Saturday, September 22, 2007

Stock Market Update 22 Sept 2007

YTD:

Dow Jones World Index: + 9.469%

EK Blackrock/MLIM Equity Fund: + 7.57%

EK Fidelity International Fund: + 11.67%



It has been a very interesting week on the markets with most of the averages gaining and the US dollar getting hammered.

The huge news of the week was the decision by the US Federal Open Market Committee to lower both the Discount Rate and the Fed Funds rate by 50 basis points each (1/2%). This took the market by surprise as most had predicted a 25 basis point cut in the Fed Funds and Discount rates (1/4%). In fact, in the futures market the 50 + 50 cut was given less odds than holding the rates steady (market had priced in only an 11% chance of a 50 + 50 cut).


The result was a significant market rally on Tuesday and into Wednesday (as I mentioned would occur with a 50 bp cut in my last blog) with a small pullback on Thursday and some further gains on Friday. Net for the week the Dow Jones index gained 3.858%.


Here are the charts as of today (click on each chart to enlarge):

First is the daily DJW line chart:


Significant points are the price rising through the 50 day moving average (though the average itself is still in decline), the ADX (14) crossing above 60 and the MACD crossing above 0. This indicates a short term bullish situation but until the 50 day moving average is again rising you must continue to view the market as being in a decline.


Next is the 1 box PNF:





This chart is looking bullish. A buy signal was generated on a price push through the 292 level on August 31 and a second buy signal through the price level of 297. However, note the calculated price objective of this move is 316 which would be just beyond the top of the past rally (313.81). Not a particularly strong price projection so this leaves me wondering somewhat whether this price move is some kind of a "head fake" and we head lower from here. Cautiously optimistic on this chart.


Next chart is the Traditional PNF:


No change on this chart; long term still bullish with a price objective of 430.


Next is the long term weekly line chart:





This chart also looks fine and to this point it looks similar to the correction in the spring/early summer of 2006.

As long as the 13 week moving average is above the 34 week moving average we are still in a long term bull market. Any cross of these averages would be a major bearish indication. So far so good.

Next chart is a monthly candlestick to give you more of a "simple" view:



The nice thing about a monthly candlestick chart is it cuts the noise down considerably.

Key to note here is the market is currently in a trading range between the 2 blue lines. You can see that the "tails" extend above and below this range but the monthly opening and closing prices have stayed very close to this fairly tight range for the past 5 months.

August was interesting as the price was slightly below the range indicated but the opening and closing prices were very close together (shown by the very small size of the candle body). This chart pattern is called a "doji" and indicates market indecision. Since then the following month (Sept) has so far been positive so it appears the market has "decided" the direction is to the upside.

Also note the 12 month moving average is currently at 288.28 and continues to rise. It should act as support on any pullbacks but as long as the monthly closing price is above this moving average the market remains bullish. A monthly closing price above the current range would of course also be bullish and lead to a good price rise into the end of the year.

A price close below the lower blue line at approx 295 would be bearish; below the 12 month moving average would be an outright sell signal.


Next chart is one I monitor daily but have not shown before. It is a ratio of the DJW index to the Japanese yen:





As we all know, the carry trade has inflated the worlds stock markets. In trying to analyze how to use this information to our advantage, I devised this chart.

As can be seen, over the past 3 years there has been a strong correlation between the yen carry trade and the DJW index. Essentially, a weak yen is good for world stock markets and a strong yen is bad news.

DJW buy signals occur when the ratio falls below the 50 day moving average (blue line) and a sell signal is generated when it rises above. Also note every bottom in the market was foretold by the RSI (14) being at or above 70. This happened with the latest correction and the ratio has fallen through the 50 day moving average. This is bullish for the stock markets.


Last chart is more sobering if your home currency is denominated (or linked) to other than the USD. Here are the rates of return year to date for the DJW priced in US dollars, Euros, Australian dollars and British pounds:




The latest currency problems have hurt the Aussies the most. Year to date the DJW has gone absolutely nowhere when priced in Aussie dollars.

Bottom line:

Holding 50% equities/ 25% Euros/ 25% USD

The markets have responded well to the Fed decision. Short term indications are bullish, medium somewhat neutral, long term bullish.

With the recent price action I am leaning towards shifting into a 75% equity/25% cash position. I will hold off until the beginning of next week to see how the markets respond early in the week (Friday was options expiry so there is a good chance there might be some market weakness next week).

As I've said before, I've got 2 balls and neither one of them is crystal. Having said that, if I were to make an educated guess I'd suggest the market may want to give back some of it's recent gains into the 1st week or 2 of Oct but after that I expect a pretty good finish to the end of the year. In any case, I'll let the charts tell me where to go and for now they are saying we are looking ok.




























