Saturday, October 03, 2009

Stock Market Update 03 Oct 2009

Many of you have been wondering where the ECAM blog had gone over the past 7 weeks (last post 10 August, 2009). I have received numerous emails over the past few weeks enquiring as to the status of the blog. Rest assured nothing of significance has changed.

I was fortunate to be able to take 5 weeks vacation (leave + days off) and was at our home in Mexico finishing construction on our future retirement abode. Unfortunately the house has yet to receive either telephone or Internet connection services so I was basically isolated from the world for the duration of our stay (which is not necessarily a bad thing).

Having returned to Dubai (to attend to ground school, 6 month refresher, etc), I have now been able to fully analyze the market action over the past month. I look back at my remarks in my last blog and ironically have very little to add:

Bottom Line:

The weekly chart issued a bullish signal based upon the 13/34 exponential moving average cross. Now both the monthly and weekly charts are on a long term bullish signal.

The shorter term daily chart is still bullish but overbought. I am now "officially" bullish but am waiting for a pullback in the daily chart to initiate long positions in the provident fund.

My initial position will be a 50% equity/50% cash position strictly due to the fact we are on the verge of entering the Sept/Oct period (which is traditionally the 2 weakest months of the year as I've shown previous).

It is sensible to believe price will retrace somewhat during this Sept-Oct period. The nature of any such decline will tell me whether my worries about the economy (as discussed above) are overblown and we are at the beginning of a new bull market or whether we are on the verge of the next collapse. In other words, I will be hedging my bets by only being 50% in equities until the economic road ahead is clearer.

I expect the view ahead will be clearer by November and will allow for a better entry of the remaining 50% of my provident fund portfolio at a lower level if all looks well. Alternately, if we do top out here and head down my exposure is limited and I will look to exit back to cash should my mid to long term charts return to bearish.

We are at a very dangerous point in the markets. This could go either way from here into the late fall.

Risk adverse subscribers who have shadowed my moves would be wise to wait in cash until past the Sept-Oct period to commit funds into equities.

Those who are more risk tolerant may want to move in line with my upcoming positions (50% on a short term pullback and 50% later into the fall when I see how the market behaves in Sept/Oct).

I am still holding current positions as of today (approx 16% equities and 84% USD cash). I will immediately blog any changes I make.

In short, very little has changed from a long term perspective. The markets are still overvalued and overbought (though they have begun a correction; see below) and my position remains unchanged.

The best way to work back into this discussion is to examine the current charts. Click on all charts to enlarge and see comments below each chart.

SPX 6 month daily:

In my August 10 blog I indicated the markets were overbought short term and due for a pullback. The SPX at that time was 1010.

The market did indeed pulled back to 978 and then began its next leg up to 1080. Today the SPX is at 1025; essentially unchanged from where it was when I left.

The market is now again in a short term decline from an overbought condition. All technical indicators on my daily trading chart are bearish.

Price as of Friday was at the 50 day moving average; this is a common area where price reverses to the upside. Should this not happen, we could repeat the price action of the last minor correction where price broke below the 50 dma but then found support at the next important support level (as shown on the chart).

Should this happen again we could expect the market to find support at the 978-991 level before the next up leg.

SPX 3 year weekly:

The weekly chart is still bullish. Price has continued to push the upper Bollinger Band and price has found some resistance at the 100 wMA.

Of significance to note is the SAR (Stop and Reverse) indicator has reversed for the 1st time since the bull market began in March. 2009. This unto itself is not a strong reversal indicator but it does raise the caution flag that this correction could be more than the previous ones we've encountered since the rally began.

As long as price remains above the Bollinger Band midpoint (currently 974.09) and the Force Index remains positive this can be viewed as a correction within an up trending market. Should those indicators reverse it would indicate the start of the next leg down in this multi-year bear market.

Stock Market Seasonality:

Stock Market Seasonality:

A reminder we are still in the "dangerous months".

Ironically we got through September with a 3.6% gain. This is very encouraging and if we can get through October without a significant decline it will be very bullish going into the Nov-Apr bullish period.

Having said that, October has the reputation of being the month with the most violent single day declines so it is important to keep this in mind should you be long the market.

Non-US Indicators

I think it is important to note there are numerous markets and indicators I monitor that give a somewhat different picture to the rather benign and bullish picture presented by the previous charts.

Shanghai Index 6 month daily:

The Shanghai index topped at the beginning of Aug and has been in decline since. It had a minor bullish pop in early Sept but has resumed the downtrend the past week. This is not a particularly encouraging sign (see below).

Shanghai Index 3 year weekly:

Note the Shanghai Index bottomed in Nov, 2008 and led the world out of the stock market meltdown. Bearish readings were recorded 4 weeks ago and the index is now officially in a bearish decline as far as my indicators are concerned.

