SPX – 1106.24
DJIA – 10,450
November 24, 2009
“What a good country or good squirrel should be doing is stashing away nuts for the winter. The United States is not only not saving nuts, it’s eating the ones left over from last winter.”
-Bill Gross, New York Times, November 22, 2009
Technical Balance on the Razor’s Edge
The DJIA closed on a new high yesterday and other indices aren’t far behind. The market is poised for confirmation or failure. Note in the first chart on how the S&P 500 (SPX) is right on the razor’s edge at a trendline connecting its all-time high (1576.09) and its first intermediate-term bear market rally into a May 2008 peak (1440.51).
Beneath the surface, internal dynamics have deteriorated since mid-October. For instance, 72% of the stocks in the SPX closed above their 50-day moving average yesterday compared to 91% on October 21 and 86% on November 11. There were 190 new highs yesterday on the New York exchange versus 462 on October 14 and 318 on November 11.
It’s normal that fewer stocks participate as an advance ages and index prices could spike higher on a close above the SPX’s declining trendline. In that case, potential resistance points are 1121.44 (50% bear market retracement), 1136.35 (75% of the 1974-2007 range), 1144.78 (62% retracement of the May 2008-March 2009 bear market leg), and 1134.19 (an average of all time).
As for harmonics and potential future turning points in time, I have one indication around Thanksgiving and more in the second half of next week, so let’s key in on price action. It’s time for the market to prove itself one way or the other as investors and traders focus on the holidays.
S&P 500 – Weekly (Source: BigCharts.com)
The three-day drop last week was enough to qualify as a short-term decline for net volume purposes. Peak readings were only (31.9) for the NYSE and (42.6) for NASDAQ, not enough to reconfirm downtrend versus their respective +56.4 and +56.1 hurdle rates. These figures set an easier target to for net volume to get back in synch with the trend if the rally continues.
The Market Trend Indicator (MTI) is signaling Uptrend, a reading that remains in place as long as each index continues to close above its respective 18% weekly exponential average. The SPX’s 18% average is 1062.81 this week and the DJIA’s is 9915. The New York Advance/Decline line is 3,851 net advances above its 18% average.
Small cap indexes and the Energy, Finance, Utilities and Telecom sectors have yet to confirm the SPX’s new high last week but Telecom shows the most near-term strength.
Trending markets exhibit momentum when the leading groups pull away from the pack. That has not been the case on this advance as investors and traders buy weakness and sell strength. Gary Anderson (www.equitypm.com) explains, “Now stronger and weaker groups are huddled around the benchmarks, and differences in volatility, not relative strength, are the more prominent. That’s another way of saying that not much is going on.”
Groups at the top of the relative strength list exhibiting the best momentum are those tied to a weaker dollar, including Platinum & Precious Metals, Gold Mining, Nonferrous Metals (copper) and Paper. At the other end of the spectrum, I think it’s a market negative that Asset Managers have fallen to the bottom ten relative strength list.
U.S. Dollar Index – Weekly (Source: StockCharts.com)
The dollar continues to influence markets and the U.S. Dollar index has yet to show it has put in a bottom. I was encouraged by the past two weeks weekly but yesterday’s weakness offset that. Note the strength in copper despite growing inventories.
Copper – Weekly (Source: StockCharts.com)
Gold’s surge continues. Gold fever is viral as people seek protection from politicians and paper money. I think speculators should keep trailing stop sell orders loose at this point so as not to get shaken out. Still, it makes sense to edge up that level and my recommendation is just under the September 29 low ($989.50 2nd London fix), up from $964 previously.
John Paulson seeded a new gold-oriented hedge fund with $250 million. It kicks off January 1. Meanwhile, prices stunted jewelry buying worldwide, particularly in the Middle East and India. The World Gold Council reported physical gold demand fell 34% in the third quarter.
Gold – Weekly (Source: StockCharts.com)
The Fed is expected to keep buying mortgage-backed bonds through mid-2010 but the president of the Federal Reserve Bank in St. Louis thinks the program should be extended through the whole year. If the Fed exits too soon, prices for risky assets could melt. Keep it up too long and the dollar’s debasement accelerates, increasing the risk of a bond collapse.
“Treasury bonds look to be pricing in a ‘sweet spot’ of exceptionally low interest rates and benign inflation- but yields are likely to rise sharply next year,” said Morgan Stanley’s global fixed income economist, Manog Prahhan.
TLT (Barclays 20-yr+ Treasury ETF) – Weekly (Source: StockCharts.com)
I’ve been recommending a short position in long-term government bonds but prices are hanging around so far despite the technical breakdown to date and well-known (but not necessarily discounted) fundamentals. Using TLT as a proxy, my recommended stop sell level is just above the October 20 high of 97.25.
An article in last Sunday’s New York Times headlined Wave of Debt Payments Facing U.S. Government highlights that payback time is nearing. The U.S. added $2 trillion of national debt this year and it totals more $12 trillion; yet with lower interest due to recession and Federal Reserve Treasury purchases, debt service is estimated at $202 billion this year, less than 2008.
Here’s the problem- the U.S. continues to pile on new debt (estimated $1.25-1.75 trillion of new borrowing in 2010), interest rates are likely to climb once the Fed determines the emergency has passed and exits its stimulus program, and a balloon of short-term debt is coming due. An official at the Concord Coalition, Robert Bixby, explains, “The government is on teaser rates. We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”
The lead headline in The Wall Street Journal this morning reads I in 4 Borrowers Under Water. First American CoreLogic figures nearly 10.7 million households had negative equity in their homes in the third quarter. A First American index shows average U.S. home price nearly doubled between January 2000 and April 2006, but have dropped around 30% since. Approximately About 1.9 million mortgages are 120 days or more overdue.
The National Association for Business Economists raised its 2010 forecast to 2.9% gross domestic product (GDP) growth from its 2.6% forecast in October.
Political Cartoon (Source: unknown)
Conclusion:
Back out short covering and program trading and there doesn’t appear to be much investment buying. Stocks are floating higher on a sea of liquidity and technical factors could cause prices to spike. If that happens, I would raise recommended trailing stop sell orders on ETFs tied to the SPX to just under the November 20 low (1086.81) from just under the November 2 low of 1029.38. Once the trend reverses, think some of the best shorts are likely to ETFs tied to small cap indices.
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.
