Stockmarket Update 21 December 2009

A routine update for the period ending 18 December 2009.

Since my last update very little has changed with respect to stocks. I will review the S&P 500 Index from the monthly charts downwards:


SPX 11 year monthly:



The first "long term" term view of the markets shows the buy signal at the end of July when price closed above the 12 month simple moving average (12 mSMA).

Price has risen to exactly the 50% Fibonacci retracement level (as shown on the chart). This is a natural point at which the market needs to "decide" whether it will continue it's advance or roll over and commence it's next downturn.

As I pointed out in a previous post, in the last bull market price stalled at the 50% Fib and spent 10 months consolidating its price before gradually being pushed upwards by the 12 mSMA. It is very possible the same could happen again.

The long term chart remains bullish.


SPX 3 year weekly:



The 2nd of my "long term" charts begins at the 2007 top to the current date.

This chart turned interim bullish in late March, 2009 on a price break above the 13 week simple moving average (13 wSMA) combined with follow-thru technical breakouts on the Stochastic midpoint and Force Index (as shown in green on the chart).

The bullish cross was confirmed in late July when the 13 wSMA crossed above the 34 wSMA (as noted in green on the chart).

Price has formed a rising bearish wedge. Normally this would be expected to break to the downside with a return to the bottom of the wedge at 666.79. That is the danger we face.

Alternately, price has been pushed into a "corner" as defined by the lower rising trend line, the 50% Fibonacci level, the last level of strong volumetric resistance, and the downtrend line from the market top in Oct, 2007. This is a key "battleground" between the bulls and the bears.

Should the bulls be able to break price above the current level there is a very good chance price will advance rapidly through the level of weak volumetric resistance on the chart and challenge the 1200 level (another 10% rise). This would negate the bearish wedge as price would break "the wrong way" above the upper wedge boundary and set up a bullish continuation pattern.

As of today this long term chart is still bullish.


SPX PNF Traditional:



The point and figure chart remains bullish and points to a price target (based upon the structure of the chart) of 1295.


SPX 1 year daily:



A nice 1 year view shows the trend line from the Mar, 2009 bottom and price action to date.

The strong level of volumetric support and resistance is clearly shown. The strongest "zone" is between 1080 and 1120 with the next level between 1080 and 1040.

A price break below 1040 shows very little support until the next strong volumetric support bar between 930 and 890.


SPX 6 month daily:



The 6 month daily chart shows the well defined channel as well as the "bull flag" I discussed previous. Price has moved sideways for over a month now between 1080 and 1120.

I do not like the negative divergences in the RSI and MACD........when price advances while technical indicators decline that is usually a sign of a forthcoming price reversal downwards.

The longer this range bound price action continues the more "established" bulls and bears become in their respective positions. Those who are "committed bulls" will be long the market with stop loss levels set just below 1080. Those who are "committed bears" will be short the market with stop loss levels set just above 1120.

I cannot predict which way this finally breaks....up or down. What I can predict is when it does there will be a hell of a move in the direction of the breakout or breakdown. Above 1120 and 1200 comes quickly. Below 1080 and 1040-1020 comes quickly.



Bottom Line:

The markets continue to be stuck in a trading range between 1080 and 1120. It is impossible to predict which way this will go.

I remain bullish as the current trend is up but am watching the trading range closely. A break of 1120 would be very bullish and continue the current cyclical bull market. My next target should that occur would be 1200.

A break of 1080 might be the first sign that the cyclical bull has ended and we are on the road to resume a downtrend back towards 666. The dreaded "C" wave in Elliott wave theory (as I have discussed previous) would have begun.

I wait and watch. The bull is doing it's best to throw me off. I am still riding this bull but the beast may be about to get much meaner. If you are in the markets you need to stay nimble.


As of today my strategic position within the Provident Fund remains unchanged at a 50% Equity/50% USD cash position.**

The ECAM Asset Allocation Fund remains 100% invested. I will blog those charts separate.



