September 12th, 2012

Fundamentals Trumped Technicals in XHB; Avoid Mistake in XLF

I could kick myself.  I allowed what people said was the fundamental realty get in the way of clear contrary picture in the charts and it cost me a bundle.  Not real dollars but only an “opportunity cost” for not having put my money to work there; but it hurt almost as much regardless.  I’m talking about the near perfect bottom reversal patterns that most home builders were building over the past three years and from which most broke out during the first quarter.

At the end of 2010, the home ownership affordability index (the number of Americans who could afford purchasing a home) was nearly the highest ever recorded.  According to a February 2011 RISMedia report:

“Nationwide housing affordability during the fourth quarter of 2010 rose to its highest level in the 20 years since it has been measured, according to National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI) data. The HOI indicated that 73.9% of all new and existing homes sold in the fourth quarter of 2010 were affordable to families earning the national median income of $64,400. The record-setting index for the fourth quarter surpassed the previous high of 72.5% set during the first quarter of 2009 and marked the eighth consecutive quarter that the index has been above 70%. Until 2009, the HOI rarely topped 65% and never reached 70%.”

And yet, most of the talking heads and business media throughout 2011 and 2012 continued to look at home prices and sales statistics and wonder whether and when housing would hit bottom.  For example, USNews on April 26 reported:

Is the housing market in good shape or is it retreating back into recession territory? That’s the question on many observers’ minds as they try to sift through several reports this week that gave a somewhat murky picture of the state of the housing market…..Just this week, the widely followed Case-Shiller Home Price Index showed that values continued to erode in many metropolitan areas, with prices falling to a near-decade low nationally. Several cities registered new post-crisis lows on the index, further evidence that the “housing market bottom” remains elusive.Sales of new homes also disappointed this week, dropping more than 7 percent in March after a healthy gain in February. Overall, sales are still way short of the 700,000 or so units experts consider evidence of a “healthy” housing market.

So I continued to be leery of the home building stocks even though I’d been following and writing about them for some time.  Way back in May 2011 I called homebuilders and financial stocks the economy’s missing fourth wheel saying “If you believe that these two sectors will be able to successfully cross their resistance hurdles and begin advancing to levels last seen in 2008 then you should be “all-in” believing the market will continue heading towards the all-time high.”  I reposted that blog in January 2012 saying “If those groups [homebuilders and financials] start advancing this time, the rest of the market may not be much far behind.”

I must confess I was scared off by the various fundamentalist-based talking heads who kept looking at the trees (i.e., home prices and sales statistics) and therefore couldn’t see the forest (gaining momentum in homebuilding stocks).  I should have stuck with the charts and jumped on the unbelievable, steady move in homebuilding stocks which are up 45% this year, about the most of any industry group:

Last month I wrote that money flow is beginning to be “directed into financial stocks gives hope that, absent a new major crisis (although our own Federal debt and budget debate is still looming on the horizon), the market will be able finally to continue to the previous all-time highs and ultimately break the grips of the 12- going on 13-year secular bear market.  A cross of the XLF above 16 will trigger for me the another clear indication that financials will begin leading the market higher.”  I can report that XLF is making progress in its base-building and edging closer to the breakout level:

I missed out on that very clear-cut opportunity but don’t plan to miss the new one in the financials.

 

January 19th, 2012

Revisiting Housing and Banking With a New Ending

There was much conversation today about how the housing and banking industry was leading the market higher ….. which reminded me of a post I made close to a year ago on May 11, 2011 entitled “Homebuilders and Financials: The Economy’s and Market’s Missing Wheel“.  The S&P 500 closed at 1342.08 that day, 2.06% above today’s close of 1314.50.  I concluded that piece by saying

“If you believe that these two sectors will be able to successfully cross their resistance hurdles and begin advancing to levels last seen in 2008 then you should be “all-in” believing the market will continue heading towards the all-time high. If not, stay on the sidelines because rather than riding a car to the top it would be like riding a three-wheeler powered by the rest of the economy including: healthcare, retail, tech & internet, commodities, industrials and consumer non-durables.”

