Monday, August 03, 2009

Stockmarket and USD update 03 August 2009

Welcome to the latest issue of ECAM.

Another week of gains on the markets has left many scratching their heads as to where this is all going.

In my opinion, these markets have risen off the March/2009 bottom NOT based upon stock market valuations nor significant improvement in the economic conditions, but as a result of the huge financial stimulus input into the U.S. via the Federal Reserve and the implied promises by the U.S. government that, no matter what, they will throw unlimited amounts of money at this problem until it is resolved.

This huge rally has left approximately 90% of all investment managers in the U.S. underweight equities and their desire to move to a more balanced position has forced most to hold their nose and throw money at this market. It is that simple.

Where this all ends no one knows. The market wants to go higher and that is that.

As a result, one of my long term indicators turned "partially" bullish this week and the other is extremely close. As such, I am almost to the point of changing my long term view of the markets from bearish to bullish.

This does not mean I will throw money immediately at this market; but it does mean that I will buy any significant pullbacks (as opposed to my previous strategy of shorting significant market rallies).

On to the charts (click all charts to enlarge):

SPX monthly 2000-2009:

This is the first of my long term charts to turn "partially" bullish. At the close of July, the SPX closed above its 12 month simple moving average (blue line) along with the FORCE index registered its first positive reading since Nov, 2007.

Ideally I would have liked the MACD to cross concurrent with these two indicators but the speed of this rally has been so rapid (and unlike other rallies in the past) that the MACD is struggling to keep up.

Until the MACD crosses, I will still be somewhat on edge but this chart is very encouraging and therefore "partially bullish". An MACD cross would confirm it bullish.

For some perspective on the value of the 12 month sMA indicator, I have included the charts from the period 1990-2000 and 1980-1990 to give you some indication of the success of this indicator:

SPX monthly 1990-2000:

SPX monthly 1980-1990:

As can be seen, while not perfect, it does a pretty good job of keeping you on the "right side of the trade". A concurrent MACD cross with the 12 sMA greatly increases the odds this indicator is right so I am still hedging my call somewhat until the MACD confirms the bullish 12sMA cross.

SPX 3 year weekly volumetric:

The 3 year chart with volumetric support/resistance levels I presented in my last blog shows a break above the previous resistance level and the downtrend line. This is bullish.

All the other indicators (RSI, MACD, ADX and FORCE) are bullish. The Stochastic is now back in overbought area indicating the market advance has been strong and is probably due for a bit of a pullback.

What is very encouraging is volume the past week increased for the 1st time this summer. This is a very positive sign as volume always must confirm price in order for an advance to be built on solid ground. This is very encouraging.

SPX 3 year weekly:

My regular weekly chart shows the 13 week exponential moving average has yet to cross above the 34 week exponential moving average (922.95 vs. 924.33). As such, this chart has yet to signal a bull market has begun.

We are still VERY CLOSE but this has to cross in order to change the chart to bullish.

SPX 6 month daily trading:

My daily trading chart is still bullish. The buy signal issued 15 July continues to hold. The RSI is still overbought (currently 71.27; anything >70 is overbought) so this market is due for a pullback at any time.

SPX 6 month daily:

Another view of the same daily chart again with possible scenarios.

A bearish wedge has formed and "should" break to the downside. If it does, it may move into a shallow uptrend as indicated. Alternately, a bullish breakout and the steeper uptrend channel would come into play as indicated on the chart.

Alternately, a breakdown could result in a pullback to the nice support level around 875'ish. That is also where the 38.2% Fibonacci retrace is located and would make a nice entry level.

Bottom Line:

For those that have followed the blog for some time, you know the 12 month sMA and the 13/34 week eMA charts are my 2 "Holy Grails" in determining the medium-to-long term direction in the markets. If both these charts confirm I will get very bullish on the long term direction in the markets. However, until I get confirmation on both, it is still too early to make the call that a new bull market has begun. We are damn close but "close only counts in horseshoes and hand grenades".

In the short term the markets are overbought and due for a pullback. The longer these markets rally upwards without a significant correction the more unstable and prone to dramatic decline they become. At this point, a further rise is very unhealthy.

I am hoping a coming short term pullback will remove the overbought indications currently on the daily charts while allowing time for the 13 week eMA to cross the 34 week eMA on the weekly charts. This would be a very bullish set up and, should this occur, I will be switching my provident fund back into 100% equities.

Given the current inverse relationship with the equity markets and the USD, I would expect the USD to break down severely should this new equity bull market begin. As such, for those who are using the "C" account, you would want to avoid sector investments in US equities and instead focus on equity markets in Europe, Australia, Canada and the Far East to gain currency appreciation gains in addition to equity gains. This is the position I will take in my personal trading/investment account outside of the EK provident fund.

As of today, my "strategic outlook" remains 100% equity bearish (actual position remains unchanged at approximately 16% equities and 84% USD cash due to ongoing monthly purchases and recent equity gains).

Any changes I make to my provident fund positons will be blogged 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.


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