Sat August 27, 2011
Overview
- Insider buying continues at a frenzied pace, can they be wrong, I doubt it
- Internal Indicators turn up
- Indices record higher lows
- Fear remains high but is subsiding
- We are short term overbought, a pullback early this next week is likely to cause even more cautious behavior, thereby missing out on a first half of Sept Rall
The Big Picture
- The rally from March, 2009 ended between February and May, 2011
- An initial Wave down appears to have ended this past week, prepare for a short term term rally
- In the very short term, three days up, one down and one up, indicate a short term overbought status, this suggests a pullback this week before going higher
- Consistent buying by corporate insiders argue for a meaningful short term low after the 400 point fall of August 8-9
Short Term Hourly Chart
This extreme short term view reveals a triangle pattern. But it also reveals higher lows i the index.
Ar left in the main panel observe the reverse head and shoulders formation. My take is that we have a neckline at 115. Note that this week's rally filed the gap left by the drop in mid August. I suspect the short term overbought indicated by the MACD at bottom, will result in the index pulling back to 115, testing, and then advancing into the middle of the month.
In the top panel, notice that on balance volume is slowly turning up. And that is really what one needs to know, no doubt that is why Joe Granville gave his indicator that name. On balance, is volume positive or negative, here slightly positive after all the negative press this week.
A Daily Perspective, the Fear Index of TLT and VIX
Technicians use market statistics to cut through the clutter of political talk and news event. Here we swapped TLT for VIX in the main panel. We showed you this Fear Dashboard three days ago.
Stocks are the green line, moving opposite the red black bars which are the VIX Volatility Index. The VIX has been making consistent lower highs, see the descending blue line. Friday the big red bar at far right was significant. The high was 43.84, the close was a whopping 8 points lower at 35.59. It was a 10.49% drop from the previous close. That is significant, yes I know I said that already but it is. At bottom the MACD has rolled over.
Still fear remains high as indicated by TLT's stubborn refusal to back down in the top panel. The blue line is the Exponential Moving Average, now at 105.75.When TLT breaks to the downside through that level expect headlines proclaiming 'New Confidence Arises in Investors as they Snap up Stock Bargains' That of course is the same group that tossed those bargains out the proverbial window August 8 when we were buying.
Longer Term Perspective - Weekly A/D Line for NYSE
Of all the reliable indicators this is the Big Daddy. Look back to late 2007. See how the indicator started breaking down though the multiple moving averages? The same thing has begun again, the 13 week EMA is curling over to the downside. At top the NYSE average has broken its EMA. At bottom the MACD has turned below its EMA. the verdict is in, the move back to S & P 666 has begun.
The Oil Market is the Economy
We over laid stocks in the green line for the SPX with Crude Oil, notice they are near the same formation.Notice they both bottomed August 8! This is not coincidence. A strong economy can afford high oil prices. A weak economy cannot afford high prices. Now both crude oil and stocks are rebounding from over sold conditions. The 95-100 are looks to be a likely target for crude oil. On the left scale that translates to 1240-1260 the 61% re trace we showed earlier this week. AT bottom MACD is turning up.
Bet on Ho Chi Minh City
Sometimes one anecdotal example can make the same case as multiple other complex indicators.
Yes I have consistently maintained that emerging markets topped last November. But some of the most profitable rallies in this bear market will be when beaten down examples rebound. They do that when the selling is exhausted, pure and simple. Again that was Joe Granville's reason for On Balance Volume. VNM bottomed with the market August 8, that is when I bought 100 shares. Friday, along with the VIX pulling back, VNM had a nice 2.66% bounce. 20.5-22 looks to be a reasonable target.
The Strategy of Proper Order Placement - Ahead of Time
Here is a great example of my point that some of the most profitable rallies happen in bear markets. Ralph Lauren is a mega success. We spotlighted his auto show in Paris, his designs are advertised in this Weekend's WSJ Fall Magazine, you can read about his son's successful ventures to link RL in cyber space here.
