Stockmarket update 18 Nov 208

"Are we there yet; are we there yet?" Welcome to the latest issue of ECAM.

Since my last update we have had huge percentage moves (both up and down) in the stock market indexes. In the last week of October we experienced a 21% rise in the Dow Jones World Index (from 154 to 187) in a little over 1 week that has all but been taken back in the past 2 weeks.

That is the nature of bear market rallies in that they tend to suck in the "pick the bottom" crowd and then proceed to remove money from their accounts. That is what you want to avoid.

During the period several of my charts switched to "buy" signals but I was unconvinced based upon other indicators I follow that did not indicate we were at the start of a true short to medium term up trend. Those indicators were correct and we have come down to retest the lows once again.

Are we there yet? As I have said before, there is no one who can say with certainty that we are "at the bottom". The only thing that will indicate this is time and price and nothing does a better job of indicating this than technical analysis.

On to the charts. As always, click on the charts to enlarge:


DJW 6 monthly daily chart:



This is my usual daily chart that I have redrawn to bring out a few of the technical indicators that I monitor that indicated the late October rally was not real and could not be trusted.

I have changed the price action from the candlestick chart I usually use to a daily line chart as the choppy price action over the past month is difficult to follow on the candlestick chart.

Keys to note:

This chart went bearish in early June as indicated. Note that during the late October price rise:

a) the RSI could not break above 50,
b) price did not break above the previous high at 191.47 (no "higher-high set),
c) the MACD never got anywhere near the zero line, and
d) neither the ADX +DI/-DI lines nor the AROON lines crossed (red lines stayed on top)

In a true trend change you would expect all the above to show themselves and they did not. As a result, I decided to sit on my hands and see what would happen and that call was correct. The indicators were telling me it was a false rally and kept me out of the market.


DJW Point and Figure (1-box) chart:



This is my short term point and figure chart. This chart actually gave a bullish signal on a price print of 185 but this turned out to be a false break as price peaked at 188 before falling once again.

It signaled a new bearish signal on a price break of 170 and continues to be bearish.


DJW Point and Figure (traditional) chart:



This is the more medium term point and figure chart. Normally this chart is highly reliable but it too got tricked on that fake bear market rally. It turned bullish on a price print of 186 which turned out to be a false break.

It just turned bearish again on a break below 162.

The lesson to be learned is it is dangerous to just rely on 1 or 2 charts to make investment decisions. You need a variety of indicators (all based on slightly different parameters) to get a true picture of the state of the markets. Only when all are in reasonable alignment do you have a reasonable chance of committing funds to equities and having the trade go in your favour.

I continue to monitor the indicators and when they tell me it is time to move back into the markets I will do so.......but I do not want to second guess them and attempt to enter too early.


DJW 1 Year Weekly chart:



The last chart is the DJW 1 year weekly chart. Note that as price has settled into a trading range the MACD histogram has been continuing to move upwards. This is a bullish sign that downside momentum is decreasing and is foretelling a coming price rally. However, until the range is broken to the upside it would be premature to jump into the markets.


Bottom Line:

I have yet to confirm a technical buy signal. Until all my indicators are in alignment I will continue to hold my cash US dollar position.

As of today, my "strategic" positions remain as follows:

-100% BlackRock/MLIM US Dollar Cash Fund**

(actual positions: USD cash 92%, equities 8%)*percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary several % from that posted (refer to current % holdings).


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.

Managing switching delays with Watson Wyatt

Since the company decided to switch from Fidelity to Watson Wyatt the delays in completing switches within your individual provident fund accounts has increased.

In discussions I have had with Nick Foxton, he has insisted there are no significant differences between Fidelity and Watson Wyatt in terms of time delays but based upon my personal experience (and emails from others), that does not seem to be the case.

The bottom line is it appears the company has elected to change administrators NOT because they offer a better service (as Foxton suggests) but more likely because they were a much cheaper option than the services offered by Fidelity.

We are now stuck with this provider and I have been asked by many how to alleviate delays in switches. Here are a few pointers:

1) switches initiated prior to 1000 DXB time are actioned that day. Beyond 1000 DXB time and they are actioned the following day. Get switch changes in early to avoid an additional day of delays.

2) there is a further delay if you are switching from one family to another family (eg. Fidelity to Blackrock/MLIM vs Fidelity to Fidelity). If time is of the essence think about switching between the same family of funds if possible.

3) use of hedges to mitigate time delays. These can be useful to essentially "freeze" your total portfolio while a switch is in the process of taking place (but are only available outside the provident fund). This is the reason why I do not have a C account with Emirates/Watson Wyatt but instead use my own brokerage account.

For example, when I made my switches from Euro/Aussie dollar to USD I used an equivalent amount of leveraged long USD positions in my brokerage account to cover the period of "transit time" for the Euro and Aussie dollars to be converted into USD in the provident fund account. I used the Rydex Strengthening Dollar x 2 Strategy (leveraged fund moves twice the movement in the USD so I only needed to commit half as much to this as was in "transit" in the provident fund account) to hedge the same amount in dollars I held in transit in the provident fund Euro and Aussie accounts. Once the switch was complete I could either take the hedge down or keep it (I kept it as the USD has continued to outperform).

