Archive for December, 2012

Big Picture Not That Bad

Sunday, December 30th, 2012

Charts Say Keep Open Mind About Bullish Outcomes

A summary of video contents can be found in the first 3:45 of the video. The bullish slant to the market is presented between 11:20 and 22:01. If cliff talks bring weakness, possible support is outlined between 3:45 and 11:20.

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

As we noted Friday after the close, the S&P 500 held at a logical level last week. Given what we know Sunday, the odds seem to point toward stocks finding some stability later in the trading week.

S&P 500 Is Down Since End of Q1

Sunday, December 30th, 2012

Video Coming Soon

Has the uncertainty in Europe and Washington impacted the financial markets in recent months? Yes, although up year-to-date, the S&P 500 has actually lost ground over the past 90 calendar days.

11th Hour Cliff Deal Taking Shape

Saturday, December 29th, 2012

Below are portions of Saturday morning articles providing the latest details on the seemingly never-ending saga in Washington. Links to the full articles are provided.

From the Washington Post - “A breakthrough”

President Obama and Senate leaders were on the verge of an agreement Friday that would let taxes rise on the wealthiest households while protecting the vast majority of Americans from historic tax hikes set to hit in January.

The development marked a breakthrough after weeks of paralysis. After meeting with Obama at the White House, Senate Majority Leader Harry M. Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) said they would work through the weekend in hopes of drafting a “fiscal cliff” package they could present to their colleagues on Sunday afternoon.

Threading all the legislative needles now falls to Reid and McConnell, who pledged to work together to craft a package that can win significant bipartisan support.

Either way, the wheels are now in motion for the Senate to vote on New Year’s Eve, Senate aides said. If that vote were successful, the Republican-controlled House would have mere hours to decide whether to approve the legislation or take the blame for letting taxes rise next month for nearly 90 percent of Americans — and for potentially sparking a new recession.

At the White House, according to the House Republican briefed on the meeting, Boehner repeatedly deferred to Senate leaders on policy details, saying only: “Let us know what you come up with, and we’ll consider it — accept it or amend it.”

From the Wall Street Journal - “Increasingly concerned about being blamed”

The two Senate leaders now have to concoct a deal that has eluded Washington since the election, and it remained unclear how the two sides could bridge their remaining differences, in particular over the threshold at which higher tax rates would kick in. Mr. Obama left open the possibility at the White House meeting of going higher than $250,000, a senior administration official said.

How the House will respond to any Senate deal is a crucial unanswered question. According to a spokesman, Mr. Boehner told the president the House would consider whatever bill passes the Senate, either accepting or amending it.

Senate Republicans have indicated they could accept some kind of compromise that would raise the threshold for income tax increases to $400,000—the level Mr. Obama had agreed to as part of broader budget talks with Mr. Boehner that broke down last week.

The optimism expressed by Mr. McConnell Friday was noteworthy because until a day earlier he had been on the sidelines of negotiations.

Republicans are growing increasingly concerned about being blamed if the country topples over the cliff, and a GOP lawmaker suggested Friday they wouldn’t stand in the way if a deal can be reached.

From the New York Times - “I’ve got a positive feeling now”

Bipartisan agreement still hinged on the Senate leaders finding an income level above which taxes will rise on Jan. 1, most likely higher than Mr. Obama’s level of $250,000. Quiet negotiations between Senate and White House officials were already drifting up toward around $400,000 before Friday’s White House meeting. The two sides were also apart on where to set taxes on inherited estates.

But senators broke from a long huddle on the Senate floor with Mr. McConnell on Friday night to say they were more optimistic that a deal was within reach. Mr. McConnell, White House aides and Mr. Reid were to continue talks on Saturday, aiming for a breakthrough as soon as Sunday.

With the House set to return to the Capitol on Sunday night, Mr. Boehner has said he would place any Senate bill before his chamber and let the vote proceed and the chips fall. The House could also change the legislation and return it to the Senate.

If the Senate is able to produce a bill that is largely bipartisan, there is a strong belief among House Republicans that the same measure would easily pass the House, with a large number of Republicans.

“I’ve got a positive feeling now,” said Senator Kay Bailey Hutchison, Republican of Texas, who said a burst of deal-making talk broke out as soon as the leaders returned to the Capitol.

Mr. Boehner appeared to recognize that he was no longer dictating terms. According to the aide, the speaker said repeatedly, “Let us know what you come up with, and we’ll consider it — accept it or amend it.”

After the meeting, Mr. Obama and officials at the White House appeared visibly optimistic. The president was cheerful with his aides before he walked into the Brady Press Briefing Room to deliver his remarks before assembled reporters. A person briefed on the meeting described a “give and take” atmosphere.

From Bloomberg - “An opportunity for a real result”

“For the first time, you’re seeing an opportunity for a real result rather than the phony-baloney acts that they’ve been engaged in,” said Senator John McCain, an Arizona Republican. “Republicans know that they’re losing the PR battle but the president knows that history will judge him.”

If Congress doesn’t act, taxes would rise by more than $3,400 per household, automatic spending cuts would start taking effect and expanded unemployment benefits would lapse. If there is no resolution soon, the economy would likely go into recession in the first half of 2013, according to the Congressional Budget Office.

