Current Technical Viewpoint

This is a chart I did yesterday outlining the two major things I see in the market's technical structure. It is actually pretty exciting because trades like this don't come around that often. There are a few key places that stops can be set to help make this trade a 4x+ reward/risk!

1) In green we are consolidating after a very quick bull move in October. This triangle could be considered a bull flag with an expected move north once the triangle is complete. This should occur in the next few days/week, if so. A solid break above the green upper trendline would give more confidence in this count. We were very close today. Watch out for a potential trendline backtest if the breakout does occur.

2) The potential bearish head and shoulders set up is equally apparent on the chart. This expectation would take the probabilistic lead with a breakdown below the uptrend of the last few months (currently around $1240). Watch for a backtest here as well (of the lower trendline).

These two scenarios are basically polar opposites, but can still be taken advantage of. One way to do this is to sit on the sidelines until such break occurs (either up or down) out of the triangle. This should allow a potential 30 pts+ in expected profit. Another way is to buy a straddle (if you are into options). This will allow you to capitalize no matter which way the market goes (you just want to make sure that it in fact does move).

Of note too are the indicators at the bottom of the chart. Both of them are showing bullish signs by making higher highs (not highlighted, but apparent). A breakdown of this could help signal an upcoming trend change and preempt a break of the price trendline...just something to keep an eye on.

Finally, volume isn't on this chart, but it has been falling somewhat during this triangle period. That supports the triangle theory. However, volume has been heavier on the down days (such as Nov 8).

Good luck!

MTA webcast series summary: Linda Raschke - Relative Strength Strategies

This presentation was on November 10, 2011 on "Traditional and Unique ways to use Relative Strength"

Hit me up if you would like the slides that accompany it or have any questions
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Presenter's Bio: Linda Bradford Raschke is President of LBRGroup, Inc., a CTA, and president of LBR Asset Management, a CPO. She began her professional trading career in 1981 as a market maker in equity options. LBRGroup has been a registered CTA since 1992. Ms. Raschke was recognized in Jack Schwager's critically acclaimed book, The New Market Wizards, and is known for her own top selling book, Street Smarts - High Probability Short-Term Trading Strategies. She has been featured in dozens of financial publications, radio and financial television programs, has served on the Board of Directors for the Market Technician's Association and was President of the American Association of Professional Technical Analysts. Ms. Raschke has presented her research and lectured on trading for the Managed Futures Association, American Association of Professional Technical Analysists, Bloomberg, Market Technician's Association, International Federation of Technical Analysis, Canadian Society of Technical Analysts, TAG, Omega World, International Online Trading Expo, AIQ, Futures Conference, and has lectured in over 16 different countries for Dow Jones.

Relative Strength Summary Suggested Rules:
-For investors look at 6 & 12 month look back periods; 4 weeks is the worst period (least return)
-Be careful as using it increases Beta on both sides (gains and losses)
-Works best in up-trending markets with good volume
-Works in stocks, sectors, and commodities
-Be extra careful using after an extended trend as rotation will often take place at peaks and troughs
-Doesn't work in downtrends (longs are already loaded up...liquidation can be quick)
-Can use on short term trades using first 30 minute strength
-Very good strategy with relative performance models that follow benchmarks and /or are constrained by investment options.
-Needs constant updating depending on time frame

Slide 8- Dax made a lower high in late Aug and thus showed relative weakness, which set up a good trade into the Sept lows. Nasdaq showed strength by not making lower low early Oct like other indices. Rallied strongest into October as well.

Slide 10- 3M vs Intel early Oct lows...INTC didn't make new lows and was a lot stronger during the rally...AMZN similar...both made higher lows vs. lower low of 3M

Slide 11 (my 2 cemts)- Coke vs. Pepsi...great tool for sector/industry analysts...she used 180ma just for structure (could be your pay period or performance period? or any MA you wanted)...swap out s&p with your benchmark. Potential to look at st.dev of ratio around 180 day to help know when to scale back and manage money? Divergences may be good signals too.

Slide 17: answer=Amazon. The tough think is you had to pay up for AMZN since it gapped and took out near term highs...but the thrust helps you make that decision.

Slide 19: Walmart was not overbought just b/c it went over 75 on RSI...Alcoa would have killed you, but Walmart stayed up.

Slide 22: Volume by 30 minutes (vertical) by day (horizontal)

Slide 23&24: 7am time period on futures pretty good at showing trend of day; is it holding or failing or oscillating?

Slide 29: Franc long out-performing well before it went parabolic...relative strength helped show it; Home Run trade!

Q&A:
-Even though correlations are at all time highs, RS still works...all things can go up, but some still outperform
- Gary Anderson's done a lot of work on Relative Strength (google him)
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MTA webcast series summary: Intermarket Relationships

Below is an email summary I prepared of the latest MTA webcast presentation by John Murphy from October 19 2011.
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Hey all. Today I attended a webcast presentation by John Murphy (of stockcharts.com & MTA). John has been around a long time and is famous for his intermarket relationships analysis (one of which is required reading for the CMT). http://en.wikipedia.org/wiki/John_Murphy_(economist)

If you are at all interested in the macro environment or economics and how it ties to the stock market, then his intermarkets book, may be for you. It is great at tying together the financial markets, business cycle, and technical analysis all together.
http://www.amazon.com/Intermarket-Analysis-Profiting-Relationships-Trading/dp/0471023299/ref=sr_1_1?ie=UTF8&qid=1319048257&sr=8-1

I have attached the slides, which are pretty self explanatory and an easy flip through to see what's going on with a lot of different markets (contact me to obtain). You likely have already recognized some of them, but it helps to put correlations in easy to read charts. Below is a short summary of the slides in pretty much order with the presentation...

