy signal (see green arrow below).

The S&P 500 Index (below), like the Dow above, has an encouraging look to its weekly MACD. The MACD Histogram is also telling us to be open to bullish outcomes since it is rising (see blue bars).

Central bankers want to avoid deflation and create positive asset inflation to assist impaired global balance sheets. The recent signs of life in gold (GLD) also support the bullish case.

In Short Takes, we often point out that weekly signals are more meaningful than daily signals. Therefore, a weekly MACD cross is something we want to be aware of and account for in our portfolio allocations.

Some of the charts shown here have “locked-in” a MACD bullish cross by closing last week with the signal in place. Some of the markets have not yet seen a weekly close with a bullish signal from MACD. If the signal carries into the end of a week, it is more important.

Since all indicators can be “whipsawed” or give false signals, it is important to have a “what happens if I am wrong” strategy in place.

You do not need to be an anchor at CNBC to know Europe has some financial problems. Notice how clear the bullish MACD cross is on the weekly chart of the Euro Stoxx 50 Index below.

If central bankers print more money, it may take some of the short-term pressure off Germany to write additional bailout checks. The weekly chart of the German DAX below is a welcome sign for all risk assets.

Emerging markets have been laggards for quite some time. When the laggards begin to perk up, it can be a sign a rally is in the cards.

Economic growth in China has slowed noticeably in recent months. Chinese stocks have been significant laggards since late 2010. The FXI ETF below is trying to complete a bullish MACD cross. When laggards show some strength their “bounce back” rallies can often be significant.

Central Banks Spark Bullish Conditions

Monday, July 30th, 2012

As outlined in a popular October 2011 video on the European debt crisis, we are well aware of the serious nature of the problems facing the financial markets. However, our market models have been telling us, and continue to tell us, to be open to ongoing bullish surprises. Debt market and economic fundamentals are being offset, at least for now, by the expectation of further central bank intervention. From a technical perspective, the markets are in a bullish posture. The posture is fragile and subject to change, but for now, it is what it is – bullish.

With little in the way of consensus relative to what actions may be taken by the European Central Bank (ECB) and Fed this week, it is a good time to take a step back and look at the health of the markets. Along the way we will sprinkle in some recent media coverage regarding this Thursday’s all-important ECB meeting.

Moving averages are used by traders to filter out day-to-day volatility, allowing for easier identification of a market’s trend. The chart of the S&P 500 below shows various moving averages from short-term (20-day in blue) to long-term (200-day in pink). Under bullish conditions, markets tend to remain above their moving averages and the slopes of the moving averages tend to be positive. Using those simple parameters, it is hard to argue the S&P 500 currently has anything but a bullish bias.

While it may not look like it in the small chart above, all the moving averages, including the green 100-day, had positive or bullish slopes as of the close on Friday, July 27. As shown in the table below, the same bullish look is present on the chart of the Dow Jones Industrial Average (DIA).

Across the pond, Bloomberg reported one possible plan of action for the ECB:

European Central Bank President Mario Draghi has gone on the offensive as he seeks a game changer in the battle against the sovereign debt crisis… Draghi’s proposal involves Europe’s rescue fund buying government bonds on the primary market, buttressed by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, two central bank officials said July 27 on condition of anonymity. Further ECB rate cuts and long- term loans to banks are also up for discussion, one of the officials said.

The video below analyzes numerous markets, including stocks, bonds, commodities, and precious metals. A “risk-on vs. risk-off” analysis appears at the 1:22 mark of the video using the ratio of stocks (SPY) to bonds (AGG). Like the charts and tables above, the weight of the evidence favors bullish outcomes. The video also covers concerning developments, including nearby areas of possible resistance. DeMark exhaustion counts are reviewed for stocks, the euro, and bonds. The follow ETFs or markets appear in the video: S&P 500 at the 00:25 mark, SPY/AGG 1:22, $NYUD 2:55, $XEU - euro 4:02, FXE DeMark 4:53, NASDAQ 5:49, European financials 6:09, EFA 6:33, Dow 7:16, NYSE Composite 7:55, RSP 8:34, SPY 9:01, VEU 12:53, the VIX 14:53, DBC 15:27, DBO 15:39, EEM 15:52, FXI 16:16, GLD 17:05, IYM 17:50, JJC 18:22, CRB Index 18:40, TLT 19:08, SLV 19:24, VTI 19:53, TLT DeMark 20:22, S&P 500 DeMark 21:26. DeMark charts and indicators are proprietary tools from Market Studies, LLC.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video:  Fed, ECB Assist Bulls Again