**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.



dwaynemalone1@gmail.com

ECAM Asset Allocation Fund

I have had a number of people over the past year ask me what I do with my personal investments outside the mandated A and B accounts of the Emirates Provident Fund.

As I have said previous, I am not a strong supporter of the Emirates Provident Fund and only invest the minimum amount required within the fund monthly (as defined by the rules governing the Provident Fund). In other words, the money the company puts into my "A" account and the mandated 5% I must put into the fund by way of the "B" account is the only money I invest in the Provident Fund. All additional funds I invest outside the Provident Fund in my own personal "C" account through several U.S. brokerage firms.

The reason why I have elected to do so is due to the limited access to various investment vehicles offered within the Provident Fund. In my opinion, there are insufficient funds offered within the Provident Fund to allow for optimal asset allocation.

As I said in a previous blog:

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.

Today in this blog I will discuss my personal investment exposure, which will be referred to as the ECAM Asset Allocation Fund.

First a little background is in order. Over the years many studies have been done on how to structure a portfolio. There have been studies on individual stocks, studies on mutual funds and studies on ETF's (Exchange Traded Funds). In all these studies it was determined that the single major determinant in the overall return of a portfolio was not the individual "picks" but the overall asset allocation.

The concept of asset allocation has been around for many years. However, in the past 5 years it has jumped to the forefront as the most important aspect of portfolio design.

In the past the common asset allocation model was structured around a mix of equities (stocks) and bonds. Over the years "standard" rules were developed to determine the ratio that should be held within a portfolio. The standard "60% equities/40% bonds" was gradually replace by the "100 - your age = your allocation to equities" rule of thumb.

While this attempt at asset allocation was commendable, it did very little to address the other investment vehicles available to individuals in designing a portfolio. It did not allow for Real Estate, Commodities, or Emerging Markets.

The concept of strategic asset allocation began in the U.S. with the Ivy League universities (predominately Yale and Harvard University). It was discovered through Monte Carlo Simulation (essentially using computers to model hundreds of thousands of possible outcomes to a given event; google "Monte Carlo Simulation" for more information if interested) that it was possible to actually INCREASE the rate of return within a portfolio and DECREASE the volatility and draw down of an investment account by adding non-correlated asset classes that were in the past thought to be too "risky". It is this concept that Yale and Harvard use in managing their endowment funds.

Unfortunately, while the concept of strategic asset allocation works well in maximizing performance while reducing volatility and draw downs, it does not alleviate the severe draw downs that occur during bear markets. The avoidance of large draw downs can only be avoided by way of market timing.

The concept of market timing using Technical Analysis is well known by those who visit the site. The standard investment industry mantra that "you can't time the market" is well versed, constantly repeated, and continually wrong.

If it is possible to time the market, why does the industry continue to say it is not possible? Quite simply, it is because the industry makes it's profits based upon the assets it has under management. If your money is not in their accounts (where they can charge you a fee), they are not making money.

This concept is very important in differentiating the difference between a "relative return" manager (your typical mutual fund or investment advisers such as Mondial, Global Eye, etc) and "absolute return" fund managers (your typical hedge fund or what I do).

A "relative return" manager does not care how much you make or do not make in your account. All a relative performance manager cares about is whether he can outperform whatever benchmark he establishes as his "marker" to define under or out performance. He takes your money, invests it in the markets, collects his monthly fees and attempts to outperform his benchmark.

This is all well and good in a rising market but what if the market turns down? In all cases, the relative performance manager will keep you invested irrespective of market direction (because his paycheck depends upon you paying him his fee monthly). He will still attempt to outperform his benchmark but if the benchmark falls 30% and your investment only falls 29%.....he considers that a success as he has "outperformed" the benchmark. I do not consider that success.

The other type of manager is the "absolute return" type. He does the same as the "relative return" type in a bull market (attempting to outperform the benchmark) but in a bear market when prices are falling he will either have your money safely in cash or have part of the funds actually invested short the market (which allows you to make money on a falling market).

