Monday, January 21, 2008

Stock Market Update 21 January 2008

It has been another wild week on the markets with the Dow Jones World Index falling 5.1%.

There has been a lot of pain generated by this decline and a level of panic appears to be building. However, once again technical analysis has allowed me to sidestep this decline and my provident fund has made money over the past month.

For those that have shadowed my moves and are currently positioned in cash and/or bonds, this is starting to look like a delicious opportunity to buy some very cheap equites soon. For those who employ financial advisors; I hope they had you safely on the sidelines for this move (as they should have). If not, you need to consider whether they are worth having.


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



As can be seen, price has declined rapidly through the downtrending channel and is now very near the lows seen in Mar/2007. Those that stayed with stocks have lost all their gains for the last year in a very short period of time. This is the violence of bear markets; when they move they move very, very fast.

There is no indication on this chart that the declines have ended. A break of the support level from Mar/07 @ 270.73 is it's last hope.


Next chart is the 1 box PNF:



This chart gave us the sell signal on a break of price below 294.

It is clear that previous support at 278 was broken easily. Next support is at 271 (right where we are at now). Below that we look to 264......below that down to 232.

Note the chart has "auto aligned" projected price targets several times over the past 2 weeks (downwards) due to the momentum and currently projects a target of 243.

Once again, for those who are new to charts, do not in any way use this as a trading target. Many times the price action will either exceed the target or fall short of the target. I use the projected price as merely an indication of the strength of the current move. A target near to current price shows me the move is shallow; a price far from current prices (as it is now) shows me there is considerable downside risk remaining.


Next chart is the PNF Traditional chart:



It can be seen on this chart that a price print of 292 was the sell signal (as I pointed out previous). As I said, when you have a multi-year buy signal that turns to a sell signal.......you listen. I did and that saved me thousands of dollars over the past 2 weeks.

It can be seen on this chart that the revised projected price is 240. It can also be seen that previous levels of support/resistance were at 264, 232 and 196. These are the current levels we should be thinking about in this bear market. Not saying they will go right to them but they give you an idea of the downside risk.


Next chart is the 10 year weekly line chart:



As I blogged several days ago, when the 13 week moving average crossed below the 34 week moving average (combined with the MACD descending below the zero line), it was the signal to move my last 25% out of equities.

Once again, the last time the 13 crossed the 34 was in April, 2003 and signaled the beginning of the bull market. As per the PNF traditional chart; when a multi-year buy signal is reversed you pay very close attention.

Also note the well defined upchannel from 2003 has now been decisively broken. This is very worrying if you are still in equities.

This chart now tells us we are in a bear market and, while there will be bounces along the way, any rally should be sold into rather than bought.



Bottom Line:

As I blogged previous, I am currently positioned as follows:

Fidelity International Bond Fund-50%
U.S. dollar cash fund-25%
Euro cash fund-25%

For those that have shadowed my moves, we sit today in a very comfortable (and profitable) position waiting for the carnage to complete and looking to move back into equities when the time is right and the price is cheap.

To be honest, I would have liked to see this decline move at a much more orderly pace but, as I said at the open, bear markets tend to be vicious.

The question now becomes when I will look to buy back in. As I have said previous, those that tell you they can pick tops and bottoms are nothing more than liars.

There are those who are buying now as the price is cheap. This is known as trying to "catch a falling knife"........sometimes you catch it right but most times you lose fingers! Not what you want to do with pension funds.

What I can say with certainty is this move has left the market in an extremely oversold condition. There are several indicators I use (not shown) that have extremely low values that I HAVE NEVER SEEN IN 10 YEARS! That tells me the market has over-reacted and we are very close to a "bottom".

I use the term bottom in quotes for a reason. When price reverses, there is a tendency for many to jump in and try to "buy the bottom" on the first price reversal. Note that technically price does not normally bounce off a bottom in a "V" shape (though it does happen on occasion). Normally what happens is buying occurs and price advances to a certain level. The dumb money sees the increase and rushes in to buy while the smart money "sells the rally". This is known as a "dead cat bounce" and generally the markets will come back down to retest the previous low. It is usually when price retests the low (or very close to it) and then reverses higher a second time that it is a safe bet the trend is reversing.

