Weekend July 28, 2012
Investors flocked to dot.coms to form a market top by March 2000. Now it appens again, the bloom is off
the social media rose. Each top has had the same social mania mood but prompted by a different market.
March 2000 Dot.coms
Fall 2007 Real Estate
Fall 2012 Social Media, Real Estate in Foreign Markets, Banks Gambling with Zero Interest Rate Loans using FDIC guaranteed deposits
The media convinced the majority to stay in 1.4% Treasuries while companies like CLF (in business since like 1847, a bit longer than Facebook) went begging for buyers, now expect more rear view mirror thinking like this headline
- July 27, 2012, 7:32 p.m. ET
U.S. Hit by Weakest Postwar Rebound
Sure that is true but, sentiment towards the markets shifted from negative to positive this week. Some readers point out to me that there are many high level meetings scheduled the next couple of months. The suggestion is that any one event could de rail the recovery in the markets. Yes there are lots of meetings the next two months. but there were the last two months as well. Do politicians really accomplish anything at such meetings, not really, I have sat through plenty of them at the city or county or university level. What happens is that politicians kill time as they have the last few months with endless 'fixes' for the Euro, until sentiment changes and then of course the politicians declare victory and demand credit for 'fixing' the crises de jour.
My reading indicates a grudging admission among analysts and such that the market might get to 1420, then they will be shoring again. This virtually guarantees the market will go higher. Again the market will be fueled by money coming out of Safe Harbor assets of low yielding bonds forced back into the market. The negative headline above will gradually morph over the next couple of months a in this sort of progression, just a hypothetical on my part.
Investors Putting Toes in the Waters of a Rising Market
Sun Shines on Traditional Companies like CAT and XOM as Confidence Builds in World Economy
Emerging Market Shares Garner Renewed Interest
Head for Mongolia-the New West!
Copper Scores Surprising Gains as Confidence Builds in Housing Sector
Commodity Sectors Register Surprise Gains, What to Expect Next
Finally expect a spate of new ads from brokerages like Merrill who want to advise you on how to become wealthy. These will only appear after the SPX has risen at least 100 points. Recall I noted that Fidelity had created a Bond Investment Center as rates fell to all time lows, late to the party as usual.
Such headlines will simply stop discussing disasters like Zynga or Facebook. The lead article above notes that Amazon took years to get going while it built computerized warehouses. With $10 B in the bank Facebook FB has plenty of time and money as the article notes. Clearly the writer is still in the defensive phase for FB. The problem here is that Zynga and FB do not produce anything, Amazon does, it is the new national Macys, Foleys, Saks, Target, Sears. Zynga is simply the 1930s Monopoly game brought into current times, unemployed with nothing to do in the 1930s embraced Monopoly then, as they did Farmville now. And as I mentioned earlier this week, Zuckerberg said his whole point was to improve communications between people, not to make a lot of money, remember he is only 26.
Okay let's get to it shall we, what to expect.
The Road Ahead
As usual we will focus on the internal indicators of the market. Here are three or four that should be of considerable help in identifying an exit point for us.
SPX Bullish Percent
Note I have been adding 125 (half way between 50 and 200) and 162 ( halfway between 125 and 200) MAs, I like this ribbon approach. Note that the SPX went bearish as it fell under 50% in late May. That was the low and as we have noted in our update last weekend, despite what you read the market was going up. I suspect, which is all anyone can do, the party will not end until that 85% level is regained.Note that the Index is below three of the longer MAs but above the shortest. I mention this wanting the reader to note that the different indicators are at different stages of development.
Weekly High Low
This is what I mean about different stages of development. here the MAs are all moving up or sideways. The indicator is at mid point. There is plenty of room for the rally to return to the February highs.
On first glance the VIX might suggest that this will be a short lived rally, it is not far to the previous low. But remember this is purely a sentiment index. Investors must be lulled to sleep again, assured that Bernanke and Darghi have thngs under control. Just yesterday I watched some politician tell Bernanke to 'get to work' on the job recovery, as if there were something Bernanke could do. Sentiment will need to be assured to the point that the fear recedes, bringing the Dollar down and bond yields up.
Back to 2007-2008
Note this is the VIX the year before the crash, exactly four years ago. Note the volatile nature, even more so than now. Huge spikes of uncertainty followed by huge drops indicating confidence, recall that a low VIX is a show of confidence and a high is a show of fear.
