The Market Perspective

OutsideThere Arose Such a Clatter...

Friday Dec 23, 2011

Hmm could that be Santa's Sleigh landing with a thud on the lawn?  We finally had three straight up days and as I write Friday Morning Europe is up as well, that would seem to qualify as a Santa Rally. Further it s bolstered by an impressive recovery in oil prices. 

Price is important but so is volume.

A/D Volume

Advance Decline Volume has been slowly improving since the August bottom. The higher lows speak to the advances outpacing the declines. 

On alance the internal indicators are turning up, it is just a matter of time. Will the inverse head and shoulder pattern above break out on a thin volume week between the holidays next week?  Beats me, I would not read a lot into it over the next week and the resistance has been fierce alone pink neckline. 

NYSE Daily Advance Decline Line

Another advantage of examining the internals of the market is that they are much more clear than attempting to count Elliott Waves. Here I put the Relative Strength behind the NYSE Advance Decline line, got that, okay something you don't see on most investing blogs. 

RIS is in green the A/D line is in Red Black. The RSI has been coiling like a spring, the energy should expend cone we get into the new Year. But the recovery I think is more clear when one sees that RSI led and now seems to support the move up. At top the NYSE index fights resistance at 7500. Once through it should generate a crescendo of buy orders driving the market up. 

Could the market fall back one more time next week. Yes but that should be the last test. 

The Bulls and Bears are Both Right, So Far

Thursday Dec 22, 2011

One reader e mails that we wil be lucky to see SPX 1250 this year, so far he's right. 

Another posts the comment that this is the last chance, presumably to exit. 

I am still tracking the bullish percent and summation index, and both are slowly turning up.

As we remarked a few posts back, things are out of synch. With the VIX at 21.43, I would have expected the SPX to have vaulted over 1250 by now but it has not.  Fear is still too high. European Banks are grabbing loans from the ECB, Oracle posts less than rosy earnings (damping the QQQ), demand was a bit softer for the last seven year bond this year, and so it goes. 

Summation Index NYSE

Still our focus on the internal indicators seems the way to go to me. Here in the main panel

NYSI looks to be turning up. It looks like it may have  a slightly higher low than it did in June, amazing how this stuff works, eh?

IN the lower panel VIX continues to fall. This makes me suspect that one day after Jan 2, we will see a series of big up days in the indices as bonds finally fall.

Bonds in the top panel are still stubbornly bullish. 

I have mentioned that all the quant programs are following the same 50 and 200 bar moving averages. This leads to herding of their decisions. After jumping in or out there is little left in terms of buying power and so the markets often reverse just on the other side of the averages. 

Now let's re adjust the MAs. There are about 65 actual trading days in one quarter. Two quarters makes 130 a year makes 260. So using two and four quarters does the picture change a bit, yes it does. Here is the same graph with adjusted MAs.

The NYSI in the main panel is just bouncing at the two quarter mark, 130 days. 

VIX at bottom has given a buy signal for stocks in that the FEAR it represents seems to be subsiding. 

TLT at top in out of synch, still stubbornly bullish. The Five Year Yield is still under 1%. 

I suspect this will the the last day of 2011  any consequence and as I write before the market open things seem to be fading. The traders and managers are off for the holidays, don't try to read too much into all this next week, volume is just too thin. 

Crude Oil The Master Market

The US Dollar is in the bottom panel. Crude Oil WTIC is in the main panel.

The out of synch view here is that Crude Oil has climbed $20 from its 77.50 low, yet the Dollar measured by UUP remains high. Again things are out of synch, UUP should be lower, but UUP and TLT are not following VIX. 

This is important, crude oil is a giant international market. In the top panel the real pulse of the energy industry the energy service sector is posting higher lows. And it is attempting to edge up over its 130 bar MA. 

So I take crude oil as another positive puzzle piece. 

Could stocks drop next week to flush out the last of the non believers, you bet. With thin volume the floor traders that show up will have things their way, As I said don't put too much stock in what happens next week. 

Cheers, thanks for reading The Market Perspective, we hope it has helped your decisions. 