Video:  Fed, ECB Assist Bulls Again

It seems unlikely the ECB will take no new action at Thursday’s meeting after Mario Draghi’s “do whatever it takes” comments last week. From the Washington Post:

Draghi “put his personal credibility on the line” and “would not have done so without being confident about his key constituency,” Erik Nielsen, global chief economist at UniCredit Bank AG in London, wrote in a note to clients yesterday. “The ECB under Draghi does not like to mess around in the market, but if it sees a need, it will come with overwhelming force.”

Last week, the Dow and S&P 500 closed above the moving averages below, giving the bulls an edge. Until some red returns to the tables shown here, we will continue to give the bulls the benefit of the doubt.

Readings on weekly and monthly charts are more meaningful to investors than those found on daily charts. The table below shows two important moving averages with postures that are indicative of bullish trends.

Other European leaders have also hinted at the possibility of imminent action from the ECB. According to Bloomberg:

“We have reached a decisive point,” Jean-Claude Juncker, who heads the group of euro-area finance ministers, told Germany’s Sueddeutsche Zeitung in an interview. “The world is talking about whether there will still be a euro zone in the next few months. We have to make abundantly clear with all available resources that we’re completely determined to guarantee the financial stability of the currency.” Juncker confirmed that the temporary bailout fund, the European Financial Stability Facility, is working with the ECB on a plan to reduce borrowing costs, adding “we have no time to lose,” the newspaper reported yesterday.

A widely used and effective tool for market analysis is the Relative Strength Index or RSI. All you need to know about RSI is the bulls tend to be in control when RSI is above 50. Below 50, RSI identifies a market controlled by the bears. As shown below, RSI also sides with the bulls on three different time frames.

If the ECB and Fed disappoint the markets this week, the bears could regain traction in a rapid manner. However, given what we know today, the path of least resistance is up. If central bankers deliver this week, we will continue to favor foreign stocks (EFA), commodities (DBC), and oil (USO). Our respect for the fragile nature of the bull’s grip is reflected in a relatively small hedge (RWM) we are holding. We are willing to maintain the bullish course or increase that hedge in a headline-driven environment.

Bulls Still In Control

Saturday, July 28th, 2012

Video covers stocks, bonds, precious metals, and commodities. ETFs: VTI SLV TLT DBC JJC GLD IYM FXI EEM DBO $VIX VEU $SPX RSP $NYA $INDU EFA QQQ

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video: Europe & Stock Market Outlook

Stocks Trying To Break Out On Central Bank Hope

Friday, July 27th, 2012

The first two times the S&P 500 hit the downward-sloping trendline, stocks reversed (below red arrows). The last two attempts, including today’s, have been a little more impressive (below green arrow). The chart below is as of 12:48 p.m. EDT. Where stocks close is more important.

Recent Stock Turn Occurred at Logical Point

Friday, July 27th, 2012

Is the market trying to turn from a reasonable area of support? The answer appears to be yes:

  1. The orange line C is 61.8% (Fibonacci) of the move from RET-A to RET-B. The market held above the orange FIB line near point D.
  2. The blue trendline E acted as resistance near the red arrow. The same blue trendline acted as support above point D.
  3. The market’s recent peak allowed us to draw the pink D2 trendline. Stocks held at the bottom of the trend channel or above the second pink line above point D.

