Archive for August, 2012

Winners Highlighted in Recent Posts

Friday, August 31st, 2012

The stock market was kind to us today. Spain, EWP, was up 3.9%. Italy (EWI) was up 2.9%; both were featured in an August 20 video and post.

After recently noting bullish developments in gold (GLD) and silver (SLV), GLD popped 2.2% Friday and SLV tacked on 4.6%.

Small caps (IWM), covered this week, continue to hold their breakout for now. IWM was up 0.47% on Friday.

We still want to see the $SPX/IEF chart improve. It held above support, but still tells us to remain very flexible with our long positions. The S&P 500 still has not cleared 1,415.

Have Stocks Put In ‘No-QE’ Top?

Thursday, August 30th, 2012

Two Significant Shifts Put The Stock Rally In Doubt:

  1. Central bank action seems less likely in the short-run.
  2. A key risk-on ratio looks similar to past stock market peaks.

Unless Ben Bernanke can spark some renewed interest in risk assets, selling pressure could continue. Below we outline our concerns and what we will be watching in the days ahead.

Central Banks Could Disappoint

Prior to looking at a troubling chart for stock investors, it is important to understand what spooked the markets in recent days. The head of the European Central Bank, Mario Draghi, is not among the central bankers gathered in Jackson Hole this week. Mr. Draghi’s absence has raised questions about the ECB’s plans to intervene in the European bond market. On top of that, Dennis Lockhart, the Atlanta Fed president, threw some cold water on the QE3-is-coming-soon theory. Thursday morning, Lockhart told CNBC:

“If we were to see deterioration from this point, let’s say a persistence of job growth numbers that were well below 100,000 per month, or see signs of disinflation that could signal the onset of deflation, then there wouldn’t be much of a question about policy.”

On August 28, we pointed out some caution flags on the chart of the S&P 500 (SPY) relative to intermediate-term Treasuries (IEF). While the chart that follows looks complex, it is based on the simple concepts of support and resistance. When the ratio is rising, stocks are in favor relative to bonds (see chart below). When the ratio is falling, bonds are strong relative to stocks. An updated version of the chart as of Thursday’s close is presented here; the stock/bond ratio is at the top with the S&P 500 below it.

  1. Points A1 and A2 (see chart) show the twin peaks made by the S&P 500 last spring. Points B1 and B2, which occurred simultaneously with the stock market’s peaks, show where the stock/bond ratio (SPY/IEF) was rejected by the downward sloping blue trendlines (acting as resistance for risk).
  2. Points C and E show where the stock/bond ratio is running into similar resistance in the present day. The red arrow to the left of B2 shows an important support break for “risk” relative to “risk-off” (see gap to left of arrow). The break of support for risk in April occurred on the same day the S&P 500 peaked at point A1.
  3. Point E shows a similar break of risk-on support that occurred on August 30 (this week). The two red arrows show similar support breaks for risk relative to risk-off. The horizontal line F could act as support for risk in the days ahead, meaning we must keep an open mind about where stocks go from here.
  4. The blue arrow shows the S&P 500 flirting with a break of support near 1,400 (bottom of chart). If stocks remain weak, point D shows an area near 1,388 where buyers may become interested again.

Back on the QE3 front, CNBC was told after the close Thursday by Charles Plosser, President of the Philadelphia Federal Reserve:

“My current assessment of the both the economy and effectiveness of QE is that I don’t think it really meets the cost-benefit analysis.”

Shorter and Shorter Rallies?

If you follow our work, you know we have been buyers of risk since early July. We have also made the case for higher highs in stocks, but not without some caveats. After the close on Thursday, we revisited some “shorter-duration” concerns that have prompted us to book some profits over the past two weeks. We have taken profits in oil stocks (OIH), oil (USO), Germany (EWG), and small caps (IWO). How could the market peak so soon after seeing bullish set-ups in stocks, oil, and precious metals? The time between buy signals and sell signals may still be in a pattern of shorter and shorter durations (see green lines below). If so, we have to be open to the possibility of legitimate sell signals occurring soon after seeing buy signals.

Weak Close Before Jackson Hole

Thursday’s close was weak. The chart below shows a bullish breakout in the stock/bond ratio (see blue arrow). Unfortunately for the bulls, the risk-on breakout failed (see red arrow). Risk-on momentum on the 30-minute chart was also turned back by the bears in the final half hour of trading (orange arrows).

An Emerging Markets Short?

