Stockmarket Update 23 May 2010

Stock market update as of the week ending Friday, 21 May 2010.


Another week of selling in all the major markets. This week produced some interesting technical changes that need to be discussed.

Click on all charts to enlarge:


Major Market Indexes (weekly):



The first chart is a simple weekly line chart of the major market indexes (INDU = Down Jones Industrial Average, SPX = S&P 500 Index, COMPQ = Nasdaq Composite Index, RUT = Russell 2000 Index, DJW = Dow Jones World Index, NDX = Nasdaq 100 Index).

In all cases it can be seen that the uptrend line from the March, 2009 bottom has been broken to the downside. However, with the exception of the Dow Jones World Index, all the other "U.S. oriented" indexes remain above their last significant lows (shown by a red line on each chart).

The fact the Dow Jones World Index closed below it's last significant low is indicative of the fact this decline is being led by China and Europe (as discussed in a previous blog).

Trend line analysis appears to be simple in theory but there is actually quite an art to it. Technicians use differing "rules" on when a trend line break is significant.

The rules I use when confirming a break of an up trend line has truly indicated a major market reversal is price must confirm by closing BELOW the last area of significant support anchoring the relevant trend line. This has not occurred (as of yet) on the majority of the indexes (other than the D.J. World Index) so we are in the "in between" area between the last up trend and the previous area of support. This is shown as the beige zone on the chart.

I classify the current overall market trend as being NEUTRAL.


Dow Jones Primary Sell Theory

Having said the above, a bearish sell signal was generated on Thursday based upon an indicator known as the Dow Primary Trend Theory Indicator.

The Dow Jones Primary Trend Theory is one of the oldest forms of Technical Analysis. Unto itself it means little day-to-day but it must be noted this theory is followed by MANY money managers so it needs to be watched closely.

Basically, the theory is that signals on the D.J. Industrial Index must match signals on the D.J. Transport Index. This is because the "industrial products" manufactured must be "transported" to customers. If both the industrials and transports are on buy signals then you have a primary bullish trend. When both are on sell signals you have a bearish trend. When they are in disagreement you have a neutral "undecided" signal.

Dow Theory Sell Signal:



On Thursday both the Industrials and the Transports broke below their last significant area of support (set in early May and shown with the red line). This confirmed a Dow Theory primary sell signal.

This is not a tradable signal but it changes the overall view of the markets in a much more bearish direction.


SPX 11 year monthly:



The long term monthly chart remains bullish. The final decision on this chart is based on monthly closing price ONLY (it can dip below mid-month).

The long term chart remains BULLISH.


SPX 3 year weekly:



The weekly chart has turned bearish with the technical indicators confirming. This indicates we MAY be into the early stages of new bear market or we MAY be in a correction mode before the next market advance.

I have drawn a key level of support on the chart from Feb, 2010. If the daily closing low of 1044.50 were to be violated I would get worried; if the weekly closing low of 1066.19 were to be violated I would become VERY CONCERNED and bearish. We are not there yet.

The intermediate term weekly chart is NEUTRAL-BEARISH.


SPX daily from 2009 bottom:



This is a new chart I have not shown before. It is a simplistic view of the current market advance off the March, 2009 bottom.

As can be seen (and discussed previous), we are in a "neutral zone" below the rising trend line and the last area of significant support.

I have drawn 2 possible dotted blue trend lines; a bullish rising one and a bearish falling one. If price were to take out 1044.50 on a closing daily basis the current market rally would be over and I would change the descending dotted trend line to solid. It would be controlling and we would be in a new down trending market.

If price were to close above 1173.57 on on a closing daily basis the current market rally would be still intact and I would change the ascending dotted trend line to solid. It would be controlling and we would be in the next phase of a new up trending market.

Anything in between is neutral as it is nothing more than market noise that could go either way. We are currently in this position.


