Stockmarket and USD update 11 July 2009

Welcome to the latest installment of ECAM.

I want to start by extending a warm welcome to the many new members who have joined the site over the past 2 months. Also thanks to those of you who have sent me emails over the past few months with the positive feedback. I'm pleased to see the site has been of benefit to many of you and look forward to providing future contributions. I would welcome all current members who feel this site is of benefit to pass it along to those who you feel might benefit from the analysis.

As I spoke about in my previous blog entries, I have been anticipating a pullback from the run up in the markets from the March, 2009 bottom. The bounce off that level was strictly an oversold correction to the present long term bear market that began in Oct, 2007. These bear market rallies are present in every bear market and only serve to take money out of the pockets of naive individual investors and put it into the pockets of the investment banks and broker dealers. That is not to say you cannot play these rallies but it is extremely important to understand that you are going "counter-trend" to the current market environment and, unless you recognize this (and trade accordingly), any long term capital you put into equates in this environment is bound to result in a loss if you apply a "buy and hold" strategy.

Just to refresh everyone's memory (or for those who are not familiar with the concept under which I invest), you must understand that the "buy and hold" mantra was developed by the mutual fund industry many years ago for one purpose, and that is to serve the mutual fund industry.

A mutual fund company makes its money based upon the fees it can charge you to "manage" your account (known as a Management Expense Ratio or MER for short). The fees they can charge are much less for a money market fund than they are for a bond fund, and again much less for a bond fund than they are for an equity fund. It is in their best interest to keep you in equity funds as long as they can (and as much as they can) so they can reap the greatest management fees on your account.

They justify their position by referring to the age old Wall Street mantra that "it is impossible to time the markets". That is not true and I (as well as thousands of others) have been doing it for years.

It is important to define the 2 main types of investment advisors. They can broadly be categorized as either "Relative Performance" advisors or "Absolute Performance" advisors.

The first is known as a Relative Performance advisor (your typical mutual fund company or investment advisor). Essentially what this type of advisor does is define the specific market index they intend to "benchmark" themselves against and then make small adjustments to their (your) portfolio holdings in an attempt to beat the index. If they outperform the index (even fractionally) they will quantify that as a successful "outperformance".

The problem with this is if the index has fallen 40% in the past year and their fund (your portfolio) has fallen by only 39%, they would tell you they have been successful in managing your funds because they "outperformed" the market by 1%. In my mind that is not success but that is the way most people invest the majority of their portfolios.

Because the majority of the money mutual fund companies make is on equities under management, most will NEVER hold more than a very small portion of your portfolio in cash as it does not serve THEIR best interest. In other words, even when it is obvious to everyone the market is sinking (on the basis of both fundamental and technical analysis); they will continue to have 100% of YOUR money exposed to the market so they can collect their MER fees.

The second type of advisor is known as an "Absolute Performance" advisor. This type of advisor uses a combination of hedging strategies, position timing and market shorting techniques to attempt to provide an absolute rate of return irrespective of market conditions. Thus it is possible to make a positive return even in a down trending market.

The most well known of this type of advisor is the hedge fund. Hedge funds have gotten a bad reputation over the past few years due to their aggressive use of over-leverage and outrageous fees (the typical hedge fund charges 2%/year upfront and 20% of any winning positions). Not withstanding the "politics" of hedge funds, they manner under which they operate (absolute performance) provides the greatest opportunity to increase the value of your portfolio over time.

To my mind that is the key to investment and essentially I am my own hedge fund. I want to see yearly gains in my portfolio balance irrespective of market conditions or, at the very least, be positioned in cash as the market goes into freefall to preserve my investment capital. This is only available through market timing and use of cahs and/or short positions in my trading account.

Unfortunately shorting the market is not an option in our Provident Fund so the best we can do is be in the right asset class (stocks, bonds, and cash) at the right time. That is what I attempt to provide to you on this site.

OK, enough of that! On to the markets (click on charts to enlarge):


S & P 500 Index Charts:


SPX Seasonal Performance chart:



Once again, here is the season performance chart of the SPX from 1950-2009. We are currently in the "summer doldrums" where prices tend to drift slightly upwards from their bottom in June to their top in August. It is a seasonally "neutral" period which proceeds the worst 2 months of the year; September and October.

You cannot use this chart to position trade but it is important to keep in mind where the mine fields might appear. I will be very cautious going into September (especially this year as I spoke about in my last stock market blog entry).


SPX 10 year monthly chart:



A reminder we are in a cyclical bear market that began when price closed below the 12 month simple moving average (blue line) in Dec, 2007.

On an inter-month basis, price may climb above the line but the defining point is the last day of each trading month. We are still below the line so this chart is BEARISH.


SPX 3 year weekly chart:



The second chart in our "dynamic duo" of mid to long term position trading.