Another useful currency hedge is the Market Vectors Double Long Euro ETN (symbol URR) or Market Vectors Double Short Euro ETN (symbol DRR).

Fortunately most of the switches I do in the provident fund tend to be of a more intermediate to long term nature so a few days of "transit time" should not have a significant effect on overall performance. However it is annoying and unnecessary for these delays so please feel free to contact Foxton to express your displeasure:

nick.foxton@emirates.com

Note he is based in London UK but will get back to you in a day or two. Maybe if enough of us complain something will be done about it.


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 01 November 2008

Welcome to the latest issue of ECAM.

Over the past month we have experienced one of the worst stock market declines since the Great Depression. I cannot stress enough my belief we are in the first stage of a forthcoming decade of flat-to-declining stock values along with forthcoming record levels of unemployment and a severe worldwide recession (Kondratieff Winter). My previous blogs have addressed those issues so feel free to review previous writings if you are interested in the details. Today's blog will center on where we are today.

Even during the worst bear markets there have been periods when stock values rise (sometimes substantially). These short term counter-trend rallies offer those who have not exited their stock positions a chance to lighten up (or go to cash) and also allow those who have been in cash a chance to "position trade" in and out of equities in an attempt to increase the value of their portfolio. We may be on the verge of such a counter-trend move.

The first chart is a 3 month candlestick chart of the Dow Jones World Index (click on the following charts to enlarge):

DJW 3 month chart:



The key to note is the orderly nature of this chart until Oct 20. Since then, trading action has produced huge gaps on the chart indicating the level of market stress over the past 2 weeks.

The key to note is the bullish divergence in the MACD histogram. Also key is to note the last "lower high" @ 184.08. Any closing price greater than this would be bullish.


DJW 1 year daily chart:



The 1 year daily line chart shows the down trending channel very well. I have drawn a line at the 184.08 price level mentioned previous. While I would normally wait for a cross of the 50 day moving average (currently @ 213.35) to enter a long position, the deeply oversold nature of the markets tells me the forthcoming snapback rally could potentially be huge. As such, I anticipate I will forego waiting for a cross of the 50 and enter a long position based upon the following:

-a closing price > 184.08, and
-the RSI(14) >50, and
-and ADX(14) DI+ and DI- cross.

When this occurs I will be taking a long equity position (along with the PNF charts below confirming).

Short term price targets? Short term would be a rise to the 50 day moving average. Based upon the current decline, I would expect price to rise above the 50 dma (which would normally be my short term buy signal anyway but I expect to be in early). Next target would be the 222-226 level (previous price support + 50% Fibonacci retracement level).


DJW PNF 1-box chart:



My custom designed short term trading chart. Last turned bearish on a price break below 234.

Still bearish but a price break >184 would turn this short term chart bullish. Watching closely.


DJW PNF Traditional chart:



Intermediate term chart. Turned bearish on a price print of 256. It has remained bearish since and has been an excellent guide through this decline. This is still one of the best charts I use to judge the intermediate direction of the markets.

Still bearish but a price print of 186 or greater would turn this chart bullish.


DJW 10 year weekly chart:



A reminder we remain within a long term bear market irrespective of any short term change in trend that might become prevalent over the next week (13 week EMA below 34 week EMA).

When pondering more "intermediate" price targets (other than the short term targets I mentioned above), note during the 2000-2003 bear market on both significant price declines price went from lows up to the 13 week exponential moving average (red line) before the decline resumed. Under the assumption that history repeats, it reasonable to project that the rise of this next short term rally (before the next decline) would be to this level. If so, based upon today’s price we could expect a rise to the 240'ish level (13 week EMA currently @ 243.63 and declining) in a bear market rally. If so, that would be an approximate 35% gain in equities and still remain within the confines of the bear market.

This is the sort of action I think is reasonable over the next 6 months.


DJW 3 year weekly candlestick chart:



In line with my previous potential price targets, I have put Fibonacci retracements on 2 declines; one from the top (321.07) and one from the start of the current decline (298.28). It is entirely reasonable to expect a retrace to at least the 50% level of the current decline (220.31) or even higher to the 61.8 level (243.39) and still be in a secular bear market decline. Note the 61.8 level corresponds with the 240'ish level I mentioned previous.

Ultimately I believe once we get a short term buy signal we will get to this price before the next decline. I intend to ride the wave up keeping in mind ultimately I expect another down leg that will exceed the current lows (and at least 5% BELOW the lows set in 2003.....perhaps even lower).

Bottom Line:

I have yet to confirm a technical buy signal. We are damn close and all my breadth indicator charts I track (over 20 of them) are all giving buy signals. That is the "foundation" of a potential rise but I need to see price action to confirm that we have entered a short-intermediate term bullish trend. As of Friday's close I have not. It may come next week.

There are times when the technicals are cloudy and times when they are clear. This is a time they appear to be clear in spite of all the weird price action over the past few weeks.

Based upon my daily line chart, the 1-box PNF and the Traditional PNF, they are all telling me a price close >186 will turn them all bullish. Should this occur I will be entering a long equity position in my provident fund account.

If/when this occurs, I will blog my changes.


As of today, my "strategic" positions remain as follows:

-100% BlackRock/MLIM US Dollar Cash Fund*

*(actual positions: USD cash 92%, equities 8%)


*percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary several % from that posted (refer to current % holdings).


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.