March 15th, 2013

Food Scarcity, Food Stocks and Market Correction

imageA oft-repeated refrain these days concerns the absence of significant inflation reported by the government.  However, those who frequent supermarkets complain about increases in food prices.  A recent page in the Financial Times included the following headlines; it’s enough to turn you into a survivalist, or “prepper”, begin building a bunker and store a food hoard (click on image to enlarge):

Food Prices

And what’s happening to the prices of companies in the food stuffs chain?  Not surprisingly their moving higher (being swept along with the rest of the market?).  We usually think of food stocks as safe havens to run to when the market gets shaky but, this time, there may be some strong fundamental drivers (along with major central bankers around the world flooding the market with their currencies) behind what could turn into dramatic food inflation and higher prices for the sector (click on symbols for charts; parenthesis are yield, volatility and relative strength):

Typically, these stocks have low volatility, offer dividend yields and, with reportedly a worldwide food shortage, may be perfect places to park some money as you sit out a market correction which could come during the “go away in May” seasonal market lull.

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June 12th, 2012

Cramer and One of My Five Lines in the Sand

I informed Members in their June 3, Weekly Recap Report that “the market has been in a 30% trading range (1050-1365) as the economy works its way through the ruins brought on by the 2007-09 Financial Crisis.  While we’ve been glued to news stories about one crisis or another over the past three years, we fail to see that, underneath the surface, the economy and the market have been in a healing process.”

I included in that Report a chart onto which I inserted five critical trendlines, levels at which the Market has pivoted (reversed direction) from 5-7 times over the past two and a half years.  I also suggested that Members “click on the image to enlarge it, print it out and past it over your computer …. we’ll be looking at it throughout the summer watching for the turn.”

On CNBC’s Fast Money show tonight (to see clip, click here), Cramer revealed a bold prediction by Carolyn Boroden, a highly regarded technician on Wall Street.and one of his “favorite” technical analysts in an “Off the Charts” segment.  The analyst predicted that 1265, the point at which the market seemed to have turned up last week, would be a line in the sand.  It might actually turn out to be the low for the year followed by a run to as high as 1465.  That technical analyst based her interpretation of the chart mostly on Fibonacci time and level measurements which were beyond my understanding.  But what I found most interesting is that the levels mirrored almost exactly the trendlines I’d presented to Members two weeks ago.

Now that Cramer has pulled the covers off a market timing analysis that closely correspondents to one that I distributed to Members a couple of weeks ago, I wouldn’t be committing any breach with Members’ by now including that chart here:

Interestingly, Cramer and I aren’t the only ones having focused on the importance of the 1265 level.  Yesterday, in the Minyanville post The Single Most Important S&P 500 Level, Kevin A. Tuttle wrote that over the last dozen years, the SPX has crossed, retested, and breached this level 12 times.  According to Tuttle,

“When adding the melodrama and sensationalism, Wall Street scandals, global tensions, political finger-pointing, misappropriation of funds, struggling economics, quantitative easing, and the US’ skyrocketing debt load, it can become somewhat overwhelming to ascertain potential direction.  It’s the whole “forest for the trees” idiom. My firm believes that no single individual or institution has the mental capacity, intellect, or quantitative ability to comprehend the amalgamation of all global fundamental factors to derive a meaningful conclusion about the general direction of the market without employing the demand factor, or better said, the law of supply and demand.”

I, said as much to Members in my Report of two weeks ago.  I confessed that I
“…. don’t have enough time for that and throw my hands up when it comes to trying to evaluate and assess the potential impact of the news flow from around the world.  I find it overwhelming and I just don’t feel up to the task.  But I can look at the above chart and identify important levels where the supply and demand for stocks came into balance and created turning points in the past (even if temporarily) and may, with a high degree of probability, do so at the same levels again in the future.”
The low of last week may have been one of those critical turning points.  If it was, then it behooves investors to begin putting some more cash to work because the summer break may be short and the run to higher ground may begin sooner than most anticipated just a month or so ago.

May 21st, 2012

Echoes of 2009, 2010 and 2011

Today’s post features excerpts from the Recap Report I sent to Members this past Sunday evening. After seeing today’s (Monday) recovery, I thought it would be worthwhile for all blog readers also to see it.