NASD Summation Index
The small stock represented by indexes like the Russell 2000 have underperformed the larger averages. Indeed it was only the Dow Industrials that were holding up last weekend, the Transports had already tanked. But more on that later, here the NASD summation has 700 points to climb to regain its February high. Patience.
Towards A New Model of Technical Analysis
Click here to re examine our analysis of the SPX this past week. We noted that it was in an uptrend and had held support. We went so far as to challenge the Dean of Letter Writing, Richard Russell, who had declared a Dow Theory Bear Market. Here is how Mr. Russell reached his conclusion, and why so many were absolutely positively certain the markets would head down.
Charles Dow created his Dow Theory about 1896. The idea is that one set of companies, the Industrials, produce things. The other set Transports, move both raw materials and finished product. The two indexes need to move in tandem. If both move to new highs we have a buy signal. If both move down we have a sell signal, that is an over simplification but the basic idea.
Back then of course Charles had to calculate the daily averages on pencil and paper. Indeed this did not change until the advent of personal computers in the late 1970s. Now however, everyone has the ability to follow, as the Doobie Brothers might say, minute by minute. The 300 point drop shown by the blue circle on the Transports above convinced near everyone that the markets were doomed. Actually the RUT and NDX and QQQ did not drop like this. But with the hysteria over a 30 point drop in Apple, the Stock that Cannot Drop, everyone from Art Hill to John Murphy to you name it was bearish.
This happens now again and again. A market will fall below a level and quantitative programs generate sell signals. But as the crowd piles in at the low, the market runs out of sellers and reverses. The same thing happens on upside breakouts.
Another interesting aspect of this is that both the Transports and the price of oil fell pretty much together. Now that oil is back over $90, the Transports jumped While this may seem counter intuitive, it really reflects the fact that the markets can afford the higher price of oil.
The bottom line is that technical analysis needs a re-write to incorporate sentiment and the fact that the world has embraced regression analysis. This keeps most believing that the trend will not reverse, technicians have in that way all become economists.
Regular readers will recall that I originally recommended Central Fund CEF shown in blue. It dropped the least which is reassuring to those watching daily values of their portfolio. I recommended GDXJ only after it fell to the $20 level, shown in red. XME has lagged an just now picked up, XES has performed well. But the point is, the greatest rebound percentage is liable to be in GDXJ not CEF. I am thinking of shifting funds from CEF to GDXJ for that reason. The miners have horribly underperformed the gold price.
This would be a good time to review Irrational Ratios. That post shows that the XAU to SPX ratio is back to March 2009 levels. This suggests that it is still time to buy the miners. Dave Rosenberg has suggested that while the miners have lagged gold, in the latter stages of the gold rally they will outperform.That time may have well arrived.
Well I am already to the 1400 word count, that's enough for this post. The next post will examine the very near term. And Peggy Noonan gets causality exactly backwards in her column the Weekend WSJ.
The Bottom Line
The sentiment switched from negative to postive this week lifting all indexes Wednesday through Friday. Short sellers had to buy back and their quantitative programs forced them into long positions. That gave the market a double buy which rocketed the Dow to back to back 200 point days. That is the first time this has happened in 3.5 years. That is a clue to what lies ahead but most 'experts' looking backwards are still overly cautious looking to short again. They will be disappointed.
The New Model of Tech Analysis for this extended period of stagnation (2000-2018) is understanding that money is chasing its own reward. it matters not that the economic recovery is slow, in an effort to make more money hedge fund managers will chase stocks, gold, and oil all higher.
Think of the markets as an hourglass. The sand just ran out of the risk on globe (stocks, gold, oil) to completely fill the risk off (bond and the dollar) globe. Wednesday sentiment turned the Market Hourglass over. The sand of sentiment is now pouring from risk off to risk on. This will happen in classic Elliott fashion. Let's review
Wave One or A - a move begins seemingly out of nowhere, doubted by most but taking the market by surprise. Numerous theories on why the 'market is wrong' are advanced
Wave Two - A pullback occurs allowing the above group to say ' I told you so'
Wave Three - A tsunami of buying overwhelms the naysayers taking the markets ever higher
Wave Four - Four is an alternate in character to Wave Two, if Two was strong Four is weak or vice versa, but the trend is interrupted either way.
Wave Five - a Weaker advance with less breadth than Wave Three but it registers a new high, this is precisely what happened in the Dollar and Bonds this past week!!!! Then both collapsed.
Whether we will see a five wave or an A B C advance is not known but this should typify the sentiment as it unfolds
Thanks for reading The Market Perspective
The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks. Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned. Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital. No guarantee can be made to the accuracy of text or charts.