This chart signaled the start of the bear market in Dec, 2007 when the 13 week exponential moving average (blue line) crossed below the 34 week exponential moving average (red line).

Over the past 2 months price rose to the point where the 2 lines began to converge but there has yet to be a crossover. During the last bear market this convergence occurred on numerous occasions but the bear market was not over until these lines crossed.

This chart remains BEARISH.


SPX 1 year daily chart:



This 1 year daily chart is a new one I am presenting on the blog.

Technical analysis is always a function of momentum confirming price. It is not a crystal ball and cannot tell the future. However, there are certain patterns that have a reasonable history of "foretelling the future". This chart has 2 such interesting patterns.

The pattern is known as a "Head and Shoulders" pattern. It can indicate a topping pattern or, if it is upside down, it can indicate a bottoming pattern.

On this chart we have a H&S topping pattern (in red) that confirmed this week when price closed below the "neckline" (NL) of the pattern. Based upon the "rules" of this pattern, the price projection is obtained by taking the distance between the head and the neckline and projecting it downwards from the point of break of the neckline. In this case the pattern projects to 810-820.

It is interesting to note the Fibonacci 50% retracement level from this current bear market rally is at 811. Thus, we can reasonable expect price to fall to around the 800-820 level given these patterns.

If/when this occurs, we may have set up an "inverted head and shoulders" pattern (shown in green). The same rules apply only in reverse. Price would form the right shoulder and then if price began to climb again (and break the neckline at 950), we could project a price objective of 1234.

Putting this all together, the "technical analysis" crystal ball calls for a drop to the 810 area followed by a rise to 1234 to complete both the patterns.

It is important to note this is not something that happens without fail and it would be unwise to trade just upon this pattern but if the patterns materialize over the next few weeks/months, that is the sort of levels we could be looking at.


SPX Point and Figure Traditional chart:



The PNF chart is bearish and points to a projected price target based upon the structure of the chart of 805. Another interesting number as it comes right in the 800-820 area I discussed above.


SPX Ichimoku chart:



Sell signal occurred on a break of the red line June 16. Sell signal confirmed by a cross of the blue below the red line on June 25.

Price is currently in the "cloud" of support and the down trending channel is clearly defined. Price held the support level of 877.86 the past 3 days. If it breaks this on a closing basis it is reasonable to assume a significant decline will begin.


SPX 6 month daily chart:



My daily trading chart showing the indicators I use to trade on a more short term basis. I went short the market on June 16 and am currently holding the majority of my trading positions short with stops near the Bollinger Band midpoint at 910.


SPX 60 minute 10 month chart:



I included this chart only to show the important support level at 875 and resistance level at 950. A significant break below 875 will bring on large amounts of selling; this level is being defended by the bulls at all costs.


U.S. Dollar Charts:

As I spoke about in my last currency blog, the USD is bearish in the longer term charts. They have not changed in any way over the past 3 weeks so I have not included them in this analysis.


USD 6 month daily chart:



In my last currency entry, I said it looked like the USD was setting up for a short term bullish push. At the time I said it looked like the 82.63-82.67 was a reasonable target for the move.

It looks more and more like this bullish move may be unlikely as time decay has allowed the upper trend line to descend below the target I set at that time. That is not to say that it cannot happen, but the likelihood of that happening has now diminished.

Since that time the USD has entered a very tight trading range. It appears to be forming a bearish pennant as shown on the chart. My technical trading indicators are neutral with a slight downwards bias.

If this chart breaks down and the USD breaks downwards out of the pennant, the projected price base upon the pattern would be 71.00'ish. This would take us back down to the all time lows in the USD.


USD PNF .10 box chart:



The .10 box PNF nicely shows the tight range the USD has been in for the past 7 weeks. The chart is currently bearish and projects a price target of 78.50.


USD PNF Traditional chart:



The PNF traditional chart is bearish and projects a price target of 71.00 (just as a break of the pennant pattern I discussed above does). Support is at 78.00 but there is very little chart resistance all the way back down to the bottom if it breaks.


USD 1 year weekly chart:



The 1 year weekly chart shows the tight trading range the USD has been in the past 7 weeks. A weekly closing price >80.80 would be bullish; a weekly closing price <79.34 size="5">Bottom Line:

There are no changes as of today to my Provident Fund positions. Still approx 12% equities and 88% U.S dollar.

I am concerned about the USD but as of today it is still neutral and there is no clear defined direction in the short term. A break down of the USD will be bullish for stocks, precious metals, commodities and foreign currencies (other than Yen). A break out of the USD will be the opposite. Until it makes its move, any positions are somewhat speculative.

I will continue to hold my present positions until the picture becomes clearer. I will blog any changes I make immediately.



**Strategic allocated 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. The author is not licensed as an investment advisor in the UAE and therefore cannot provide individual account advice to individuals and/or institutions.

dwaynemalone1@gmail.com