Stock Market Update 29 June 2008

Another brutal week in the markets for those that are long equities. For those (like myself) that are still in a combination of non-U.S. cash and international bonds, it was entertaining to watch.

Here are the year-to-date returns for the funds I hold:


Core Holdings (currently approx 95% of portfolio)

Fidelity Australian Dollar Fund: +3.05%
Fidelity Euro Fund: +1.63%
Fidelity International Bond Fund: +2.89%

Ongoing Equity Purchases (currently approx 5% of portfolio)

BlackRock/MLIM Equity: -11.45%
Fidelity International Fund: -10.91%
Russell Global 90 Fund: -9.21%

Representative Charting Index:

Dow Jones World Index: -10.5%


The big news of the week was the U.S. Federal Reserve meeting and the decision to leave the U.S. Fed funds rate steady at 2.0%. While this news was not a surprise to anyone in the markets, what did spook investors is the wording of the statement that accompanied the rate announcement.

In short, Ben Bernanke over the past 2-3 weeks has been "talking tough" in the media about the possibility of raising short term rates in the near future to combat rising price inflation in the U.S.(and also in an attempt to talk up the U.S. dollar). The markets took the talk at face value and had started to price in the chance of interest rate increases towards the end of the summer/fall. This in turn provided a short term boost to the US dollar over the past few weeks (which I mentioned in a previous blog) and a rise in bond yields/decline in bond prices.

Following the wording of the official announcement (which was much more "wishy-washy" than Bernanke's talk in the media), the markets essentially viewed Bernanke and his "tough talk" over the past few weeks as pure B.S. and in turn sold off the dollar and tanked the stock markets. Bonds did very well over the week.

The bottom line is the U.S. Fed is in a quandary. If the Fed raises short term rates to fight price inflation (which would reduce consumer demand for goods as well as support the dollar), they would end up tanking what remains of the U.S. housing market and with it the U.S. consumer (due to outstanding mortgage and credit card debt). As approx 70% of U.S. GDP is consumer based, that in turn would put the U.S. into a steep recession/depression.

On the other hand, if he lowers short term rates (to reduce mortgages to support the economy via the housing market and consumer), he tanks the dollar and sends commodity prices to the moon. That leads to the possibility of out-of-control price inflation/hyperinflation.

It really is a "damned if you do/damned if you don’t" type of situation.

It appears what they will do is "fence sit" on interest rates for now; talk tough in the media and hope over time other countries will be forced to reduce their respective interest rates to combat their own upcoming slowdowns/recessions. In turn, the reduced interest rate differential will strengthen the USD, which will reduce commodity inflation, which will reduce US price inflation. With this plan, inflation gradually falls without the Fed having to move up U.S. rates.......they hope.

The trillion dollar question is whether this plan will work. Should it not, I do not see the Fed raising rates; instead they will cut if they have to. If so, they will allow inflation to skyrocket in order to save the economy and deal with the inflation question at a "later date". If this happens, it will have a profound impact on all our investments as it could lead to a hyperinflationary depression.

This is without a doubt the most serious financial crisis to face the world since the 1930's; it is that bad. In this light, I have been asked by others where I have positioned my own "C" account excess savings (I only use Wyatt Watson for my mandated A and B account holdings and do not hold any excess savings in the Provident fund). I will touch on that at a later time but for now I will say I do not use the provident fund offerings as they do not offer the diversification necessary to make it though such a scenario as I fear may unfold. For now; if you are looking into investments think "stuff" that holds value in an inflationary environment (such as gold/silver, commodities, commodity producing countries and companies, commercial real estate, etc).

That is enough doom and gloom for now. On to the charts (click all charts to enlarge).


First chart is the Dow Jones World Index (DJW) daily line chart:



This chart went bearish in early June and has not recovered to date. All technical indicators are bearish and it looks to be attempting to retest the bottom near 261.

