SPX – 1074.57
DJIA – 10,138
June 29, 2010
“Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend.”
-Jesse Livermore
If we were just looking at fundamental data, there would be little to anticipate beyond the summer doldrums, a trading range bound by slowing earnings growth capping the upper end of the range while a lean corporate-driven cash buildup supports the low end. That’s not how I operate, believing instead that stock market action itself is the best forecaster of future business conditions as well as its own future, a belief proven time and time again after tracking markets for more than three decades. Mr. Market doesn’t always reveal its intentions but when it does and that indication is bearish, pay attention or pay up as it will cost you plenty.
I only see two bull markets, gold and inverse short exchange traded funds (ETFs) tracking stock markets around the world, or to quote General Douglas MacArthur, “We are not retreating. We are advancing in the other direction.”
After a four section advance, price and time overbalanced for the S&P 500 (SPX) in May and its 3-day swing chart pattern confirmed with a pattern of lower highs and lower lows, indicating the primary trend was down, an indication confirmed by Dow Theory and other lesser signals, including the SPX falling under its 200-day moving average. All we know is the stock market has already discounted the best that is likely to occur over this cycle. How far the market drops and how long it lasts are unknown but it is not a good sign that it plunged on the first section down in May, hinting of a test of the March 2009 lows or worse.
Fundament factors behind “or worse” were summed up in a headline in the Financial Times over the weekend, Spectre of deflation is back to haunt investors, particularly if economies slip back into recession, increasing the risk of outright deflation against a backdrop when last year’s policy tools (the stimulus package and Fed injections) are politically untenable. Nothing is preordained but the stage may be set for a crisis. Can the economy stand on its own? Stay tuned; the answer will be revealed in the fullness of time. Near-term, The Wall Street Journal asked yesterday, Will Earnings Surprise the Bears? The results and guidance are what analysts and investors judge and their reaction will leave a trail we can follow.
Net volume readings on last week’s decline reached (60.6) for the NYSE and (57.3) for NASDAQ, surpassing respective peak readings of +44.8 and +49.1 and indicating the SPX’s June 21 intraday high of 1131.23 likely marked the end of the rebound rally. Friday’s letter in PDF had the numbers wrong (70.9) and (71.3) but the first set is what would need to be exceeded to cancel last week’s indication.
S&P 500 – Daily (Source: StockCharts.com)
The Market Trend Indicator (MTI) is signaling DOWNTREND, reach index below its respective 18% weekly exponential moving average. The SPX’s 18% average is 1109.08 this week and the DJIA’s is 10,359. The New York Advance/Decline line is 400 net declines below its 18% average so it wouldn’t take much strength for the MTI to shift back to neutral territory.
There’s little on the group front to warrant optimism. Oil & Gas was the hardest hit sector last week but the weakness was widespread. Real Estate Investment Trusts dropped out of the top ten group list as measured by relative strength, replaced by Marine Transportation, just as Baltic Dry Index (tracking dry bulk packaging shipping rates) drops sharply from its May 26 peak, so I don’t expect an extended run. From a longer term perspective, sectors that performed best in the 14-month cyclical bull market were the same that did well in the 2002-2007 bull market, but gold aside, it looks to have been an echo bounce.
Baltic Dry Index (Source: WikiCharts.com)
A reflected in this table from Bespoke Group (country price/earnings multiples and the ratio that P/E multiple to GDP Growth estimates), the best values and growth prospects are in emerging markets but that’s no place to hide in highly correlated markets as a likely double dip in Europe and weakness in Japan slow exports and likely expose excesses hidden in centrally run regimes.
Country P/E P/E to GDP Growth
United States 16x 5.1x
Germany 16x 8.6x
Japan 34x 14.2x
Brazil 14x 5.1x
Russia 8x 1.9x
India 18x 2.1x
China 19x 1.9x
As for other key markets, flight-to-safety buying continues to drive buying in long-term government bonds. There will come a time to short but not yet. The U.S. Dollar index has backed off but I expect another rally carrying it higher than its early 2009 peak. It will be interesting to see how gold reacts beyond short-term weakness. I don’t plan to stick around if it breaks its parabolic rising curve seen on long-term charts.
Gold (continuous contract) – Daily (Source: SockCharts.com)
Gold – Monthly (Source: DecisionPoint.com)
30-Year Treasury Bonds – Weekly (Source: DecisionPoint.com)
Harmonic Preview:
(Higher Probability SPX Turning Point or Acceleration Days)
July 1* (Thursday)
July 9 (Friday)
July 14* (Wednesday)
July 16 (Friday)
July 22 * (Thursday
* An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.
The next two paragraphs are for young male readers debating making a change and perhaps wondering where to live. Everyone else can skip to the Conclusion section. San Francisco is a city of mostly old and young as couples met, get married and move to the suburbs to raise families. I was on my own Sunday when my wife was celebrating a 60th birthday with a lifelong friend. Walking through the neighborhood, I noticed bars were packed for World Cup matches, an enthusiasm I don’t share, so I headed into Golden Gate Park for a free concert put on by a local radio station.
It was a nice San Francisco summer day, warm by local standards with temperatures near 80 degrees and just right for slight summer fashions by thousands of young women at the concert. There seemed to my eye to be about two women for every man or at least a three-to-two ratio. Of course there was a Gay Pride parade in another part of the city that swung that ratio and revealed the true odds for single males.
Conclusion:
Speculators following my lead were stopped out of long positions last Friday. Establish short positions with stops above the June 21 high (SPX-1131.23) and average down if and as the 21-day rule confirms the MTI and prices break under the June 8 low (SPX-1042.17).
Inverse ETF buy candidates to establish short positions include the ProShares Short S&P 500 (SH) and for double leverage, ProShares UltraShort S&P 500 (SDS). For an index likely to fall more than the SPX, I think the ProShares Short Russell 2000 (RWM) and ProShares UltraShort Russell 2000 (TWM) make sense. Other leveraged inverse ETFs based on sectors I think could fall more than the general market include ProShares UltraShort Basic Materials (SMN), ProShares UltraShort Consumer Goods (SZK) and ProShares UltraShort Financials (SKF). A little further out the risk curve and after the next short-term rally fades, I may also take a shot with the iPath S&P 500 VIX Short-Term Futures exchange traded note (VXX).
Investors should sell all positions you don’t want to hold through a bear market. The SPX quarterly chart is sure to close with an negative outside reversal pattern and my technical studies indicate lower prices and panic lie ahead in coming months and that’s when you want to buy, not sell.
The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.
