Stock Market Update 23 November 2009

Welcome to the latest installment of the ECAM report.

Since my previous update (31 Oct 2009) nothing has changed. We are still in a cyclical bull market rally within a secular bear market that will last until at least 2015.

Whether the beginning of the secular (15 year) bear market began at the "2000 top" or the "2007 top" is irrelevant. Only historians 100 years from now will be able to define what was truly "THE top" and what was truly "THE bottom". What is important to understand is this current up trend movement in the markets is a counter trend rally to the longer term downtrend cycle (as I discussed in my article on "Cycles"). As such, it is extremely unwise to get too comfortable and assume "all is well" and it is extremely unwise to park 100% of your assets in equities and expect to "buy and hold" for the long term.

Having said all the above, this cyclical bull market counter trend rally could go on for some time. It would be equally unwise to have 100% of your assets in cash when there is the potential to make considerable profits playing this rally. The key is to have a well defined exit strategy when (not if) this market reverses again to the downside.

As I discussed in my last market update (31 Oct 2009), the key level I was watching at that time for an indication of a bear market reversal was 1019 on the S & P 500 cash index. At that time my short term trading charts were bearish but I reiterated we had seen this pattern before (July/Aug 2009) and it was merely a consolidation within the bigger term bullish pattern.

As of today, the technicals are telling us the "collective" believes prices have gotten a bit too high in the short term. Is it possible that this could turn into the next severe bear market leg down? Absolutely. However, technically that information has not been presented "yet?".

Should price close below approx 1019 on the SPX, that would violate the previous support level and be a technical trend change to the downside. As I discussed previous using 5 x the ATR, my calculated stop was 1027.72. I am prepared to allow a slight amount of "leash" to the 1019 level to give the market a chance to prove itself. However, should price close on a daily closing basis below 1019 I think there is a very real chance we will have begun Wave "C" down in this bear market.

The bottom of that short term downtrend ended at 1029.38 and we have moved back to a bullish short term signal. As such, the "C" wave I am watching for has yet to arrive. Until it does, I remain short to medium term bullish but continue to expect this rally to end with a severe reversal to the downside.

Click on all charts below to enlarge.


SPX 11 year monthly:



Once again, the long term monthly chart turned bullish at the end of July/2009 on a monthly price close above the 12 month simple moving average. The last time this chart gave a buy signal was in April, 2003 and signaled the 2003-2007 cyclical bull market.

It would take a monthly closing price below the 12 mSMA (currently at 930.51) to reverse the trend.

Long term trend is bullish.


SPX 10 year weekly:



The second of my long term charts is the weekly chart. This chart turned bullish the 1st week of July, 2009 when the 13 week exponential moving average crossed above the 34 week exponential moving average. Shown on the chart are the previous signals over the past 10 years.
If we are currently in wave "B" of an A-B-C market correction (as I believe we are and discussed in my "Cycles" blog), price would rise to between the 50% and 61.8% Fibonacci retracement levels before turning down. We are currently at the 50% level and also exactly at the trend line from the top of the 2007 market collapse.

This is an extremely important level; hence the reason the markets have been meandering around this level for the past few weeks. The market is unsure whether it wants to continue up or to collapse back to the lows. At this point, either scenario is equally possible so I am watching very closely the market action at this point in time.

A price break above approximately 1125 and prices will rocket towards 1200 very quickly. Ultimately they would try to test the 61.8% level at 1228. However, a price breakdown below the 38.2% Fib (1014) would confirm that wave "C" down has begun. The initial target would be the previous low at 666.

The medium term trend is still bullish.


SPX 1 year daily:



This 1 year daily chart shows nicely the previous price correction in Jul/Aug 2009 and the subsequent rally.

One of the keys in Technical Analysis is to identify the "trend" and to invest accordingly. The key to identifying an uptrend is the concept of the "higher high/higher low". As long as this pattern remains in place, the uptrend continues.

As of today, price continues to exhibit higher highs and higher lows. As such, the trend is still positive.


SPX 6 month daily:



The 6 month daily trading chart reaffirms this analysis. A well defined shallow up trending channel appears to have formed. The negative divergence on the MACD is worrying but as long as price does not break below 1029.38 (the last significant low), the short term trend remains up.


Gold:


I have had several requests asking about the technicals on gold. While not part of the provident fund A-B account funds available to invest in (and therefore not something I normally cover in this blog), I have included a few charts below.

For the purpose of disclosure, I am neither a "gold bug" nor a "gold bear". I have a core position in gold in my personal accounts (both bullion and gold stocks) that I have accumulated over the past 8 years. I have stated in a previous blog that I think it is important as part of a well balanced portfolio to have some exposure to gold (either via bullion or stocks).

The positions I have in gold have done extremely well. However, to me the current price of gold bullion is irrelevant and has no bearing on whether I would buy more or sell my current position. As I have stated previous, I view gold as nothing more than a currency that cannot be printed that pays 0% interest. It is a store of value and I treat it as such.