Intro: "You have to go back to the 30's to find similar correlations as today". Most "traditional" relationships have broken down in the last decade (starting with the Asian Crisis). The reason behind this is the deflationary theme we are currently in compared to the primarily inflationary period of the past. He cites 3 major deflationary events recently, the Japanese bubble bursting (1989), the asian contagion, and the US property bubble burst.

Slides 4&5: There was a paradigm shift around the time of the Asian Crisis. Bond yields and stocks started to move together. He cites a deflationary environment as the primary reason. He doesn't expect this relationship to revert back to the "norm" until deflation is out of the picture. Slide 5 shows that same relationship in 2011. In august 2011, bond yields didn't confirm the rally, which gave a hint stocks would see new lows.

Slides 6&7: Stocks and Commodities are positively correlated (extremely). This has not occurred since the 1930s. There is no other real good example in history and is one of the reasons he sees us in a deflationary environment. Commodities, like yields, seem to be leading stocks. He comments simply that Bernanke wouldn't talk about it so much if it wasn't a concern and prevalent.
One of the most reliable inverse relationships is the dollar/commodities; Recently a similar relationship has occurred between the dollar and stocks.

Slides 11&12; Stocks peak when energy outperforms...This occurred through the summer 2011. Rotation into safety, also has occurred...too early to tell if rotation into safety is over and downturn is "complete", but that cycle is longer term. Stocks are in red on slide 11 and the business cycle is in green.

Slides 14+; US stocks outperform foreign stocks when the dollar rises; however, they both fall. The Euro is something like 56% of the US Dollar Index and the majority of the 5 components.

Euro stocks are leading the US stocks right now

Ratio charts are a great way to see what is really happening and driving prices (I agree).

Q&A session...
-A China revaluation would result in inflation in America & decline of the dollar

-Use the 10 year bond when comparing across countries because most others don't have 30 year bonds.

-Expects "deflationary environment to continue until proven otherwise". Will look at bond/stock relationship to help tell.

Take care everyone and good luck! Let me know if you have any questions.
Chad

How Technical Analysis helps when Fundamental Analysis cannot. A look at Amazon's earnings miss.

This afternoon after the market closed Amazon reported earnings that were well below expectations. Guidance also was lowered with a potential negative earnings in the 4th quarter as part of that theme. As a result no doubt there will be countless analysts coming out tomorrow and this week to lower Amazon's price target and/or their recommendations. Most of these analysts had price targets well above today's pre-announcement price of $227.15 and almost all had buy ratings (most of the others that did not, had hold ratings). I didn't come across any "sells". I mean who saw this coming?!?!?! Amazon had been one of the cream of the crop stocks over the past few years with its "cloud computing" stronghold (forget its 70+ forward P/E and 27% average annual earnings growth expectations. Right now Amazon's price is below $200 @ $199.01 as of 6pm central time. Can you chalk this one up as anything besides a massive fail by wall street analysts??? This seems to be a theme that continues to play itself out year after year when dealing with fundamental analysts. I would be very interested in studying the amount of luck (Beta) that the analysts benefit from versus the analysts that go against the market's beta and go out on a limb to actually predict something.

Every earnings season this is the typical charade. Analysts have price targets and if the company reaches that price target, the analysts increase their target price; if the company's price becomes too far below that target, they lower the price target (almost always after a major setback in price when it is too late for you). Essentially the analysts are backing into the price that the market sets by adjusting multiples, etc in the models to get to the current price, with a typical "buy" premium. They basically let the market tell them how to plug their models so that they can give never-ending buy/hold signals to their customers.

To me the best way to describe it is the infamous chicken and egg scenario. What/who is really predicting the price? Are the analysts actually predicting the stock's price or are they more or less just following the stock's price? Time and time again it seems they are just followers, like the rest of us. They assume the market is always right and efficient. That is the main problem with fundamental analysis. That is why you rarely see a price target significantly lower (or higher) than current prices (usually within a 1-2 standard deviation range), yet time and time again this strategy is wrong, often during major inflection points (like tonight with Amazon).

However, technical analysis can be used to help identify such points in time when analysts are likely too bullish and should scale back their estimates. The amazon chart below shows a very nice ending diagonal triangle. This is a technical pattern that occurs at the end of bull trends. It shows weaker and weaker momentum as price struggles to make higher highs. This pattern showed overlap in all the down moves into previous major price high territory. Where I have labeled 2 and 4 both encroached (greatly) on the 1 and 3 price highs. This shows major overlap and lack of conviction in the uptrend. There are other structural points with an ending diagonal, such as the 3 wave moves I have labeled A and B that help to identify this structure, as well.

Below the price chart are two measures of momentum, the relative strength and the MACD. The RSI (relative strength) shows the difference between changes in today's price versus a set period in the past. This helps identify the slowing of momentum, or the second derivative of price. The MACD is the Moving Average convergence/divergence and show the difference between trailing moving averages of the price. This helps show the difference above and below historical average prices. It too shows relative strength signs. Both of these indicators topped out on the way to the Sept $244 top. Notice that the $246 top coincided with both an RSI and MACD that peaked lower than where they were during the $244 top. This was a major warning sign, especially when price fell back below $235.