ECB Comments Turn Tide

Thursday, July 26th, 2012

The light switch nature of the present day financial markets is alive and well. During Tuesday’s session the S&P 500 was down 21 points intraday with the markets looking very vulnerable. Add in a market friendly Fed story from the WSJ and this morning’s comments from the ECB and you flip the switch back to “risk on”. From Bloomberg:

European Central Bank President Mario Draghi said policy makers will do whatever is needed to preserve the euro, suggesting they may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the 17-nation currency bloc. “To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate,” Draghi said in a speech at the Global Investment Conference in London today. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said, adding: “believe me, it will be enough.” Economists said the comments suggest the ECB may be preparing to unveil new measures to fight the crisis as potential bailouts for economies the size of Spain and Italy threaten to overwhelm Europe’s rescue funds.

We are happy to remove our relatively small hedge should today’s euphoria hold for more than a few hours. After the Fed article stemmed the recent decline, the S&P 500 was able to avoid making a significant lower low in terms of trends.

Bearish Set-Ups In Multiple Time Frames

Wednesday, July 25th, 2012

As of Wednesday’s close, the S&P 500 remained in a bullish uptrend. Nothing overly concerning has occurred yet. The patterns shown in the video are on our “good to be aware of” list.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video: Europe & Stock Market Outlook

Fed Tries To Calm European and Stock Market Waters

Wednesday, July 25th, 2012

As outlined in a July 22 video, there are still numerous reasons to be bullish relative to the intermediate-term outlook for stocks. However, there has been significant deterioration to the short-term picture in the last three trading sessions. With the S&P 500 down 21 points and on the technical ropes, the Wall Street Journal ran the following before the markets closed on Tuesday:

Federal Reserve officials, impatient with the economy’s sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring.

The S&P 500 responded with a 9 point rally into the close. The biggest bearish development in recent days was Europe’s backtracking on a previously announced plan to directly recapitalize banks. The Washington Post summed up the primary driver of renewed strains in the market for Spanish debt, and risk assets in general:

Recall that in June, E.U. officials agreed (and announced) to lend money directly to Spain’s troubled banks. At the time, observers thought that the entire euro zone would use its financial might to prop up Spain’s banks. The already-squeezed Spanish government wouldn’t have to bear the burden alone. That announcement seemed to reassure the markets. Well, fast forward a month. The bailout package has just been approved by the rest of Europe. But Germany’s politicians have thrown a kink in the plan. The German Bundestag voted Thursday to approve the $122 billion banking bailout, but only if the Spanish government accepted full liability for the loans. “There will be no direct bank financing,” said Volker Kauder, head of the Christian Democratic delegation in the Bundestag.

As outlined on June 14, Germany’s timetable remains radically different than Wall Street’s. The recent spike in Spanish yields is the market’s way of telling Europe “you better pick up the pace”. Bloomberg touched on bank recapitalization hurdles that remain:

Europe’s quest to sever the link between Spain’s fiscal fate and its failing banks hinges on an obstacle-strewn race to hand greater powers to the European Central Bank. Until euro-area leaders overcome German doubts, ECB concerns, and turf battles everywhere, Spain will remain on the hook for a bailout of its banks of as much as 100 billion euros ($121 billion). “It’s quite worrying that the direct recapitalization of euro-zone banks hinges on what is likely to be a messy and drawn-out process in establishing a pan-European banking supervisor,” Nicholas Spiro of Spiro Sovereign Strategy in London said in an e-mail.

Another factor in the market’s shift back to risk-off was recent requests by Spanish regional governments for central government aid (think of a U.S. state asking Washington for help). The Associated Press described the severity of the problem:

No one knows how much money the regions will need, though leading newspaper El Pais said they have debts of euro140 billion and that euro36 billion must be refinanced this year. The fund set up by the government on July 13 will have euro18 billion in capital, part of it raided from national lottery coffers. So if more funds are needed, Spain would either have to issue debt at punishing rates — or ask for a bailout.