I will use the charts and they will tell me when the time is right. But just to give you some idea of how pesimistic the markets are currently, I have included the Bullish Percent Index for the Nasdaq, S&P 500 and NYSE. These charts tell you the percentage of stocks within the index that are currenly on a "buy" signal on their PNF chart.

Note the levels are at their lowest levels since 2003 (or in some cases actually below 2003). That tells me we are getting near to a bottom.





Wednesday, January 16, 2008

What is going on with the markets?

Sorry for the multiple posts over the past few days but this is a time of "change" and as such there are a lot of market issues that need to be addressed.

For those who were wondering if I was monitoring/updating the site over the past 6 months when we were in the "good times" and I was updating infrequently (and you were wondering if I was continuing to monitor the markets and updating the site)........I guess you now know I live and breath this stuff! When there is nothing to say.......I say nothing. Where there is something important to say.........I speak....... a lot.

Simply, here is the crux of the issue........."Credit crunch".

What does that mean? Essentially all banks are hesitant to lend to one another given all their individual exposure to mortgage debt/credit card debt/auto loan dept/etc in a falling asset environment. This has led to banks unwilling to lend to one another.

As I mentioned previous; no lending = no monetary velocity = deflation= Oh, oh!

So why are they unwilling to lend to one another?

1) most exposed themselves to "exotic" toxic mortgage related tranches over the past number of years (that I have talked about previous) and they really do not know the value of those assets they hold (and by default neither does the other guy on the opposite side of the trade), and,

2) they really have no idea to what extent defaults will occur in the future in not only the mortgages they hold but also credit cars and auto loans.

In order to keep it simple, here are the biggest issues you need to understand:

First chart is the various U.S. mortgage resets (as there are numerous types of mortgages in the U.S) based upon time over the next few years (click on charts to enlarge):


I've tried to annotate the chart as best as able. The key point to note is while "sub prime" is the "flavor of the day" as far as the media is concerned (and by inference once that "sub prime" period has past all will be well), in fact there is a huge amount of additional resets that will occur over the next couple of years that could be the "2nd" tsunami. The point is we are not out of the woods on this issue for some time irrespective of what you might here in the media.

The key to note is the number of mortgage resets over the next 2 years. Initially it was thought that only the "sub prime" mortgages would be an issue but data over the past month has indicated the more "quality" mortgages are also going into default. This is very bad news for the markets going forward.

Secondly, banks have started to report 4th quarter earnings. Citi group announced almost a 10 BILLION loss for the quarter! That number sounds huge but more is yet to come....see below.


Note the huge rise in both CC debt and also auto loan debt defaults. This is the second wave of the tsunami the markets have yet to fully price in ( in addition to the 2nd tsunami in mortgage resets).

The bottom line is this is probably one of the most challenging markets in recent history. I caution you not to listen to the media and the "all is well" crowd................this is a huge event and you need to be prepared to deal with it. I cannot stress that enough.

As I have told you previous; I have positioned myself now in 100% non-equity positions. While I will not advise individuals to do the same (as I am not offering any sort of service to provide this advice); I would caution those who are long equities in the provident fund to seriously look at their positions and assess accordingly.

In my opinion, the markets are due for a "dead cat" rebound. Until proven otherwise, I will take that bounce as the "tide going out" where all the uninformed stand on the beach wondering where the tide went while the 2nd tsunami is inbound.

Monthly Investment Strategy

I've had numerous questions over the past few months on how I go about investing my ongoing monthly provident fund contributions.

It has been proven over time that of the 3 investment options (cash, bonds, stocks), in the end stocks ultimately outperform both the other 2 asset classes and also inflation. As such, my personal strategy is to maintain a 100% stock purchase program monthly (divided equally amongst the 3 equity funds we have available in our A/B accounts) irrespective of the current market conditions.

Maintaining a constant purchase strategy allows me to purchase units at a lower cost when the market is in decline (think of the units as being "on sale") and therefore accumulate additional units. When the market is doing well I purchase lessor units monthly. This concept is called "dollar cost averaging" and allows over time an accumulation strategy that gives you a fairly reasonable price/unit measured over time. This also makes things simpler as you don't have to worry about investment choices; only positioning of current positions to protect your capital gains based upon technical indicators.