Heading into Friday, we have a substantial cash position. If the SPY/IEF risk-on/risk-off ratio continues to break support, we will most likely hedge our long positions rather than entering additional sell orders. While emerging markets (EEM) were extremely oversold at the close on Thursday, if EEM closes below 38.85 on Friday, we may consider taking the bearish side of the trade via EUM (or similar vehicle). For those scoring at home, the 00:15 mark of an August 29 video shows key bull/bear demarcation levels you can monitor in small caps (IWM). If the small cap rally falters, it would be a red flag for all stocks, commodities, and precious metals. Should small caps continue to show impressive relative strength, it would increase the odds of risk assets pushing higher. Bullish or bearish, IWM can help us monitor risk.

Are We Calling A Top?

Absolutely not, but we have seen enough to make some fairly significant changes to our client portfolios. We do not care if the market goes up or down. Our objective is to maintain a prudent exposure to growth assets. The only way to do that in this centrally-planned financial world is to maintain a posture of maximum flexibility, which requires an open-mind. On one hand, if Uncle Ben delivers at Jackson Hole and the S&P 500 clears resistance at 1,415, we are happy to redeploy our cash in a bullish manner. On the other hand, if buy signals start to look like sell signals, who are we to argue?

Rally Duration Concern Still In Play

Thursday, August 30th, 2012

In the August 26 video below, we noted our concern about a pattern of shorter and shorter rallies in stocks after seeing bullish signals (see 10:16 to 11:05 in video). That concern remains and is one of the reasons we have been taking profits in numerous positions (OIH, DBO, IWO, etc.). We now have a “prove it to me” market where we want to see key resistance taken out.

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

Video

Ready To Raise More Cash

Thursday, August 30th, 2012

We have been watching the cart below for some time with a concerned eye. This is an intraday version, but for now support appears to be breaking in a bearish manner for risk. We will most likely sell and hedge today.

What Are Small Caps Telling Us About Risk?

Wednesday, August 29th, 2012

Small cap stocks appear to be confirming the bullish signals recently given by oil and precious metals. All three markets point to a central bank induced reflation theme driving asset prices higher. From a fundamental perspective, strength in small caps shows investors are willing to buy stocks of smaller, more volatile, and less established companies.

According to MarketWatch, the Fed may assist in pushing small caps higher:

Supporting momentum from small-cap stocks may come in the form of bank lending incentives from the Fed, according to Michael Jones, chief investment officer of RiverFront Investment Group. Such measures could be announced at the Federal Reserve’s retreat in Jackson Hole, Wyo., later this week or at the September Federal Open Market Committee meeting.

The small cap ETF, IWM, has a potentially bullish chart pattern known as an “inverted head-and-shoulders”. Stocks, commodities, silver, and gold would all like to see IWM close above 81.53, 81.71 and 81.97. Those levels represent possible resistance based on the pattern shown below.

Since the S&P 500 faces strong resistance between 1,403 and 1,415, we have to remain open to false breakouts. Therefore, even if the bullish set-ups outlined in the video below are followed by weakness in small caps, we will still gather useful information about the health of the current rally in stocks, commodities, and precious metals. Key bull/bear levels for the small cap ETF (IWM) are shown at the 00:16 mark of the video. We will monitor these levels in the days ahead to gain a better understanding of the current rally’s sustainability.

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

Video

Eric Marshall, portfolio manager of the Hodges Small Cap Fund, told MarketWatch why he believes small caps offer more attractive valuations than their large-cap brethren:

“Stocks were mispriced because people were focused on Greek and Spanish bond yields and less focused on company fundamentals,” Marshall said. “Those kinds of market inefficiencies get exaggerated in the small-cap space.”

Another widely utilized pattern by traders is the “cup-with-handle” formation. The handle represents the last wave of selling (or doubt) before a market can move higher. It is possible to see two cup-and-handle formations on the chart of IWM below.

Our respect for the significant overhead resistance facing stocks was a driving force to book profits in the oil services ETF (OIH), a position we established back in late June. If small caps, precious metals, and foreign stocks can hold their breakouts, we will turn to our short list of buy candidates, which includes regional banks (KBE), small caps (IWM), and agricultural commodities (DBA).

To feel better about the bullish case, we would like to see the S&P 500 close above 1,415 on a weekly basis. Should conditions deteriorate further, we are happy to raise additional cash. With the Fed and ECB just around the corner, flexibility is more important than ever.