Because of the new more constructive view of housing and banking with the hopes of continued advances for stocks in those groups, I repeat that blog, including those charts, below:

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Two Industry Groups stand in the way of further market advances: financials and homebuilders.

Home building industry spokespeople go on CNBC regularly each time of the housing statistics are announced, like monthly sales, financing and refinancing, starts, or permits issued. And the spokespeople each time differentiate between the sales of new homes and resales, especially those that are in foreclosure or underwater; they also attempt to differentiate between national statistics which include negative information from extremely skewed markets like Las Vegas, Phoenix and Florida and the rest of the national housing market.

Discussed less frequently are conditions and prospects for banking, insurance, asset managers and the rest of the financial industry group. Since the bottom in 2009, I have believed the sector was a key to launching a true bull market:

  • On 3/20/09 in Financial Stocks are Laggards I wrote: “It’s often said that financial stocks are the Industry Group that leads the market out of the average Bear Market. In this case, however, the financials not only lead us into the Bear Market but they were the principal cause.
  • On 5/18/09 in XLF (Financial Sector ETF): What Now? I wrote: “XLF seems to be making what looks like the beginning of an inverse head-and-shoulder, a stock pattern that looks similar to the S&P 500 Index pattern….There’s only a one-in-four chance that XLF will be able to cross the resistance at the 13.00 neckline allowing it to move up to 17.00. It’s almost certain that 12-18 months from now XLF will be double what it is today [closed at 12.29 on that day], we just can’t say when.
  • On 6/7/2009 in XLF (Financial Sector ETF) = Market Health I wrote: “…the key to solidifying the market’s turn, to a true change in momentum from bear to bull is financial stocks starting to move up…..The financial sector is tied up with economic health, exchange value of the $US, interest rates and the health of the financial system itself. I’ll rest easier when I see the XLF successfully and with conviction cross above it’s neckline. “
  • On 9/16/10 in Housing and Finance: Two Superimposed Crises and Bear MarketsI wrote: “[The] graph clearly depicts what I see as two coincidental and superimposed Crises the country has faced. We often see them merged into one continuous stream of bad news but, in reality, there was a Financial Crisis (impacting business) that was preceded by Housing Bubble and Bust (impacting consumers).” and inserted the following graph, now updated to last night’s close (click on image to enlarge):

A year later, while the rest of the economy has regained its footing enabling the market to push higher (up nearly 20% since then), those two industry groups are still stuck below significant resistance and unable to breakthrough and push significantly higher:

  • Homebuilders
  • Financials

If you believe that these two sectors will be able to successfully cross their resistance hurdles and begin advancing to levels last seen in 2008 then you should be “all-in” believing the market will continue heading towards the all-time high. If not, stay on the sidelines because rather than riding a car to the top it would be like riding a three-wheeler powered by the rest of the economy including: healthcare, retail, tech & internet, commodities, industrials and consumer non-durables.

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If those groups start advancing this time, the rest of the market may not be much far behind.

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January 4th, 2012

Preliminary Positive Signs on Banks and Financials

A market timing strategy sometimes recommended by professionals like Fidelity Investments assumes that the various phases of the stock market’s life cycle correspond roughly to the stages of an economic business cycle.  To aide investors following the strategy, they developed the following schematic which overlays a typical economic cycle, the market life cycle phases corresponding to the various economic sectors and the industry groups that typically tend to perform best in them.

In the Financial Crises Crash, financial stocks was one of the first (after homebuilders) and most beaten down of all the Industry Groups having come under new, intense Federal scrutiny, regulation and restructuring and, up to now, the stocks have been slow to recover.  But their time may be coming.  The XLF (Financials ETF) appears to be struggling to form a small reversal bottom with a neckline at 14.00 which if crossed could carry the stock to the next resistance at 17.00:

The XLF is comprised mostly of the larger-cap, money center banks and insurance companies (click here for the current list of top holdings).  The ETF of smaller regional bank stocks, RKH, looks similar and the the various IBD regional bank groups are continually advancing in their ranking among the 197 Industry Groups.  Two examples of groups moving higher and above their 20-week moving average are the Midwest and Southwest banks:


If these aren’t apparitions but inklings that the financials are actually beginning a recovery reversal then the market may also finally begin to break out of it’s long trading range, emerge from its funk and begin an assault somewhere down the road on it’s all-time time high.

