October 10th, 2012

Assessing Market Opportunities and Risks

It’s been some time since I last posted because, well, because there wasn’t much new or much positive to write about.  As a matter of fact, the last time I wrote about the market was on August 29 in “Every Trading Range Is Not a Reversal Top“; the market is a mere 1.56% above the level at that close.

I pretty much fully invested now; I like most of the stocks I own since I’ve been cleaning house as this bull run has progressed.  There are a ton of stocks that look like they, along with the over-all market are struggling to clear an intermediate sort of resistance level (the market Index may actually be stuck in the claws of a tiny “buyers’ remorse” correction after having barely crossed above that resistance at 1420-1425.

One must always evaluate the market in two ways : what are the upside opportunities and what sort of downside reversal risks are there.  When I step back today from the market’s day-to-day noise, I see upside potential to the 1567 all-time high level.  However, I also see what I hope will be only short-term obstacles.

My longer-term optimism comes from the fact that the market has steadily crawled up the lower boundary of an ascending channel emanating from last year’s low connecting with this year’s March low.  The parallel upper boundary of the channel conforms nicely.

Furthermore, this spring’s correction can be interpreted as a flag pattern.  Traditional chart reading rules of thumb suggest that the consolidation pattern will be approximately midway between the trough of the channel and the peak.  If that turned out to be true, then the peak should be somewhere in the 1600 area (1410/1125*1280), or not far from the all-time high.

The fly in that ointment is volume which just doesn’t seem to be cooperating so far.  Since 2011, the 50-dma of daily volume of the S&P 500 stocks has been trending lower (with the exception of last summer’s correction).  Even more ominous is the divergence that’s emerged between the Index levels and the on-balance-volume.  For those who need a refresher, OBV is Joseph Granville’s indicator in which volumes on up days are added and volumes on down days are subtracted from a rolling total.  A declining OBV indicates that volume on days when the market closes lower tend to exceed the volume on days when the market rises.  A divergence indicates that a rising market isn’t supported by adequate volume.

There’s sufficient cash on the sidelines waiting to be put to work and fixed income with it’s low rates isn’t the place to put it anymore.  ZeroHedge had an interesting piece this morning entitled “Are Businesses Quietly Preparing For A Financial Apocalypse?” about all the cash sitting on corporate balance sheets.  If the uncertainty coming from Presidential Election, Fiscal Cliff and continuing Eurozone saga then a good chunk of that money, both investor and corporate, could come into the stock market and make up for the volume drought.

While prices haven’t indicated a reversal process emerging yet, there sure are a lot of risks out there, both fundamentally and technically.

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July 17th, 2012

Market’s Path to 1575

“Bear markets make you feel dumber than you are, the same way bull markets make you feel smarter than you are…..investing is a marathon, not a sprint, and do not let the bear market turn you into a sprinter.”  all you can do is That quote is from Vitaliy N. Katsenelson’s The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere in Barry Ritholtz’s popular Big Picture blog.  And how true it is.  It’s been incredibly difficult harvesting any capital gains for so long and it feels like the recent boring market when one ignores the drama of the political and economic background grinding out day in and day out.

But all that may soon change.  The market has carved out, for reasons that continually bewilder those of the fundamental analysis persuasion, a fairly clear consolidation pattern that it is trying desperately to break out of:

For this to truly be considered a flag, volume on the breakout needs to expand and the advance has to cross above the previous high at 1420.

But if everything works out as we hope, then the outlook is extremely promising.  According to traditional charting rules-of-thumb, the consolidation pattern should be at about the midpoint of the range from the trough to the ultimate peak.  The move from an October, 2011 low at the end of the Congressional and the beginning of the EuroZone budget stalemates to March 2012 peak was approximately 26.5%.  Advancing a similar 26.5% from the June bottom of this recent consolidation would carry the market to about 1575.

Whether it’s coincidental or not, the 1575 target happens to also be about the market’s all-time high as measured by the S&P 500.  As we hear all the negative news still flooding the media (to which must be added the impact on consumer prices from the devastating impact of the heat wave on crop yields), it seems hard to believe that the market can advance to those levels.  However, all that negative sets us up for positive surprises.