Bull-Bear Post Coming Soon

Wednesday, August 29th, 2012

We are working on a post and one-chart video outlining some important things to watch in the chart of IWM (small cap ETF). This information can assist with the bigger picture bull-bear case.

Concerns Remain On Risk Charts

Tuesday, August 28th, 2012

The $SPX/IEF chart shown here was analyzed extensively in Sunday night’s video. Until the S&P 500 clearly takes out the 1,405 to 1,415 range, we will watch with a skeptical eye. Below is an updated version of a chart we first presented on August 22, along with the original description of points A through F:

Point A shows the S&P 500’s peak in April 2012. Point B shows a warning flag for risk that was in place in the form of a lower high in the stock/bond ratio. Point C shows no such warning for stocks is present today, as the ratio recently made a higher high as stocks made a higher high. However, point C also shows the stock/bond ratio is near two forms of possible resistance. Should a multiple-day correction come in stocks, point D shows three areas of possible support near 1,380 on the S&P 500. The “cluster” of trendlines near point E highlights possible support for the stock/bond ratio. Should support at point E not hold, point F identifies the recent stock/bond ratio breakout level, which has acted as support and resistance several times in 2012; it may again act as support.

From a bullish perspective, risk-on support has held thus far at point E above. Point F is in play as well. Today is a projected “low” date if you monitor five-week market cycles. If a bullish reversal were to occur based on the five-week cycle, it could come anytime in the next few days.

Open-Ended QE: A Game Changer For Stocks?

Monday, August 27th, 2012

There is no question central banks around the globe are moving closer to more easing and more money printing, which should provide a tailwind for stocks and commodities.

The European Central Banks’ plan to possibly “cap” bond yields has been referred to as a “game changer”. Not to be outdone, the Fed may have its own game changer in the form of open-ended QE (quantitative easing). According to an August 26 Reuters story:

“Some officials have said any new bond buying, or quantitative easing, could be open-ended, meaning it would not be bound by a fixed amount or time frame.”

Before you decide “QE will have no impact or Jackson Hole doesn’t matter”, it may be helpful to understand how QE works in the real world. As we described in a series of quantitative easing videos, QE puts freshly printed money in the hands of the Fed’s Primary Dealers, which includes Barclays Capital, Goldman Sachs, and Morgan Stanley. As shown in this flow chart, the fresh cash can also find its way into the brokerage accounts of primary dealer clients. Therefore, QE has a clearly defined path for the new greenbacks to make their way into the real economy.

The video below reviews the current state of “risk-on vs. risk-off’, using the performance of the S&P 500 (SPY) relative to intermediate-term Treasuries (IEF). While stocks face significant resistance, numerous technical indicators continue to lean toward a bullish resolution. The video points out numerous concerns that remain, including resistance and a trend of shorter and shorter central bank induced rallies.

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

Video

When economic conditions are weak and global debt levels are elevated, investors understandably underestimate the intermediate-term importance of central bank intervention. Reuters noted the following on open-ended QE:

Because it would have no set limit other than the supply of Treasury or mortgage securities available, this method could eventually lead to very aggressive action, particularly if it is tied to an economic target - such as bringing the nation’s 8.3 percent jobless rate down beneath, say, 7 percent.

With the S&P 500 facing significant resistance below 1,415 and a fragile situation in Europe, it is important that we remain open-minded. Over the past ten weeks, we have taken numerous positions in commodities, foreign stocks, and precious metals. Using an approach similar to what is outlined in the video above, we have been fortunate to post the following gains vs. our entry points.

We will continue to give the bullish case the benefit of the doubt as long as the charts and central bankers allow. With potentially strong long-term S&P 500 resistance sitting between 1,403 and 1,415, flexibility must be coupled with any bullish stance.

Central Banks vs. Stock Market Resistance

Sunday, August 26th, 2012

We recently expressed concern about potential resistance on an important “risk-on vs. risk-off” chart. This week’s video examines what numerous technical indicators are telling us about the probability of a bullish breakout relative to a bearish reversal. The end of the video explains what the recent moves in gold, silver, and commodities may be forecasting for global stocks.

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: Stock Market Outlook, Technical Analysis

Skeptical Until This Chart Improves

Thursday, August 23rd, 2012

Below is an updated version of a chart we presented on August 22. We plan to take some additional money off the table today (for the third time in three days). Our rationale is the same that we outlined yesterday; if stocks recover, we can redeploy cash into better risk-reward options. If stocks continue to drop, we have booked some profits while reducing risk.