As part of each Weekly Report, members also see the current position of the Market Momentum Meter and what extrapolation of alternative market trends in terms of S&P 500 levels over alternative time horizons might produce in respective Meter signals.  This is important for evaluating true market risk and portfolio strategies for dealing it.

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This week’s Report is very difficult to write. There was so much going on last week and the market acted so horribly. Europe was still a huge question mark, the over-hyped Facebook IPO was characterized as a disappointment (to all but Zuckerberg and about 1000 other insiders). Worst of all, the market had its worst decline of the year with a drop of 4.30%; the tech heavy Nasdaq Composite Index did even worse with a 5.28% decline. Stocks in the Model Portfolio fared poorly declining 5.95% but fortunately the 40% cash position cushioned the portfolio’s net drop to more constrained 3.92%.

This is the third year in which the market has tanked entering the summer months (the “sell in May” syndrome working overtime). The one consolation is that in both of those prior instances there was a respite and early stirrings of a recovery soon after the Index penetrated below the 300-dma (in time not in level). This Friday’s intra-day low touched the 300-dma and closed just above it (click on image to enlarge):

I know this looks complex with many horizontal trendlines but one can think of it in terms of the market climbing up a step set of stairs. Each resistance level that the market has successfully crossed above winds up later being a landing it steps on in preparation for the assault on the next resistance level.

That’s what may be happening again (speaking technically only and putting aside any discussion of the continually evolving fundamental causes like Greece, unemployment rate, declining price of gold, oil and other commodities, a harder than expected landing in China and the ever nearer Presidential election).

If this will be the third time around, then the current correction is close to the end/bottom. There may be another 2-3% left on the downside to 1250-1260 or to about the level of the neckline of the previous head-and-shoulders top.

As they say, there are harmonies (or echoes) in the market but never exact replicas. If this is the extent of the decline that the market suffers after having all this bad news thrown at it then the optimist in me thinks that any positive news on any front could result in a bottoming and reversal of direction again (and we won’t know what positive news it was that caused the market to reverse course until way after the fact).

Rather than thinking about how bad things could get, a better “contrarian” approach might be to think of this correction as our last opportunity to climb aboard the train that we missed climbing on three times before (2009, 2010 and 2011 bottoms). Some called the March, 2009 low at 666 as a “generational bottom” and it truly was. We had an opportunity to make up for being to fearful to act then in 2010 and again in 2011. This may be the next and hopefully last opportunity. Let’s not obsess above the bottom of the value and look instead to the climb up the other side to the market’s previous all-time high peak of 1576 made in October, 2007.

May 16th, 2012

The Difficult Choice

The times aren’t easy for market timers.  The market has declined around 6% since the April 2 peak of 1419.04 and the anxiety level is rising.  The question of every market  timers lips are: “Should we sell into this decline and, if so, how much?  Is this a collapse similar to the stealth bear market brought on by last year’s Federal budget deficit crisis, the S&P downgrade of US debt and the deepening lose of confidence in the Euro currency?  Or, as many have discussed before, are we merely going through a typical “sell in May” correction which, if we stay put, we’ll recover from relatively unscathed in the fall?

Contrarians might take the opposing side and ask “Should we take advantage of the opportunity presented by lower prices and begin to pick up some bargains while we have the chance?”  As the saying goes, that’s what makes a market.  Two diametrically opposing views leading to two opposite courses of action, both coming from the same set of facts.

Unfortunately, the chart of the S&P 500 doesn’t provide much insight as to the best course of action.  I first began surveying what I called a “congestion zone” on April 12 in “Identifying the Boundaries of Stock Chart Congestion Areas” and followed that up on April 23 with “The Lower Boundary is Becoming Clearer“.  Here we are, just over a month later, and without any clearer idea of what the boundaries of the zone are or whether we may have actually fallen through the bottom of the zone and began a downward trend.  The striking thing is the apparent similarity between March-April hump this year and the April-May hump last year.  Let’s hope the slide when the Index crossed below the 200-dma last year isn’t repeated this year.

