October 16th, 2012

KOL and UNG: the First Chapter

I’m not breaking any new headlines here but the Fed has flooded the economy with a huge amount of liquidity.  To this point about the only thing I focused on with regard to all that money sloshing around is to wonder when it might come in to the stock market.  Consequently, I missed the surprising new boom that’s emerged in housing and most related industries like lumber,construction equipment and tools and home related retail.

But sooner or later all that newly created money should begin to show up in commodity prices (other than precious metals), inflation statistics and, finally, in interest rates.  We may have gotten a peek at that future this morning when the government reported that industrial production rose 0.4% in September while capacity utilization inched ahead from 78.0% to 78.3% and copper rose 0.5% on the commodity exchange.  It may be time to take a look at a couple commodity ETFs.

  • UNG (Natural Gas): I swore off of natural gas having been burned by it (no pun intended) several times over the past few years as I bought mistakenly believing that the commodity just couldn’t drop any further in price only to have been proven wrong.  Perhaps it might be one of the instances again:What a huge destruction of value!  If you had put $1000 into UNG when it first became available and held on for the duration, you would have been left with a measly $54.80.  There’s not much hope in recouping all that money any time soon but, if you want to put $1000 in UNG today, you could have a fairly good chance of perhaps doubling it.  For the first time in many years, UNG is in the process of forming a reversal bottom pattern.  The 50-dma has crossed above both the 100- and 200-dma’s and the 100-dma has also crossed above the 200-dma.  Volume has picked up significantly due to many bottom fishers who are now betting on that bottom taking place.  There still are many skeptics out there so if a reversal is truly in the making then it will probably go through many stages and stretch out for years.  Along the way, there will be several constructive trading opportunities …. a long-term buy-and-hold approach could be frustrating.
  • KOL (coal): Coal is the bad boy of the energy complex but, with the possibility of a Romney victory, may gain some new found respect in the effort to become energy independent.Like the case of UNG, KOL is in the early phases of a clear-cut reversal pattern.  The upside opportunities may not be as significant as UNG (because the previous decline wasn’t as severe) but, as a more mature industry, they may be more certain.

Of course,one can play the natural gas and coal producers instead of the ETFs and there always are the precious metals (GLD, SLV, GDX) and their producers.  Clearly, this is a long-term unfolding story that we’ll continue to follow.

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.

 

May 11th, 2012

Why the fixation on foreign exchange?

I’m always surprised and bewildered seeing the “Alert” image and hear the special effects sound whenever CNBC wants to say something about foreign exchange and make it appear as if something really significant has happened.  This morning it was a “breaking news” story about a move (or absence of a move when actually one was expected) in the €EU.

I understand that currency fluctuations are important since the world figuratively revolves around the free exchange of wealth (money) and goods.  And I also understand that countless speculators, investors and governments are involved in foreign exchange markets.  Furthermore, I understand that currency markets are extremely leveraged since the players can put on and lever up to huge positions with small equity of their own.  And finally I understand that the exchange values of one currency against another is based on supply and demand amongst all those players tempered by the policy positions of governments and central banks who attempt to influence (control) and stabilize those exchange values.

But as a trader who trades foreign exchange only on an extremely limited basis through ETFs, I don’t understand foreign exchange as a trading vehicle when currencies don’t fluctuate really that much.  Take the €EU (Euro) as an example.  It may be hard to believe given all the discussion about sovereign defaults and debate about the currency’s possible breakup, the €EU today is where it was in 2006 as reflected in the price of FXE (the Rudex CurrencyShares EuroTrust ETF:

The following chart compares the $US Index (a composite exchange rate index for a basket of currencies of our largest trading partners) with the more volatile S&P 500 Index:

To add another dimension to the €EU’s volatility, I superimposed the FXE on a chart of YUM (Yum Brands) for the same period to compare the two (the FXE is in blue):

Businesses surely need to pay attention to foreign exchange since those fluctuations impact revenues, costs and profits but I don’t understand where the fascination for individual investors comes from given that you’d wind up paying margin interest and wouldn’t earn the dividend yield (which in the case of YUM is currently 1.6%).

Why do most of the search results for the term “technical analysis” focus on foreign exchange?  If it weren’t for the huge margin possibilities (up to 90%) which makes it a more risky game, why should the average investor be interested at all in foreign exchange?  I can’t predict the future of the €EU or the $US but my guess is that fluctuation in the short run future won’t be all that significantly different than they have been in the past regardless of the EU outcome.  Can someone please answer the question “What am I missing?”