Another piece to the puzzle was the volume. Volume tells you a ton! For instance on most of the up moves, volume would decline from the initial thrust to the top such as the lower volume in the first half of September versus the higher volume at the end of August. Volume also helped to show the bottoms, with it usually weaker near the bottoms with a pickup when buying started.

Finally, we can use volume to help us find support areas. Notice on the left the "Volume by Price". This helps show that in the $190-$200 area, there has been a lot of volume. This is where the majority of people bought (and sold). This also is likely where a lot of people will "breakeven". I expect it to show support during this pullback on earnings. It may even provide another buying opportunity for the rebound that will likely occur to backtest the 2 to 4 trendline in the $215-$220 range. Notice too that there was relatively little volume at the peaks in price and above $200. To me this shows more interest in AMZN at the $200 price than at the $240 price.

Amazon is a great example of why I trust technical analysis more than fundamental analysis. Fundamental analysis helps provide a rear view mirror as to why price did such things, but technical analysis can help get you in front of that trend and help raise red flags in price action. After all, at the end of the day, the price action is what makes you money, not the company's fundamentals or some analysts's backed into expectations.

MTA webcast series summary: The LongWave

I decided I will start capturing the notes I take during webcasts or meetings I attend that are relevant to this blog's purpose.

Below is a summary I sent in email form on the webcast I just attended concerning the LongWave presented by Ian Gordon of the LongWave Group. Typically there are also slides that accompany the presentation. If you are interested in these or have other questions, please contact me and I will send to you directly...keep in mind that these are notes I took as a 3rd party and are the presenter's thoughts, not necessarily mine.

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Today I had the pleasure of listening to a webcast of the Longwave theory (also known as the Kondratieff Wave) which has to do with generational economic cycles. This theory was first proposed by a Russian Economist (Kondratieff in the early 20th century) http://en.wikipedia.org/wiki/Nikolai_Kondratiev and is pretty famous, especially because it's expectations are playing out in similar time frames and because it analyzed back to the 1700's and the beginning of the US and continues to play out.

This theory breaks an economic period into 4 seasons (Spring -rebirth, Summer -growth, Autumn-Speculation/inflation, Winter-Crash/Cleanse) of roughly 60-80 years and the attached chart should be read from the bottom up and used while reading the summary below. I think it is apparent that the interest rates help show the potential long waves through time and the ebb and flow of cycles and how those rates effect other markets. According to this theory we are in our 5th winter since the Revolutionary War and it is far from over (really just begun according to the author).

Here is a summary of the notes I took below...

-Summer is always the season of inflation/interest rate peaks (latest one was the 60s/70s) and autumn of speculation (90s/2000s)
-Entering the 30s depression, the US was actually in pretty good shape. Debt was pretty low, and it was primarily govt. debt (instead of consumer). The debt/GDP ratios are misleading back in the depression because GDP fell 45%...so the main driver of the ratio peaking, wasn't debt, but was GDP dropping (denominator effect).
-It allowed for the govt. to increase its debt because it could be paid back from GDP growth (since GDP could realistically be expected to grow thru time and thus the decline by the 50s to less than 150% D/GDP). This time is different, it is debt driving the ratio of GDP and it is unclear GDP will ever get to a level that sustains the debt increase at 350% GDP.
-The winter period typically cleanses the debt that was built up during the speculative autumn period; in the 50's there was very little consumer and corporate debt (coming out of winter and entering spring)...a very conservative and scared of reverting generation-apprehensive...fuel to kickoff spring. In the previous winter season over 10,000 banks went under
-A peak in interest rates tells us that autumn is around the corner (and that interest rates will soon fall); biggest bulls occur in autumn (1980)
-The autumn period is the speculative period. It is when debt explodes because confidence is high and most assets (stocks, bonds, real estate) do well (1982-2000)
-There is typically a small recession after the summer period before autumn kicks off (1866, 1920, 1981)
-Autumn speculative themes: 1820s- midwest US land grab; Canal buildings; 1860s- railroads (many went bankrupt in the next winter); 1920's- industrial expansion/consumer starts borrowing from corps/US largest creditor; 1990s-internet boom/housing
-The fed has interefered with true stock and asset valuations...delaying the inevitable; Yes, things are different than the Great Depression, but not necessarily any better. US is now largest debtor nation when in the 20s it was the largest creditor...maybe not even richest...globalization/competition pressures...a lot larger now so growth is slower (the Microsoft effect)...
-The longwave group expects things in the future to be much worse than Great Depression because of debt...whether that is a longer time period or a deeper pain is yet to be determined...likely a combo of both. Now debt is on the consumer versus then it was on the govt which will be a major issue going forward.

