Weekend October 20 2012
A word of explanation
I repeated several of our comments from this past month to reinforce what has so far turned out to be rather good advice, our exit in mid September. In doing so I noticed that despite our use of the spell check we have been guilty of numerous typos. I am not one to make excuses but my assistant Bentley while a great friend and at least as helpful as any economist at a brokerage firm, is not much on proof reading. After retinal detachment surgery in both eyes I am delighted to be able to see. But as my opthamologist observed as much as we have beat up the back of your eyeballs no wonder you see some spots. I frankly don't see the monitor as well as I used to. So please excuse my errors, they are unintentional. I hope the value of the message outweighs these imperfections.
A Socionomic Warning
Conventional wisdom has it that a weakening economy causes businessmen to be more cautious.
Socionomics turns this idea on its head grasping that mood is endogenously generated. A socionomist takes the position that cautious businessmen result in a slower economy. Now consider this observation from Ingersoll Rand CEO Lamach
You're seeing corporations being a lot more cautious about planning, and that is translating into being more cautious about spending and hiring.
WSJ Third Quarter Revenue Hits Air Pocket Front Page Weekend WSJ
Our cautious warnings that the risk reward of being long was dramatically shrinking all came true since our exit Sept 18. Google, IBM, and Apple got socked this week, the CITI CEO got the boot, Beirut Lebanon had its most destructive bombing in nearly four years killing an adversary of Assad, and the Dow tanked 204 points on its 25th anniversary of October 1987. What could go wrong indeed!
Even Big Tex, the iconic 62 year old statute at the Texas State Fair Grounds burned up Friday, ie, October has lived up to its usual dramatic downside. Still I don't think a 204 point drop in an index at 13,000+ is a plunge which is how others are describing this.
For New Readers
Here is a compilation of various comments at TMP since September 15 2012. our position has been that a declining risk reward from the markets made banking our profits by Sept 18 a reasonable conservative idea. Our warnings are coming true.
9/15/12 An alert reader pointed out that the market had not exceeded its Bollinger Bands since 2010!
Does anyone have a clue as to why employers would want to hire people just because the FED is literally printing (if you and I did this it is called counterfeiting) money to buy bonds flooding the markets with cheap easy to borrow money.? The answer is no, it is the classic government knee jerk response,
9/18/2012 I sold virtually all my positions this morning.
Regarding the NYSE Advance Decline Volume indicator we wrote
As Mark Hulbert notes in his column above this has been a tremendous, indeed, historic rally. This was a huge run of 5500 points. If it turns out this is THE fall high in this indicator,it is telling us to expect lower prices this Fall.
The Harmonic Convergence of August 1987. This was a world wide metaphysical event back then. It was as good as things would get. And so I wondered could we be in a similar period now? We are 25 years forward from 1987 and sure enough
9/19/2012 In retrospect we did not exit too earlly but at the market high from the move up June 1
I put the graph of the DOW from 1987 up for good reason. it is easy to exit when the mood is positive but quite difficult once sentiment turns dark and stocks are not well bid.
I am certain that I have exited too early. The markets will no doubt run higher. But with a top expected between now and the election one will need to be very nimble, as Art Cashin likes to say, in picking an exit strategy.
Put another way, staying long here is a bet that one will be wonderfully omniscient, in a market wwith the RSI already topped out at 72.22 and with MACD at 1.07, yes one will pick the very moment before the mood switches and all race for the exits.
TMP Wednesday Sept 19, 2012 commenting on GDXJ
Wednesday Sept 26 2012 7:00 AM Central Time
Evidence continues to mount that the rally from June 1 in stocks, oil, and metals is ending.
Thursday Sept 27 2012 An alert reader suggests this article about the slowing economy is of interest, he's right. Boeing Deere and CAT are all predicting lower earnings.
10/2/2012 Regarding the Volatility Index we wrote
Now this is interesting. Despite an up day on Monday the VIX had an up day as well. Notice
the quiet series of higher lows since mid August, all of Sept is slightly higher
the rounded bottom formation which dates back to the end of June.
That VIX closed over its 50 day MA
that the other MAs are converging
This is how a market bottom is formed. Each pullback sees slightly more buyers coming into the market. The MAs come together, the shortest MA starts climbing, a first attempt to break through fails but as we say, a higher bottom is then formed. This bears watching very closely.
10/4/2012 Regarding crude oil we wrote
Above, the line in the sand appears to be the 200 day MA around 95-97. after the Feb to May period, one more try into that territory failed in Sept. Crude is now down 11% from there. The feverish pitch of activity in the Dakotas, south of San Antonio, and in the Permian Basin, will slow now that price has fallen below all the MAs
Friday October 12 2012
Elwood: It's a hundred and six miles to Chicago, we've got a full tank of gas, half a pack of cigarettes, it's dark, and we're wearing sunglasses. Jake: Hit it.
Elwood, The Blues Brothers head for Chicago
Well three weeks left to the election. Perhaps that has the markets stalled. Let's take a look at two views of where we might be headed. First the Gathering Storm of the VIX
The Bottom Line
Parabolic sell signals in real estate shares, Wells Fargo bank, and gold suggest a top here of some significance. A buy signal in TLT suggests defensive action by many investors. Longer term the XLF looks very toppy as we anticipate a long term top dating from the March 2009 low. Remember all markets do not top simultaneously. Again we rate the probability of a long term top forming within the next few months as THE most likely outcome for the markets.
Today Weekend October 20, 2012
Like Donna Rice we offer No Excuses for our decision to exit the markets September 18. We suggested that the risk reward for longer term investors was not here. We even ran a piece highlighting Harry Markowitz Nobel winning theory about the risk reward frontier suggesting that readers decide where their frontier really is. If you exited you did so with profits and were able to watch all this excitement from the comfortable sidelines.