Confirmed Bear Market

Brutal start to the week. Charts confirm bear market.

DJW daily line chart (click charts to enlarge):



Downtrending channel remains intact. Right at the trendline support from Aug/07. A break below takes us to the August low at 277.17, below that the July/07 low at 270.73.

DJW PNF 1 box:

Bearish with a revised price target of 263.00

DJW PNF traditional:


Bearish with a price target of 256.00

DJW 10 Year weekly line chart:



Key to note that as of today the 13 week ma crossed below the 34 week ma. This has confirmed the bull market that began in 2003 is now complete and we are heading lower from here.

The only ray of hope is currently price is right on the lower trendline that forms the channel from 2003. It may hold support at this level for a bit (or even go a bit higher) but ultimately (based upon momentum) I think this trendline is going to be violated to the downside.


Bottom Line:

I will be switching the last 25% of my equities position into the Fidelity International Bond Fund. As such, my positions (as of tomorrow) will be:

-Fidelity International Bond fund 50%
-USD cash 25%
-Euro cash 25%

For those who have "shadowed" my moves; looks like you did well and you are safely in cash and bonds. For those who did not, note the market is severely oversold at this point and I do expect a "relief rally". It may be a time to consider repositioning out of equities and sell into the strength.

I still am very optimistic for the end of the year. In fact, more so now that this selling has taken place. I will be looking for a bottom some time in the Apr-Jun period at which point I think the market will rally strongly into the year end (as per my forecast previous). However, I will not try to "front-run" the move and will let the charts tell me when the time is right.

Wednesday, January 09, 2008

Stock Market Update 09 January 2008

Just got back from Osaka but thought I'd update before going to bed.

A couple of small moves on the markets over the past 2 days have made a big difference in the technical picture.

On the day before yesterday's move (07 Jan closing price), the PNF charts turned negative. As per my previous post, this triggered a further repositioning in my provident fund account.

I switched a further 25% out of equities and into the Fidelity International Bond Fund. I will go into my rational for this move in my next blog but the key point is I have reduced my equities exposure to 25%. I was unable to blog this move on Jan 8th (blog site issues), therefore I am announcing it 1 day late. However, I made the switch in the provident fund on Jan 08.

First chart is the daily line chart (click charts to enlarge):



The change of significance in this chart is the swing low @ 292.17 has been broken. This confirms the downtrending channel drawn on the chart. The chart is confirmed bearish.

Next chart is the 1-box PNF:



It printed a price below 292 and has gone short term bearish. Currently it projects a 275 price objective.

Next is the PNF Traditional chart:


This chart too turned bearish on a price break below 292 and is projecting a 272 price objective.

The key thing to note here is this chart last turned positive in Oct/2004 on a price break through 192. That is over 3 years of "bullish" price projections and this is the first sell signal since then. When a consistant signal over many years reverses direction you take it at face value. Bearish, bearish, bearish!

Last chart is our weekly line chart. The 13/34 ma cross has not occured yet...........hence I am still 25% equities. Another few days of this sort of price action and this chart could turn negative. But until it does I stick to my 25% equity position.



Bottom Line:

I reduced my equity exposure on Jan 08 to:

-25% equities
-25% Euro cash
-25% USD cash
-25% Fidelity International bond fund

The market is extremely oversold at this point and I do expect some sort of bounce. However, the overall picture is one of bearish price action and I am comfortable my equity exposure has been reduced.

When this market reverses course (and it will at some point) I will scale back into equities but for now I believe based upon both the technicals and the fundamentals that minimal equity exposure is the prudent course of action.

Saturday, January 05, 2008

Stock Market Update 05 January 2008

Greetings and welcome to the first ECAM stockmarket update for 2008.

Firstly, be forewarned this update is somewhat more lengthy than usual. The reason for this is because I want to first review 2007 before going onto the current conditions. Afterwards I will give my "crystal ball" outlook for 2008.