March 20th, 2012

URE: A possible rocket ride

As regular readers here know, I’m a frequent critic of Tom Knight, creator of the Slope of Hope blog.  For example,  on February 14, a guest blogger to the site commented that the the market has risen too far and diverged too far from its 400-dma such that there’s no questions “if this debt-filled balloon will disintegrate, but when“.  The writer’s premise is that the several times in the past when the Index has diverged as far as it has from its 400-dma have all been followed by a drop or correction.  As of today, the S&P 500 is approximately 4.0% above the 1350.50 close that day.  According to my analysis,

“The S&P 500 Index is currently 6.38% above the 300-dma.  In the 12,089 trading days between March 12, 1963 and March 11, 2011, a spread between the index and the 300-dma of 5.00-7.99% occurred on one out of every 6 days, or 16.89% of the time.  One could almost say that this spread is “typical”, not large or overbought or stratospheric.”

Today, Slope of Hope featured the following chart on URE and Knight writes:

“Below is URE (the double-bullish on real estate ETF) with three nice inverted head and shoulders pattern. On one hand, yes, there was a lift in each of these instances, but on the other hand, the lift was either very short-lived or, if it did persist, was choppy and not especially profitable. Past behavior on specific instruments with certain patterns can be helpful in anticipating what subsequent patterns on the same instrument will do in the future.”

What?!  There are two continual problems with Knight’s chart analysis: 1) the time horizons and trading style are usually too short-term and 2) he makes a conclusion and looks for chart images for proof rather than looking at a charts from a range of time horizons and then drawing a conclusion from them.

It’s truly amazing how different the same information in a chart can appear when one changes the scaling and looks at it from a number of different time horizons:

I arrive at a totally different conclusion that the Slope because of my longer term perspective.  I see dozens of pivot point areas over the past 4 years at four key levels: 35, 51, 64 and 115.  These levels aren’t “Fibonacci” levels; rather they are key areas where the ETF has reversed direction (either up-to-down or down-to-up) several times.  The balance of control has changed hands from bulls to bears or from bears to bulls.  Even more importantly, when it hasn’t changed hands at one of those levels, the ETF has launched a longer and more extended trend.

The ETF is at 61.27 and approaching 64, the level where it reversed twice before.  The more important point that I would have focused on (a point that Knight didn’t comment on at all), is that a cross of 64 would carry the ETF into near a near void, territory through which it passed like a meteor through outer space.  During the worst of the Financial Crisis Crash from October1, 2008 to November 20, 2008, URE declined 86%!  If it closes back above the outer limits of its current atmosphere, which I estimate to be around 64, then it will reenter a space where there it will face little friction.  One could easily say that had it not been for the Greece and the Euro crisis last year that derailed it, URE could have been on its way to 115 last year.

There’s no way to predict what will happen to URE above 64 but to not mention it, to not see that event as a potential quick and dramatic profit opportunity is a huge oversight.  Rather than a very short-lived or choppy and not especially profitable possible outcome, I see a potentially huge, longer-term windfall profit opportunity. But of course, if you are a day-trader, or a trader who looks for a quick 5-10% profit, then you can be excused for not seeing those rare, 100% multi- month or year trade opportunities.

February 16th, 2012

Parallel trendlines for positioning targets

There are those who follow Bob Prechter, one of the strong proponents of the Elliott Wave principles have their ways of identifying price level targets.  And then there’s the crowd who hide out at Slope of Hope, the place where perma-bears can always find a reason for an impending correction or “much welcomed” bear market crash through targets derived by their overly precise application of arcane Fibonacci mathematics.  But I’ve always found a rather simple approach to projecting out potential targets by applying a resistance trendline parallel to the corresponding supporting trendline and thereby creating a channel.

Take for example XHB, the homebuilders ETF.First, you should note how reversal and consolidation patterns easily morph from one form to another without a general market tailwind.  Until last summer’s meltdown due to the domestic budget and European sovereign debt crises, it looked as if XHB would break out the upside of a symmetrical triangle.  Since last summer’s 30% decline, it now appears that pattern has morphed into an ascending triangle and, with cooperation of a more constructive general market backdrop and expectations for finally an improved housing market, that upside breakout might now be at hand.

If break out does materialize, the next question is what might be a reasonable target for the move higher?  Consider a parallel line as on benchmark:

Parallel lines are simplistic and anything but elegant but they usually work.  They definite position a target for one’s expectations.  They won’t let your dreams run wildly out of control and add a time dimension to a price expectations.

Reality never really works so perfectly but, if the market and XHB dramatically diverges from this trajectory then we can make mid-course adjustments when and to the degree necessary.