 

Total Return Outflow

Wed Dec 21, 2011

Check out the article on page C3 in today's WSJ. for the first time ever Pimco's Total Return Fund will experience a net outflow of money for  the year. The article notes that  Bil Gross, the manager, bet on falling Treasury Prices earlier this year, just as Treasuries bottomed. It then notes that Gross has been buying Treasuries lately. Treasuries probably topped this week. 

We took the opposite tack here this year buying TLT earlier and then using its topping action as a signal the last few weeks. 

The Hourglass

Wed Dec 21, 2011

There appears to be enough evidence to call a top in bonds and the US Dollar. We have been suggesting that was the case since last Wednesday and in fact mused that last Wed was the top in the buck, and it was. 

Technical analysis needs a re write. We posted the comments from the stockcharts tech analysts the day before recent bottoms. They were uniformly bearish just as they were this past Monday. They noted that the prices had fallen below 50 and or 200 day MAs. True, and that caused lots of computer programs to sell the market short. No sooner did they do that than the markets reversed on Tuesday. The reason markets like oil soared over $3 was the 'double buy' caused by these ver programs. 

These same programs were mindlessly long the US Dollar looking for ever higher prices. For the same reason the programs were short the Euro, betting that the Euro would continue to fall. That was a bad bet given that the Euro had fallen all year and was exhibiting a five wave completion pattern. And those programs were 'short' oil. They had sold oil futures planing to buy back at much lower prices. On Tuesday, all those assumptions, as we suggested in our newspaper column last week. were proved wrong. 

The 100 point drop in the Dow Jones Industrials on Monday caused the last few who were not short to also sell oil. Then the reversal on Tuesday jerked all the participants the other way. Now many prices advanced above those same moving averages that had caused selling just days before. 

The result was two fold. First the programs had to buy oil contracts to exit the short positions. Then the same computer programs had to buy oil contracts to establish long positions. So one had massive buying into a market with few sellers. The result was a soaring price, over $3 in one day.

Traditional technical analysis is not working for a couple of reasons.Now anyone with a discount broker has access to charting software that would have been a techie's dream in 1988. And all the programs that buy and sell stocks assume the same metrics using pretty much the same moving averages. And so, a sudden drop causes all the hedge funds to go short. Once those orders are filled, there are no more sellers. Then the market reverses. This was the cause of the dramatic turnarounds August 8 and October 3, and Tuesday December 20. 

In an extended bull market like 1984-2000, a buy and hold philosophy works. And violations of moving averages work pretty well. But in an up and down period like 1966-1984 or 2000 to now, such a buy and hold or moving average based trading system does not work. Rather one needs to watch the flow of funds from risk on to risk off. once all have assumed a risk off position, driving bond prices to absurd new highs as well as the US Dollar, we are clearly set for a reversal. 

Think of an hourglass. Once all the sand runs into one end. there is no more left. The only thing that can happen is for the hourglass to be turned and the sand run the other way. That is what happened Tuesday as bonds and the dollar topped. As gloom and doom pervaded oil and gold trading, those commodities bottomed, along with the stock markets. 

Bonds, the Dollar, VIX

TLT is in the red black in the large panel, UUP in green is the US Dollar. I believe we have registered a top in both. The lower panel is VIX the volatility index. As it has been falling, TLT and UUP will likely continue falling in a dramatic fashion to 'catch up' with VIX. 

OH all those sky high rates in Europe, they are falling, the European Central Bank is lending $640 B to banks, etc. So in true socionomic fashion, the sentiment was just as Elliott described ending E Waves, see our earlier post. 

Bullish Percent

At the end of the movie Thelma and Louise, the gals drive a Thunderbird literally off a cliff rather than turn themselves into the police. Apparently some readers thought we were doing the same with our stubborn position. We did say this chart had to turn up or we would be wrong. The cavalry rode in just in time and yes our Thunderbird is still on terra firma. 

