Santa Claus Is Comin' to Town

Sunday Nov 13, 2011

Italy is forming a new government and paying substantially higher bond rates. And so the Euro can is kicked down the road again. 

The Market Perspective

Overview

Major indices have returned to pre-August internal levels. The DOW, NYSE, SPX now exhibit bullish percentages in more than 50% of their stocks. The NASD is lagging at 49%.  A performance chart of the larger indices versus the smaller shows the Russell small cap still underperforming. 

VIX Volatility Index continues to pull back confirming the renewed confidence in stocks. 

Crude oil and energy service are surging higher supporting both optimism and higher stock prices. 

Silver appears to exhibit bear market characteristics. 

 

 

 

The Stock Market

This chart of the  SPX with the accompanying indicators sums up the action of the last few months. The seasonal weakness started early this fall, in August. At top the Chakin Money flow shows investors exiting stocks in to August. The big drop then generated a sell signal in the PAR SAR, see blue dots at top. That has reversed to a buy signal three weeks ago in the PAR SAR, see blue dots at bottom. 

The red green purple ribbon of Moving Averages MAs shows the break down. The 13 has not penetrated back to the upside but it is close. On Oct 24 MACD SAR PAR and the MAs flashed an all clear as money began moving back into stocks. 

 

Our comments and recommendations throughout this period are posted on the blog for all to see. We recommended going long during periods of weakness. Our buy this past Wednesday worked out well. We recommended a ladder of lower buy limit orders. That day saw the Dow down about 400 points. Friday's recovery made it quite the dramatic reversal. That probably was the last of the panic lows for the weakfall season. 

One would expect the markets to recover in typical seasonal fashion with a Santa Claus rally continuing into January. 

The Dashboard - The other side of the coin

 

TLT long government bonds are in gold. We used the same ribbon MAs on the VIX to demonstrate the opposite end of the worry spectrum. The low has been the 25 level circled in blue. Fear is still elevated with TLT at 115 and VIX at 30.04. Note the big drop this week from over 35. At bottom note the mirror image recovery in SPX.

But the big picture is that VIX is moving to a complacent under 20 level. At that point TLT should confirm with a move below 97.5. Clearly we are a long way from there yet. 

 So complacency and over confidence are returning. This is necessary to set up a January 1973 type level of over confidence. 

 Apple

Another reason for NASD under performance is Apple. AAPL looks to have gotten too far above its 20 day MA. Support lies at 350. Our school is undertaking an IPad rental program as are other public school districts. Apple has become a mainstream player in the same way IBM used to be with its typewriters.

The Dollar

The US Dollar has begun an oh so slow recovery. The blue arrows on this weekly chart mark the higher lows. Now that we have yet another 'back from the dead' Euro recovery story, best guess is that the Dollar will bottom in such a fashion that the recovery in stocks is not threatened until well into the New Year. At top note that RSI is just now recovering over the 50% level. 

Crude Oil The Master Market

Here is another confirmation that stocks should sail into the New Year. Yep the All One Market AOM Theory is alive and well. Note that oil prices tracked the sell off and recovery in stocks. 

At top is our energy service indicator Patterson PTEN. We pegged the top of the oil market this summer using the 2008 analog when PTEN topped at 34. My guess is that Patterson starts to move up with the recovery in oil prices. But I doubt oil can take out its previous high at 115. That  top in oil and PTEN should tip us off to a top in stocks, just as it did this past summer. 

Silver

 Despite the hype, silver is putting in a series of lower highs and lower lows, a bear market in the making.   The 50 day MA has crossed over the 200 to the downside. Price has stopped at the 50 day MA level. The May sell off was four days and the late September sell off was shorter than that. So, no good way to play the shorts here either. Silver is reflecting industrial weakness and US Dollar Strength. 

The Trojan Horse

Athens now trades at less than one fifth of its 2008 valuation. This panic low should serve as a temporary stop on the way to whatever the new Euro will be. 

Bombay

Bombay ( india) Brazil and Shanghai all continue to look terrible. As the US recovers the Daily MACD rols over. Admittedly the US daily MACD   is also high but the US market is recovering. Note the big drop Friday in india. 

Recommended Action

The great buying opportunities are now quickly passed. You might mentally prepare for the first quarter of next year by visiting a library that has micro fiche of newspapers in 1973. I am not kidding.  Read the headlines of January 1973.  By the time complacency displaces the pessimism of the past three months, it will be hard to mentally start selling stocks and buying long dated government bonds. 

One might purchase a stock index and sell a short term call such as December or January against it. The idea would be to say buy QQQ at 58 and sell a January or December call. But frankly at this point the best idea is as we said above start mentally preparing for a top the first quarter of 2012. 

Ultra short funds like TBT that seek a 2X short against the bond market are subject to all sorts of difficulties as they re adjust their daily prices to the futures market. One can be right on the direction of the market and still come away empty handed. 

 

Socionomics

We now need a return to the overconfidence of January 1973. 

You can revisit how the 1973 bear began at this link. Optimism was high as McGovern had lost his  home state of South Dakota winning only   Massachusetts and the District of Columbia. The US was leaving VIet Nam just as it is leaving Afghanistan and Iraq today. The DOW had recovered to its 1966 high of 1,000 just as the DOW is recovering to previous 200 and 2007 peaks as I write.  

Today on MarketWatch I see an article speculating that 2012 will be a good investing year since Obama is running for re-election.  That is precisely the same sentiment that accompanied Nixon's re-eection in 1972.It didn't work out that way. 

 The charts of Bombay Brazil and Shanghai suggest however that the best of times in those countries has already past. Real estate remains at elevated levels, there are reports of payments slowing in China, rail projects on hold,  and increasing dissent. . 

The Business Editor for the San Antonio paper recanted his prediction  that we are in another recession.  He gave up too soon! That of course ignores the 45 M plus individuals  on food stamps, the near permanent unemployment at over 10%, and massive unfunded Pensions at city and state levels in the US. Harrisburg PA and Montgomery Co AL took bankruptcy this past month. So much for PA coming to the rescue of Harrisburg. So the required complacency is coming, we will track it via TLT and VIX. 

Various cities are desiring the removal of OWS protests at violence and undesirable activity has increased in those locations. This mirrors the unrest of the 1973-74 period. With Obama sporting below 50 ratings, a Republican party unenthused about its candidates, and Congress polling in the single digits, the stage is set for real unhappiness. And remember these numbers are occurring with the DOW at 12,000!

We noted the confluence of negative sentiment this past Wed as headlines screamed there was no future for Europe, Penn State's reputation collapsed, a blogger was beheaded in Mexico, and the DOW dropped 400 points. Elsewhere multiple accusers against Herman Cain appeared and the Governor of Texas could not remember he wanted to eliminate the Department of Energy. We'll let the sun spot experts explain that one but it speaks to the potential of negative sentiment which will surface once the market roll over here. Again note the graph of Bombay, the move down has already begun world wide. 

Thanks for reading TMP

 

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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 and 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.

 

 

Comments

[valentin tristan]

This is your best article yet. It explain how traders are at a turning point. There might be a short rally in the short term but it is also showing how the market is turning down soon. If there is a santa claus rally, how high do you thing it will go from here? Give me some numbers. The pten could very well be at its top right now, tomorrow will tell the direction short term.

[valentin tristan]

Looks to me like its looking at 11850 on the downside and then back to 11900 and then it looks like decision time. Which trend will it follow? the short term which is up or the longer term which is down. I believe the decision will be made after thanksgiving. Possibly sideways to down and then we have an up day the day before thanksgiving like always.

[Dennis Elam]

Don't get too short term, the market will be up into the first quarter of 2012.