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August 2nd, 2009

Where Were You At Obama’s Election?

That’s not intended as a political question but rather interest in your portfolio’s health since then. The reason for framing the question this way is because Friday was a watershed day: the market closed at 987.40, nearly the identical level it was on November 4, 2008, Election Day, or 1005.75. It closed up 39.45, or 4.08%, from the 966.30 pre-Election close and has not been as high since.

After careening down since last labor day, through the Lehman bankruptcy and the Merrill Lynch acquisition, market psychology was temporarily bolstered over the succeeding weeks by announcements of the G-7 meeting and decision for a coordinated effort “to combat the crisis including the use of ‘all available tools’ to support key institutions and prevent their failure.” (If you are a masochist and want to relive those awful days, click here for an excellent timeline of all the gory details assembled by the St. Louis Fed.)

When you look at those two Index closing levels, you might think the last 9 months has been a boring, flat market. Au contraire, my friends. There’s been the equivalent of a bear market with a 32.73% decline to March 9 and a booming bull market with a 45.96% recovery since March in between. How did your portfolio perform over the same period. Having an average 40% in cash over the past nine months, my portfolio has gained only a disappointing 3.5% from last Election Day, net of dividends, commissions, interest, gains/losses and additions/withdrawals.

So for me, and perhaps some of you, the game is just beginning again. I can drool at all the profits that could have been made if only I had been less fearful and jumped back into stocks in a big way soon after the bottom (see March 19, “The Debate is Settled: The Market Has Hit Bottom“). I sought a safe haven, found it in cash but may have stayed there a bit longer that I should have.

As an aside, remember the Coppock Curve, Mean Reversion and MTI Indicators. I last checked in on them on May 1; two months later they look even more accurate at predicting the bottom. Coppock got it right again as the Curve has clearly trended up since May:

And the Mean Reversion Indicator? It’s still eerily similar to the path off the 1973 bottom (as a matter of fact, see the predictions of May 1 for a July close of 999.60 vs. an actual of 987.48). I wonder how long that parallelism will continue:

Finally, the MTI gave an “all-clear” signal on June 1 when the Index crossed the 200-day Moving Average. But that’s all history. Where do we go from here? I focused on all the money that’s parked on the sidelines needing to be invested as a possible catalyst for further market appreciation. “Z”, a loyal reader, recommended the following references as support to this notion: “Six Good Reasons to Like Stocks” from Barrons on August 3:

“There will certainly be a ton of buying power available once any bear conversion takes place. Cash holdings amounted to about 95% of the value of U.S. stocks at the end of the first quarter. Paulsen argues that given the current environment of inflation and interest rates, this ratio of cash to market cap should stand at around 50%. That would leave, by his reckoning, nearly $5 trillion of cash currently sitting on the sidelines available to push stocks markedly higher.”

and “Parked cash hoard: Fuel for further stock gains?” from Fidelity Investments on June 22 (the numbers are different but the conclusion is the same):

“Although investor cash levels have fallen from their record high in March, their value is still equivalent to about 40% of the entire U.S. stock market. This level of cash—as a percentage of what it could purchase of the overall stock market—remains much higher than the 27% peak rate seen during the 2000-2002 bear market, and well above the historical average rate of 16%….the cash stockpile on the sidelines remains so much larger than it historically has been that it would only take a smaller percentage of stock market re-entrants (relative to past cycles) to provide a significant boost to stock prices.”

So where should we look for stocks to lead the next leg up. Which stocks were involved in the Bull Market of Spring 2009 and which ones might take us through the end of the year?

More than half the stocks in the Telechart database, 56.3%, were higher this past Friday than they were on Election day. But what was most amazing is that the sectors up the most are those you wouldn’t necessarily expect, like retailers. As Bob Doll of BlackRock calls it a “relief rally” where investors said to themselves “Maybe this isn’t another Great Depression, and I’m underinvested in equities — I have to participate”; the speculated on the stocks that had been hit the hardest. Paul Lim, in today’s NYTimes, interviews analysts who rationalize that large caps with good fundamentals will support the next leg up.