SPX daily with volumetric:



The daily chart with volumetric shows the continued strong support and resistance zone between 1040-1130. Interesting to note price on Thursday closed below the fairly strong volumetric support line @ 1080 (the middle black line) yet popped back into that area on Friday. This is encouraging.

It is possible the market has transitioned into a new more shallow price channel than previous. I have indicated this channel in a red dotted fashion and it is also interesting to note Thursdays low bounce right off the possible lower support channel.


SPX Point and Figure Traditional:



A very negative development that occurred last week is the Point and Figure chart turned bearish. It is now targeting a price of 940.


SPX 6 month daily:



Another bearish development is on Thursday price broke below the 200 day moving average (shown in green). During the early stages of a bear market once this occurs price may recover but many times finds resistance at the 50 day moving average while longer term turning lower.

The only positive thing to note on the chart is price did not close below the Feb 08 closing low of 1056.51. This combined with the oversold nature of the market has me expecting a bounce upwards as early as Monday.

The short term charts remain BEARISH.



Bottom Line:

As you can probably discern by my comments, technically the markets are at a "wishy-washy" point where they could go either way. There are some charts that are bearish; some that are bullish. Sometimes things are crystal clear; sometimes they are hazy. That is the nature of investment and that is where we stand today.

In my experience, the best investment decisions I have made are those where I sit on my hands during times of indecision and let the market tell me where it wants to go. When the time is right I have no problem becoming bearish and committing to cash (or more likely shorting the market) and there are times when patience is a virtue and you stay long and bullish in the face of danger. That is where I feel we are at today.

I remain long term bullish and intermediate term neutral on the markets. There is nothing in the longer term charts that indicate we have begun a new bear market decline. As such, until they do so I remain in cautious "Bull" mode and view the current decline as a correction of the overbought nature of the markets over the past few months.

It is not to say that we may have just experienced the....... "this time it's different" scenario that could possibly have moved the market from a bull market to a bear market basically overnight. It is only with time/price action that this would become apparent but the odds do not favor such a scenario. What I can say is my long term indicators have an excellent record of being right and, as of yet, they have not indicated the bull market advance from the March, 2009 bottom is over.
My "gut" feeling is we have entered a consolidation period in the markets to digest the huge rise off the March, 2009 bottom. Seasonally markets tend to be weak going into the summer (the" sell in May and go away" scenario) followed by a summer rally followed by a further decline into the fall. I still believe whatever low we set into this fall will be a great time to go "all-in" based upon the Presidential 4 year stock market cycle (also discussed in a previous blog).

I am neither a bull nor a bear. I go wherever I can make money and I never, never let emotion creep into my investment decisions. Hard to do sometimes but over the years I have learned this is what needs to be done.

We are in a neutral zone where this can go either way. I lean cautiously bullish and am positioned accordingly in the Provident Fund (still holding 25% cash).

Ironically the ECAM Asset Allocation Fund, which is 100% technically driven (and can be thought of as 10 independent "brains" all thinking individually based upon their "specific area of expertise"), is positioned neutral as well (45% invested/55% cash) based upon their very strict, totally technically driven indicators I employ to each asset class.


Emirates Provident Fund:

As of today my "strategic positioning" within the Emirates Provident Fund A and B accounts remains at a 75% Equity/25% USD cash position. (1) see below

I have received numerous emails the past few weeks from those subscribers who want more specific details as to exactly which equity fund(s) I hold within the Provident Fund account.

The short answer is.....it doesn't matter.

The funds available within the Emirates Provident Fund A/B accounts (BlackRock/MLIM Equity Portfolio vs. Fidelity International Fund vs. Russell Global 90 Fund) will move +/- a percent or two year-to-year. In the end you could flip a coin and have as good a chance of picking the outperforming EK equity fund as I could.

The key is that none of these funds will EVER provide for a long term secure retirement given their extremely limited exposure to the investment universe and their mandates to be "relative performance" funds (ie, not actively managed). I only deal with them because the company tells me I must. Given my choice I would have 0% in the EK accounts.