It must be noted there is a positive divergence in place on the MACD histogram indicating we may be near the trading bottom I have been looking for. The sign a short term bottom has been made will be a higher high/higher low in price along with a turn of the faster moving indicators (SlowSTO break above 20).

This market is oversold and I am looking to move back in for a swing trade long.


Next chart is the DJW 1-box Point and Figure chart (PNF):



This chart went bearish on a price break below 288 and currently projects a price target of 254. A clear line of support can be seen at the 262-263 price level; a turn around above that would be positive, a break below would be very negative for the markets.


Next chart is the DJW Traditional PNF chart:



This is the only chart that is still bullish. Because of this, I am still of the opinion that a good intermediate price rise is coming soon. Should this "medium term" chart turn negative it would change my mind. So far it has not.

It shows strong support at 264 and projects a price target of 364.


Next chart is the 4 year candlestick chart:

No changes here. Still bearish with a descending downtrend line in place. Price could easily drop down to 245 to tag the bottom of this channel.


Next chart is the 10 year weekly chart:

Once again still bearish. The 13 week moving average is still below the 34 week and appears to be diverging downwards. Important support can be seen at the 258-261 level. A break below here would leave open the room to run considerably further down.

Just to reiterate; while I am expecting a bear market rally anytime soon, this in no way changes my view that the long term direction is down. As such, my move into the market (when I do) will be done ONLY WITH THE INTENTION OF A SHORT TERM AGGRESSIVE SWING TRADE.

Those who are risk averse should not attempt to go long the market until the 13 week moving average has crossed above the 34 week moving average.

Last chart is the DJW monthly chart:

No changes here; June will pass and price will not have closed the month above the 12month moving average (currently at 291.61). This is still bearish.


Bottom Line:

I am still awaiting a short term bottom to move into equities. I continue to believe that bounce is coming soon and should continue into the late summer/fall. Then I expect a fallback into Dec with a Christmas rally.

I do not expect this upcoming bounce is the end of the bear market. I expect much further downside over the next 1-2 years. Until my long term charts are all in alignment, I will be very protective with preservation of capital.


I remain invested as follows:

50% Fidelity International Bond Fund*
25% Fidelity Australian Dollar Fund*
25% Fidelity Euro Fund*


*percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary 1-2% from that posted.



Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

Stock Market Update 15 June 2008

Happy Father's Day!!

A very interesting week in the markets......to start off, here are the Emirates Provident Fund statistics year-to-date for my A/B account stock/bond/currency funds:

Current Core Holdings:

Fidelity International Bond Fund: +1.10%
Fidelity Australian Dollar Fund: +2.80%
Fidelity Euro Currency Fund: +1.49%

Ongoing Monthly Purchases:

BlackRock/MLIM Equity Portfolio: -9.88%
Fidelity International Fund: -7.5%
Russell Global 90 Fund: -8.05%

As can be seen, my market-timed "core holdings" continue to beat a "buy and hold" equity strategy by being 100% weighted in International Bonds and Aussie/Euro Currencies. Those who have remained 100% invested in equities over this period have taken a beating both YTD and more so from the July/2007 highs.

My "ongoing equity purchases" continue to underperform (as I expect they will during bear markets) to take advantage of lower prices in equities to accumulate the maximum number of equity shares per month on an ongoing basis. For those who are new subscribers, please review my previous blog on my investment strategy at:

http://emiratescapitalassetmanagement.blogspot.com/2008/01/monthly-investment-strategy.html).

As I have mentioned previously, there are times when you want to be aggressive to maximize total return ON capital and there are times where you need to be conservative to maximize total return OF capital. You need to recognize when you are swimming with the current and when you are swimming against the current. The "current" is currently in our faces and my strategy at this point is just to "hold my own" in the middle of the river; when the current reverses THAT is the time to be aggressively swimming with the current. Now is still not that time.