The most likely outcome now is that the 50 day MA for this chart will climb over the 20 day MA, the red line. THat will take the averages much higher forcing all that are short to the long side of the market. Then, the bearish position will likely be proven correct as stocks drop and bonds rally in convincing fashion. How long will this take?  Let's watch the hourglass, posting targets can lead to dangerous mental patterning. As VIX drops in to the teens and TLT drops back below 100 we will look to sell our equity positions. 

SPX

If our analysis about the bullish percent chart is correct the blue 50 day MA will cross the red 200 day MA on the price chart. This will take the average much higher than most realize. As we noted earlier this week, there is a clear pattern of higher lows at work here. Indeed the 50 day MA has been moving up since mid October. 

It appears that The Market Perspective TMP will end 2011 on a pleasant and profitable note. We hope you have enjoyed reading and profited likewise from our suggestions and thoughts. 

The Empire (Wall Street) Strikes Back !

Tuesday Dec 20, 2011

If you have not, please read the last week's posts on this blog before proceeding further. 

 

We told you this chart would need to turn up or we would be wrong-in our expectation  for an up market.  

It did. 

More tomorrow morning. 

Those of you that stayed long as we recommended, right into the teeth of near universal bear thought, 

are enjoying  a Happy Holiday.

 

thanks for reading TMP.

Slowly We Turn

Tuesday Dec 20, 2011

Please read my post from yesterday Dec 19 if you have not done so already. So far it is spot on correct.

We quoted from Prechter's Elliott Wave Text about the emotional state of a Wave E. It appears as we said that all the requirements for the emotion of a Wave E were present. This morning, at least so far, we have a social mod change. 

30 Minute SPX

I noted yesterday that the close under the 50 and 65 day MAs had turned the analysts at stockcharts even more negative. I went so far as to reproduce their comments from Nov 26, the weekend before the markets turned Nov 28. So far it appears to be a repeat of that as well as the occasion in Oct when the markets reversed. I am not seeking to criticize the analysts at  stockcharts. But there comments perfectly illustrate how the investing industry has become one gigantic regression line, simply following it blindly  until , surprise, it turns. 

The collar is down and in my opinion that has reversed oil enough to call a high in the Dollar. WTIC is up  a whopping 2.85 this morning. 

Now understand what is apparently happening here. The same quantitative programs that caused funds and investors to be out of or short stocks as they fell through the MAs the last few days, has now jerked them back into the market with buy signals as 

the Dollar falls

Oil increases

Gold increases

This of course magnifies the move as computers are closing short positions and going long, so we actually have two buys, one to close the short position betting on lower prices and another to establish fresh longs, this explains the huge jump of nearly $3in crude oil. 

So, we hope that you are finding TMP to be a different and refreshing approach to anticipating a change in trend rather than simply reporting on what has happened in the trend. 

More after the close today. 

A Fifth of a Fifth?

Monday Dec 19, 2011

E Waves - E waves appear to most market observers to be the dramatic kickoff of a new downtrend after a top has been built. They are almost always accompanied by supportive news (this would be negative news). That in conjunction with the tendency of E waves to stage a false breakdown through the triangle boundary line intensifies the bearish conviction of market participants at precisely the time that they should be preparing for a substantial move in the opposite direction. THus E waves being ending waves are attended by a psychology as emotional as that of fifth waves. 

Elliott Wave Principle, Frost and Prechter, page 83-84

Our longer term wave counts were on Wed  Dec 14, 2011. My count may be right or wrong but there is no disputing the above description depicts the state of investor attitudes right now. 

As the markets closed today

CNBC intoned that stocks were off 'sharply' the last hour. Would that be the ending 5 of 5  wave?  Actually SPX closed at 1205.35. if anything volume is sharply lower. 

the WSJ continues the drumbeat that the European banks, countries and presumably Dutch tulips and Swiss cheese will all soon be downgraded

It appears that stocks will end the year right where they started..

my point is that the media has filled the requirement of re enforcing negative news

I don't know quite where 'the pattern is complete' and neither does anyone else. But the requirements for a Wave E completion all appear present and accounted for. Volume is typically lower during the two week holiday period we are now in so that muddies things a bit more. TLT hit its previous high today on lower MACD, again what one would expect at a fifth wave high. 