Whenever I try to balance the news I hear against the market’s action I fall back to a chart I’ve frequently featured here: The Cycle of Market Emotions.  I ask myself what emotional state does it feel that most market participants are experiencing today.  Today, you can’t argue that most players continue to express feelings of fear, desperation, panic, despondency, depression and, sometimes, “hope” than they do emotions of optimism, excitement, thrill or euphoria.  These range of emotions are actually bullish because they signal that the market is closer to a bottom than a top.
The market’s ability to continue advancing above 1365 will give me the confidence I need fully commit the remainder of my cash reserves.

June 28th, 2012

Follow the Leader: S&P 500 vs. Nasdaq Composite

The big build-up for the Supreme Court decision on Obamacare turned out to be a big dud (from the stock market perspective, that is).  The decision came, the market reacted for most of the day and, then, at 3:30 some new rumors concerning the European meeting this weekend surfaced and the market did a 180° turn and wound up the day nearly flat.  So the Talking Head’s discussions about how a court decision would bring certainty to corporate CEOs and finally encourage them to start hiring turned into a discussion about how it’s really uncertainty concerning the financial cliff, uncertainty about the future of the Euro, lack of transparency about the business prospects for the remainder of the year, yada, yada, yada.  I can’t hope to try to sort all that out and don’t want to pretend, like they do, that I do have it all figured out.  All I hope to be able to do is to try to remain nimble enough to perceive in which direction the majority seem to be leaning and, when the a trigger is pulled to launch some directional momentum, to climb on board for the ride.

For the past couple of days, one of the recurring themes seems to be that money is flowing into dividend and defensive stocks and out of tech and other growth areas due to what some have now discovered to be the leading edge of a world-wide recession, close to a world-wide depression.  I notice that the tech stocks in my portfolio, the stocks that had accounted for much of my Portfolio’s gains during the first half now seem to be lagging so,of course, the Talking Heads no say that tech does and will continue to suffer from the “world-wide recession”.  So I decided to step back and take a longer-term comparison of the Nasdaq Composite relative to the S&P 500 (click on image to enlarge):

True, the Nasdaq composite has diverged from the S&P 500 at different times but, over a nearly four year comparison, the similarity of the two indexes has been incredibly close.  If anything, the Nasdaq has been slightly more volatile of the two as to be expected.

This comparison drives home the truth of Benjamin King postulated in 1966, a principal that has been a core of my portfolio management philosophy for many years:

“50% of a stock’s price movement can be attributed to the overall movement in the market, 30% to the movement in its sector and only 20% on its own.”

Should I follow the Talking Heads and move money from tech stocks to more defensive stocks?  Probably not because if the market continues to correct tech stocks will too but if the market finally successfully crosses above the 1360-1365 zone of resistance then Nasdaq stocks will zoom higher.

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February 27th, 2012

2 x 10 Investment Lessons

Years ago, I regularly visited a site that offered nothing more than a wonderful,  limitless supply of Wall Street sayings, truths and rules-of-thumb.  When I found the market to be frustrating or demoralizing or I caught myself being giddy with optimism or self-satisfaction I would turn to the site and read some wise quotations from market pioneers or real, true stock market gurus.

I usually try to bring you fresh ideas and concepts but I need to bring this to your attention the following item which happens to be all over the Internet because 1) I think it’s so true and 2) you may have been missed it because today each of us is being continually inundated with information and data useful and otherwise.

Jeremy Grantham, British investor and co-founder and Chief Investment Strategist of one of the largest asset management firm in the world, Grantham Mayo Van Otterloo (GMO), based in Boston.  Grantham is regarded as a highly knowledgeable investor in various stock, bond, and commodity markets, and is particularly noted for his prediction of various bubbles.  He just contributed a list of his 10 lessons investors have to learn in order to survive and succeed as investors to MarketWatch.

Bob Farrell, formerly Merrill Lynch’s chief market strategist, pioneered technical analysis of stock movements and broke new ground using investor sentiment figures to better understand how markets and individual stocks might move.  Many years ago, he had come up with his own lost of 10 lessons for investors.