For those who are eager to see double digit returns, it must be re-stated that patience is required in times of market fluctuations such as now. During bear markets, if you can preserve the capital you have accumulated you are well ahead of the game. Those who either stay 100% invested in equities or those who "jump the gun" and try to get in too early get killed. On the other side of the trade, those that remain in cash at all times and never hold equities get totally obliterated relative to inflation over time. My intention is to experience neither scenario.

On to the Dow Jones World Index (DJW) charts. First chart is a lesson in chart pattern recognition and the value of Technical Analysis (click on all charts to enlarge):



What you are looking at is called a "Head and Shoulders" pattern. It can be seen that the price action forms a "left shoulder" (LS) followed by a Head followed by a right shoulder (RS). The line connecting the shoulders is the "neckline". The price projection is derived by taking the distance between the head and the neckline directly below (Head = 297, neckline directly below the head = 287; difference = 10) and once the right shoulder breaks below the neckline applying the difference to the breakdown level to get the target (right shoulder breakdown at 286, price target = 286 - 10 = 276).

As can be seen, Thursdays close was 275.80.......price projection complete.

This is the reason why I did not enter the market after giving a "heads up" blog on the VIX breakout early last week; the pattern was too perfect to ignore. It turned out exactly as it should and prevented an early entry.


Next chart is the 1 year daily chart:



Since my last update, this chart has turned BEARISH. Key points:

Bearish:
-price broken below the 50 day moving average
-the ADX (14) red DI- line has broken 60 indicating a short term bearish trend
-the MACD has broken below zero

Bullish:
-RSI (14) has bounce off oversold @30
-price has found support right at a previous price level (275.80)
-the slow Sto is oversold

Overall this chart is Bearish.


Next chart is the 1-box Point and Figure (PNF) chart:



Price turned bearish on a break below 286 and projects a target of 254. This short term chart is Bearish.


Next chart is the DJW Traditional PNF chart



This chart still indicates Bullish and projects a target of 364.


Next chart is the DJW 4 year weekly chart:

The possible downtrend channel I spoke about previous appears to be intact. If so, it projects to a bottom around 248 currently. This chart is Bearish.


Next chart is our longer term DJW weekly line chart:

This chart went bearish on a 13 week moving average cross of the 34 week moving average. There is no change and this chart remains Bearish.


Next is the long term monthly chart:

No changes as the closing monthly price in May did not close above the 12 month moving average. Still Bearish.


Bottom Line:

Based upon the charts I remain invested as follows:

-50% Fidelity International Bond Fund

-25% Fidelity Australian Dollar Fund

-25% Fidelity Euro Currency Fund

As I noted in a previous blog, my bond timing charts have turned bearish. As far as currencies are concerned, my U.S. dollar charts have turned short term bullish. I will be monitoring these next week with the possibility of selling my Aussie dollar/Euro positions and moving into USD cash (or equities if the charts indicate).

The next week will be very interesting. I expect a higher price close next week due to options expiry on June 20 (options expiry weeks have a statistically positive close) and the fact the market is short term oversold and at support. There is a possibility that if we have hit a low this past Thursday it MAY be the intermediate bottom I have been looking for.

If/when I make a change I will blog it immediately.

Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

Flash Blog Sunday 08 June 2008

A very quick entry as I don't have a chance at this moment to blog the "whole picture" but need to get this out asap (click to enlarge):



Simply....the VIX can be viewed as a "fear index". When the VIX (fear index) is "abnormally high" (which is an indication that the general investment community is overly bearish and abnormally fearful), this many times gives a heads up that there is going to be a future market rise.

The Bollinger Band (black bands surrounding the market price) normally restrict price movements to a 95% band of the underlying value. A movement above/below these levels is significant.

On Friday the VIX blew WELL above the upper BB. What this means is the stock market is MEGA oversold and due for a bounce.


Bottom Line:

This could be the first indication we are at a true intermediate term bottom that I blogged previously that I was looking for and due for a rise. The first day or two next week will determine my positions.