On the Other Hand

The tech analysts at stockcharts are beating the bear drum, the evidence is that the SPX closed under its 50 and here 65 day MA today. Here was their comment from Sat Nov 26, the day before the last low Nov 28, they are saying essentially the same things today. 

RISING DOLLAR HAS NEGATIVE IMPACT ON US STOCKS AND COMMODITIES -- IT'S ALSO CAUSING FOREIGN SHARES TO FALL FASTER -- WHILE TREASURIES RALLY, CORPORATE BONDS FALL WITH STOCKS -- DEFENSIVE LEADERSHIP IS ANOTHER BAD SIGN FOR MARKET

I am not criticizing other writers but do want readers to know I read them too. I do believe that most trend following systems are just that. And most chart systems use 50 and 200 day 
MAs and so do their quant programs, causing buys and sells in mass, often at lows and highs. It's the nature of a system that the entire herd of funds is following.  

 

Hmm, SPX also made a higher low than in Sept, Oct and Nov, so So take your pick. If things don't pick up soon I will admit I am wrong. Before you write me off, compare this past chart and the quote above with the opening quote from Elliott Wave.

 

Catch a Falling Knife..

Saturday December 16, 2011

Catch a falling star and put it in your pocket
Never let it fade away
Catch a falling star and put it in your pocket
Save it for a rainy day

Recorded by Perry Como, 1957

Another famous dictum of investing is to avoid the temptation to catch a falling knife, one never knows how low it might go. Borrowing from the Perry Como tune, Gold was a star just a  few moths back. Now the blogs are outdoing one  another in doomsday predictions of further lows. Dennis Gartman went so far as to declare the entire gold bull market at an end. Is this the chance to put a star in your pocket, for that rainy day when the trillons of debt sloshing around the world has to be faced down?  We take a look today. 

This past week 

Tuesday - we stated that it sure felt like a dramatic cycle low of some sort was at hand, the next day gold collapsed %76.

Wednesday - We showed a  five wave pattern up in the dollar and a five wave pattern down in the Euro

Friday - We noted that the indicators were out of synch. Investors had taken a polsition almost as defensive as at the August and October lows, TLT soars. But the VIX continues down. 

The WSJ reports that Currency Bets are Tabled Until the New Year. The options column  reports that 'fear gauges' declined substantially Friday. This would seem to bolster our argument for  the Dollar and Euro have reached an extreme. But it may be that all trading will slow into the holidays. 

Generals fight the last war and investors worry about the last crash. Funds and small investors have shunned stocks to embrace low yield bonds in a frenzy not seen since late 2008. It seems unlikely the market will fall and reward such defensive action. 

So let's look at each of the major markets. 

Currencies

US Dollar versus Euro

The Dollar pulled back the last two days and the Euro, well, at least did not fall any further. The dollar is in red and green, the Euro is in black. This is not enough to call a top in the buck or a bottom in the Euro but  along with the report in the WSJ suggests the market hit some sort of extreme. Again lower volatility for the mext two weeks may delay a resolution until next year. 

Bullish Percentage 200 Day SPX

THe BP on the longer 20 day MA exhibits three higher lows. 
A reverse head and shoulders pattern is testing the 50 day MA for the indicator.

This chart has to turn up to keep the bullish case alive.  

Dow Diamonds

We used the DIA to exhibit the Chakin Money Flow at top. 

DIA has formidable resistance at 122 or 12,200. It has not been able to break through in the last two months. In the top panel note how quickly investors money out on even a modest pullback. MACD at bottom indicates the total lack of interest investing in DIA. 

SPX

The very big picture as we have reported, is that the stock market internals and price probably both peaked earlier this year. ONe can easily see the longer term 200 day MA in red is trending down.  but the market needs to lure more people back in before it really begins the plunge back to March 2009lows. A re test of the 200 day MA once more seems possible. 

New York Stock Exchange Hourly

The  NYSE hourly chart as well as the SPX and QQQ have the same general look. the hourly charts have re traced about half the advance from the FED action in late November. The MACD at bottom is  turing up. 

