October 13, 2009
“October. This is one of the particularly dangerous month to speculate in stocks. Others are November, December, January, February, March, April, May, June, July, August and September.”
Not to Decide is to Decide
Price persistence, broad participation (advance/decline strength) and expanding new highs support the case for a potential burst of momentum. I suspect short sellers are pretty battered. The S&P 500 (SPX) closed on new recovery highs the past two days. So have the Dow Industrials.
But a potential non-confirmation is brewing because the Dow Transports last closing high was September 15 at 4015.16. While it wouldn’t take much additional strength for the Transports to confirm, this is no time to get complacent and take your eye off the tape because volume indicators are also flashing a warning. Total volume is light, the five-day moving average of advancing volume declined on each rally since the early August high and most importantly, net volume in not in synch with price.
NYSE net volume overbalanced to the downside on the last short-term decline with a (56.8) peak compared to a +56.2 figure into the September 23 high (1080.15). The peak reading so far on the current short-term rally is only +47.5. NASDAQ net volume hasn’t overbalanced yet but its +42.5 peak last week didn’t overcome a (43.4) hurdle rate.
The Market Trend Indicator (MTI) is signaling Uptrend. It remains on uptrend status until at least one index closes below its 18% weekly exponential average; then the reading shifts to neutral.If all three indices close below its respective 18% average, the MTI will signal downtrend; it hasn’t signaled that since the week ended March 20. The SPX’s 18% average is 1027.15 this week and the DJIA’s is 9496. The New York Advance/Decline line is 8,844 net advances above its 18% average.
Could stock prices break out decidedly? The Investment Company Institute reported money fund assets rose $16.7 billion last week to $3.4 trillion, so there’s plenty of firepower. Important resistance above 1083.53 (5/8 the March 2009 low) is 1121.44, a level that marks the halfway point of the bear market. If the SPX were to trade in the top half of its bear market range, it would confirm, in my opinion, the belief that normal is back for the economy and stock market.
Tactics and money management count for far more than predictions. My plan is to raise stop sell levels to just under the SPX’s last 3-day swing low; see the conclusion section for specifics. The advantage of planned, deliberate speculation is being able to step aside if and when the stock market turns down while the disadvantage versus investing is giving up some profits if the weakness is just indeed a correction.
As for stock groups, there’s little change in leadership. As ranked by relative strength, the top ten groups are Full Line Insurance, Platinum & Precious Metals, Consumer Electronics, Airlines, Gambling, Coal, Hotels, Paper, Copper and Aluminum. Will these groups have legs if the cyclical bull continues? I have tough time with the rally in hotels picking up much steam from here. RevPar (trailing-twelve month hotel revenue per room) was $56.19 in August, down 15% year-over-year and following on the heels of a 13% decline in July and nearly 12% drop in June. Los Angeles Times reported that more than 300 hotels in California were in default or foreclosure at the end of the third quarter and the number is rising. At the same time, a study by The Wall Street Journal found that banks with heavy exposure to commercial real estate only set aside $0.38 for every dollar of bad commercial real estate loans in the second quarter
In other key markets, long-term government bond prices are bouncing in early trading but are nearing a point where they will have shown enough weakness to initiate short positions. Bloomberg columnist Caroline Baum wrote this morning, “Investors – dollar-recycling foreign central banks aside – are buying bonds because they’re pessimistic, not optimistic.”
Using TLT as a proxy, I would initiate short positions if TLT close below 94.60 and add to that position if TLT prices trade below the September 9 low (93.52). A short position can be established by going long TBF (ProShares Short Barclay’s 20-year+ Treasury ETF) and TBT (ProShares UltraShort Barclay’s 20-year+ Treasuries). There’s also a Direxion ETF with triple leverage but I prefer not to play in that sandbox.
As for the dollar, TurboTax Tim reiterated last week that “it’s important that America continues to have a strong currency.” Of course that’s a little tricky when the final estimate by Congressional Budget Office (CBO) for the fiscal 2009 year ended September was $1.4 trillion compared to a $459 billion deficit in fiscal 2008.