I am looking for this as an opportunity to buy into this market. I will await confirmation from my other indicators to confirm this but it is important to understand now is the time to potentially be looking Long/Bullish.


Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.
I will advise when I make a move.

Stock Market Update 01 June 2008

Since my last update of 07 May the markets have done very little (07 May the DJW Index closed at 292.09, 31 May the DJW Index closed at 290.85). Over this period a correction took place (as I anticipated) and a small recovery is currently taking place. See my previous post should you have any questions as to what my thoughts were at that time.

Year-to-date, here are the performance figures for the various funds I participate in within the Provident Fund:

Current holdings:

Fidelity Australian Dollar Fund: +2.53%
Fidelity Euro Fund: +1.36%
Fidelity International Bond Fund: +2.97%

Ongoing Purchases:

Fidelity International Fund: -4.06%
Blackrock/MLIM Equity Fund: -6.57%
Russell Global 90 Fund: -3.67%

As readers are aware, I have been in the Bond Fund and Australian/Euro currencies for some time. As such, my core holdings have risen in value year-to-date.

Just to reiterate my investment strategy for those who are new to the blog, I using technical analysis to move my core holdings amongst stocks, bonds and currencies to enhance/protect their value and invest my monthly Provident Fund contributions 100% in equities at all times (divided 40% Russell Global 90, 30% Blackrock/MLIM Equity and 30% Fidelity International Fund).

This investment strategy is known as "dollar cost averaging". For further, see my previous post on this subject or "goggle" it for further details:

http://emiratescapitalassetmanagement.blogspot.com/2008/01/monthly-investment-strategy.html

As of the end of May, the markets sit in a very unusual position. While there are signs of strength, there are also disconnects within the market that tell me all is not well. More on that below.

The first chart is the Dow Jones World (DJW) daily line chart (click all charts to enlarge):



The key points are:

Bullish:

-the short term bullish signal from 01 April is still intact as the red DI- line has not crossed above 60,
-the Relative Strength Index (RSI 14) broke the uptrend line but has reversed and remains above 50,
-price remains above the 50 day moving average (50DMA) @ 284.99 and the 50 dma itself is in an uptrend,
-the MACD remains above zero and, while it is downtrending, there are signs on the histogram (the blue bars on the MACD) that the downward momentum is decreasing, and
-both the Slow Stochastic and Stochastic/RSI are oversold and appear to be reversing upwards.

Bearish:

-price broke the uptrend line established from the April 01 bottom (but it must be noted the slope of the uptrend line was unsustainable and in need of a readjustment anyway), and
-the price was able to push as high as 297.19 but has been turned back by the 61.8% Fibonacci level (at 297.72). This is a potentially very bearish development as a break above this level would have signaled the downtrend was done as far as Elliot Wave analysis is concerned. As such, there is still the possibility we head lower from here.

Overall call this chart Bullish.


Next chart is the short term DJW 1-box Point & Figure (PNF) Chart:



Price went short term bullish on a break above 272 and remains bullish. Currently projects to 329 for a target (for new subscribers, see previous posts on targets; they are useful for direction and "strength of move" but not in predicting specific price levels).

This chart is Bullish.


Next chart is the intermediate term DJW Traditional Point & Figure (PNF) Chart:



This chart went bullish on a price break above 284 and currently projects a target of 364.

Currently Bullish.


Next chart is the DJW weekly line chart:



The key to note here is price fell out of the long established uptrending channel in the first week of Jan/o8 and appears to have formed a fairly well defined downtrending channel. Note price returned to backtest the upchannel and failed followed by the start of a new decline (backtests of previous trendlines is a common occurrence before a resumption of the downtrend).

Currently it appears price has hit the top of the channel and is reversing downwards. This could take us down to the bottom of the channel near 250. Supporting this is the fact the Slow Stochastic is in overbought territory on the weekly chart and appears to be reversing downwards. However, the weekly MACD has nicely recovered and appears to be moving above the zero line. This would be a bullish development.