Some investment themes the LongWave group holds:
-Dow 1000 expectations gotten from a number of different ways, but primarily because of the 1:1 Dow:Gold Ratio expectation that has held through time (2nd page of presentation). Gold over the long run does opposite of stocks, so basically an investment decision should be either/or not both.
-In previous winters, the market fell to almost 50% of the previous season's low...1921=Dow ~$65 and bottom at ~$40 in 1933; 1981=Dow 800 so projection =Dow 400 at winter's bottom.... which means on 30 stocks with a P/E of 5 would mean about $2.60 earnings on average per company...not sure about this methodology with fiat currencies.
-"Sure not going to see Dow 14,000 any time soon.
-"I'm convinced stock market will eventually reflect reality TPTB (the powers that be) won't be able to control forever like they have interfered the last 12 years"
-"Greenspan messed with rates and bottom should have been a lot sooner and harder after 2000 top"
-Stocks are best in Spring and autumn
-Gold is best in Winter (now) and Summer
(my 2 cents) keep in mind that it is a ratio which doesn't mean that they both can't go down...just that one will perform better than the other and/or go down less
-Every major longwave bottom had a 1:1 Dow:Gold price except the 1930s. This is because the fixed price of gold was at $20.67...if was at market would have hit 1:1 (my 2 cents: it hit 2:1 for arguments sake...so maybe that is the conservative target)
-Expects deflation and debt will overwhelm govts eventually creating a new monetary system; expects Euro to fail..similar to 30s when Austria and Britain currency status quos were upheaved
-(my question) - The timing of the waves is not near as important as the events...need to know where events occur in the cycle to know when seasons will change; things like fiat money and human lifetimes throw the timing off making it less reliable. If US was on gold standard like in the 30s would have been completely different today
-"you can predict price or you can predict time, but you cant predict both"
-Expects 2012 to be a bad year...primarily due to GANN cycles and the 20 year and 2nd year in the decade cycle (1932, 1982, 1992, 2002)

In full disclaimer he got his clients all into gold in 1999 with the expectant coming winter...he got out of stocks. he has been in gold since and will continue to hold until the Dow/Gold ratio is 1:1 (he expects to actually undershoot it because of the overshoot of the ratio in the 90s). he suggested that land, food, guns, etc will be other good investments...things to become self sustainable. Expects currencies to basically stop working and industry shuts down preventing transportation of goods, etc.

Big Five Sporting Goods Fundamental Analysis

As I mentioned in this blog's investment thesis, I believe fundamental analysis can work for long term stock picking of companies that are cash flow generators and valuation targets. This entry is the first one I have done concerning fundamentals since GMR.

Big Five Sporting Goods is a stock I used to follow in a previous life as a buy side analyst. On top of meetings with management I visited their very impressive state of the art distribution center. This kind of due diligence work can help prevent the small chance of a fraudulent company, or help you preemptively find those "something's not right" moments. However, this company seems rock solid and one that I am looking at from a longer term fundamental buy position.

I have done some deeper analysis, but attached I have 4 simple summaries of how to value a company fundamentally. The first picture shows the financials of the past year and a half and some simple valuation metrics in the bottom.



As can be seen, the company creates around $0.45 per share in free cash flow, which theoretically could all be paid out to shareholders as dividends. Another valuation metric is Price to book value. Anything that is 1 or below means that the company is currently valued at its liquidation price...so if the company had to liquidate everything in a desperate moment, this is likely the price it would get. However, this is rare and typically a worse case scenario valuation. Most companies trade above 1.0 book value.

The next excel screenshot shows what the company could be worth to a private equity company or other buyer. Typically public companies cost more because of the public "premium" that the markets create. Assuming a 7.0x EBITDA valuation is likely conservative.





The next photo shows a simple discounted cash flow model with a Gross PP&E terminal value discounted to today's assumed price. One scenario assumes zero growth and the other assumes a 10% growth. Typically DCF models are conservative in that they assume a longer time horizon for an event to occur, which makes the discounted value of that event worth less (in this case a 10 year horizon generating only $3.42 in current value - note that if the event was moved up to year 5 then the terminal value would create $6.00 of present value). I have assumed a 12% discount rate which is likely conservative given the current market and low interest rate environment.





Averaging all of these valuation methods together, comes up with an $11.10 price which is significantly higher than the current $6.88 price. Alternatively, the lowest and most conservative valuation yields a $5.96 price which should provide a decent floor for the stock price.

The risks include the Free Cash Flow falling and/or the values of PP&E and Inventory on the books are overstated. However, The conservative case takes most of this into account by assuming no FCF growth in the next 10 years as well as an event that doesn't occur for another 10 years.

My experience with Big Five, its ownership, and management are the intangibles that add peace of mind to my thesis that Big Five Sporting Goods is likely undervalued at these prices and constitutes a "buy".

Good Luck

The S&P Currency Ratio Charts

After my posting yesterday I was thinking again about how much currency affects stock prices (answer: a great deal much!). To prove the effect, I came up with the attached chart which measures the performance since the October 2007 top of the S&P500 as well as its performance based in other marketable goods other than the US Dollar. The way to think about the chart is the conventional S&P 500 measurement is 1 S&P500 priced in $1 US Dollar or $SPX/$1. But, you can swap out the denominator in the equation to compare the $SPX in other liquid assets such as 1 canadian dollar, or one euro, or one barrel of oil, etc.

The reason this is relevant is because the markets are global. People from all over the world invest in the United States and vice versa. As such, people like me in the United States are affected by currency fluctuations. As a net importer most of the products purchased are from other countries (oil, electronics, many others). The exchange rate affects us more than we likely even know as a result. A truly localized economy wouldn't be affected by such things and would have a rather constant exchange rate, but that just isn't the world we live in.

In the attached chart I show the S&P500 in solid blue which is the S&P chart most people are familiar with. However, all the other line charts are also the S&P500! But, how can that be?!?!?!



The difference between the blue line and the 5 others is the blue line is the S&P500 as measured in US Dollars, the typical view found everywhere. The dashed lines are the S&P500 measured in other currencies (Red=Euro, Pink=Yen, Purple=Canada), an atypical view rarely if ever viewed or talked about. The thin black line is the market priced in a barrel of Oil and the Gold line is the market priced in an ounce of Gold. As you can see there are some major differences in price when the measurement tool is swapped out.