But the point is that RL hit a panic low of 105 August 9, then raced up for five days to 140, a tidy 33% gain. BUT, only if you managed to get the low price. I broke down the chart into shorter and shorter time periods, it looks like the low price occurred during one ten minute period, and then immediately reversed. It ran back to 125 that day, posting most of the gain on the way to 140!
No, I did not get it at 105. And who knew, well no one, that it would go that low. The only possible way to have purchased some, short of being at the NYSE RL post, would be to have placed orders all the way down to 105 and below before the low happened. That way one could have at least averaged down, no one would have been clever enough to buy a huge position at that price on a wild day of trading.
For the Series 7 Broker Exam, trainees are asked all sorts of arcane multiple choice questions about orders.But trainers rarely point out that the bargains are gained by placing orders ahead of time, imagining what no one else does, that during a time of panic, there will be some real bargains. But unless your order is there, ready and waiting to be filled, you are not likely to be averaging down into that price. A tip of the hat to Steve Kaplan at True Contrarian for pointing this out.
Socionomics and the Presidential Race
Hard times bring harder opinions and extreme demonstrations. The Bonus Army demonstration and break up by MacArthur on July 28, 1932 at the very bottom of the stock market is a perfect example. At first MacArthur supported the demonstration with tents. He later broke it up with tanks.
Hard times bring a desire for more decisive leadership. This is no time for moderates. As conditions worsen populations desire men and women of action. No dobut this will result in the emergence of politicians in the Club Med countries of Greece and Portugal, who will call for a return to their own currencies, decrying the austerity measures demanded by 'foreign bankers.'
Now let's look at the current and past Presidential Campaigns. Al Gore and George Bush II were really two peas in slightly different pods. Both were sons of successful men, neither was ever successful at business in their own right. Bush walked into my office in Andrews, Texas in 1978 while wandering into a disastrous run for Congress, he lost. He then went broke in an oilfield venture. Dick Morris notes that Gore was always hobbled by the fear of doing something wrong, without a track record of success and failure it's tough to know what to do.
Both men were Yale educated and never really worried about where their next meal was coming from. Each were property burnished for public office. Bush got a stint in the National Guard during Viet Nam, Gore wrote for the Stars and Stripes, no risks there. Bush got a plumb job 'managing' a baseball team his Dad's friends bought for him, Gore had a carefully constructed career as a Senator.
While they represented different parties, Bush turned out to be a big spender, never vetoing a single spending bill. Gore is now worth of $100 M due to Google Stock options. Bush sold his interest in the Rangers for $15 M. There is nothing unusual about politicians Peddling their political influence in the private sector of course, but that makes these two typical, not unusual.
Now contrast that with the current candidates. No one so far was really resonating with the Republican base, and then came Rick Perry. Perry is from Paint Rock Texas and attended Texas A & M , not Yale. He was in the A & M Corps. His book, Fed Up, rails against the Federal Government. He flew C 130s in the Air Force. He is a self made man.
In that regard Perry is much more like Bill Clinton. Whatever you think of either one of them, both are self made men from extremely modest backgrounds and locations, Paint Rock, Tx and Hope, Ark.
Barack's background remains a mystery. His 'tenure' at Columbia remains a secret. But again the parallel is that we have someone from a modest background who has parlayed that into a big time arena. As opinions harden, he is the most liberal Senator ever elected while Perry promises to make the Federal Govt inconsequential in your life. The difference could not be more stark. Stark times, stark differences.
Our pont is that despite the elite media misgivings about Perry, like Clinton, he is the real deal, a politician with solid success of his own doing. Clinton came seemingly out of nowhere to capture his nomination. At this point Perry appears be following the same template. Again, why?
Romney is another son of a successful man. Yes he has been successful in his own right but does not project the sort of powerful image that will resonate with the public in true hard time. As I write Romney is tearing down a 3,000 sf home near San Diego to build one three times that size. This is hardly the sort of 'up by my bootstraps' image that will resonate with the public with U 6 unemployment at 16%.
It's a long time until the conventions of next summer. But the smart money bet is on the self made candidate.
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