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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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December 19th, 2011

Shorting Treasuries: Conventional Wisdom Gone Awry

One of the perplexing aspects of the monetary and fiscal issues  around the world (especially here in the US) has been the absence of inflation and the strength of the $US.  In “Short TLT Rather Than Be Long TBT” (January 2010), I quoted from the NY Times:

“Liquidating investments that pay almost nothing in order to shift to long-term bonds that pay substantially more may not make sense right now, said Robert F. Auwaerter, the head of fixed-income investing at the Vanguard Group….interest rates — at both the short and the long ends of the yield curve — are likely to rise this year if the economy keeps expanding…..When bond yields rise, their prices fall. The effect is magnified for longer-term securities, so a 30-year Treasury bond would fall in value much more sharply than, say, a six-month Treasury bill.”

That was the conventional wisdom and has continued to be for some time.  To take advantage of what seemed patently obvious, one could play the rise in Treasury bond yields by either buying TBT, the ultrashort ETF or shorting TLT, the ultralong ETF.

But this was just another case of conventional wisdom goes awry.  The turmoil in Europe has caused money there to seek out a safe haven and,  as incredible as it is, that safe haven has been the $US and US Treasuries.  Rather than seeing yields rise as prices decline, rates continued to decline to historic lows.  Holding TBT in the expectation of rising rates has been an unmitigated disaster for all those holding TBT:

20-yr Treas Yields vs. TBT 2010-2011

Not only have yields declined rather than rising this year causing TBT to also decline but TBT has declined further on a relative basis (some of the difference is compensated by dividend distributions).  Holding TBT in the hopes of increases in yields due either to inflation or fears brought on by the budget disputes has resulted in a nearly a 50% loss.  If interest rates reverse and return from the current 2.5% to above 4.0%, the levels it was at the beginning of the year then TBT could be expected to nearly double.

It could be a long wait but perhaps at this point one that might be worthwhile.

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December 16th, 2011

World Stock Markets are Correlated

If thanks are in order then it’s from me to all of you.  It’s because of you that I take the time to be analytic, to look at the forest instead of at the trees, to look in places and directions that are different than those we regularly hear and read about in the business media.  For example, when attempting to divine our market’s future we often see with blinders on.  We look at individual stocks, we look at the S&P 500 and we look at our economy but we don’t often to look at what might be happening to other markets around the world, something that’s relatively easy to do these days because of ETFs.  I scanned those ETFs and was surprised by what I found.

In an article in today’s Reuters, “Stock markets have become so highly correlated to one another that it can feel like a one decision world: in or out.  The massive and global nature of the series of related financial crises since 2007 have robbed diversification of much of its value. Nearly every asset class is now closely correlated.”  The article quotes a study by Societe Generale that “a massive increase in correlation, from about a .5 correlation in the early 1980s to nearly .9 percent in recent months.”

The same seems to be happening to the returns generated by the “Herd”, the hedge funds who get paid huge fees to generate better than average returns on the large sums of money they manage.  According to Reuters, “these correlations in the 1990s were at about the .6 level, now they are topping the .9 mark, begging the question of why investors are paying expensive managers.”

We can’t explain the new correlation or, for that matter, care to know the cause.  The point is that “Diversification was the low hanging fruit of wealth management” and due to the increase in international trade, it’s no longer available.  We can see it in the ETFs of stock markets around the world; I could have picked more from the 30 some ETFs but you get the picture (click on image to enlarge):

  • Brazil: a possible double-head reversal top
  • Hong Kong; a surrogate for various Asian markets, including China
  • EAFE: 22 developed countries in Europe, Australasia, and Far East other than US and Canada
  • S&P 500: an argument can be made for forcing a reversal top, in this case an emerging head and shoulder formation, on the S&P 500 Index

We’ve spent a lot of time and emotional energy trying to figure out in which direction the market will break out of the trading range. We waiver back and forth depending on the news out of Europe. We turn optimistic when we finally start getting a little bit of positive news on our economy (like “things aren’t getting worse” or “things are slowly getting better”). Bottom line ….

  1.  in today’s market, diversification gives way to market timing and
  2. we might fair no better than other world markets and have to endure a further 20-25% decline before we’ll see a bull market trend begin.

Like it or not, truly, today We are the World.