The market index has fallen through the lower boundary of what could have been a flag pattern.  It fell below what I was hoping would be the neckline of a small head-and-shoulders pattern.  It fell below the 100-dma and is quickly approaching the 200-dma (which, coincidentally lies just above the 300-dma).  If last year is any example, then the selling could again be quick and deep.  But the recovery 4-6 months later was just as sudden and it may be so again this year.

The Market Momentum Meter was tested against nearly 50 years worth of stock market history and in the process identified the conditions (as reflected in the relative positions of the moving averages and the Index itself) under which exiting the market was the best strategy.  At other times, staying in the market, regardless short-term fluctuations, was the best long-term strategy.

So far, the Meter is still signalling a full commitment.  However, extrapolating further straight-line declines of an average -0.168% per day (the average daily rate of market declined between March 26 and yesterday’s close), the signal would turn a Cautious/Yellow when the Index hit approximately 1290 and a Bear/Red at 1240.  Coincidentally, those are the approximate levels of the 200-dma and of a long-term trend line that has been the locus of multiple pivot points since the Tech Bubble began in 2000, respectively.

Last year, however, the market’s decline was so steep and rapid that the Meter’s exit signal was too late.  Furthermore, the recover was rather quick so that it failed to signal a timely return.  Unfortunately, the difficult choice being faced is between violating our discipline and sticking to the discipline and risk further losses.

March 26th, 2012

“Sell-in-May” in 2012, too?

In my weekly recap report to members yesterday, I wrote that “having a ‘game plan’, some expectation of the market’s near-term direction, helps put context to individual security trading decisions.  That game plan may turn out to be precisely correct or widely off the mark.  In any event, your game plan should give you more confidence in the decisions you ultimately make.”

My “game plan” foresees a “collision”, or convergence, between two significant chart patterns, or paths:

  1. the trendline extending through several key pivot points that occurred during the 2007-09 Financial Crisis Crash.  I described that trendline on March 19 at the area of 1435-1440 because “that’s approximately the level of the higher of two alternative necklines of the 2007-2008 reversal top of the 2007-2009 Financial Crisis Crash.
  2. a narrowing ascending “spiked” channel boundaries of the market’s move since the end of last November.  “This narrowing, trading range can’t continue indefinitely and I believe will be, in all probability, resolved with the market falling below the bottom trendline as contrasted with a highly unlikely blow-out cross above the upper boundary ….. sometime towards the end of April.”

The chart I included in the report depicting that “collision” follows:
Coincidentally, that projected “collision” coincides with what likely will be the launch of the seasonal “Sell in May and go away” mantra.  Taking that course of action in 2010 and 2011 would have been the right move; doing so this year may again prove to be best decision.

Supporting that view but from another direction based on Elliott Wave counts [a technical approach which, in full disclosure, I don’t follow or believe in], Bloomberg BusinessWeek reprinted a report this morning from the technical analysts at UBS AG in an article entitled “S&P 500 Index May Begin Correction: Technical Analysis“.

““The S&P 500 (SPX) is trading in a wave 5, which suggests the market is on its way to a first important tactical top,” Michael Riesner and Marc Mueller wrote in a note yesterday. “The current rally is driven by fewer and fewer stocks and this is usually something we see at the end of rallies or bull moves….a setback could last as long as 10 days, dragging the benchmark gauge for U.S. equities to retest the 1,340 level.”

Where did they come up with 1340?  A 5% decline to 1340 would bring the market to a level where it last pivoted and, thereby, create a trendline that soon will be identified as the neckline of an emerging head-and-shoulder pattern with the decline completing the formation’s head portion.

So if you feel that the market has been running away from you, if you are looking to take some money out of fixed income investments that are currently generating a nominal yield and putting it to work in equities then I would recommend that you wait.  If you have some nice gains from having been adventuresome and put bought stocks last fall when everyone was scared to death by the European sovereign debt crisis then taking some profits could also be prudent.

There’s no need for predictions because the market will tell us within the next several of weeks its future direction.  A move above the 1425-35 area will indicate further advances.  A move below 1380 indicates that “sell-in-May” returns for a third year and purchases can be deferred to September-October.