We can add a potentially bearish chart pattern to the market’s list short-term of problems. The Vanguard All-World Index Ex-U.S. ETF (VEU) is a good vehicle to monitor global risk tolerance. VEU has a potentially bearish head-and-shoulders chart pattern, one of the most reliable in technical analysis. Keep in mind, the break of the red neckline below occurred before the Wall Street Journal’s report about possible Fed intervention. As long as VEU remains below 39.58 on a closing basis, the pattern will remain in play. While the pattern below is not a textbook example, the requirement of three peaks has been met.

The chart of VEU below has price removed and instead shows various moving averages. Moving averages help filter out day-to-day volatility so we can focus on trends. Intraday on Tuesday, all four of the moving averages below were pointing down in a bearish manner. After word came that QE3 could be on the way, stocks rallied allowing the 200-day moving average (in pink) and 20-day moving average (blue) to finish flat, indicating indecision on the part of investors from both a longer (200 day) and shorter-term (20-day) perspective. Thus far, the 100-day (green) and 50-day (red) have been unable to turn up in a bullish manner, which still gives the slight nod to the bears as of Tuesday’s close.

The headline driven nature of the market remains firmly intact with the term “banking license” sparking some risk-on interest early in Thursday’s session. From MarketWatch:

Ewald Nowotny, a member of the ECB’s rate-setting Governing Council and head of Austria’s central bank, told Bloomberg in an interview that he saw some arguments in favor of allowing the European Stability Mechanism, or ESM, to apply for a bank license. That would let the ESM leverage its 500 billion euro ($606.4 billion) cash pile via loans through the ECB. Nowotny said there were also “other arguments” and that he knew of no discussions on the issue within the ECB.

We remain cautiously bullish looking out a few weeks. However, the developments outlined above caused us to add a relatively-small hedge to our portfolios earlier this week. If we pay attention to the chart of VEU, we should not stray too far from the market’s tolerance for risk.

WSJ Releases Fed Story During Decline

Tuesday, July 24th, 2012

For the second time in the last year or so, the WSJ has floated a story about possible Fed intervention while the market was open, something that is very rare. The S&P 500 rallied 10 points in the final forty-five minutes of trading. This text below was posted on the WSJ’s blog before the close:

Here comes another QE-rally. Stocks are bouncing off session lows in the final trading hour after WSJ’s Jon Hilsenrath is reporting Fed officials are moving closer to taking new actions if the labor market and economic growth don’t pick up soon.

Apple is down roughly 5% in the after-hours session after announcing earnings.

Markets Migrating Toward Bearish Camp

Tuesday, July 24th, 2012

We have added some hedges to our accounts today due to the developments described below. We are open further defensive moves in the coming days should conditions warrant.

In a July 22 video, we noted the weekly chart of the All World Stock Index Ex-US (VEU) “could go either way” and emphasized the need to remain flexible given the fluid situation in Europe. The news from Europe keeps getting worse. From a Reuters exclusive story:

Greece is unlikely to be able to pay what it owes and further debt restructuring is likely to be necessary, three EU officials said on Tuesday, a cost that would have to fall on the European Central Bank and euro zone governments… The officials said that twice bailed-out Greece would be found to be way off track by EU and International Monetary Fund officials who have been assessing the country… It means Greece’s official-sector creditors — the ECB and euro zone governments — will have to restructure some of the estimated 200 billion euros of Greek government debt they own if Athens is to be put back on a sustainable footing…But there is no willingness among member states or the ECB to take such dramatic action at this stage.”

Markets that “could go either way” are now leaning bearish. Since the chart below is an intraday chart, our comments would become more relevant if VEU closes below 39.54. The moving averages labeled A, B, C, and D all appear to be rolling over in a negative fashion. The blue “S H S” shows the “old” bullish head-and-shoulders pattern; the neckline is shown via the blue line. Currently, VEU is below the blue neckline or a potential form of support. A potentially bearish head-and-shoulders is shown via the black “S H S”. A break of the red neckline would produce a probabilistic target of roughly 37.03, which is below the June low.