I’ll go with the laggards since Obama’s Election: Banking, Real Estate, Transportation, Energy, Chemicals and Consumer Durables. That’s close to 1000 stocks of which many have formed beautiful reversal bottom patterns they’re about to break above. I’ll post a spreadsheet for you tomorrow.

October 11th, 2008

HBHC, "Platinum Cross" Other IBD Regional Banks

“I was going to write a speculative piece about the alternative possibilities of where the ‘hot money’ might flow after the oil and commodities bubble bursts, which I think can’t be too far off now.” That was the lead sentence in my May 5, 2008, piece entitled “Regional and Local Banks; Today’s Market Retreat“. Again, I was a little premature.

Just over five months have passed, the S&P 500 was 1390 back then, a whopping 55% higher than yesterday’s close, and in today’s Investors’ Business Daily Industry Snapshot, entitled “For Banks, Smaller is Better” you read:

“While IBD’s industry group of big money centers ranks a relatively poor No. 120 out of 197 total, community banks in all four regions of the country rank in the top 30…..Expect more bank failures and consolidation as the stronger banks pick up the weaker ones.

Given that the market has been devastated lately, lead by the large money center banks, oil and commodity stocks, it’s not surprising that a group that is falling less precipitously, even hold its own, is pushes higher in the Industry Group rankings. Regional Banks have done that:

It’s quite an extensive report, well worth getting your hands on and lists the following stocks:

  • UMBF (UMB Financial)
  • HBHC (Hancock Financial)
  • SBNY (Signature Banks)
  • PNFP (Pinnacle Financial)
  • HTLF (Heartland Financial)
  • SYBY (SY Bancorp)

A couple of days ago, in “What to Look for at the Bottom“, I wrote that stocks that have formed “Golden Crosses” (where the 90-day MA crossed over the 180-day MA) might be excellent trading opportunties in the early stages of a recovery from the market bottom. It’s interesting to note that the following 24 regional bank charts with “Golden Crosses” out of a mere 90 stocks in total fit that criteria. The most active of these banks include (click on symbol for charts):

  • PNC (PNC Financial)
  • NAL (Newalliance Bancshares)
  • PRSP (Prosperity Bancshares)
  • ONB (Old National Bancshares)
  • HBHC (Hancock Holding)
  • SBNY (Signature Bank)

Note: I’ve dubbed the double cross overs in the HBHC chart as a “Platinum Cross”, a chart where the 90-day has crossed both the 180-day and the 300-day MA – a perfect Bull Market alignment of 60-, 90-, 180- and 300-day MA’s. Perhaps that’s one of the reasons HBHC is also an IBD pick. IBD’s pick UMBF would have been on list too but it closed yesterday below the 90-day MA.

October 10th, 2008

How to Play a Recovery Bounce

On June 28 in “How Do Ultrashorts Work?” if offered some charts depicting the relationship between the Proshares Ultrshort etf’s (SDS, TWM and QID) and the underlying market indexes (S&P 500, Russell 2000 and Nasdaq). Almost 4 months have passed and the market is down about 30% (as measured by the S&P 500). What happened to the double shorts? I can sum it up in one word – “Amazing!” [By the way, I learned that these etf’s pay dividends so I adjusted their prices for cummulative dividends paid.]

  • S&P 500 (SDS)
  • Nasdaq Composite (QID)
  • Russell 2000 (TWM)

Just look at the percentage moves, 60% increases as the indexes dropped 25-30% – just the way they were supposed to. If you’re wondering whether I acted on what I felt strongly would happend I must confess “yes and no”. I did have positions (I was chicken so weren’t that significant) for most of this decline (chicken again, I sold at the end of last week).

Many are asking “what should I do now?” First you have to take an strategic stance and mine is that the market isn’t going to decline to zero, we may not even go to the 2002 Tech Bubble Crash low. The 1987 crash cost 27% over three days, this time it took 2-3 weeks. In 1987, the recovery 6 months and then onto a huge bull market. This crash will recover too even though we can’t see it or imagine it today.

