SPX – 1108.01
DJIA – 10,383
February 23, 2010
“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
Following a notable technical warning that a cyclical high is already in place (see “Price and Time Overbalanced” posted January 28), stock prices are creeping higher from the February 5 low. Breadth (broad participation) is the leading light with the New York Advance/Decline line closing at a modest new all-time high last week, not the sort of action typically seen at cyclical tops.
Psychologically, indecision crept in on cats paws, then spread like a computer virus, infecting traders and investors alike. Trading slowed to a crawl. Back out computer-driven high-frequency activity and there’s not much going on. Net volume readings are mixed. The NYSE peak so far is +55.5, unable to overcome its (69.6) hurdle rate. NASDAQ turned positive with a +51.6 peak figure bettering its (50.7) reading on the prior decline, but it’s already flip-flopped a couple of times already this year. Still, the Nasdaq 100 (NDX) is stronger than the S&P 500 (SPX) and NASDAQ net volume is in synch with the rally.

S&P 500 – Daily Equivolume (Source: StockCharts.com)
Yesterday marked the end of the window for a valid volume confirmation day espoused by William O’Neil, Investor’s Business Daily). According to O’Neil, days two and three from the reversal aren’t important as short sellers head for cover. A volume confirmation usually comes on days four through seven when an important index (SPX, DJIA or NASDAQ) increases 1.7% or more with a significant jump in volume versus the prior day. Follow-through days after the tenth day indicate the rally may be weak or likely to fail.
Price is what we trade and speculators following my guidance should be long. The Market Trend Indicator (MTI) confirmed UPTREND with last Tuesday’s close. It remains in an uptrend until one of more of the MTI’s three key indices closes below its respective 18% weekly exponential average. This week, the SPX’s 18% average is 1094.59 and the DJIA’s is 10,250. The NY A/D line is 5,459 net advances above its 18% average.
SPX price target of 13 mainstream strategists vary from a low 1120 to a high of 1325; the average is 1232. Technical opinions are all over the map, ranging from modestly higher prices into April followed by a more meaningful correction to more correction now followed by higher prices in the first half, or perhaps the mix of improving fundamentals but questionable sustainability creates an extended trading range. “Broken clock” bears are still preaching doomsday, and while I suspect a cyclical bear market may have started, I wish the number of technicians sharing this view wasn’t so uncomfortably high. It’s hard to be a lone contrarian in a world where technical analysis has gotten so popular. It’s not particularly positive for the stock market that the stocks of money managers are lagging.
Fundamentally, “quantitative easing” flooded the markets with liquidity, triggering both the recovery and boosting the stock market. Reflecting more confidence in the recovery, the Federal Reserve signaled its intention to begin withdrawing life support by hiking the discount rate. A headline in last Saturday’s Financial Times (No quick end to era of easy money) sums up the Fed’s exit. San Francisco Fed president Janet Yellen explained yesterday, “Three major restraints to economic growth include slow income growth, wealth destruction and credit availability.”
From the February 5 low, the best performing sectors have been Energy, Materials and Consumer Discretionary followed by Technology and Industrials. According to Bespoke Investment Group, nearly 70% of the companies reporting earnings so far beat their estimates while higher estimate revisions were most common among Automobiles, Technology and Retail. I think it’s best to stick with ETFs tied to a broad index to play this rally.
In other markets, the U.S. Dollar index is stalled near resistance but has yet to confirm a reversal. Despite the dollar’s 50-day moving average crossing above its 200-day moving average, I’m not in the dollar bull market camp, thinking it’s only the best compared to a troubled Euro and slippery Yen. Gold is gaining on every major currency.
Gold prices are holding well despite dollar strength and it’s positive that gold mining stocks have started to outperform the metal. But don’t lose sight of where gold is in its bull market. The bear market low was more than ten years ago and I think gold has been in its third and most speculative psychological phase since the November 2009 low. Note in the monthly chart how a parabolic rise is underway. This pattern generally ends with a rapid rush up and quick collapse. The final run may not last long but it can tack on a lot of price and I think it likely lies ahead. I recommend keeping stop sell orders loose for now (under last September’s low, 989.50 2nd London fix) but I hope to raise this level shortly to just below the February 5 low.
Long-term government bond prices haven’t been able to mount much of a short-term rally but short positions are probably large enough to trigger quite a pop when it finally does. In the corporate debt world, credit spreads between quality and junk continue to contract.

TLT (Barclays 20-yr+ Treasury ETF) – Daily (Source: StockCharts.com)
In a microcosm of the times, Sunnyvale’s second attempt to vitalize its downtown stalled for a lack of $300 million to finish the project in what the San Jose Mercury News called a “mishmash of vacant lots, nearly completed buildings and the steel skeletons of others.” Media News, which owns the Mercury News and 53 other daily newspapers as well as television and radio broadcasters filed recently for a prepackaged bankruptcy, lowering debt to $165 million from $930 million and wiping out a $400 million investment by Hearst Corporation. The “2010 Index of Silicon Valley” report shows Silicon Valley lost 90,000 jobs between the middle of 2008 and middle of 2009. Venture funding dropped 37% in 2009 and commercial vacancies rose 33%. Per capita income was $62,003 and the unemployment rate is over 11%.
WisdomTree will close ten exchange traded funds (ETFs) in March but new ETFs continue to come fast and furious. ProShares brought out a group with triple leverage both long and short to do battle with Direxion. The new ProShares ETFs include UltraPro Dow 30 (UDOW), UltraPro S&P MidCap 400 (UMDD), UltraPro QQQ (TQQQ) and UltraPro Russell 2000 (URTY). The ProShares triple leverage inverse ETFs are UltraPro Short Dow 30 (SDOW), UltraPro Shot S&P MidCap 400 (SMDD), UltraPro Short QQQ (SQQQ) and UltraPro Short Russell 2000 (SRTY). Bear in mind that the stock market is inherently unforgiving for the overleveraged.
For those seeking speed as well as leverage, Thomson Reuters sells “machine readable news” in a special feed that signals market making news to high-frequency traders willing to foot the bill. According to Tabb Group, algorithmic (traditional institutional orders sliced and diced to hide size) and high-frequency trading account for more than 60% of U.S. stock volume but I don’t have a breakdown between the two.
Harmonic Preview:
(High Probability SPX Turning Point or Acceleration Days)
March 1 (Monday)
March 4* (Thursday)
March 9 (Tuesday)
*An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.
Conclusion:
The burden of proof is on the bulls on this rally; volume is the technical fly in the ointment. For longs, my recommended stop sell point is just under the February 8 lows (SPX-1056.51) but I hope to raise that level after what I suspect is an imminent short-term decline passes. Start preparing now to establish short positions if and as this intermediate-term rally fails.
I suspect investors should lighten some holdings on the same signal for speculators to establish shorts. Stay tuned. The more important signal for more serious selling comes when each of the three indices in the MTI close below their respective 5% weekly exponential averages, roughly the equivalent of a 40-week moving average.
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.