Sunday, September 16, 2007

Stock Update 16 September 2007 (GOLD)

No changes to the indexes. They are neutral and I continue to hold my 50% equity/25% Euro/25% USD positions

The markets are caught like a "deer in the headlights"..... a term used to describe a situation in which they do not know which way to go. On the one hand the daily charts are positive...but on the other hand the weekly charts are negative. Price action has gone nowhere and everyone is waiting on the FED and their interest rate decision on Tuesday.

My guess is the market has already priced in a 1/4% rate reduction. If they go 1/2% you'll see a rally, 1/4% neutral choppy trading, and if no change to the rates look for a stock market correction of some significance.

Bonds look good here; will post more on this at a later date. USD looks like crap; other currencies fine. BUT.........USD oversold so expect a short term oversold bounce.

I want to include a couple charts of gold charts as I think we may be on the verge of a significant price rise in both the physical metal and the stocks. It is not normally part of the provident fund but there is the option to purchase precious metals in the "C" account or outside the provident fund so I thought I would share my thoughts.

I think we are on the verge of a significant increase in price as the charts below show (click on the charts to enlarge them):


First is the HUI (AMEX Gold Bugs Index); a commonly traded index of unhedged gold stocks on the AMEX exchange:






Note the consolidation pattern for the past 1 1/2 years. A breakout above the upper red line will be a very strong buy indication with a potential for 60-80% upside appreciation (see next chart as to why).

Next is the same index plotted since 1998:






Note that since the bull market in PM began in 2001 there have been 4 significant areas of "consolidation" (marked in red lines). While the shape of these consolidations have been somewhat different, the key is upon breakout each upward thrust was significant.

I think we may be there again.

Last chart is a different index I monitor, the S&P/TSX Global Gold Index. It is more broad based than the HUI and gives a more global view:




My notes are on the chart. Bottom line is the CCI has broken out and the index to gold ratio is below 0.45 and almost crossing the EMA(20). This is a rare event (indicating an extremely oversold condition) and in the past has precluded spectacular price appreciation over the next 6 months. The series of lower lows on this chart would have to be broken to the upside to give me further confidence we are on the start of a significant price appreciation in Precious Metals.

I have taken an initial position in my personal trading account in Precious Metals based upon these charts. A breakout on the HUI will lead me to purchase much, much more.

No recommendations, just what I am doing and why for your consideration.

FYI

Wednesday, September 12, 2007

Stock Update 12 September 2007

It has been a wicked couple weeks on the markets yet we have gone nowhere.

Here is the daily DJW line chart (click on all charts to enlarge):




The sell signal on this chart occurred when 4 things happened:

1) the ADX (14) red line crossed above 60,
2) the daily price fell through the 50 day moving average (50MA blue line),
3) the MACD fell below zero, and
4) the StochRSI (25) confirmed a continuation by staying below 0.2

Since then only the StochRSI has made a trip into positive territory with the rest (to this point) falling well short. In addition, the 50 MA is now in descent; this is a major indication that the medium term direction is bearish (down).


Next is the 1 box PNF:




Here it can be seen a short term buy signal was generated on Aug 31 when the price broke above 292. Normally I would have looked at this as a buy signal but given the line chart discussed previous I sat on my hands and watched.

Since then nothing has changed and the price has retreated to 293.93. In other words, this chart has yet to prove to me this rally is for real as nothing has happened in 2 weeks.


Next is the longer term traditional PNF:




This one is still on a buy signal therefore no panic to liquidate positions (yet?).

In a previous blog entry, I mentioned I expected the market to put in a minor rally followed by a retrace back to the initial bottom at 277.17. There is no indication on the charts to change this view.

This action the past 2 weeks has been fast and furious but it has been driven by day traders and hedge funds. All the big players (mutual funds, pension funds) have been on the sidelines (confirmed by the pathetic volume on the major U.S. averages the past 4 weeks). A real confirmation of direction will be evident once the volume picks up and we see which direction it is heading.

Last chart is the pathetic USD chart. I've used the long term chart to give some idea of how bad it is




The USD has broken to a new all time low against the Euro. It has support going back to 1992 at 79.12 (it closed yesterday at 79.68). Any close below 79.12 is truly in uncharted territory; it will be interesting to watch the chart action if/when it crosses this threshold.


Bottom Line: Still maintaining my 50% equity/25% Euro/25% USD positions. I am comfortable with this "neutral" position until this mess sorts itself out and a direction is indicated.

Your email address:


Powered by FeedBlitz