One strategy for you to consider is trying to trade the bounce/recovery. In the same way that these etf’s rocketed as the market collapsed, you could buy put options, sell them short or, my preference, by their mirror image, the double longs; mirror image of the SDS is SSO. I’d also look at the severly damaged regional banks and a resurgent in the commodity trade (oils, fertilizer, steels and other metals, mining equipment, farming equipment). The world isn’t going to come to an end although it looks like that might be just around the corner.

August 19th, 2008

Central Banks’ Markets Intervention

I’ve heard about it, I’ve read about it but it wasn’t until I looked at a whole series of charts and focused in did I see the manipulation that was the “market” that’s taken place since July 14, the day the Fed said they’d “backstop” Freddie and Fanny. It was as if somebody closed the curtain and then quickly opened it again and we were watching a different play. Let me try to show you what I’m talking about with some close-up charts (I reduced the charts to allow for more):

If I believed in conspiracy theories and thought it was even remotely possible, I would think that major central banks acted in harmony to stem the “commodities speculative bubble” by propping up the $US, depressing their own currencies and pushing gold and silver down.

What other explanation could there be for everything happening just as the Fed was saving the US mortgage lending industry and housing market?

August 14th, 2008

Last Shoes to Drop: GS and JPM

I mentioned below what looks to me like a precarious chart for GS (Goldman Sachs) and JPM (JPMorgan). Granted, their charts don’t look anything as bad as those of LEH, MER, WB, BAC or any of a several others. However, if you were to rewind the charts of any of wounded banks backwards several months, the tops they formed around the beginning of 2007 looks not dissimilar to the tops that GS and JPM have completed.

  • GS (Goldman Sachs): It’s taken nearly two years but GS appears to be at the end of forming a major top. I call it a “double top” but, whatever name you give it, it looks ominous. Recent downgrades don’t help those who piled on to GS as a financial industry safe haven while all the other banks were tanking. Will that whole herd now abandon GS like they did the other financials? Where will that money flow to next? By traditional guidelines, a move down leg from here would be approximately 30% to 120, the same percentage between the peak of 240 and the neckline of 170.

  • JPM (JPMorgan Chase): The chart presents a much more complex and confusing picture. For some reason that I can’t explain, JPM seems to have started struggling and forming a top all the way back in 2003. It may weather its own extended storm (its stock is now higher than it was in 2003 but it’s not lower either) and the past five years may turn out to be a base for future sustained growth. At the moment, however, I’ll assume that the stock price movement represents an extended top formation.

    I inserted two alternative necklines because, honestly, I can’t tell which might ultimately will pervade. If the stock continues moving down, replicating the move from peak to neckline would result in a decline from 35-45% to the 15-20 area.

August 14th, 2008

London View on Gold and FX

However, confidence in this defensive strategy has been shaken since July 15 as gold and silver (SLV and GLD), Euro (FXE), Pound (FXB), Yen (FXY) tanked and the stock market rallied (S&P 500). Note also that the collapse of financial stocks was halted (temporarily?) and a sharp recovery began. But the bounce seems to be petering out as the individual stocks and the Financials ETF hit a descending the wall of a 60-day moving average. What brought all this on was the Fed’s decision to bail out Freddie and Fanny. But enough history. The think we should be caring about is what might happen in the future and what should be our strategy.

I attended another session of the New York Investing Meetup Group in Manhattan last night. If you aren’t in commuting distance or weren’t aware of the group before, you can catch up the proceedings since Daryl Montgomery, the groups founder and principal presenter, posts most of the presentations on the groups website. In addition, Daryl offers some videos of previous presentations hosted on youTube. Daryl also writes about economic matters at The Helicopter Economics Investing Guide.

One of Daryl’s recurring themes since the sub-prime crises emerged last August has been the inaccurate media or biased reporting, prospect of significant inflation on the horizon (“government statistics aren’t accurate and intentionally untrue”), facts concerning the financial system collapse and protections potentially available through foreign currencies, gold and silver.