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December 14th, 2011

The S&P 500/Gold Ratio

On Wednesdays, the focus here at the Stock Chartist blog is on individual stocks or ETFs and the topic today is GLD.  GLD is the 2nd-highest capitalized ETF behind only SPY; it’s nearly triple the capitalization of QQQ. Some can look at the price of gold in purely economic terms to arrive at what they feel is a theoretically correct price; others attempt to correlate the gold prices to other assets to see whether they are in line in a macro- way and, finally, one can look gold prices in purely technical terms.

  • Some say that the price of gold has a fixed relationship to the rate of inflation.  Specifically, Eddy Elfenbein has estimated that relationship to be that “for every one percentage point that real rates differ from 2%, gold moves by eight times that amount per year.  So if the real rates are at 1%, gold will move up at an 8% annualized rate. If real rates are at 0%, then gold will move up at a 16% rate (that’s been about the story for the past decade). Conversely, if the real rate jumps to 3%, then gold will drop at an 8% rate.”
  • The stock market, as represented by the S&P 500 Index fluctuates within a fairly wide range when priced in gold rather than the $US.  I wrote about this last May in which a inserted the following chart (since updated) which shows the S&P 500/gold: S&P/Gold Ratio since 1971

“The ratio is a function of both variables, the price of gold and the value of the 500 largest US public companies. Both variables are equally driven by value of the $US, domestic and international economic trends and a host of other drivers. Alternative possibilities for the ratio are possible through almost an infinite number of combinations of both variables. Some gold bugs claim that the price of gold is headed to the $4000/ounce level without indicating what they think will happen to the stock market. That doesn’t work for me.Make your own guess as to where and when you think the price of gold will be. But you should also forecast where you think the S&P 500 might be at the same time. It’s only after you calculate their ratio and see where it plots on the above chart will you be able to assess the reasonableness of those projections.Once a long-term trend begins it’s hard to reverse. I can accept $4000 gold and the S&P hits 2000 (a 50% increase from current levels) for a ratio 2.0 in 2014.”

  • The charting approach is to look for reversals in the chart of the GLD etf (click on image to enlarge):

Everyone continually is on the look out for the big reversal, the one that will carry GLD back below 100 and gold below 1000.  Let me tell you with a high degree of confidence and certainty that a move as substantial as GLD has had since 2006, a reversal when it comes won’t happen in a week or month.  It’ll take quarters.  In the meanwhile, retracements like the many that occurred since 2006 and are plainly visible on the above chart, are only pauses in a long march higher.

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December 13th, 2011

Revisiting Semiconductor Industry and Stocks

There’s one industry group that stands taller than the rest in the amount of frustration and tears it’s brought to investors’ eyes over the last ten years.  Many thought the industry would recover after the excesses of the Tech Bubble was wrung out of those stocks with the Crash of 2000-2003.  Alas, the group has failed time and again in its attempt to climb above a wall of resistance.  Only a handful of individual members of the group have seen their stock come close, let alone surmount, the highs set in 1999 and 2000.  But hope springs eternal.  When the market regains its strength, this groups will make another attempt to break through the wall and, perhaps, this time successfully move out of the range.

Last May (see:What’s Happening to Semiconductor Stocks), I wrote:

“As bulls and bears struggling it out for control to determine if the semiconductor group can final cross into territory not seen since after the Tech Bubble burst in 2001, the decision every individual investor with a stake in that struggle, like myself, has to make is whether to sell any or all of their semiconductor-related stocks today or should they try to weather out what could be a the long and possibly disappointing struggle of the big boys. Furthermore, how long might this contest take? Weeks? Months? Quarters? And what opportunities, if any, might be lost by having money tied up in semi’s?

 

The Bulls failed in 2003 and 2007; there’s no guarantee they won’t fail in 2011. I think I’m going to step back a little and watch this from the sidelines.”

That was the correct decision for many reasons.  The Semiconductor Group was able to march up to the target but then its struggle turned out to also coincide with the European debt crisis and the impact that had on our markets.  Here’s a more recent long-term view of the SMH (Semiconductor Holders etf):

SMH (Semiconductor Holders) 12/13/11

Looking at SMH can be a bit deceiving because the charts of each of the 17 stocks comprising the eft look so dramatically different.  Yet there are some similarities.  The most common is that all are close to another attempt at changing the prevailing descending trend.  One example is TXN (Texas Instruments):

TXN 12/13/11

TXN (Texas Instruments) 12/13/11

Another is BRCM (Broadcom):

BRCM (Broadcom) 12/13/11

A third is INTC (Intel):

INTC (Intel) 12/13/11

We are all short-term traders and these are all long-term views but …… if and when the semiconductor industry is able to cross above its major resistance level (if we live that long) then they should provide years of solid growth and capital gains.