SPX – 1114.11
DJIA – 10,501
December 15, 2009
“To see what is in front of one’s nose requires a constant struggle.”
-George Orwell
The S&P 500 (SPX) closed a new closing recovery high (1114.11) yesterday, above the November 16 high (1113.68) that I thought would signal a breakout from the range. Dow Theory confirmed the move as both the Industrials and Transports closed on new recovery highs.
It didn’t feel like a breakout nor look like one on a hourly chart tied to intraday peaks. Market action seems more like fog creeping through the Golden Gate, reflecting uncertainty in directionless trading. Most hedge funds are locked down through year-end with little incentive to push their bets. Volume is light and it’s estimated that 40% of that is high frequency algorithmic trading oriented.
S&P 500 – Daily (Source: StockCharts.com)
S&P 500: 15-minute close; 10-day view (Source: BigCharts.com)
Net volume readings are mixed. The peak NYSE net volume reading is +32.5, barely above a (31.9) on the last decline. NASDAQ’s peak net volume was unable to overcome its (42.6) hurdle rate with a +36.5 peak reading. Weekly net volume readings also haven’t confirmed the move for either the NYSE or NASDAQ but that could change if buying picks up from here.
The Market Trend Indicator (MTI) remains in an Uptrend, a condition that stays in effect until one or more of its three key indices closes below its respective 18% weekly exponential average. An 18% average is roughly the equivalent of a slightly weighted 10-week moving average. The 18% average for the SPX (included to measures professional psychology) is 1080.50 and the DJIA’s (measures public psychology even though pros account for most of the activity) is 10,133. The New York Advance/Decline line (to monitor the average stock) is 6,261 net advances above its 18% average.
As for group action, Platinum & Precious Metals and Nonferrous Metals (copper) fell the most last week amid strength in the dollar. Yet, both remain in the top ten relative strength list (weighted towards nine months) and Platinum and Precious Metals managed to hold onto its number one position. Be ready to buy if and as the correction passes. Airlines raced to the number two position as measured by relative strength but I don’t expect an extended run given the buy weakness-sell strength nature market action. The Gambling group is a good example of this phenomenon. It was in the top ten list as late as the week ended October 8 but was among the ten worst performing groups over the past month. Real Estate also moved up the relative strength list but I’m skeptical here as well that the performance continues. On the other hand, Internet and Software, though not in the top ten, have maintained ongoing strength, a role that could continue given the shift towards quality.
In other markets, the U.S. Dollar index confirmed an intermediate-term uptrend is underway by rallying above its with a trade above its November 3rd 3-day swing high (76.82). Gold which trades contrary to the dollar continues to correct. I’m keeping stops loose on the long-gold trade because of all the markets I track, it has the greatest potential for the crowd’s IQ to sink to the lowest common denominator as passion and not brains comes to the forefront.
U.S. Dollar Index – Daily (Source: StockCharts.com)
The trend remains down for long-term government bonds. Using the TLT as a proxy, my recommended stop point is just above the TLT’s November 30 high of 96.73. Markets are awaiting Federal Reserve direction on its exit strategy and releases this week could trigger moves in stocks, bonds, currencies and precious metals.
Barclays 20-yr+ Treasury ETF (TLT) – Daily (Source: BigCharts.com)
At the 2009 roundup luncheon for the Technical Analyst Association of San Francisco (www.tsaasf.org) last week, my presentation was Plan Ahead and Follow the Trend. I won’t go into the highlights because it mirrored this letter.
The other speaker, Hank Pruden, delivered a provoking presentation, “The forgotten man: Finding Market History That Fits.” Hank figures the 1932-1937 bull market during the Great Depression period most closely mirrors investor psychology in today’s market as FDR experimented with multiple programs to save capitalism. Dismal news filled the newspapers but the SPX rose more than threefold from 4.40 in June of 1932 to 18.68 in March 1937.
For investors, here’s a handy checklist from Mike Moe (Finding the Next Starbucks) regarding growth stock investing, an area near and dear to my heart.
Moe’s Ten Commandments:
1. Focus on the fastest growing companies. Be right on the fundamentals.
2. Anticipate where the world is heading. Be proactive, not reactive to catch winners early.
3. Be rigorous but don’t have rigor mortis. It is possible to overanalyze opportunities. The best investments are often easy and intuitive.
4. When wrong, admit it. Be intellectually honest. Make decisions based on facts, not what you had thought to begin with.
5. Cockroach theory is in play. If you find a problem at a growth company, there are always more behind it.
6. Investment ideas are about information and insight. Information is valuable if it is proprietary. Insight is valuable if we know what the information means.
7. The four Ps are key: People, Product, Potential and Predictability. The first P is the most important.
8. Use five independent sources for each stock you invest in. If possible, have a regular dialogue with the company but remember, they will always see the glass as half full.
9. Find the three main reasons for a stock to move up or down. In addition, identify near-term catalysts for price movements. Maintaining a thesis for why you own a stock is key.
10. Be passionate about investing, but dispassionate about the investment. The stock doesn’t know you own it.
Lastly, from the miscellaneous opportunity file courtesy of the New York Times, the Chinese will buy about 12.8 million cars and light trucks this year compared to 10.3 million in the United States. In the third quarter, 7.2 million personal computers were sold in China versus 6.6 million here.
Conclusion:
The trend remains up but it’s no time to fall asleep. From a period of dullness and inactive consolidation, it’s important to watch for and prepare to follow a move in the direction in which volume increases. The SPX closed above 1113.68, so I think it makes sense to raise trailing stop sell orders to just under the November 27 low of 1083.74 from just under the November 2 low of 1029.38. The new point is also just under the SPX’s 50-day moving average at 1084.15. I would hold off on new buys unless prices move up on volume. Once the trend reverses, I 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.