Using this concept, I have designed the ECAM Asset Allocation Fund based upon what I believe is the optimal strategy. When the technical indicators are positive I use strategic asset allocation to maximize returns within the portfolio while minimizing draw downs. However, when the technical indicators point to a longer term decline I move the funds to cash along with up to a 50% short exposure to take advantage of the declining market to add to performance.

Using this concept, I invest in Exchange Traded Funds (ETF's) that allow for optimum asset allocation. The ETF's I choose offer the lowest MER (management expense ratio) which allow me to pay the least fees to the fund company and maximize my returns.

The composition of the ECAM Asset Allocation Fund takes into account 5 distinct asset classes and the following percentages within the portfolio:

1) U.S. Domestic Stocks-15%
2) Foreign Stocks-25%
3) Bonds-15%
4) Real Estate-15%
5) Commodities-20%

Using these 5 non-correlated asset classes results in above average returns over a standard benchmark (S&P 500 Index) while reducing draw downs. Sharp eyes will note the total above is only 90%.....where is the other 10%? More on that below.

To break the asset classes down further, I have set up the portfolio as follows:

U.S. Domestic Stocks (15%):

-U.S. large cap stocks-10%
-U.S. small cap stocks-5%

Foreign Stocks (25%):

-Developed Markets ex-U.S.-15%
-Emerging Markets-10%

Bonds (15%):

-U.S. Domestic bonds-10%
-U.S. TIPS (inflation protected bonds)-5%

Real Estate (15%):

-U.S. Real Estate-10%
-Foreign Real Estate-5%

Commodities (20%):

-"Hard" Commodities basket-10%
-"Soft" Commodities basket-10%

Discretionary (10%):

The discretionary part of the portfolio allows me to invest in areas that are capable of generating "alpha" to allow for additional returns within the portfolio. This can take the form of any asset class I deem of sufficient strength and non-correlation to the other asset classes to be included.

Based upon the above, here is the current breakdown of the portfolio:

1) U.S. Domestic stocks

-VTI (Vanguard Total Market ETF) 10%
-VB (Vanguard Small Cap ETF) 5%

2) Foreign Stocks

-VEU (Vanguard FTSE All-World ex-US ETF) 15%
-VWO (Vanguard Emerging Markets ETF) 10%

3) Bonds

-BND (Vanguard Total Bond Market ETF) 10%
-TIP (iShares Barclays TIPS Bond Fund ETF) 5%

4) Real Estate

-VNQ (Vanguard REIT ETF) 10%
-RWX (SPDR DJ Wiltshire Intl Real Estate Index ETF) 5%

5) Commodities

-DBC (DB Commodities Tracking Index ETF) 10%
-DBA (PowerShares DB Multi-Sector Commodity Trust Agriculture Fund) 10%

6) Discretionary

-GDX (Market Vectors Gold Miners ETF) 5%
-FXA (Currency Shares Australian Dollar Trust) 5%



The fund is managed as follows:

1) When my technical indicators for each asset class (some previously published, some proprietary) indicate it is safe to be in the market over the medium-long term, the funds are fully invested as described previous.

2) The percentages are rebalanced quarterly to maintain the optimum asset allocation. Higher return assets are sold and lower return assets are bought (the classic "sell high/buy low" strategy).

3) The discretionary part of the portfolio is reviewed weekly and funds bought or sold based upon their technical strength and degree of non-correlation to the other asset classes.

4) When a given asset is determined to be medium to long term technically weak, that asset is sold and the proceeds from that asset class are moved into cash.

5) At the point at which the majority of the asset classes have become technically weak (and are held in cash), strategic shorts are placed into the fund (with a cap of a 50% short allocation as being the maximum allowed within the fund) to capitalize on longer term downtrends within bear markets and add value to the fund.

Using this combination of strategic asset allocation and market timing will ultimately deliver a superior rate of return over the traditional "buy and hold" strategy. As such, the ECAM Asset Allocation Fund is currently 100% invested as per above. As market conditions change I will include the status of the funds position in my future blogs along with my Provident Fund positions.

I have been asked by many people whether I might be interested in managing their funds for them. I will not do so currently given the considerable time I would want to put into doing so and my current time constraints. However, in the future I may consider doing so and will use the ECAM Asset Allocation Fund as my personal benchmark in determining projected rates of return.