I will do a more in-depth discussion on this at a future date but since there appears to be a desire to have specific direction on what I do:

1) 100% of my REQUIRED monthly provident fund investment purchases (the A + B account purchases the company requires me to contribute) goes 100% into equities. It has for the past 11 years and I NEVER CHANGE THIS ALLOCATION NO MATTER WHAT DIRECTION THE EQUITY MARKETS TAKE.

2) Of those ongoing required monthly purchases, the monthly allocation I have assigned is as follows:

-Russell Global 90 Fund-40%
-BlackRock/MLIM Equity Portfolio-30%
-Fidelity International Fund-30%

3) My current holdings (based upon technical market timing) are approximately as follows (market fluctuations change the mix somewhat):

-BlackRock/MLIM Equity Portfolio-50%
-Russell Global 90 Fund-15%
-Fidelity International Fund-10%
-BlackRock/MLIM US Dollar Cash Portfolio-25%

The reason I have such a high exposure to BlackRock/MLIM Equity is not because I feel they can outperform the others; it is only because they give me the "out" to move to USD cash more quickly in the event of a market crash (as discussed in a previous blog below):

http://emiratescapitalassetmanagement.blogspot.com/2010/04/provident-fund-switching-anomaly.html).

3) All other investments (ie. my entire free monthly investment cash flow other than that described above) I put into the ECAM Asset Allocation Fund.

I have not seen a more effective method of long term investment to date and there is no other investment strategy I would commit my retirement savings to.


Emirates Capital Asset Management (ECAM) Asset Allocation Fund:

The ECAM Asset Allocation Fund (my personal C account) remains at a 45% invested/55% cash position. (2) see below

Current holdings:

Core Strategic Asset Holdings (90% of entire assets under management):

-U.S. Large cap equities:10% (VTI)
-U.S. Small cap equities: 5% (VB)
-U.S. Real Estate Investment Trusts (REITs): 10% (VNQ)
-U.S. Domestic bonds: 10% (BND)
-U.S. Inflation protected bonds: 5% (TIP)
-Cash: 50%

Discretionary (10% of entire assets under management):

-Gold mining stocks: 5% (GDX)
-Cash: 5%


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


(1) Emirates Provident Fund "Strategic positioning" percentages are as per how funds were originally allotted. Due to daily market price fluctuations and ongoing equity monthly purchases within the Provident Fund account these amounts will vary several percent from that posted.

(2) The Emirates Capital Asset Allocation Fund is a composite investment fund based upon Modern Portfolio Theory and Strategic Asset Allocation.

It is composed of the following asset classes and percentage of potential exposure to each asset class:

Core Holdings (90%):

-U.S. Domestic Large Cap Equities-(10%)
-U.S. Domestic Small Cap Equities-(5%)
-Foreign Established Markets Equities-(10%)
-Emerging Market Equities-(15%)
-U.S. Domestic Bonds-(10%)
-U.S. Treasury Inflation Protected Bonds-(5%)
-U.S. Domestic Real Estate Trusts (REIT)-(10%)
-Foreign Real Estate Trusts-(5%)
-Hard Commodities-(10%)
-Soft Commodities-(5%)
-Managed timber-(5%)

Discretionary Asset Holds (10%):

-any asset class with shorter term positive technical indications that the manager deems appropriate for inclusion into the fund for the potential for added alpha returns.

Each asset class within the fund is individually invested based upon strict technical analysis criteria. Asset classes without a positive technical outlook are moved into cash. When the majority of equity asset classes are deemed in bear markets up to 50% of the equity positon may be positioned in short market/put option instruments.

European and China Market update

The recent market weakness in non-U.S. markets is something I am watching closely.

The reason why is because the emerging markets (including the BRIC countries; mostly China) and non-U.S developed markets were the ones that led the U.S. into the current market advance. As such, they may be the "canary in the coal mine" that telegraphs the next market decline worldwide.