From a currency standpoint, the market priced in Yen (purple dashed) is only up about 20% since the March 2009 $730 equivalent level. Compare this to the S&P in dollars (blue line) which is up over 50% since then and sits at over $1200. The S&P/1 Canadian Dollar is fairing a little better, but still below the US Dollar priced S&P. The Euro is most similar to the USD based S&P, just slightly below, which means the Euro since then has behaved similarly to the US Dollar.

The S&P priced in oil is the outlyer of the group with wild swings. From the October 2007 high, the S&P priced in Oil is also lower at around $1075 from $1350...so still down around 20% which is similar to the S&P priced in dollars.

The final line in gold is the S&P priced in gold. This is currently making a new low below that of March 2009. Another way to think about it is this is how much 1 S&P500 is worth per 1 ounce of gold. This is very telling and means that Gold has significantly outperformed the US Market since the 2007 high and that priced in gold equivalent the S&P 500 is actually lower than it was in 2009. The next chart (below) is even more telling and shows that ratio since the year 2000 top.

There are many inferences one can draw from these graphs, but the primary theme is that a major reason the stock market is even as high as it is, is because of the weakening US Dollar and as a result a significant decline in the purchasing power of the American consumer. So, the stock market is up, but the American consumer's purchasing power has fallen, thus leaving them with less money at the end of the day. Just because the S&P is at a certain level, that same level doesn't buy you near what it used to and doesn't mean things are "better".

Another way to look at this is from a constant dollar perspective. The market's are quoted at current currency rates, but an investor who invests in the year 2000 invests in year 2000 dollars and is then at the mercy of both the numerator (stock performance) and the denominator (currency) over time. Therefore performance could and should be measured on a constant dollar basis (also known as purchasing power).

On that same chart from 2000 (below) that shows the S&P500 priced in gold, I also track the USD's trade weighted performance.

In March 2000 the trade weighted dollar index was around 106. Today it is around 74. Suppose that someone bought at the top in March 2000 when the S&P was at $1500 and the dollar was at 106. Now suppose that person sold today at S&P $1200. That would be a loss of $300 or 20% on the S&P...not that horrible on the surface. So that person cashes out and now wants to buy something with his $1200 cash, but he finds that his $1200 is not near what it was in 2000. In fact, on an average basis it now buys 30% less (106-74=32/106=30%) than it did in the year 2000. So in reality that investor has likely actually lost around 50% in their purchasing power over the 11 year period. They would have been much better off buying something that held its value better, however, they lost on both fronts.

This is best shown on that same chart with the S&P priced in Gold. That ratio has fallen a staggering 87% from a ratio of 5.3 S&P's per 1 oz Gold in March 2000 to only .66 S&P's for 1 ounce of gold today. Assuming Gold is a good measurement of purchasing power (which I do not totally agree with, but I think directionally it provides a good starting point), this shows that investing in the stock market since 2000 has actually set you back SIGNIFICANTLY...a lot more than the surface 20% decline implies!

Current Elliott Wave Count and Japan 1989 Comparison

Well, it looks like it is finally here. The next leg of the biggest bear market in most people's lifetime may finally be upon us. However, for most investors the probabilities are not yet high enough to justify a short position...not yet, anyways...there should be plenty of opportunities.

Attached is the latest wave count I am following. Encroachment into the Flash Crash territory of 2010 killed a lot of the bulls's hope of this being a new bull market up from the March 2009 lows. However, I would like to see a monthly close below $1190 to give even more probability to this count being correct from a longer term perspective. A new low around or below $1100 is needed before I can fully get excited about the new leg down. Once that occurs we should see a big rally back to where we are around now. At that time will be a good spot to get short and close longs. The market will have revealed more cards to us by then.

From a near term perspective I equate August's action to that of January 2008. Both of these months saw "hammer" candlesticks and ended big moves down from multi-year highs in the indices which subsequently rebounded some of that move. They also both occurred 4 months after the respective recent price highs. The first and last weeks of February of 2008 were strongly down with the culmination of that move down occurring March of 2008. If things are playing out similarly, then I expect September to be pretty volatile as well.

Linkable Real Time Chart : http://stockcharts.com/h-sc/ui?s=$SPX&p=M&yr=5&mn=0&dy=0&id=p72172925866&a=242864511



Finally, I would like to use Japan's last 3 decades as a roadmap to our current situation (some of the reasons I lay out on the chart below). Japan is the only major example of a deflationary environment in recent history and its size, importance, etc mimic the US's situation fairly well with some supporting arguments on the chart.





The key to me in the whole deflationary scenario is the country's currency situation. Just like the United States, Japan's stock market exploded as its currency declined in the 1980's...this makes sense as I have laid out in other postings about the $USD (see list of $USD labels to the right). Also, Japan's market peaked roughly when their currency bottomed. Since then, the market has declined significantly, deflation has taken hold, and its currency recently made new highs near all time stock market lows. Boiling it down to one point, I expect the US dollar to rally for the distant future keeping a lid on stock prices, supporting the deflation and low interest rates argument, and behaving similarly as Japan did the last few decades.

Keep in mind, one days volume on the foreign exchange markets is around $4 trillion...it absolutely trumps the stock market.