Stockmarket update 02 December 2009

Another interesting few weeks in the markets.

Of course the big news last week was Dubai World and it's notice of a possible planned default on it's Nakheel bond repayment due mid December. The markets had a few rough days following the announcement but seem to have shaken off the event.

The message they are giving is that currently the markets do not believe there will be a follow-on contagion effect that spreads to other weak countries/markets. There are many such markets that are on very shaky ground and it would not take much to push at least one of them over (mostly Eastern European countries but also something as big as Japan could follow suit in a domino-style collapse).

Having said all the above, the markets are still in a cyclical bull market within a secular bear market. Everything is pointing up (as of today) but every day I look at my charts I say to myself "is this the top"/"is this the turn"/"where do I plan to exit when this finally turns down again".

Riding this bull is a risky venture; profitable but risky. It is sort of like riding a real bull (not that I have actually done this but can imagine what it is like)......you don't know the bulls nature, you only know he does not want you on his back and and will do his best to throw you off and try and kill you. You need to ride the bull but know when it is time to jump off before you get killed.


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


Stockmarket


SPX 11 year monthly:



First chart is the S and P 500 Index monthly chart. This chart is the first of 2 medium to long term charts I use. It turned bullish in July as noted on the chart.

The uptrend is intact but note price has risen very close to the 50% Fibonacci retracement level near 1121.44. This is the most common area where a cyclical bull market would reverse course and recommence it's decline so it is necessary to pay close attention to price at this level.

Should price rise above the 50% level the next target would be the 61.8% level at 1228.

As of today this long term chart is bullish.


SPX 2 year weekly:



The second of my intermediate to long term investment charts. This chart turned bullish in late March as shown on the chart. This was confirmed by the 13/34 exponential moving average crossover in late July.

All indicators on the chart remain bullish but note price has risen to the critical level as defined by:

-the 50% Fibonacci level (as discussed previous)
-the last area of fairly strong volumetric resistance at 1120
-the apex of what appears to be a bearish wedge pattern
-the bottom of the downtrend line from the market top in 2007

The confluence of these conditions have held price in a tight range the past 2 weeks. The market needs to decide if it wants to go up from here (taking out the levels mentioned) or commence a breakdown. It is impossible to guess which will happen so we need to let the markets tell us which way they want to go.

Should price be able to break above it's current range, it appears there is very little resistance to at least 1200.

As of today this intermediate to long term chart is bullish.


SPX 6 month daily:



The 6 month daily chart shows what appears to be a well defined channel (in dotted red). Price is still established in a "higher high/higher low" pattern so the uptrend is still intact. It would take a close below 1029.38 to change the pattern.

I have drawn (in black) a pattern on the chart known as a bull flag. A bull flag pattern appears when price has a strong advance and then sets up a trading range while it digests it's recent run (in the process working off overbought conditions as can be seen by the Stochastic moving from well above 80 down to the 50'ish level currently). The pattern takes the shape of a "flag staff" and the "flag" itself.

Normally this pattern is quite reliable and should break to the upside. If this were the case the expected target on the advance is calculated by taking the length of the "staff" and adding it to the point of breakout. 1113 - 1029 = 84 points. On a break above 1113 we would add 84 and arrive at a target of 1197. Note this level is very close to the 1200 level I mentioned previous.

The MACD continues to produce a divergence so this is a bit worrying. I would like to see the MACD break above the downtrend line to give greater confidence all is well.

As of today the short term chart is bullish.


SPX Point and Figure:



The SPX Point and Figure chart turned bullish in July on a price print of 935. It remains bullish and has a target price based upon the structure of the chart of 1295.


SPX 15 Minute:



I have included a very short term 15 minute chart to give you some idea of the price action the past few days.

Price entered the current consolidation range on Nov 9 and has moved no where since. A break above the current range would be bullish; a break below bearish.


Warning Signs


Having said all the bullish above, there are 2 things I am watching closely that give me considerable pause.