While researching what others have to say about these events, I ran across an extremely enlightening article appearing in the Telegraph of London by Ambrose Evans-Pritchard entitled “Stage two of the gold bull market is just beginning (by the way, if you’re like me and have never read this blog before then do so now. His articles shed light on what’s happening globally – something that affects here in the US but don’t read much about in our press). Here are some of his main points:

“we reached the moment when gold bugs must start questioning their deepest assumptions. Have they bought too deeply into the “dollar-collapse/M3 monetary bubble” tale, ignoring all the other moving parts in the complex global system? Nobody wants to be left holding the bag all the way down to the bottom of the slide, long after the hedge funds have sold out.

Well, my own view is that gold bugs should start looking very closely at something else: the implosion of Europe. (Japan is in recession too)…….

The rift between North and South was not enough to fracture the system in the first post-EMU downturn, the dotcom bust. We have moved a long way since then. The Club Med bloc is now massively dependent on capital inflows from North Europe to plug their current account gaps: Spain (10pc), Portugal (10pc), Greece (14pc). UBS warned that these flows are no longer forthcoming.

The central banks of Asia, the Mid-East, and Russia have been parking a chunk of their $6 trillion reserves in European bonds on the assumption that the euro can serve as a twin pillar of the global monetary system alongside the dollar. But the euro is nothing like the dollar. It has no European government, tax, or social security system to back it up. Each member country is sovereign, each fiercely proud, answering to its own ancient rythms……

What we are about to see is a race to the bottom by the world’s major currencies as each tries to devalue against others in a beggar-thy-neighbour policy to shore up exports, or indeed simply because they have to cut rates frantically to stave off the consequences of debt-deleveraging and the risk of an outright Slump.

When that happens – if it is not already happening – it will become clear that the both pillars of the global monetary system are unstable, infested with the dry rot of excess debt……

Gold bugs, you ain’t seen nothing yet. Gold at $800 looks like a bargain in the new world currency disorder.”

The markets will sober up from the false positive reactions to the Fannie and Freddie bailout on July 14. The charts seem to be indicating that the financials will resume their retreat (some don’t have too far left to go before they hit zero). But this time their going to be joined by the big players who seem to have been somewhat immunized from the effects of the collapse. Specifically, Goldman Sachs (GS)and JPMorgan (JPM). More on that later.

July 31st, 2008

The Final Shoe to Drop: Mortgage Resets and Interest Rates

I’ve been wondering why interest rates haven’t increased when evidence on all sides says they should:

  • we’re facing the prospect of significant inflation. Some say that the current inflation rate is in the area of 12-14% if they were recalculated on a basis consistent with the method used prior to 1998 (see Rating the Real Cost of Inflation).
  • The value of the $US has been consistently eroding
  • The budget deficit is unprecedented and continues growing. Without higher rates, foreign investors will stop funding this deficit at some point.

A Talking Head shed light on it yesterday (unbeknownst to them and surprising to me) when they made a comment that “mortgage foreclosures include fewer variable reset mortgages than originally anticipated because mortgagee’s can do so at affordable rates”. So that raised the question of what is going to be the flow of reset mortgages in the future and what, if any impact might that have on interest rates in the future.

I found the answer in a table prepared on a site called TheRealEstateBloggers.com at the beginning of the sub-prime mortgage credit crises on August 13, 2007. The table, entitled Adjustable Rate Loan Resets For 2007–2008 follows:

Month           Millions
January-07      22
February-07     25
March-07        35
April-07        37
May-07          36
June-07         42
July-07         43
August-07       52
September-07    58
October-07      55
November-07     52
December-07     58
January-08      80
February-08     88
March-08        110
April-08        92
May-08          76
June-08         75
July-08         50
August-08       35
September-08    26
October-08      20
November-08     15
December-08     17

What that means to me is that the Fed and Treasury have been consciously keeping rates low until the balloon in variable mortgage resets (Jan-July, 2008)!

And what might we expect as the majority of these mortgages complete their resets and convert to fixed rates (assuming those funds are available), there will be less incentive to keep rates low. I can see that interest rates will start edging up beginning Labor Day and will accelerate significantly as we approach New Years.

If true, what does this mean to stock investors? I think that will be the final shoe in this economic recession cycle to fall and trigger the last drop in the index and stock prices.