First the year 2007. For the year the Emirates Provident Fund A & B equity funds returned the following:

-Blackrock/MLIM Equity fund: +5.9%


-Fidelity International Equity fund: +13.2%


-Russell 90 fund: +10.4%

By comparison, the Dow Jones World Index (that I use in this blog as my proxy fund) returned 8.1% over the year. If you had invested 1/3 of your equities in each of the 3 funds, you would have returned an average of 9.8%; not bad considering the volatility that occurred in the second half of the year.

This highlights the importance of not picking any one equity fund within the provident fund as year to year their results will sometimes vary considerably. I feel it is much better to divide your equity position equally amongst the 3 offered.

The first chart is the DJW year to date chart ending 31 Dec 2007 (click on all charts to enlarge):



The key thing to note is, of the 4 currencies I monitor regularly, a positive DJW rate of return was only achieved in the USD and the British pound. Due to the relative strength of both the Euro and the Aussie dollar over the year, the end result was a loss on the DJW when priced in those currencies.

Throughout the year it can be seen the market experienced 2 significant corrections (one in March which is unusual, and one in August). This could be described as somewhat of a "typical" year given the continued strength from the beginning of the year into the summer, followed by a mid-summer correction, followed by a strengthening period into the year end.

See the next chart which is a 25 year averaged chart of the MSCI index which shows the tendency for strength into the summer followed by a correction followed by a further rise. Also if you take the average rise over the past 25 years (100 to 109) you'll see that on average over the past 25 years the index has returned 9%. As such, our year this year was very much an "average" year; not great but also not bad.



Along with the historical seasonality, I also find it useful to monitor the 4 year presidential cycle. For those who have never heard of it, the theory is that the year before an election the political machinery begins to inflate the economy in the hope that by the time the actual election occurs in November of the following year the economy is doing great, unemployment is low, and the stock market is booming. The hope is that in doing so the incumbent party (currently the Republicans) would be re-elected.

Here is the long term historical chart of the Dow Jones average going back over 100 years:




Once again it can be seen the markets generally do well in the early part of the year, swoon in the summer period, but then move higher into year end. Also note in a pre-election year the Dow Jones Industrial Average has returned an average of approx 9% over the past 100 years(this year it returned 6.4% so was somewhat below average).

In summary, the markets in 2007 did pretty much what they should do on a historical basis. The big question is where are we currently at and where might we be going in 2008.

First chart is the DJW as of yesterday's close:



It has been a tough opening week for the markets in 2008:

Nasdaq Composite Index: -6.35%
S&P 500 Index: -4.52%
Dow Jones Industrial Average Index: -4.23%
New York Composite Index: -3.79%
Dow Jones World Index: -3.19%

Note that the DJW index, while down significantly on the week, did better than the rest of the U.S. indexes. This indicates that, while things might be rapidly falling off the rails in the U.S., the rest of the world seems to be holding up slightly better (for now?). Also note it is still well above it's August/2007 swing low whereas the U.S. indexes are close to violating (or already have violated) their August swing lows. This is another reasonably bullish sign things might be ok in the DJW index.

Next chart is the DJW daily line chart:




On a short term basis the market is still in a corrective declining channel. The ADX (14) sell signal issued in early Nov continues. Price remains below the 50 day moving average. Price closed .04cents above the last swing low that occurred in mid-November (but as of today still has not violated it). This is not encouraging short term.

Next chart is the DJW PNF 1-box:


This chart confirms the bearish price action in the short term. A double bottom breakdown occurred on Friday and this chart now indicates a bearish projection to a 283 price objective. Another short term negative indicator.

The only positive to take from this chart is it still held above 292 (it's closing price of 292.21 just avoided printing a new "O" at 292........my "line in the sand" I spoke about in my previous post.

Next chart is the DJW PNF traditional:


This chart remains bullish as of today and still projects a target of 430. HOWEVER it is also within .21 cents of printing another "O" at 292 and doing so would change the chart to bearish. It is virtually poised on the edge of a cliff and could either way from here.

Next chart is the 6 year DJW line chart:


Once again, from a medium-long term point of it is bullish as of today. Note that while the 13 ma has not yet crossed the 34 ma, it is awful close to getting there (13 ma @ 301.70, 34 ma @ 299.23). A cross would be the first time this would have happened since the bull market began in 2003.........should this occur it will be very bad news. However, one again to stress the positive as of today it has not happened. It has been close before, maybe this time is the same? Only the next couple of weeks will tell for sure.