I’ve combined those two lists into new tablets of 20 commandments.  I suggest you click on the image, print it and post it prominently above wherever you make most of your investment decisions or do your trading.  Whenever you are confused and don’t really know what to do about a stock or about the market, read the list again … it will help clear your head and regain your balance.

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 3rd, 2012

First Trading Day Facts

There’s always much said about the relevance of the year’s first trading day and what it might portend for the way the rest of the year ends up so I decided to do my own research based on the S&P 500 Index since 1963 and found what I consider to be some interesting factoids:

 

  • The market closed higher 36, or 78%, of 49 years since 1963.
  •  Of those 49 first trading days in January, about half (26) resulted in a higher closing for the day.
  • When the first trading day resulted in a higher closing, 60% (16) of those years also followed with a higher closing.
  • Of the 23 first trading days that closed down, only 6 years also closed down.
  • The first trading day with the greatest gain was 3.59% in 1988; the market closed 12.40% higher that year.
  • The first trading day with the greatest decline was 2.80% in 2001; the market closed 13.04% lower that year.
  • The best correlations between the first trading day and the rest of the year was when the first days trading resulted in changes of 1% or more.
    • Of the 10 first trading days that closed higher by 1% or more, 8  were followed by higher year-end closes.
    • Of the 8 first trading days that closed down 1% or more, 6 resulted also in lower year-end closes.
  • Of the 31 years when the first trading resulted in a less than 1% change
    • 9 resulted in a lower first day close and 22 with a positive close for the day but
    • more than half (19) of the years closed in the opposite direction as the first day of trading.

For whatever it’s worth, the Bulls must push for a positive close of 1% or more for Tuesday, January 3, 2012 to increase the probability that the year winds up on December 31, 2012 higher than it closed last week; an up close of less than 1% just won’t cut it. Those interested in the statistics can click here .

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December 27th, 2011

The Mid-term Election Year Cycle: Redux

Many hang their hat on old Wall Street sayings like “As goes the first week of January so goes January” or “As goes January so goes the year”.  Another Wall Street rule of thumb  is the “Mid-year election year” cycle.  A year ago, in “Mid-term Elections in 2010 and the Stock Market“, I wrote about the Election Cycle Power Zone from a firm called Alpha Investment Management. Alpha’s research came up with the following interesting statistics:

“The Power Zone is 15-months long, beginning 30 days before the mid-term elections. This 5-quarter period has not been down since 1931 (Dow Industrials’ Total Return)…..The average return has been 25.5% plus dividends. The average daily return since 1931 has been 7.7 times greater than the average daily gain for all other trading days. A $1,000 investment in the Dow only during the Power Zone (31% of the time) appreciated to $68,200 as of the end of 2009. A $1,000 investment in the Dow during all other trading days (69% of the time) grew to just $1,800 since 1931…..If there is any time to be invested in the stock market, it is this.”

Since the end of the most current mid-term election cycle that began on October 1, 2010 is quickly approaching, it’s appropriate to see whether this rule-of-thumb is true or whether it’s another that has to be thrown into the trash heap because of this unusual and volatile market.

We were savoring the truth of the mid-term election cycle this past April and were confident that the market would soon hit 1430 by year-end, a level that was the rule’s average 25% above the previous September 2010 close of 1141.20.  By the end of this last April, the market had already run up 19.49% to 1363.61; advancing another 6.0 over the remainder of the year to meet the average didn’t seem like to much of a stretch.  But then Europe blew up in our faces (click on image to enlarge).

Mid-term Election Cycle 2011

The market closed at 1131.42 on September 30, 2011, the exact anniversary of the “official” start of the cycle on September 28, 2010, for just shy of a 1% decline.  What had started out looking like a rule-of-thumb with a long history of accuracy was stolen in a brief 4 months by the European financial crisis.

We’re not in the business of predicting but with just 4 trading days left in the Cycle (and the year for that matter), it looks like the recovery since September could bring some respectability back to this rule-of-thumb.  With last Friday’s close of 1265.33, the market was a disappointing 10.9% above where the Cycle began and far short of the average but still higher.

Perhaps the Mid-term Election Year Cycle needs to have a qualifying clause added to it:

If there is any time to be invested in the stock market, it is this ….. so long as nothing external interferes [he says with tongue in cheek].

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