Weekend August 11, 2012
Stocks rallied into Friday's close with the SP 500 capping its longest streak of gains since late 2010. Investors shrugged off an unexpected drop in China's trade surplus.
Blue Chips Continue March Higher, page B 4 Weekend WSJ
The markets continue to build a base at SPX 1400 and NYSE 8,000. TLT may kiss the lower side of its falling moving average. The scenario continues to favor the move to out of favor commodity plays. We will get to that in a bit but first let' s examine yesterday's ticker tape action and then peruse a few reading assignments about quantitative trading programs
The Ticker Tape
Ticker tape was the earliest digital electronic communications medium, transmitting stockprice information over telegraph lines, in use between around 1870 through 1970. It consisted of a paper strip which ran through a machine called a stock ticker, which printed abbreviated company names as alphabetic symbols followed by numeric stock transaction price and volume information. The term "ticker" came from the sound made by the machine as it printed.
Paper ticker tape started to become obsolete in the 1960s, as television and computers were increasingly used to transmit financial information. The concept of the stock ticker lives on, however, in the scrolling electronic tickers seen on brokerage walls and on financial television networks.
Wikipedia on the stock ticker
By the time I arrived form six months of broker school in Los Angeles to the 32nd floor of Two Shell Plaza in Houston Texas, the stock ticker had become electronic. It hummed and had a mechanical sound as the band of lights made its 360 degree loop throughout the day. There was no FNN or CNBC. Often times the 'stters and spitters' (though chewing tobacco was verboten in the office) would sit in a couple of rows watching the translations. Then the volume was low enough that all the transactions of the day could be displayed. Those were the ten million share days. At times the tape would literally stop, for lack of transactions.
But the one thing we were warned to avoid in broker school was, don't waste time watching the tape. One instructor made the point that a tremendous amount of time was wasted simply visiting about the latest price change in IBM, then the most recommended stock in that day, 1973.
However for our purposes, watching yesterday's tape yields a few clues about what is really happening. Let's take a look.
As Steve Kaplan notes the public tends to put their orders in before the market opens. as they have to be at work. Friday this dropped the SPX eight points right off the bat. The market spent the rest of the day recovering. In other words the smart money started buying as soon as the sell orders bottomed the market. By th end of the day the SPX was higher than the Thursday close.
This is so important for the juncture of where we are I am going to show a couple of charts in more detail.
Richard Arms, creator of the Arms Index, put a lot of stock in the first and last half hour of trading. This Friday the traders went home long the market.
Dow Indus trials Ten Minute Chart
The process of examining the same market at different time intervals is termed telescoping. Imagine standing on a hill with a variable telescope at its maximum magnification. Then slowly dial back to take in more and more of the landscape, what do we see?
While we usually don't show the Dow given the small number os stocks it covers, it is reported so much that most are familiar with the levels. Here is the past week for the Dow Indus trials in a ten minute bar chart. Monday was th exception with the sell off late in the day. But the rest of the week was marked by an early sell off each day, note the low in CCI in the bottom panel. Then, and this is the point of watching the tapes at such a juncture, money purchases drove the market higher every day. By the end of the week this action had pulled all four MAs higher, and the market closed above them, drum roll please.
The difference in an A student and a C student is the time spent literally studying material. Watching, examining, comparing, contrasting, outlining, note-taking, memorizing, absorbing, yes that is what studying is all about, the process of becoming a seasoned observer. Let's continue because I want TMP readers to be A students.
Dow Indus trials 15 Minute Chart
What do you see, seriously tell me? Recall the lows at the first of June, now we have a distinct low the first of August which was met with ferocious buying. The previous level of 13,100 was never breached in the subsequent rally. And the market closed above all four MAs by the end of this past week. Are you seeing a pattern of building momentum here?
Dow Industrials Hourly for Three Months
Markets move in fractals, each a smaller slice of the larger action. As markets begin to move in one direction those fractals are repeated at different levels of degree. These three charts are a perfect demonstration of just that. The Sentiment Shift as we labeled a recent post is evident in early June. that shift was tested throughout July at 12,500. As we have recently shown, the market has moved above its upper level and should begin trading a a new higher range. The repeated buying throughout July supports this idea.