Why this "downdraft" can get worse

The put call ratio is a contrarian indicator often used to help mark extremes in sentiment. The thought is that when people buy more puts than usual (and more calls than usual) then sentiment may be at an extreme. Right now a lot of people are looking at the spike up in put buying and concluding that the market's selloff may be extreme. They also may conclude as a result that the selloff will soon be over. However, I have other thoughts.


Im not that concerned about the put call from a bear perspective for a few reasons...

1) We aren't near 2008 panic levels from both an actual and a moving average standpoint. The 75 day Moving Average (blue MA line) is at .71 and it peaked above .8 during 2008 a few times. It stayed above .71 for over a year then. The actual put/call of 1.11 and 1.08 thus far was seen back in 08 and peaked even higher at 1.35, 1.18, 1.16 then in April and December of 2008. Notice the recent spikes were even higher than the Flash Crash telling me this is something worse.
2) The rise of the ratio has been faster than in '08, but our starting point was a lot lower (complacency a lot higher it seems). Also, the fall in stocks over the past month was extremely fast...much faster than the kickoff after 2007's top. The fact that the put/call ratio was so low in the first place were warning signs that bulls were getting too comfortable.
3) Some of the highest put/call ratio readings were actually nearer to the highs than the lows. Maybe this hints at some major smart money bets as some have discussed yesterday/today.
4) Where we are currently from a moving average perspective is mid 2009 as well as all of 2007, so not that high. The point being we may be extreme from a short term perspective because of the quick rise and very low starting point, but it doesn't look so bad to me on a longer term and leads me to think that the Moving Averages of this ratio could stay here (and likely go higher) for quite some time. This would imply a high vix and continued stock sell off.

I would like to see this index come back down below .5 a few times before I would get comfortable being a bull. Notice that in all of 2008 and most of 2009 this index never went below .5...fear was present the whole time.

Good Luck.

TITN - Mirrors of 2008?

This stock was requested by a friend. From a technical standpoint Titan looks a lot like it did in 2008 when it topped. The chart is pretty self explanatory and lists the 5 reasons I think an investor should be cautious. A lot of damage was done when the gap from April was filled last month. However, there is a little hope as the stock has climbed back above that area rendering the gap and subsequent fill neutral at this point.

I would still be cautious as there are many negative technical signs such as the volume spikes, the waning momentum (divergences) as well as the looming all time price high just above at $34. A new all time high would likely put me in the bull camp for this stock.

A positive is that it was able to buck the trend in 2008 at least longer than most of its peers. Also, the recent price rise has taken it back above midterm support. Perhaps this stock again will show relative strength in a broad sell off. Time will tell.

Good Luck

Time to Overweight Bonds?

This chart helps show good times to change weightings between stocks and bonds. Right now the markets are at a critical juncture and if the downtrend line gets broken to the top then that would be a confirmation signal that treasuries should be overweighted and stocks underweighted. This would be set until a confirmed trend can be established at which another trendline could be used to help show the next flip flop.

Good luck! Click on the title above to see a live updated chart.

S&P500 apparent 18 month cycle

I did this chart after the late 2004 vertical line (cycle low). The vertical lines are all the exact time distance apart (roughly 18 months) and are created by connecting previous market turning points like the 97 and 98 lows and the 99 high. These 3 points are all the exact distance apart and we can use that knowledge looking forward to predict when potential market turning points will be. So basically I use the charting program that overlays equidistance vertical lines with the length of time I decide.

After bringing the chart forward to today's date, incredibly the cycles are still working well and have aligned directionally with the 07, 09, and 2010 lows. All I did to this chart is update the time range and the charting program projects the cycles outward. The next cycle point based on this will be 18 months from June 2010, or December 2011.

The market will let us know if it is likely a high or a low.

Click on the title heading to see an updated chart.

Good luck!

Google Armageddon?

This chart is one I found online and decided it was so good looking I'd recreate it.

With today's bad Google news and subsequent big selloff afterhours, I decided it could be extremely relevant. Not much needs to be said that isnt on the chart...

If this is true though then 2011 should be as crazy or crazier than 2008. The hope is that the pink line of support will hold and keep the uptrend intact.

Good Luck.

Gold versus Silver? Which one?

Gold and Silver are all the rage right now!!! Sell your gold and silver advertisements are in every mall, infomercial, and financial website!

Regardless of my position on gold and silver, an investor still should choose wisely between them. Looking at the chart above, you can see why. Currently Gold is significantly underperforming silver. In fact it hasn't been this undervalued to silver since the early 80s. This can mean a lot of things (for instance what occurred in the early 80s? - hint, they both started to free fall).

However, if you must own one of them right now. Gold looks to be the far better choice. Eventually this ratio will find parity which could mean it rallies back up to at least the midpoint on the chart of around 50x. This means gold should be 50x the price of silver, or silver should be 1/50 the price of Gold. With a current gold price of $1450 silver, based on these historical standards should be around $29.

Either way, a move up or down in the metals, Gold seems to be the better choice right now.

Good Luck

A Lesson in Dow Theory

Attached is a chart of the Dow Transports and then the Dow Industrials in order to show how the 100 year old Dow Theory works. On the chart I have two captions pointing out two different timeframes. The black lettering is the shorter time frame and shows both the Dow Jones Industrials and Transports printing a high, a low, and then a new high. Because both of these resulted in new highs above the previous high (in Novemeber and December 2010), they confirmed a shorter term Dow Theory buy signal.

On the longest time frame, however, neither index has made a new high above the previous high (2007) and thus neither index has confirmed the long term buy signal.

