February 16th, 2009

Seeds of Next Bull Market? Shippers and Heavy Construction

It’s time for a reality check to see how the base building I described on January 26 is progressing. The negative news reported over the airwaves, in the press and in blogs continues unabated. You can take a pulse of the general consensus by reading the headlines presented in such aggregator sites as The Kirk Report and Abnormal Returns. Last time, the list was from The Kirk Report; this list comes from this past Friday’s Abnormal Returns (for links to actual stories, click the link above):

  • Earnings have collapsed. How long before they return to trend?
  • Absolute return mutual funds have been anything but.
  • The wave of bankruptcies is nowhere near cresting.
  • Germany is having problems placing its debt.
  • Is the US doomed to make the same mistakes that Japan made?
  • Europe, especially Ireland, is in bigger trouble than the US.
  • No matter how you measure the employment picture, it is bad.
  • Economist aren’t stupid. They are simply trying to explain something, the economy, that is too complex for us to understand.
  • Curing the common cold will be just about as easy as preventing future market bubbles.

I’ve heard it said in the news business that “good news doesn’t sell papers” nor does it hold on to TV viewers so it shouldn’t come as a surprise if the media hasn’t yet be able to shake their case of the blues. A couple of weeks ago I prescribed that you take a look at the market’s internal dynamics as a palliative for a sure case of investor depression. So how do those measures stack up now after two more weeks full of bad news?

Interestingly, and surprisingly, they continue to improve:

More than a third of stocks have successfully crossed above their 90-day moving averages as compared with only a fifth a month ago. Nearly one of every ten stocks are now above their 180-day moving averages as compared with one of every fourteen a month ago. It’s a greater challenge for stocks to cross the slower and more removed 300-day moving average; improvement there has only been marginal.

Finally, a large number of regional banks reversed their Golden Cross status (the index above the 90-day MA which was above the 180-day MA) because of serious erosion in the prices of the group, other stocks have risen to take their place holding the count constant though relatively small.

I’ve written here fairly consistently since the end of last year (see October 22, 2008) that I believe the market is working hard to build a base after the huge 2008 collapse. I’ve warned that patience is need since it would take some time until we get an all clear signal. But in addition to the Industry Groups I mentioned previously that appear to be leading in the base building effort (Oil, Fertilizer, Steel, Healthcare, Gold) here are two more offering some interesting basing action (click on symbol for charts; note time scales may differ):

  • Shippers
    • DSX (Diana Shipping)
    • TGP (Teeky LNG)
    • GNK (Genco Shipping)
    • VLCCF (Knightsbridge Tankers)
    • TBSI (TBS International)
    • NAT (Nordic American)
    • ONAV (Omega Navigation)
    • SSW (Seaspan)
    • PRGN (Paragon)
  • Heavy Construction and Engineering:
    • FLR (Fluor)
    • JEC (Jacobs Engineering)
    • KBR (KBR)
    • ACM (Aecom)
    • CBI (Chicago Bridge & Iron)
    • PCR (Perini)
    • STRL (Sterling)
    • ENG (Englobal)

Notice the similarities among these charts as all appear to be forming chart patterns: symmetical triangles, ascending trianges, wedges, cups-and-handles, downward sloping channels, head-and-shoulders – a true charting eduction. The similarity is understandable since the herd is stampeding these stocks for the same underlying economic reasons (yes, “fundamental” and “technical” analysis do sometimes overlap).

But a word of caution is warranted. “Looks can be deceiving.” We are in the early stages of what we hope is the beginning of the first phase (i.e., accumulation) in a new market life cycle. If true, then the charts will turn out to be true reversal patterns but, if not, then they will merely have been consolidation patterns followed by further downside.

Chart patterns often look compelling but caution dictates that you first merely put these stocks on your watch list and only later, after you see a breakout above the suggested trendlines by significant percentages and on above average volume, should you put one or two in your portfolio.

It’s too early to say how high momentum will carry these stocks if and when they do break to the upside. Each will face their own unique headwind and resistance. But “where there’s smoke there’s fire”. All these stocks can’t be basing without some fundamentals to push them in the same direction.

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