I have a percentage of my entire net worth in physical gold (that is adjusted upwards as my net worth increases) as a "financial insurance policy" that I will never sell. The intent of that investment is that, should economic conditions deteriorate over the next few years (resulting in hyperinflation), my gold bullion will act as an "insurance policy" to protect me from financial disaster. I think it would be wise for everyone to have "financial insurance" just as I would suggest everyone have life insurance and car insurance. Nothing more, nothing less.

In addition to my physical holdings, I also have exposure to gold stocks in my personal "C" account fund that I actively manage. It is not an overweight position (currently 5% of assets under management within the account but can go as high as 10% given my defined investment parameters) but does allow for some alpha to boost fund performance.

If the above explaination is "Greek" to some subscribers, I plan on doing a blog in the future on what will become known as the ECAM Asset Allocation Fund. Essentially it will be an inside look at how I manage my personal funds outside the mandated Emirates provident fund A/B accounts.

Having said all the above, the current gold fever has many wondering what to do. See the charts below for my comments.


Gold Seasonal:



The first chart is the seasonal tendencies in gold. Just like any other commodity, gold tends to have a "season" as can be seen in the above chart.

The chart shows a monthly breakdown of gold returns from 1977-2008. The key to note on the chart is not the individual monthly returns (as they will vary year to year) but the "seasonal period" in which gold tends to do the best. As can be seen on the chart, that period is from Aug-Jan each year.

Using this data, the best time to buy gold is when it is on sale (June or July each year) and the best time to sell gold is at the end of the seasonal period when price is the highest (Jan).

I have used this purchase methodology for years and it has served me well. I last bought physical gold in July/2009 for my personal account and I am not a buyer of physical gold at this point in time.


Gold 10 year weekly:



The 10 year weekly chart shows the well defined support levels at 715.50 and 999.50. The key support at 999.50 on a weekly close is key support for gold at this point.

When attempting to project possible upward prices, there are several techniques I use. Some are conventional (pattern projection as per below) and some are unique. One of the techniques I use that is unique is Fibonacci extension.

Essentially Fib extension is taking the last significant levels of support and resistance, using those levels as anchors, and then extending the Fibonacci levels to the "next" highest Fib extension.

Using this technique, my current target on gold is 1177.22. Should this level break to the upside, I will publish my next level.


Gold 3 year weekly:



The weekly chart shows my annotations on gold over the past few years. In early 2009 I highlighted on my chart a bullish inverse head and shoulders pattern that would require a breakout above 1007 to confirm. This occurred the 1st week of Oct, 2009.

Based upon the structure of the pattern I have a projected target of 1333. Nothing I have seen in the current price action leads me to believe that target will not be reached at some point.


Gold 6 month daily:



Having said all the bullish above, the short term looks VERY DANGEROUS as follows:

-the RSI is in overbought territory
-the full stochastic is as overbought as any time in recent history
-the percentage of "bulls" vs "bears" on gold (not show on the chart but something I monitor) is currently at 96%.

These above indicators make investing in gold at this level extremely dangerous. Can it go higher.....sure it can. Are the odds that it can go higher in your favour......absolutely not.

Short term gold is extremely overbought and due for a correction at any time. This short term blow-off could last for days or weeks but it is a very dangerous place to take new positions.

I prefer to leave the top to the "casino players". I buy when things are on sale......now is not such a time.


Bottom Line:

The stock markets remain on short, medium and long term buy signals. There is no technical indications we are reversing to the downside from the current levels.

I do have some of my indicators (proprietary) that indicate we may be rolling over here but not enough evidence to change my positions. As such, until we get a "lower low" the markets remain in a bullish uptrend.

Having said that, I am still cautious as indicated by my current EK provident fund A/B account positioning. The reason this is the case is because the limited nature of the available investment funds within the Emirates provident fund A/B accounts does not allow for reasonable market positioning based upon strategic asset allocation. This is a failing of the merits of the fund and the reason why the majority of fund participants will never experience long term capital appreciation within their individual provident fund accounts. My attempts with this blog have been to attempt to suggest portfolio positioning within these accounts as defined by these constraints.

This is not the case with what I refer to as my personal "C" account (which, in the future will be referred to as the ECAM Asset Allocation Fund). This fund is my personal account (which is currently 100% invested) that I manage daily to maximize investment return while limiting downside potential.

The next few weeks will be interesting. We are in a seasonally strong period for the markets (Nov/Apr yearly), we are at the level of the downtrend line from the 2007 top and the 50% Fibonacci level, and we are at the cusp of some interesting market cycles (the end of year 1 of the Presidential 4 year and the end of the 10 year decennial cycle).

At this point you need to be agnostic. Do not listen to CNBC, do not listen to Mondial or other "long only" advisers (if you are still with thee types) and do not listen to the newspapers. Listen to the markets. They are telling you all you need to know.


As of today my strategic position remains unchanged at a predefined 50% Equity/50% USD cash position.**

**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).



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dwaynemalone1@gmail.com