While we usually prefer internal measures we are certainly capable of looking at the price index itself and drawing conclusions. This summer has been an instructive tape watching experience. The break above the channel is exactly what we have been saying was about to occur.
TLT
A thirty minute chart of TLT reveals, as expected, the exact opposite pattern. This is the end of the hour glass that will provide the impetus to propel stocks higher.The collapse began in early August, note the low in stocks was early June, so it took two months for the real exit to occur. The smart money began buying stocks in early June, now the later comers are playing catch up. Each rally in TLT dies at a MA. Meanwhile Bill Gross declared the death of equities, just as money begins exiting his beloved bond funds, what happened to that guy anyway?
NYSE Advance Decline Line Daily
Some analysts say we are now in a Dow Theory Primary Sell Signal. The NYSE A/D line above argues otherwise. Again the sentiment shift in early June is evident, then a move to new highs. At bottom Relative Strength is not overbought yet.
NASD Bullish Percent and Composite Index
Most tech stocks do not pay dividends. The large caps do that. The main panel shows the internals improving right from the sentiment shift in early June. At bottom a ratio chart of the NASD Comp to the SPX has not turned up yet, but the arrows suggest to me that the turn is just about upon us. It makes sense that money will eventually flow from safer big caps to smaller caps, as we noted in RAX this past week, up 25% in four days. The turn is coming and it looks to be in August.
GDXJ
I moved some funds from Central Fund CEF to GDXJ this week as it looks like it will outperform. The big move in GDXJ has not happened yet but the its day is coming.
I added ye another MA ribbon, this one splits the difference of the 50 and 125 at 87.5. Sure enough GDXJ crested that MA by a dime on the Friday close. The selling is drying up measured by the chakin money flow at bottom.
US Dollar versus Crude Oil and GDXJ
The USD is in candlestick form to heighten the comparison. Crude oil is the black line and GDXJ is the gold line, GDXJ has not really gotten underway yet for the simple reason that the USD has not broken its trend line, the simplest of indicators, yet. Oil as the most emotional commodity and helped with never ending mid East tensions has moved up. We have no way of knowing what might get the Euro going. The Australian and Canadian dollars have already experienced nice rallies.
Is it possible that the Euro simply won't get fixed, that the rallies occur in the Aussie and Loonie and Swiss and British Pound, and the US Buck moves sideways, I suppose it could be but only if the Commitment of Traders report is wrong.
Emerging Markets
Despite the Euro weakness, various emerging markets around the world are rallying. I own some of this fund in my college retirement account.
Natural Gas Update
Chevy and GMC debut pickups with natural gas power option.
Westport offers natural gas conversion for Ford F 250.
Dodge Ram 250 offered with CNG power option.
Shell Oil and Travel Centers announce construction of 100 natural gas fueling stations along the interstate.
One hundred strategically positioned fueling stations on the interstate system would allow coast to coast travel both north south and east west. Now if we had an administration that embraced the idea we mght actually become more energy independent.
I am long FCG, a fund of natural gas producders.
The Bottom Line
Stock markets spent June and July testing support and found it. We expect stocks to move to new higher trading ranges in August. Commodity related investments are attracting more investor funds but are doing so at different speeds. XES is leading the pack with GDXJ bringing up the rear.
Socionomics
I just love fighting. And I love beating people up.
Claressa Shields, US Women's MIddleweight Weight Gold Medalist
Now if we could just have this kind of refreshing candor from politicians. Frankly the idea of women's boxing does not enchant me, judo or karate perhaps but boxing?
Where are the Centa Millionaires? Recall I am long Fidelity Emerging Markets Fund.
Three Elephants on the Coffee Table
- Another article on our prediction of regarding defaults in kind for cities.
- Earlier this week the WSJ had an article on how the high cost of college is hitting the well to do.
- And don't forget the investor Black Holes of Madfoff, IMF Global, Peregrien, and just missing a collapse Knight Capital ( avoiding that fate with a rescue).
An emerging short term social mood is allowing the markets to overlook these obvious problems, for now. Once the mood turns negative after an expected top later this year, these will all become BIG stories.
Thanks for reading The Market Perspective
Dennislelam@gmail.com
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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 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.
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