So far price has held up relatively well but there is very little price support between it's current price and it's Nov, 2008 bottom. It would not take much to send this right back to the bottom (and the rest of the world's stock markets with it).

If the Shanghai Index has indeed become the leading world stock market index, this needs to be watched closely.

Given the above, we need to explore what I feel are the top indicators to monitor China.

The first charts are the Baltic Dry Index:

Baltic Dry Index 6 month daily:

The Baltic Dry index is basically an index of the cost of shipping bulk non-liquid cargo (i.e. ex- oil, natural gas, etc) worldwide. A high Baltic Dry indicates robust raw material shipping activity (high demand for ships) while a low Baltic Dry indicates low demand for shipping.

Note on the daily chart peak shipping rates occurred in June and have been on decline since. This is a strong indication that the shipping of raw material goods used in manufacturing (mostly China) has peaked and is in decline. This is not a good sign of strong future economic activity.

Baltic Dry Index 3 year weekly:

Note the Baltic Dry bottomed at the end of Nov, 2008 and peaked the 1st week of June, 2009 (as did the Shanghai Index). This is not a sign of robust future economic growth; it is a sign of a future reversal of the bullish growth forecasts currently being put out into the markets.

Copper 6 month daily:

One of the most important raw materials used in building and electrical components is copper. It is a great "lead indicator" of future manufacturing activity.

Does this chart look like a top occurred in late Aug-early Sept? It does to me.

Copper 3 year weekly:

On this 3 year chart it is evident it bottomed in mid December, 2008 and appears to have topped in late Aug, 2009.

Is that a bullish indication?

Lumber 6 month daily:

In addition to copper I like to monitor lumber. The unique thing about lumber is it is harder to stockpile for extended periods of time (which you can do with copper and other base metals). As such, it is more of a "real time" indicator of construction activity.

The daily chart shows a double top with price declining since early August.

Lumber 3 year weekly:

On the weekly chart lumber bottomed slightly later than copper (early March, 2009) but topped in mid June, 2009.

Is it reasonable to assume lumber rose in anticipation of an economic recovery (especially in housing in the US) but now is telling us that view was mistaken.

I believe it is so.

To add to the puzzle, let’s look at the bond market.

First, it is important to understand the bond market is MUCH more important than the stock market.

Size wise, here is the contrast:

Size of Bond vs. Stock Market:

The bond market is the 6000 pound elephant in the room. You ignore it at your peril.

TNX 6 month daily:

The daily chart of the yield on the 10 year treasury has been on decline since the second week of August.

This is telling us the bond market believes:

1) inflation is not a problem; deflation is more likely
2) economic expansion as a result will be slow to non-existent

The 3.265 level had been a floor that had held since July; it broke down on Thursday. This is a very dangerous sign for the stock market.

TNX 3 year weekly:

Note on this chart the last time we had this set up in the bond market. It was August, 2008 and just before the huge plunge in bond market yields (and with it stock prices).

There is some support around the 30.54 level on the weekly chart. If that doesn't hold there is a good chance we revisit the bottom at 20.38.

Should this retest occur it will result in a stock market collapse that will take us below the lows in March, 2009.

USD 6 month daily:

The USD is in a declining channel as indicated on the chart. It is short term bearish but close to turning bullish. A bullish dollar will be bearish for stock markets given the inverse corrolation that has been evident over the past year.

Price needs to break above 77.43 to have any chance of getting a rally going.

There is strong overhead resistance all the way up to 81.47 and the only way it is going to get through those levels is with a significant stock and bond market collapse.

USD 3 year weekly:

Bearish on the weekly chart. Price appears to have found support at the resistance level of 75.89.

It would take a weekly price close > 78.84 (Bollinger Band midpoint and coincident 100 wMA) to switch the weekly chart to bullish. A break of 75.89/74.31 and we go back to test the bottom at 70.70. If we do so, I do not believe it will hold.

Bottom Line:

No change. The markets are in a short term decline. If price finds a nice support level and the bond market cooperates, I will move into a 50% equity position on a buy signal on the daily charts. The other 50% will be moved out of the USD and into the Australian dollar (given the inverse dollar/stock market relationship that currently exists and the Aussie exposure to China which would need to lead any further stock market gains).

Should stocks collapse the USD will be the place to be. Should this occur I will remain in my 100% USD cash position.

As of today my strategic position remains unchanged at a 100% USD cash position.**

(Actual holdings approx 85% cash, 15 % equities due to ongoing monthly equity purchases through the company required provident fund contributions)

**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 FINANCIAL 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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