The absence of a debt ceiling agreement would make the limit on U.S. borrowing authority the next major event forcing a fiscal debate. Republicans plan to use it as leverage to force Obama to accept spending cuts.

From Reuters - “Deal can easily be retroactive”

“Regardless of whether the government resolves the issues now, any deal can easily be retroactive. We’re not as concerned with January 1 as the market seems to be,” said Richard Weiss, a senior money manager at American Century Investments.

S&P rating agency said on Friday the fiscal cliff impasse did not affect the U.S. sovereign rating. That lifted the immediate threat of a downgrade from the agency, which cut the United States’ triple-A rating in August, 2011 in an unprecedented move after a similar partisan budget fight.

Updated charts and comments available via Twitter (@CiovaccoCapital).

Sticking To Disciplined Approach

Friday, December 28th, 2012

One of the most effective ways to manage risk during high-stress market conditions is to draw lines in the sand when the markets are closed. When the market is closed, especially very early in the morning, you can make rational decisions about areas of possible support.

Early Friday morning when the markets were closed and the futures were tame, we created the chart shown on the left side below. The chart told us to exercise some patience as long as the S&P 500 held above the cluster of possible support between 1393 and 1401. At 7:37 AM ET Friday, we posted our game plan on Short Takes. The right side of the chart below shows the S&P 500 closed above the intersection of the orange, purple, green, and red trendlines (exactly at the point we identified as potential support).

If our leaders in Washington fail to compromise on the fiscal cliff, can the market blow right through the support levels shown above? Sure it can, but until that happens, we will treat it as support.

We noted at 10:51 AM ET Friday that we have a spreadsheet with numerous levels of possible support for all our holdings. We identified 108 levels for our core holdings. Only 26% of those areas of possible support were breached on Friday; 74% remain in place.

Given the 26% number and the fact the S&P 500 closed above the 1393-1401 level, we made very few moves on Friday. We did do some moderate selling in select accounts (as we did on Thursday). Friday was a day with high levels of fiscal cliff fear and uncertainty. Over the long run, selling when everyone else is selling and fearful is not a recipe for success.

Game Plan For Next Week

If the S&P 500 closes in or below the 1393-1401 range, we will most likely reduce risk at a faster pace. Another close below 1411 puts the daily uptrend in serious doubt. Monday will most likely prove to be a binary day – either very bullish or very bearish. We will make adjustments as needed.

Risk Management

Friday, December 28th, 2012

For CCM clients, we have a spreadsheet with numerous levels of possible support for all our holdings. Levels are green when our position remains above support. Levels turn red when our position is trading below support. The levels are based on numerous methods and time frames (ranging from monthly to 15 minutes). This allows us to quickly monitor and discern between “leave it alone” levels and “time to reduce risk” levels.

Important Support For Risk-On Rally

Friday, December 28th, 2012

The S&P 500 held at 1401 intraday Thursday. The range between 1393 and 1401 remains important. Above 1393, we will exercise some patience. Below 1393, a more defensive and bearish bias would be warranted.

To see a LARGER version of the CHART above click here.

Our level of concern is reflected in the fact that we did some very moderate selling Thursday (rather than buying the dip). We will keep an open mind and remain flexible in the coming days. More on Twitter (@CiovaccoCapital) during the day.

Bears Gaining Momentum

Thursday, December 27th, 2012

Our market models are beginning to show signs of concerning deterioration. We are monitoring the markets very closely and stand ready to convert to a more conservative/bearish stance if warranted.

Today’s weakness has brought us to a point where the markets now have very little margin for error. If time permits, we will make some brief comments on Twitter (@CiovaccoCapital).

Weakness Not Overly Concerning - Yet

Wednesday, December 26th, 2012

Below is an updated version of the chart we presented Monday. The chart below is as of 1:48 PM ET Wednesday, when the S&P was down 7 points. The chart has not broken down in a meaningful way.

When the ratio rises, stocks are in favor relative to bonds (risk-on). When the ratio falls, bonds are in greater demand relative to stocks (risk-off). It is hard to look at the weekly chart below as of last Friday’s close and draw anything but bullish conclusions.

Charts change as risk appetite changes. Therefore, as long as our market models and the charts allow, we will continue to stay with the bullish daily and weekly trends. If the markets shift back to risk-off, we are ready, willing, and able to take defensive action.

Global Triangle Leans Bullish For Stocks

Monday, December 24th, 2012

Over the last few weeks, we have been watching numerous risk-on vs. risk-off triangles. The chart below shows a triangle breaking in the bulls’ favor. When the ratio rises, stocks are in favor relative to bonds (risk-on). When the ratio falls, bonds are in greater demand relative to stocks (risk-off). It is hard to look at the weekly chart below as of last Friday’s close and draw anything but bullish conclusions.

Charts change as risk appetite changes. Therefore, as long as our market models and the charts allow, we will continue to stay with the bullish daily and weekly trends. If the markets shift back to risk-off, we are ready, willing, and able to take defensive action.

Daily Uptrend Still Intact

Friday, December 21st, 2012

The chart below is messy, but helpful; the clusters of blue trendlines show areas of possible support. The S&P 500 has not made a significant lower low, which means the daily bullish trend is still in place (as of 2:30 PM ET).