Overall this chart is Neutral and too early to call.


Next chart is the longer term 10 year weekly chart:



The bearish sell signal was generated when the 13 week moving average crossed below the 34 week moving average. As of today the 13 week has not crossed above the 34 week average (285.92 vs 286.85) so it still Bearish.


Next chart is the Monthly candlestick chart:



As noted, at the end of May the closing price did not get above the 12 month moving average (closed @ 290.85 vs the 12 ma @ 294.66). It did try to get above the average inter-month (as indicated by the "pin" that goes above the average) but in order to turn this chart bullish it would need a monthly close above the 12 ma.

For the month of May this chart remains Bearish.


So that is how the market looks to date. It can be seen that there is a general bullish landscape in the short-mid term but the longer term charts are still bearish.

It appears to me we need to have a bit more of a correction in price (which I expect over the next week or so) before another drive upwards. The key I will be watching is the 297.72 price level as a close above this price would take us above the 61.8% Fib level. This would also result in a breakout of the downtrending channel I spoke about on the 4 year weekly chart. If this were to occur, it would be a very bullish development and would persuade me to start dipping a toe back into equities.

In line with this, my bond timing signals (not shown) have turned negative (which is bearish for bonds but bullish for stocks). As such, if/when this change occurs I will be moving money out of the bond fund and into equities.

Over the longer term, there are signs all is not well (as I mentioned at the open). My biggest concern right now is the health of the U.S. financial companies (banks and brokers).

Historically these stocks have been the leaders in the market due to their huge weighting in the indexes. As the U.S. has gone from a manufacturing base to a financial base over the years, the importance of financial stocks cannot be overstated. To a large extent, the U.S. does not make "things" anymore; they now make "financial instruments". As such, the financials are by far the single most important "industry" in the U.S. So........when the banks and the brokers are doing well; everyone is doing well. When they are not.........hmmmm.

Having said that, here is what I am worried about:

First chart is the Broker/Dealer Index. This chart tracks the performance of the majority of the major stock brokerage houses in the U.S.



This chart looks bad; no other way to say it. The key negatives are:

-unable to break above its 100 day moving average since the meltdown began last July,
-a well established downtrend line, and
-a series of Lower highs, lower lows.

Until this turns around I think it is still too soon to call a bottom and the start of a new bull market. What would turn me "market bullish" would be a break above the downtrend line/the 100 dma along with a price close above 185.12. This would negate the downward price pattern and turn things bullish.


Next chart is the Banking Index. It contains all the major banks operating in the U.S.



How are the banks doing? You don't have to be a technical analyst to see this one.

Right at the bottom of a support line that has held since Jan/2008. It has tried to break this level 4 times and has been unable to get through on a closing basis. From a "glass half full" point of view, this is a good sign and should this level hold it would be bullish for stocks. But from a "glass half empty" point of view, the market would not be testing these low levels multiple times if the banks were in good shape (see my previous blog for comments on the banks); in fact they would be breaking out to new highs. So this chart tells me "something is up". And that something is not good.

Until this chart gets above the downtrend line and the 100 dma, it still makes me nervous.


Last chart is the Financial Select Sector chart (essentially a mix of banks, brokers, finance companies, mortgage companies, etc).



Also not looking too shiny. Bouncing off support at the 24.41 level; a break of this level on a closing basis as well as a break of the shallow uptrend line would be bad news.

In short, the stock markets will go nowhere until the banks and the brokers strengthen. Until then any movements in the general indexes should be regarded as suspect.


Bottom Line:


My positions remain unchanged:

Fidelity International Bond Fund: 50%
Fidelity Australian Dollar Fund: 25%
Fidelity Euro Currency Fund: 25%

As mentioned, depending on what happens next week, I may move some money out of bonds and into stocks. Any changes I make will be blogged immediately.


Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.