Last current chart is the DJW monthly chart:



Once again, the key here is ON A MONTHLY CLOSING BASIS this chart has not violated the 12 month moving average since the bull market began in 2003. It has tried 6 times inter-month since 2003 (as seen by the "pins" that poke below the 12 ma) but has yet to close there. It is currently sitting below but until January ends to confirm it could just as easily move back above by the end of the month. I continue to monitor this one closely.

Bottom Line:

As of the close of trading on 04 January, within the Emirates Provident fund A and B accounts I still remained positioned 50% equities, 25% Euro cash, 25% USD cash. Nothing that occurred this week in the markets has changed my positioning.

HOWEVER, as I mentioned above, the charts are literally sitting on the edge of a cliff. Any significant down day next week (DJW close below 292) and I will be forced to lighten up my positions into a 25% equity/75% cash posture. Should a 13/34 cross occur by the end of next week I'll be 100% cash.

Alternately, should the markets turn around in the next week or two (which is very possible given their extreme oversold condition), I would look to go into a 75% equities/25% cash position on:

-price climbing above the 50 ma on the daily line chart (currently at 303.75 as of today) combined with a green buy signal on the ADX (14) (green line crossing above 60), and

-a new buy signal on the 1-box PNF chart (currently it would take a closing price of 303 or greater).

It is that simple.

2008 Forecast

Now comes the fun stuff.

Firstly, I must stress all of this is strictly conjecture/thoughtful analysis/common sense/etc and as such nothing said here should be used to make investment decisions in any way.

Having said that, here are my predictions:

1) the stock markets will go through a very turbulent 1st half of the year. The current bearish malaise overhanging the U.S. will continue (4th quarter earnings for many firms will be downgraded, housing foreclosures will increase, a least 1 major financial institution may face bankruptcy, individual and class action lawsuits will be filed as a result of poor business practises associated with the mortgage industry, government investigations into various firms who provided these toxic mortgages will occur, etc). In short, for the first half of the year "everything will be bad" from a sentiment point of view.

From an economic point of view, I expect the U.S. is already in recession but the "official" numbers won't confirm it until the summer. Note that during a "typical" recession the S&P 500 index loses 26-30% of it's value from peak to trough. Taking the peak of 1576.09 achieved in early-mid Oct 2007 as the benchmark, should a recession actually occur I see the S&P 500 index finding a bottom in the first half of 2008 in the region of 1166-1103.

2) I expect U.S. house prices to decline at least another 10% nationwide next year (and bottom in 2009). This combined with a further deterioration in the Asset Backed Commercial Paper market (ie. the credit markets) will result in significant unemployment in the U.S. This will spike the unemployment rate to 6%.

3) All this will be highly deflationary for the U.S economy initially (at least the first quarter of 2008) but then will lead to "stagflation" later on (stagnant growth with increasing inflation). I expect the Fed and the U.S. government to become very aggressive in trying to reflate the economy to avoid a significant recession or depression. The Fed will lower rates dramatically and the government will offer numerous "plums" to get the economy moving in what appears to be the "right direction" (probably tax cuts, tax incentives, debt forgiveness for many sub-prime real estate loan defaults, etc). It would not surprise me to see the government introduce some sort of "price controls" to attempt to control inflation in commodity(food) prices. All this liquidity injection will lead in time to inflation with weak to stagnant growth (stagflation)

4) The combination above will lead to a market bottom in the May-June period. From there I expect a significantly more bullish market into year-end as per the traditional election year performance over the past 100 years:




By the summer all the "bad stuff" will be out. From that point the media will shift their focus from the economy to the Olympics and in the fall to the Presidential elections. This distraction will take our minds off how bad the markets are (people will be so disillusioned by the markets at that point that they will have no interest in them). It is then the markets will begin a dramatic rebound into year end.

5) All this re-flation of the economy will become highly inflationary. I expect the USD to set new record lows (but not as bad as many believe as I think the Euro, Pound, Aussie and Canadian dollars will do worse so on a "relative" basis the USD will not be the worst performing currency next year). I expect gold to go above $1000/oz.

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