The topping process is just that - a process not an event. There are warnings that are ignored, we have noted the lower earnings predictions for major companies over the last month. Investors tend to crowd into popular stocks near the end of a move. It was the Nifty Fiftyin 1972 and the dot.coms in Year 2000 and real estate stocks in Fall 2007. Now Google, Apple, and IBM have out of the blue declines which just goes to show what happens when unrealistic expectations are not met.
The Hot Tech Market or October lives up to its Reputation
This has meant the large cap stocks are still up but the smaller ones are failing. Overseas Shangahi topped in Fall 2010. One might do well to re examine the chart of the 2007 market top we printed this past Wednesday October 17, here it is again.
Is this paranoid schizophrenic activity or what?
- SPX drops 160 points form July to August
- SPX rallies 180 points form August to October, the top is in
- SPX falls 140 from October to November
- SPX rallies 100 in two weeks.
Now honestly this is not a Warren Buffet John Templeton market. It is a picture of how a market tops and this sort of jump in jump out activity has existed since the high in February this year, 2012.
All the comments and charts to this point speak to the coming top we have been describing to you for months. I began this blog to force myself to be accountable to readers and be prepared for the next market top. In that I believe we have succeeded.
Okay that was a decent rundown on the more conventional news, now back to TMP view of things.
NYSE Advance Decline Volume Weekly
At TMP we believe the internal indicators of what stocks are doing are often more informative than the price charts themselves. Here the NYUD displays what may be a 4th save on the chart. This suggests a fifth wave to follow but remember I am in cash, just watching.
Weekly New Highs New Lows
Here is the same up down up down pattern as in the chart above. Notice how quickly the market reverses on a new high each time. This is what we meant that staying long will require incredible timing to pick off a profit. The current position of these indicators is strictly mid stream, not a great buy nor a great selling opportunity.
NYSE versus QQQ
The black line the QQQ is diverging from the big cap NYSE shown in red black bars. This is another sign of impending weakness. And certainly the weakness in GOOG, AAPL, HPQ, DELL is weighing the QQQ down. Traditional PC makers are like Dell and HPQ are seeing sales slide with the move to tablets and mobile. And this is impacting chip makers. Hence the slide in the QQQ, an index of tech stocks.
Putting it all together here is what we have.
I cut the indicators down to the 50 day Moving Average and the Bollinger Bands. Price simply got too far ahead of the MAs. Note how the price had spent most of its time at the top of the Bollinger Band in its move up from June 1. Since the Sept high it has been in a downtrend channel, more obvious on the two hour chart. The correction has taken it back to the 50 day MA and the lower Bollinger Band. RSI has returned to its midpoint.
Note to Readers We use VIX as an indicator, we do not recommend positions in synthetic VIX wannabes or any other such creation subject to the vagaries of future re-investment.
As we have noted the VIX has begun its series of higher lows. Friday was a 13.51% move up. that will put VIX in a higher range.But stocks could still bump up off this over sold condition. The effect would be to keep VIX between its shortest moving average, the 50 shown by the blue line, while beginning an assault on the higher MAs.
Romney's bump from the first debate has made the campaign more of a real contest which interjects more indecision into things. This argues for a bounce this week. But I don't know that we have a bottom yet with the election Nov 6, just two weeks away. Oh yes about GDXJ
As I have often stated, there are many blogs that track Elliott Waves, this is not one of them. But the top is either Wave 3, or 5!, and surely there are five waves between what I labeled as the bottom of 2 and the top of 3. With a bottom slightly higher than the last two this argues for a low but as we say there is a lot of indecision out there.
The guys at stockcharts are forever contrasting Consumer Staples XLP versus the Consumer Discretionary XLY ETFs. But here is another way to look at it, the price of gasoline.
First look a few charts back at the SPX from August to October 2007. Notice how the market advanced and then collapsed just a quickly Here is the same view in unleaded gasoline. Sure there is plenty of oil as I have said but lower demand, less driving, and a slowing economy are all on display here. Make not mistake, a declining price of oil and gasoline means a weaker economy. Here is another reliable indicator, the willingness to be on the future of heavily indebted MGM Casinos,
Shanghai SEEC peaked in the Fall of 2010. MGM did the same a couple of months later. Since then ith as beenin this now obvious downtrend channel. A weekly close under $90 will be quite negative.
MGM is losing money, has a 142% debt to equity ratio, and is trading below book value. This weakness is another reliable indicator of where the market thinks the economy is likely headed. In case one thinks I am just picking on zombie debt dead MGM, here is LVS.
Las Vegas Sands
Last I checked Mr. Adelson's LVS had %5 Billion in the bank. But the pattern is a massive multi-year head and shoulders with a neckline at 35. The right shoulder is lower than the left.
Falling Revenue Dings Stocks, Front Page WSJ
Along with Aapl, Goog, IBM DE, CAT, MGM, MCS is about as basic an indicator as one can have. Note the decline is world wide. Note hte outside reversal week which dropped below all the MAs.
Our bottom line is that the market has the potential for another high but the number of question marks are keeping any rally on the ropes. A Romney victory might surprise and be a cause for a big final move up. An Obama victory may mean that some markets have already seen their tops.
Apple The Textbook Picture of a Parabolic Final Blow Off
The move from 2009 to 2012 was steep. But this year Apple has really gone parabolic as every fund on the planet has piled in to buy. This is oh so typical of social mood and herding ain the final throes of a market move.
Foxconn has been unable to supply all the iPhone 5s to meet the expected world wide 50 million sales for 4th quarter 2012. We write these reports on a Macbook Pro but this is how manias end.
Our friend Matt Lampert resident scholar at the Socionomics Institute, presents findings at Oxford University on recent European Elections.
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.