The Transports are getting close to making a new high. If that occurs then we will look toward the Industrials to confirm the hew high by surpassing its 2007 high. Obviously this has a long way to go and will leave a lot on the table, but that's the way a trend following technique works.

If the Industrials fail to confirm the new high, and go on to post a high, a low, a lower high, and then a lower low (all below the 2007 top), that will be a Dow Theory Non-Confirmation and a pending sale signal. If that occurs and then the Transports do the same, that will be a Dow Theory all out sell signal, on the shorter black time frame.

Dow Theory can work at all time frames, but for this analysis I have just used the 2 longest time frames.

For more on Dow Theory and how it helped foreshadow the 2008 bear market in a January 2008 post, click on 'Dow Theory' to the right in the Labels Section.

Good Luck!

Bear case losing ground...again.

The bear scenario laid out in the previous blog post (in blue) is day by day losing it's probability of occuring. After today's move we are at a do or die point (which actually makes for the best trading opportunities). A straddle at today's close would help capture either one of these scenarios which both call for significant moves in the upcoming weeks.

Bottomline is a downturn must occur as soon as possible (tomorrow or Monday). Any significant move up will likely put the bear case to bed and result in new highs. Right now it is up in the air if the market will continue up to new highs in a final 5th wave or if the bear market will finally begin again (yes, I have been waiting for it for awhile).

The other option (not on the chart) is that this move down and now smaller move up is an A,B of an A,B,C which would suggest eventually the market moves lower (but only in a corrective mode before moving on to new highs).

Good Luck

Where I think we are in the grand scheme of things

Well, the rally from the March 2009 lows has certainly been impressive. I think it has taken many "bears" by surprise, including me. The top in April 2010 was definitely a spot the market could have turned south (as it did thruout the summer). However, after the August decline, which could have easily been the start of our next major move down, the market did not continue down further. It decided we needed another elongated move up. This was about the time of QE2, which may or may not have had a positive impact on the stock market and "worked" from that perspective.

I will drive myself crazy if I tried to figure out all the possible reasons for the elongation of our cyclical bull in our secular (11 years now) bear. All we need to know at this point is it happened, so what's the next move? Keep in mind that it took 25 years for the market to make new highs above its 1929 price and Japan is still trying to get there after 21+ years now.

After 9 months of seemingly unabated uptrend, the market is once again at a turning point. The real question now is, are we in a 4th wave correction or was the Egypt and then Libya conflicts the topping point?

The attached chart shows my current expectations in blue with a close alternate in red. The next few days and weeks will let me know. Any break below $1220 on the $SPX really raises the probability of a continued, larger move down. The alternative is that the move up from the July 2010 lows was not impulsive and was an A wave of a larger A,B,C (with the C needing 5 waves for completion - shown in Red).

This is a lot of technical jargon to swallow, so the key takeaways are drawn on the chart. In blue, the market has topped and is just starting its long, hard fall. This expectation assumes most other asset classes will also fall (as the dollar rallies) since markets almost always are interrelated. Also, there are numerous technical factors supporting this including volume, momentum, and the fact that we haven't had a good sized pullback in almost a year.

The alternative which I will look at as viable until disproved is shown in red and assumes at least a new moderate high is made before a decent decline.

The $1220 area remains key. If it is breached then the likelihood of a continued decline raises significantly. If it holds then the red alternative becomes my primary expectation.

Good Luck.

A lesson in International Finance

Attached is a chart of Symrise AG, based out of Germany and traded on the German exchanges. I apologize that the chart isn't near as clean as the stockcharts.com charts I usually use, but stockcharts.com doesn't have access to the European exchanges yet (just US and Canada). However, Tradestation is great for use with foreign currencies as will be shown.

I want to talk briefly about the difference between a US traded stock and a foreign stock trading thru its ADR (American Depository Receipt) on the US markets. The ADR for all intents and purposes is the share ownership of the underlying asset. However, the key difference is that the ADR must adjust for exchange rates between the ADR and the home country's security price. The chart above will show you how big a difference it can make!

The top chart is of the Symrise ADR traded in the States. The second chart is the price of the Euro. The 3rd chart is a nice ratio chart essentially converting the ADR back into its home country's currency. The final graph is that of the 20 trading day correlation (1 month).

The one thing I don't like about the tradestation platform for charting is the text which is a pain to use, but other than that it has some wonderful functionality such as the correlation graph that I don't have at stockcharts.com.

Ignoring the text for now, the ADR looks to have completed a 5 wave move up from its June lows and topped in November. Notice similar tops occurred on the spread chart. What is nice about the June top is that occurred at a time the Euro was weakening, so the move from Nov 2009 to May 2010 was actually stronger than the ADR would leave you to believe (as the spread chart helps show).

However the main thing I wanted to point out with this ADR (and likely many others) is the recent correlation. Notice the 20 day correlation is sitting at .60 and has been steadily climbing over the past year and a half. This means that more and more of the ADR's return is actually coming from changes in the exchange rate rather than changes in the company's performance. That is important to note so that you don't confuse the reasons for the stock's returns.

This blog heading's title above links to the German traded Symrise AG on bigcharts.com. I have also copied it below. This is helpful in seeing a longer time horizon of the company since the American ADR just started in late 2008. Notice that early '09 was the longer term price bottom. It also looks like a pretty good impulsive move up. The November top does indeed look like a completed 5 wave top assuming a May/June '09 2nd wave and May/June 2010 4th wave. If so then support could be found in the $20 ADR ($16 German exchange and spread chart) assuming a breakdown below $25 on the ADR.