The Bond Market - Defensive Action to the Max

At top the VIX continues its steady slow decline. TLT in the main panel is a defensive investment. As the SPX fell near 1200 this past week ore money poured into this fund of long term government bonds. Volume in the vertical bars at bottom however was less. So TLT now sports a triple top even though the stock market has made progressively higher lows. As Dr. S[pock might say to Captain Kirk, this is irrational. Eventually this defensive posture will not be rewarded. 

Gold

THe last time GDXJ traded at this price, about $25-26, gold was selling for $1200, that is a $400 discount to where it is now. The vertical blue line marks that last spot.  Gold has been the strongest bull market around. This seems the most logical way to establish a position in this market. AFter the big price tumble this may take a good while to get going to the upside again but buying when no one else wants it is the way to enter the metals market. Recall that gold languished for a couple of years at the $300 level from 1998-2000. 

Energy Services

The Energy Services SPDR seems to be making a bit of a bottom on its hourly chart. It stopped falling Wednesday. Energy services are often the key to what is about to happen in the energy sector. 

So we are cautiously optimistic that a rally will begin in stocks, now that investors are safely in bonds 

the reason to support this position as advanced in the charts we have shown are

• Sentiment is uniformly terrible, which is typical of a market low, the media keeps beating the drum that European banks will be downgraded, see our photo of the Italian Welfare Minister earlier this week, ie leaders are in tears
• the Dollar Euro rubber band appears to have stretched to its limit
• The fear level indicated by TLT returning to its recent highs, when stock prices were much lower than they are now is irrational, Bill Gross at PIMCO has been wrong all year and is likely wrong again on his bond bet
• The bullish percent charts along with hourly charts of the NYSE and XLE look favorable to at least a rally
• The sell off in GDXJ is providing a relative low risk entry

 

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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.

 

 

 

 

 

 

Out of Synch

Thursday Dec 15, 2011

Our various indicators seem to be outof synch with one another. The VIX contniues to drope but the stock market internals are terrible. The sumation index has truned down, as I said yeserday this is not a good sign at all.

After a big down day like Wednesday, it is typical to have a weak bounce which is what we got today. The Dollar fell but not very mch. The hourly and daily chart remain quite overbought on the Dollar. But oil and gold fell again. Clearly hedge funds are dumping positions to accomodate redemptions. In that regard they are acting as they did in the fall of 2008, sell sell sell.

The percent of NYSE stocsk in bullish formation has dropped to 50%. sp we are indeed at a crossroads. Still insider buying is fairly strong, investors are hiding in bonds with the iive year yield at a meager .86%. Again this would correlate with much lower valuation than we have now, things are out of synch.

Computer quant programs extrapolate the trend and that is just what they continue to do, and so we are getting lower projections from nearly everyone.

GDXJ has fallen below its October lows. Gold closed under its 200 day MA causing computer generated sell signals, hence the massive dumping of positions. Here is another out of synch example. GDXJ is now trading at the same price it traded last summer-when gold was $1200!!! I doubt gold is going to drop to $1200.

We still believe the dollar will call the tune here, even today one could trach interday dollar movement and see the stock market rising and falling in the opposite direction.

Soinvestors are hiding in low yield bonds

Funds are dumping oil and gold positions driving stock prices in those areas to significant lows

VIX continues to drop as insiders continue to buy into their own companies.

The media continues the negative drumbeat about Europe but, so what else is new?

More tomorrow morning, the effects of whatever cycle low at work her have not abated yet.

The Day After

Thursday Dec 15, 2011

We speculated Tuesday evening that this was starting to feel like a cycle low washout. With gold down $76,  and oil down $5, that's pretty much what happened. 

Is it over yet?  That's hard to say, the markets are marginally up this morning but that would be typical after such a hard down day. VIX bounced off its 200 day MA moving u p 2.4%. 

One never quite knows when an Elliott Pattern has ended. The Euro has not fallen further this morning, we also speculated that the Dollar ad Euro were near completing respective five wave patterns. Once they reverse we will know, until then, we wait.