Humbly Following the Trend

SPX – 1173.22

DJIA – 10,895

“The inherent vice of capitalism is the unequal sharing of the blessings. The inherent  blessing of socialism is the equal sharing of misery.”

-Winston Churchill

Consensus expectations seem to be playing out, confounding bearish-bias technicians, Elliott Wave aficionados in particular, scrambling for a count after preconceived notions that sometimes bypassed the common sense of simpler observation, were repudiated by improving fundamentals and persistent stock market strength. Presumptions and pride of opinion are liabilities when trading markets. Price targets from thirteen leading bank and brokerage strategists for the S&P 500 (SPX) range from 1125 to 1325 and average 1243.

A contrary change likely sneaks in at some point but the potential hook isn’t discernible from my readings or technical studies. I suspect the intermediate-term advance that started February 5 carries into April, but that’s bias. The plan is to let profits run, relying on discipline and tactics to stick with the trend, humbly and patiently until it reverses.

The Market Trend Indicator (MTI) continues to signal UPTREND. Each key index is above its respective 18% weekly exponential moving average. This week, the SPX’s 18% average is 1129.08 and the DJIA’s is 10,513. The New York Advance/Decline line is 8,846 net advances above its 18% average.

As for net volume, it unfolds in a pattern of waves, its movements eventually and inevitably reversing in like degree but not yet. NASDAQ weekly net volume reconfirmed primary uptrend last week with a +20.1 reading compared to (19.1) on the prior decline. Daily readings are more appropriate for intermediate-term trends. As stock prices crept higher over the past three weeks, peak readings haven’t bettered their early March figures, +42.6 for the NYSE and +44.5 for NASDAQ, hinting of an aging advance closer to its end than not.

The S&P 500 (SPX) is approaching its July 2008 low (1200.44), a level it violated amid fierce selling in September 2008 after Lehman failed; it’s now resistance. Harmonic divisions and potential resistance are 1182.07 and 1197.31 below that key level and 1207.43, 1228.74, 1235.10 and 1246.88 above it.

Harmonic Preview:

(High Probability SPX Turning Point or Acceleration Days)

April 5             (Monday)

April 8             (Wednesday)

April 16           (Friday)

*An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.

Stock market gains to date are broad-based across groups but leadership continues to rotate, not the sort of market favoring momentum-based strategies where particular groups pull away from the pack. From the February low, the best performing stocks are weighted towards Consumer Discretionary and Financials sectors followed by Industrial and Technology issues. Laggards in the bottom ten group list (as measured by relative strength) that I think are primed to rally in the “buy low, sell high” sort of market we’re include Oil Equipment & Services, Oil Exploration & Production and Integrated Oil & Gas.

In other markets, the U.S. Dollar Index rallied sharply above its February 5 high last Wednesday amid fears of the PIIG (Portugal, Ireland, Italy & Greece) debt in Europe and deflation in Japan versus improvements here. Note how the dollar’s strength is the mirror image of weakness in the Euro. Last week’s dollar rally marked the 5^th swing on its 3-day charts, strength I’ve pegged as an intermediate-term advance in a primary bear market. If dollar strength carries through seven swings on its 3-day swing chart, I’ll have to rethink my long standing thesis as that would be an indication the primary trend is up. For example, the SPX’s 3-day swing chart is in its 7^th swing from its July low.

Triggered by disappointing Treasury auctions and steadily improving economic data, long-term government bond prices fell hard last week. Using TLT (Barclays 20-yr.+ Treasury ETF) as a proxy, my recommended stop point just above the February 5 high (TLT-92.42) wasn’t reached and the pattern on its 3-day swing chart is one of lower highs and lower lows. Prices aren’t far from the June 2009 low (87.56) and if that low doesn’t hold, it implies a test of the June 2007 lows (82.20). At what point do rising interest rates impact investors? Stay tuned.

Note how gold fell just beneath a rising trendline but held above its February 5 low, an indication of potential strength while shaking out weak holders. A 2^nd London fix above $1110 would indicate gold’s uptrend has reasserted itself. There’s no change in my recommend stop sell points, under the February 5 low for recent purchases ($1058 2^nd London fix) and under $989.50 2^nd London fix for longer held positions).

Mark Mobius (Templeton Asset Management) pointed out that emerging market economies are growing four times faster than developed nations in 2010. According to Mobius, the two elephants behind further growth are rapid money supply growth in the U.S., China, India and others and derivative activity. Emerging markets account for approximately 20% of the worldwide market capitalization but comprise just 3-8% of investments at U.S. money management firms. Note how emerging markets, which led the last year’s advance, haven’t confirmed the latest high by the SPX.

U.S. growth may be slower but it’s readily apparent as spring raises spirits not only in San Francisco but all around the Bay Area. I joined a couple of cousins for a bike ride in Sonoma over the weekend, starting and finishing in Sebastapol where business seemed normal and even thriving. Historically, it’s an area I usually avoided for bicycling despite its beauty due to too many drinkers behind the wheel, but there’s now a protected bike path along what used to be a railroad track. We pedaled the swing to Forestville through apple orchards (Gravenstein), boutique berry farms, vineyards and wine tasting, saving the Santa Rosa loop for another day. There was only one small stretch with vehicle exposure on Occidental Road but with a wide bike lane before turning onto a protected route towards Graton. Just before that turnoff, there was a winery on my left, organic farm on my right and a woman pulled over in a Prius messaging or tracking down information on her smart phone. That sums up Sonoma County.

According to London-based research firm, Prequin, private equity firms called up an average of $119 billion per year between 2004 and 2009 and paid back an average of $131 billion. In 2008 and 2009 the average call up was $112 billion but the distribution was only $44 billion. For investors, it’s just another example of the danger of chasing a particular style or asset class after an extended run. In contrast, the federal government’s TARP investment in Citigroup (necessary to insure survival but contrarian) is expected to yield a profit of more than $7 billion.

Conclusion:

My plan is to edge up trailing stop sell orders as the rally ages. For ETFs tied to the SPX, I recommend a stop sell levels just under its 18% exponential average, 1129.08. For ETFs tied to the Nasdaq 100 (NDX), I favor a stop point just under its 50-day moving average, 1847.18. When the trend reverses, and given the contrary nature of group rotation, I plan to short the strongest areas not the weakest; those would be ETFs tied to small cap indexes.

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.