SPX – 1093.08

DJIA – 10,226

November 10, 2009

“I have never been a gold bug. It is just an asset, that like everything

else has its time and place. And now is that time.”

-Paul Tudor Jones

To Err is Human, to Hedge Divine

Short sellers scrambled, spurring a surprisingly strong stock market rally yesterday as the notion of no stimulus exit from a “talk-the-talk” but unable to “walk-the-walk” America swept the tumbling tumbleweed dollar across the world. New York City traders will just have to wait another day to see if there’s any follow through buying by investors.

The Dow Industrials closed at a new high, setting up a possible Dow Theory non-confirmation by the Transports. Small cap stocks may or may not confirm as well. Financial stocks, the leaders from the March lows, are also lagging and net volume readings haven’t reversed their warning the despite yesterday’s strength.

Still, the Market Trend Indicator (MTI) is back in Uptrend territory. Each index is above its respective 18% weekly exponential average, 1048.23 for the S&P 500 (SPX) and 9730 for the DJIA. The New York Advance/Decline line is 4,614 net advances above its 18% average.

NYSE net volume reconfirmed its downtrend warning a couple of weeks ago with a (64.9) peak reading and NASDAQ net volume with a (65.9) peak reading. Peak readings on the short-term rally from the November 2 low were recorded yesterday, +56.4 and +56.1 for the NYSE and NASDAQ respectively, but not yet higher figures than the last decline to validate the MTI.

S&P 500 - Daily

Source: StockCharts.com

Price and time overbalanced for the Nasdaq 100 (NDX) from its March low but not from its November 21, 2008 bear market low. Neither price nor time overbalanced for the SPX from its bear market low. If this rally fails, any ensuing weakness is likely only a correction in an ongoing cyclical bull market.

Save the thought that the SPX is dancing to a tune tied to its March low. Yesterday marked 38% of its price low in time; if it continues to kick at other divisions, I’ll be alert for a major turn once price squares out.

As for the here and now, the fast rise in bearish sentiment on sell off into the November 2nd low reflects how little conviction players had despite the strong advance from March. We’re all reading the same news but the reaction is positive for further gains in 2010.

Group leadership as measured by relative strength is a mixed bag with Precious Metals and Copper leading the pack followed by Durable Household Products, Commercial Vehicles, Paper, Internet and Coal. Platinum & Precious Metals was the only group in the top ten list to pick up strength in last week’s rally. Despite a new high by the Dow, only 24 of the 100 groups I monitor are under short-term buys while 76 are in a short-term sell mode. On a long-term basis, 85 are buy-rated and 15 are sells.

One cyclical group that has defied the rotation of others is Paper. Part of the reasons why is now front page news. It’s the heath care bill, a 1,990 page document that weighs 19.6 pounds and stacks more than eight inches high according to The Wall Street Journal. Kidding aside, a letter to the editor cited an appropriate quote from James Madison from the Federalist Papers in 1787. “It will be of little avail to the people that laws are being made by men of their own choice,” wrote Madison “if the laws be so voluminous that they can not be read; or so incoherent that they can not be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man who knows what the law is today can guess what it will be tomorrow.”

In other key markets, the trend remains down for long-term government bond prices, down for the dollar and up for gold. I think speculators should be positioned with each of these trends.

Using TLT as a proxy for long-term government bonds, I haven’t yet lowered my recommended stop buy point for stop buys just above its 97.25, its October 20th high. Regarding government bonds, a November 2009 report by Morgan Stanley’s Henry McVey (Inflation Outlook: On the Razor’s Edge) has a chart showing how it’s taking more and more debt to produce each incremental dollar of Gross Domestic Product (GDP). It took 1.4 dollars to create a dollar of GPD in the 1950s, $1.5 in the 1960s, $1.7 in the 1970s, $2.9 in the 1980s, $3.2 in the 1990s and $3.5 in the 2000s. Not a good trend.

TLT - Daily

TLT – Daily (Source: StockCharts.com)

The U.S. Dollar index would have to trade above its 3-day swing high on October 28 (76.82) to indicate a reversal in its intermediate-term trend. Gold appears to be starting a parabolic ascent; the time to get worried in when rally is disclosed in large headlines on the front page of daily newspapers.

U.S. Dollar Index - Daily

U.S. Dollar Index – Daily (Source: StockCharts.com)

How about black gold? The Guardian reports a former senior official (undisclosed) at the International Energy Agency (IEA) says IEA data shows the world has already entered its peak production zone and estimates that oil production can be lifted from 83 million barrels a day to 105 million barrels a day by 2030 are too high.

A headline in The Wall Street Journal last Friday read, Productivity Soared in Third Quarter. Businesses were quick to cut costs and reexamine how they conduct operations. One thing I heard repeatedly on third quarter earnings calls was that when business picks up, there will be plenty of operating leverage because most of these positions are no longer needed.

That can’t be good for commercial real estate loans. ING Clarion Partners figures that $1.4 trillion of commercial real estate loans come due before 2012. A report from the Urban Land Institute and Price-WaterhouseCoopers released at a conference in San Francisco last week said, “2010 looks like an unavoidable bloodbath for a multitude of ‘zombie’ borrowers, investors and lenders.” In Las Vegas, where the unemployment rate is 13.9% and rising, the Las Vegas Sun reports Nevada’s state bird (the construction crane) is on the endangered species list. Could this be behind the lagging Financials?

NY Financial Index - Daily

NY Financial Index – daily (Source: StockCharts.com)


The stock market is made up of buyers and sellers and all their emotions, including anxiety, anger, caution, confidence, enthusiasm, jealousy, greed and fear. The day-to-day swings are often contrary and contradictory; regularly unfolding in a manner that fools most participants.

Long positions tied to the NDX should be history. For positions tied to the SPX, I recommend raising stop levels to just under the November 2nd low of 1029.38; it is both 3-day swing low and 21-day low and it violation would mark a trend reversal. For shorts once we get a market signal, I prefer ETFs tied to small cap indices.

As for investing, it’s the art of making money in spite of limited information. According to Warren Buffett, “It’s far better to buy a wonderful company at  fair price than a fair company at a wonderful price.” For the record, Morgan Stanley data shows that low quality stocks are valued at a premium to high quality. Size constraints aside, here’s what Mr. Buffet looks for.

  • The best businesses earn a high return on capital and fixed assets without accounting gimmicks or excessive debt.
  • Favor businesses with dependable earnings.
  • Favor businesses with consistent earnings progress.
  • Favor businesses that are understandable and don’t take a genius to run.
  • Favor companies where you can be reasonably  sure of your values.
  • Favor companies with strong-to-dominant market positions.
  • Favor companies that re not targets of regulation.
  • Favor managements that are owner-oriented, who treat shareholders as partners, not suckers to be taken advantage of.

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.