SPX – 1056.74
DJIA – 9,908
February 9, 2010
“We’re positioning ourselves extremely conservatively. Given how much stocks have rallied since March, it’s hard to imagine a big bull market continuing from these levels.”
-Whitney Tilson, T2 Partners
Stock market weakness started mid-January as a “sell on the news” mentality gripped the Street amid fourth quarter earnings progress and “less bad” economic data. It may have ended with near-panic as debt-stuffed PIGS in Europe threatened to keel over. One strategist said the market was “taking a well-deserved sabbatical” while others called it a “normal” or “old fashioned correction.” Perhaps it was, but price and time overbalanced for the S&P 500 (SPX)- warning me that the SPX’s January 19 high of 1150.44 might be the top. We’ll be able to tell more on the next rally.
I suspect an intermediate-term junction may be at hand in several related markets, including stocks, gold and long-term government bonds. To my eye, Friday’s low looked like it could have ended the first section down or if the mainstream is right, the end of a correction. From high to low, the SPX was off 9.2% compared to 8.4% for the DJIA, 9.7% for the Nasdaq 100 (NDX) and 10.6% for the Russell 2000. There’s often a change in the intermediate-term trend soon after the SPX overbalances and the MTI first shifts after an extended run. We’ll know shortly.
S&P 500 (SPX) – Daily (Source: StockCharts.com)
The Market Trend Indicator (MTI) is signaling Downtrend. The SPX, DJIA and NY Advance/Decline line all closed below their respective 18% weekly exponential average. This average is roughly the equivalent of a slightly weighted 10-week moving average. The SPX’s 18% average is 1094.88 and the DJIA’s is 10,242. The A/D line is just 1,400 net declines below its 18% average.
Peak net volume readings are unchanged despite a 90%-down day last Thursday, (69.6) for the NYSE and (50.7) for NASDAQ. There’s been enough weakness to trigger sells in some mechanical systems (20-day moving average below 50-day moving average, more than 50% of stocks below their 15-week moving average, etc) and bring other systems close to the brink.
As for groups, there’s nothing in the studies I monitor to indicate the Street’s “buy low-sell high” attitude has changed in favor of momentum. The relative strength rankings I track are weighted towards nine month performance. My favorite contrary buys are precious metals, gold mining and Internet. Besides a rebound in commodity-based groups, I think a shift to quality with steady growth, balance sheet strength and larger capitalization stocks is likely to assume leadership.
Top Ten Groups (2/5/10) Top Ten Groups (1/19/10)
1. Airlines Automobiles
2. Automobiles Airlines
3. Recreational Products Steel
4. Home Construction Coal
5. Recreational Services Aluminum
6. Auto Parts Business Training
7. Biotechnology Platinum & PM
8. Specialty Finance Real Estate Developers
9. Pipelines Healthcare Providers
10. Publishing Home Construction
Bottom Ten Groups (2/8/10) Bottom Ten Groups (1/19/10)
100. Platinum & Precious Metals Insurance Brokers
99. Nonferrous Metals Gold Mining
98. Gold Mining Food Retailers/Wh
97. Paper Distillers/Brewers
96. Transportation Services Personal Products
95. Investment Services Integrated Oil & Gas
94. Aluminum Reinsurance
93. Tires Nondurable Household
92. Internet Soft Drinks
91. Containers & Packaging P&C Insurers
In other markets, Treasurys Put the Doubters in Their Place read a headline in The Wall Street Journal yesterday. I expected even better performance but as reflected in the TLT chart, prices stalled around a declining trendline from the high and just under the 200-day moving average. If stocks rally, I suspect a test of the June 2009 lows for bonds or worse. Congress will soon vote to raise the government’s debt ceiling to $14.3 trillion from $12.4 trillion, a level to be breached this month. If all goes according to plan, the new ceiling should allow borrowing through 2011.
Barclays 20-yr+ Treasury ETF (TLT) – Weekly (Source: StockCharts.com)
I think a short position makes sense, although I’m not foaming at the mouth like Black Swan author Nassim Nicholas Taleb, who said at a conference in Moscow last week, “It’s a ‘no brainer’ to sell short Treasuries. Every single human being should have that trade.” A TLT close below its 50-day moving average would be my signal to take action with a tight stop above the most recent short-term highs. The easiest way to establish a short position in long-term government bonds is to go long inverse ETFs including TBF (ProShares Short Barclay’s 20-year+ Treasury), SHV (Barclays Short Treasury Bond) and for more leverage, TBT (ProShares UltraShort Lehman 20-yr. Treasury).
TLT – Daily (Source: StockCharts.com)
There’s no sign of a reversal yet in the U.S. Dollar index (up as markets punish the Euro) but I’m alert as prices are in the low end of my price target zone. Even if the dollar continues to rally, I suspect the correction in gold prices reached its low last Friday. Confirmation comes with a close above gold’s 50-day moving average (1122.09 2nd London fix), a point that I think could be the last logical entry spot before “gold fever” grips the world. My favorite ETFs include GLD (SPDR Gold Trust) and for more leverage, UGL (PowerShares Ultra Gold Bullion) as well as GDX (Market Vectors Gold Miners) and GDXJ (Market Vectors Junior Gold Miners). A new SEC filing shows China’s sovereign fund (CIC) has $155.6 million invested in GLD and $116.4 million in GDX.
SPDR Gold Trust (GLD) – Daily (Source: StockCharts.com)
Harmonic Preview:
(High Probability SPX Turning Point or Acceleration Days)
February 9 (Tuesday)
February 16 (Tuesday)
February 19* (Friday)
March 1 (Monday)
March 4* (Thursday)
*An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.
I try not to let harmonic days impact my trading if technical action dictates otherwise. One particular danger is developing a preconceived notion that a future square will be an important turning point that keeps you from taking appropriate action when necessary. For example, March 4 is a square that’s kicking and is also close to March 6, 2009 anniversary date for the low. I suspect it could be important but I don’t want to lock myself into a bias that might not play out. I would rather put the market’s trend, pattern and price into context when that square arrives.
Conclusion:
I think the stock market, bond market and gold may all be at interrelated critical junctures for intermediate-term trades. I want to see SPX and gold closes above their respective 50-day moving averages and for long-term Treasuries below its 50-day average to trigger action followed by an MTI reading back in the uptrend mode. I plan to play the next stock rally using broad ETFs ties to either the NDX or SPX, putting on the position on confirmation a rally is underway and figuring out later whether it’s for real or not. To determine whether the overbalance signal was correct or not, the technical character of the next rally should tip us off.
For investors, figure how exposed you want to be in the next bear market. It may have already started. If technical characteristics on the next short-term rally are poor, I’ll probably recommend some selling into strength. Confirmation of a bear market comes with a lag.
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.