One final point on the spread chart. Notice its current price of 20.05Euros. Compare this to the bigcharts.com German traded price of 20.14Euros...pretty close and lets us know that we did the conversion correctly. You can also go to this site to look up the German stocks...

http://deutsche-boerse.com/dbag/dispatch/en/isg/gdb_navigation/home?module=InOverview_Equi&wp=DE000SYM9999&foldertype=_Equi

Long Term Bond Prices

As the previous post highlighted, the long bond looks to be falling in price. The attached chart is a very long term strategy that will help show when the drop in price is more than just a simple pullback.



The chart has a moving average ribbon of 110, 115, and 120 months. Notice this moving average has provided support 3 times in the past in 1994, 2000, and 2007. Bond prices have not dropped below this moving average since the early 80s bottoming process. Also notice that bonds have dropped the last 6 months in a row. This is not unprecedented, but has rarely occurred in the rally of the past 30 years.

If the moving averages do not hold as support over the next few months, then the long term bond market may indeed be set to fall (yields rising).

These moving averages will become important as the year progresses!

The Long Bond

The long bond looks poised to rally once the next pullback ensues.

Looking at the chart, it seems we had a 5-3-5 move up off the ultimate '08 low to the June '09 high (in blue and red). This is not impulsive, but rather is corrective since it is only 3 moves to the upside. However, the move was huge and likely is the beginning of correcting the ~30 year downward move in yields. As the chart lays out, once that 5-3-5 completed in June of '09 a relatively long sideways retracement brought it back to its almost exact 61.8% retrace in August 2010. From there it has started to rally again in a 5 wave move which looks to be close to completion.

This next move should see the 30 yr topping for a short term (red 1) and pulling back in a 2nd wave retrace before a powerful 3rd wave up again (in red on right of chart). This move at least should take yields over the 5.1% at a minimum.

There is a chance that this chart is more bullish than I have labeled (if for instance the 2010 top was really where Black A should be labeled), but that won't matter for a year or so from now and both counts provide similar results.

In the meantime this means that the long bond yield's risk is to the upside and may mean to target shorter duration products and or take some profits on bonds.

Cullen Frost Bankers (CFR)

Above is the technical analysis of Cullen Frost Bankers. It looks pretty good assuming my wave count is correct. If the wave count is not correct it is likely we are closer to a top than a bottom. The trendlines I have placed on the chart should help determine when a sell may be in order. However, the trend is your friend on this one and it has performed pretty well lately. Momentum is confirming the trend up as well. I will watch those indicators for lower highs as price makes higher highs for a divergence sell signal.

The $59 level is also pretty important to the wave count. From a relative perspective and useful to a sector specific fund this company is outperforming the other banks (bottom indicator on chart above). Notice how well it did relatively during the 2008/2009 crisis. If these trendlines are broken, but the relative strength holds, then a manager needing to buy banks for allocation or diversification reasons may want to hold onto this stock even though it is falling in price. For others, a break in the trendline may warrant a sell.

Overall this stock has been performing well and there is no reason yet to sell. Similar to pretty much every stock out there the low volume remains a little concerning. However, most other technical indicators are in favor of this company.

Schlumberger (SLB)

This analysis was requested from a special someone!

Schlumberger is an oil and gas service provider and sits in a strong sector. Its stock has been on fire lately and has made a lot of people happy. The good news is it looks like there is some more upside. The bad news is that it looks to be limited with some significant risk to the downside.

Here is the first chart, a long term look at the stock from its early days to the financial crisis, to now.



The chart is pretty much self explanatory just follow the comments in a counter clockwise fashion from left to right. Bottom line is the stock has been performing well over the last decade but has recently shown some weakness, especially in volume. The key for this stock going forward is to hold above the $73.25 high. The letters and numbers I have on the chart are a technique called elliott wave theory and help to point the direction of the next moves. The $73.25 price holds the key to this technique.

Another technique is to use trendlines to help find buy and sell points. Notice in the late 90's this technique worked pretty well as the midterm sell point around $39.00 would have saved you the entire downturn of the 2001 recession as price didn't reach that level again until 2005. This technique would have given a buy entry in 1999, a sell at the end of 2000 and another buy in 2003 around $23.00. These buy/sell lines aren't on the chart to keep it simpler, but you can imagine them by connecting major price highs and lows.

Currently the mid term green sell line is at $60.00 but rising fast. By June it will be at $68.00 and by the end of the year it will be at $77.00. Combine this with the $73.25 level and we have a pretty good profit taking point.

One final point on this chart is that volume has been declining even though price has risen. Typically this is a negative warning sign. The same thing occured at the 2010 top. Notice the green bars getting lower and lower as 2009 progressed. A similar thing is occurring now.

The next chart is a shorterm term closer look at the last 2 years. This chart helps point to the higher price levels that are expected. Be warned though, this elliott wave pattern looks just about complete and once finished prices should come back to the current $80 levels at a minimum. The blue box area is where very little volume occurred and could be a point the price could fall fast.



Trendlines are also used on this chart and there is a very steep one currently at $82. A break of this trendline would keep profits tight because of its steepness and should be considered if worried about whipsawing price. Another way to help look for a price top is thru divergences which I show on the indicators at the bottom. Similar to the topping that occurred at the 2010 new year, I will look for a lower high on the momentum indicators. If a top occurs in one of these indicators that is lower than the one in early December, then that is a good signal that momentum is waning and a high could be in.