December 15th, 2009

Becalmed, Waiting For New Tailwind

If there’s one piece of advice I can offer right now is that you not focus on any individual stock. Look instead at the market. It doesn’t matter what you hear on CNBC or read in (other) blogs and newsletters about one stock or another because all are moving in unison to one extent or another.

Think back to March, when all we could see were stocks forming reversal bottom patterns. There were inverted heads-and-shoulders, upward sloping triangles, cups and handles, double-bottoms …. you name it and you saw it. Some of the formations began six months prior, some four months. Some were broad and encompassed 70-100% fluctuations from trough to peak, while others were narrower and only covered 20-40% moves. You could have played that volatility but uncertainty reigned since no one was sure where the bottom was and whether any of the moves up were dead cat bounces, suckers’ rallies or the real thing.

The talking heads were out selling their wares (stocks) telling you why it should be bought because of a strong balance sheet, good cash position, no toxic assets, relatively immunity from the financial crises because of a large export business or the opening of burger joints or coffee houses in China. But only a few rare special situations were able to ignore the base-building phase.

What I’m telling you is that if you were looking for a stock that’s different and will succeed in breaking away from the crowd you’re going to be disappointed. After scanning hundreds of stocks, the situation today feels similar to that period back in spring: there’s a common denominator running through nearly all stocks and it’s the spring that the market’s tightly winding.

Nearly ever stock I see is struggling to either cross a significant long-term resistance trendline (overhead supply), cross a key moving average (a downward-sloping 300-day moving average) or escape from a relatively narrow channel. This struggle began in late July to early September, sometime around Labor Day. It was just about the time that the 200-day moving average of the S&P 500 Index turned positive, just after the 100-day moving average crossed above the 200-day (the “Market’s Golden Cross”) and when the Index itself crossed above its 300-day moving average.

Just as most were beginning to believe a bottom was in, that green shoots were popping up all over, the wind that had been behind our backs started to die down. Since mid-September, we’ve been becalmed, waiting for a whiff of wind to tell us which direction we’ll be going. There’s no question that the market’s internals have improved. The market’s 300-day moving average has turned up for the first time in over a year; 27% of stocks now have an upward sloping 300-day moving average while an equal percentage now have charts with “Bull Crosses” (where the price > 50DMA > 100DMA > 200DMA>300DMA and all are pointing up).

So we may have been experiencing a consolidation beneath the surface since September, a “stealth correction” you might call it. Take TEVA as an example, a great move up from the October low only to be becalmed in July in a horizontal consolidation channel:

How about SNDA (Shanda Interactive), China’s big online entertainment and gaming site:

SNDA more than doubled between December and July only to hit a brick wall and go into a 7 month pennant consolidation formation. Or what about ANR (Alpha Natural Resources):

ANR had a clear reversal formation at the beginning of the year, broke out into a pennant shaped “buyers’ remorse” correction back to successfully test the support and has been in a channel consolidation since September.

I’m not clear which way the wind will blow when it picks up again. I still have my longs and hedges in place but I’m beginning to have second thoughts about the correction I was looking for in the 1125-1150 area. Because of the strength in the market, we may already have had it in 1060-1110 area and not even known it.

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  • Anonymous

    Hey Guru,

    Off topic. If you could afford (now and in the future) to take 25% equity out of your home right now (great rates for great FICO), would you do it ?

  • Joe

    As for taking equity out of your home, I'm in now position to give you any advice but can tell you some of the things you should consider:
    1) the % of equity/mortgage currently
    2) the % of current amortization/income
    3) terms of any new financing (fixed or variable, rate, term)
    4) how you plan to use the funds
    5) how long you expect to own that house. All difficult questions, with personal answers.

    If you're asking whether you should take equity and put it into the market, my short answer would be "no".

  • Anonymous

    Hi Joe – Great blog! Have been reading it for awhile… But, do you actually think that we have already corrected – with "numerous" reasons that we should pull back here? I won't go into all of them but from technician to technician, we both know what they are… They won't drop it in January due to earnings being reported…

    But, any "possible" breakout move to the upside will be fake… February/March says we come down hard…

    Once again, appreciate your blog…
    Vis

  • Anonymous

    Guru,

    Thanks for answer…as well as all your other insight. Been reading for sometime now. One day I'll create an account.

    Short response: For a lender, I'm an excellent candidate from all perspectives (not trying to brag). We can get a sub-5/30-fixed, high LTV no problem.

    I've been mulling going from 75% equity to 60 or 50% equity for the reason you stated not to…. or maybe another asset purchase, like a small farm. Have even thought of going further into equity and essentially becoming a lifetime renter, letting the bank deal with inflation.

    Also driven by the thought that you can't sell the bathroom if you need 10 or 20 grand in short order.

    I know you're right; the numbers back it up in normal circumstances. But cheap money gets my attention.

    After the new year I'll take you up on your coaching/training sessions.

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