Economist David Malpass (Encima Global) explains, “Washington’s current economic program pushes capital away by weakening the dollar, threatening higher tax rates, borrowing short (the Fed’s near trillion-dollar overnight debt, Treasury’s mounds of bill and note issuance) to lend long (mortgages, student loans, entitlements), doubling down on government subsidies, and rechanneling bank loans to governments and big businesses instead of the small business job-growth engine.”
The dollar might be universally hated but a if the U.S. Dollar index trades above 77.47, it would indicate an intermediate-term swing up is underway. A rally is long overdue but I plan to wait for confirmation.
If the dollar manages to rally, it could be telling as to how gold reacts. Gold has been a bull market since July 1999 ($252 an ounce, 2nd London fix) and, in my opinion, this market is in the psychological phase where public participation (already feeling their oats) takes hold, much like Internet in mid-1999 and housing in 2005. The stage is set for gold fever and prices could overshoot. For speculators, I recommend keeping trailing stops loose, or just beneath the August 17 low ($932.75 2nd fix) to accommodate any possible correction.
In international markets, and helped by demand for commodities, Brazil, Russia and Australia have moved to the top of the best performing country list. Could China be the “canary in the coal mine?” The Shanghai Composite and Shenzhen and Hong Kong markets bear close watching over the next two weeks. Through September, China’s economy grew about 9% this year but The Economist reported lending is up 34% through or nearly four times GDP through August.
Jim Rogers was interviewed by Maria Bartiromo on CNBC last week. He said his contrary view is to not buy stocks in any world market. It’s no surprise he favors commodities. He reasons if the world economy gets better, commodities will lead because there are shortages. If the world economy stays depressed, commodities could do well because the government will print even more money.
Switching continents, Spain has the highest unemployment rate in Europe (18.5%) and its economy is still contracting. Bloomberg reported Spanish lenders acquired $29 billion of real estate in the past 18 months to keep the losses off the books. Instead of cutting prices on homes, the banks are offering variable rate 100% financing.
In the U.S. housing market, the Mortgage Bankers Association disclosed that prime loans accounted for 58% of new foreclosures in the second quarter, up from 44% the year before. Zillow.com figures 30% of the foreclosures in June were in houses in the top third of local home prices. Someone figured (and I haven’t confirmed the number) there’s a foreclosure somewhere in America every thirteen seconds.
As for streaks, the Federal Reserve reported consumer credit fell for the seventh consecutive month in August, the longest run since 1991. Including a 13% drop in credit card charges, total consumer credit was off $12 billion or 5.8 % seasonally adjusted.
September was the sixth consecutive month in which corporate America sold more than it bought. According to TrimTabs, corporate selling (new offerings + insider selling) was $34.4 billion or more than two times corporate buying (new cash takeovers + buybacks) of $13.4 billion.
A lawsuit brought by Citadel alleged several former employees of its Tactical Trading high-frequency trading fund violated noncompete agreements when they set up Teza Technologies. Tactical Trading earned $892 million in 2007, up from $75 million in 2005 and $3 million in 2004. It was spun out as a separate fund in 2007.
Let’s close with a comment from the healthy living file. Apparently, fried ribs, fried bacon and fried ice cream are popular items at the Texas State Fair; I discovered corn dogs there when San Rafael’s Eddie Lebaron and Len Dawson were quarterbacking the Cowboys and Texans (now the Kansas City Chiefs) respectively. I read in The Economist that the winner of this year’s creativity award was fried butter (balls of butter dipped in dough, deep fried and dusted with powdered sugar)!
Conclusion: Given the light volume as the stock market enters third-quarter reporting season, I think it makes sense to raise trailing stop sell orders to a point just under the SPX’s October 2nd 3-day swing low of 1019.75. The equivalent figure for the Nasdaq 100 (NDX) is just below 1656.57, up from 1585.56 previously. I wouldn’t initiate short positions until the trend turns down; if and as that occurs, I prefer ETFs tied to small cap indices.
For investors, I think it’s best to hold quality merchandise. It’s also time to plan ahead as to what percentage of assets to hold in stocks once longer-term technical tools indicate that the cyclical bull market has run its course.
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.