Generally in the stockmarket the "leaders" tend to be Financials and Technology. These 2 tend to pull the general market up and they tend to pull the general market down.

I have represented the Financials by way of the Financial Select SPDR ETF and Technology by way of the Philadelphia Semiconductor Index:


XLF 6 month daily:



XLF 3 year weekly:



The financials are looking weak. The short term chart signalled a sell signal several days ago and price appears to be forming a possible descending channel.

The weekly chart is very close to a sell signal. A closing price below the Bollinger Band midpoint along with confirmation on my technical indicators would confirm an intermediate bearish trend had begun. Note that we are not there yet but we are close.


SOX 6 month daily:



SOX 3 year weekly:



Technology is showing similar weakness. A similar short term down trending channel appears to have formed and the weekly is in a similar position to the Financials.

Should these 2 move into a bearish reversal it will be next to impossible for the general markets to sustain their uptrend. I am watching these closely.



U.S. Dollar


USD 3 year weekly:



I have included three USD charts today. The first is the 3 year weekly chart. This chart turned bearish in mid-April 2009.

The decline has been incredibly linear; continuous lower levels week after week after week. A very unusual pattern; in fact I have NEVER seen a weekly stochastic remain in the oversold area for a full 6 months ON ANYTHING.

Note the RSI is still not in oversold territory so, believe it or not, it is possible the USD could decline further before a meaningful retracement upwards. Having said that, the pattern on the chart is a falling bullish wedge that should break upwards. When.......who knows. What I do know is there are a ton of market players short the USD and a ton of market players using the USD as their "carry trade" currency; when it does turn (and it will at some point) there will be a mad rush to cover short positions. This will result in a rocket ride north for the USD. I suspect the "unwind" to be very volatile.

The price is currently sitting right on top of 2 support lines that form essentially 1 level of support at 74.31-74.48. A minor support at 73.89 is below this. Should these levels break I think there is a very good chance we go back down to test the all time low at 70.70.

As of today the USD long term still looks bearish.


USD 6 month daily:



The USD daily chart shows the wedge pattern. The price level of 74.94 was decisively broken last week so we can expect in the short term there will be more USD weakness.

Note the Bollinger Band midpoint has acted as a barrier during this decline. It currently sits at 75.22 and until price can break above this level......down the USD goes.

As of today the short term USD chart is bearish.


USD Point and Figure:



The USD Point and Figure chart turned bearish in May, 2009 on a price print of 82. It currently projects a bearish price target of 63 based upon the structure of the chart.


Gold


Gold 3 year weekly:



Gold continues to power ahead. The inverted Head and Shoulders pattern I discussed previous is still in play and my long term target is 1333.

I have also included my latest Fibonacci extension target as shown on the chart (1245). That is the current short term target on this momentous movement.

Gold is severely overbought and this appears to be a blow off. The RSI has reached an extreme level of overbought as it did in Oct, 2007 and Feb, 2008. The Oct/07 correction was mild (approx $70 decline) while the Feb/08 correction was more substantial (approx $200). There is no way to tell how big the next correction will be but there is NO WAY I would be a buyer of bullion at this point in time.

In fact, while I have said I would never sell my current holdings, I am now toying with the idea of doing so given the profits I have in the position. If I don't I will probably buy downside insurance protection via options (puts on GLD).


Bottom Line:

The markets continue to exhibit strength. The well defined support and resistance levels on the SPX are clear indicators there is a fight between bulls and bears at this point.

At this point I am still a "nervous" short-to-intermediate term bull. However I am still a bear long term. I would prefer to see an orderly market decline to the 1060'ish level to work off some overbought conditions and reduce the bullish sentiment currently in the market; that would ultimately be good for the markets at this point. However, we may not get that and we may just continue further up from here.

A break above 1113 and the uptrend continues. Next reasonable target 1200'ish.


As of today my strategic position within the Provident Fund remains unchanged at a 50% Equity/50% USD cash position.**

The ECAM Asset Allocation Fund remains 100% invested.

**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.

dwaynemalone1@gmail.com