It is these charts that have me worried and the reason I am not committing additional assets into equities at this point. I would need to see some bullish recovery in these to go "all in".

Just something to keep in mind over the next week or two.

Europe

A good proxy for non-U.S. developed market assets is the iShares MSCI EAFE Index Fund (EFA). With assets of more than $32 billion, iShares MSCI EAFE Index Fund is among the five biggest ETFs.

The tracking index is a popular benchmark for developed markets outside North America -- EAFE stands for Europe, Australasia and the Far East.


EFA monthly:



The monthly chart is looking bearish. Price is well below the 10 month sma as of this month with the RSI <50>

EFA weekly:



The weekly chart turned intermediate term bearish last week and broke below previous support on large down volume. This is a very bearish sign.


EFA daily:



The short term daily chart turned bearish on April 21 and broke the support level around 50. It recovered it briefly this week but could not hold it by weeks end. The short term chart looks very bearish.

China

Shanghai Index monthly:



The monthly chart turned bearish at the end of April and is currently down 6% for the month of May. It is sitting right on a level of previous support at 2639.75 (Sept, 2009 lows). This is an extremely important monthly closing price to watch.

Shanghai Index weekly:

The index on the weekly chart issued a sell signal last week. Price broke below the previous weekly closing price set in Sept, 2009 and all weekly indicators are bearish.

This is a potentially dangerous position as there is no real strong long term support all the way back down to the bear market lows at 1665.


Shanghai Index daily:



The daily chart looks awful. No technical support, no divergent technical indicators, no bottom in sight short term. There is some minor movement in the RSI and Stochastic out of oversold area but not enough to get excited about at this point.


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

Stock Market and Currency Update 16 May 2010

Stock market and currency update as of the week ending Friday, 14 May 2010.

(edited for date typo post publication)

I am currently on the road and do not have access to all my charting data. However, I thought I would put together a quick update based upon the past weeks market activity.

For the week the markets were up 2-5% with the oversold bounce I spoke about previous taking place on Monday. The current market mayhem seems to be centered in Europe and China. Either of these two situations could spill over and totally derail the current world market advance so they need to be watched closely.

I will speak about the U.S. charts 1st followed by China and Europe:

Click on all charts to enlarge:


SPX 11 year monthly:



The long term monthly chart remains bullish until the monthly closing price closes below the 12 month simple moving average.

No changes from my previous comments; the long term remains BULLISH.


SPX 3 year weekly:



The weekly chart looks neutral. Price recovered to the Bollinger Band midpoint. The RSI has regained >50 and the Stochastic remains >50 (but continues to point downwards). These are all longer term bullish signals.

We are now in week 3 of the current downturn (note the previous 2 downturns in this bull market took 4 weeks to unfold as previously mentioned). The other indicators remain neutral to bearish.

The overall medium term picture is currently NEUTRAL.

SPX 3 year weekly with volumetric:



The weekly volumetric chart shows the largest weekly chart support/resistance in the 1120-1050 area. Price has retraced back to the 50% Fibonacci at 1121.44 along with a backtest of the previous downtrend line as well as what could be the bottom of a slightly less steep rising price channel I have tentatively drawn on the chart.

This indicates we are at an inflection point but at strong support.


SPX daily with volumetric from Mar, 2009 bottom:



The daily volumetric chart from the March, 2009 bottom shows us nicely sitting on a large amount of support (dotted black lines). It would have been preferential for price to break the top of the resistance around 1170. If it can do it next week it appears we will be on track to attempt the tops at 1220.

If price breaks current levels we test 1050 followed by 1040. Note the decreasing volumetric support all the way down to 940. That would be my target if the longer term charts turn bearish.


SPX 6 month daily:



The meltdown from the previous week and subsequent partial recovery this past week is evident. The fact that 1150 was nicely re-gained Mon/Tue but could not be hold on the daily chart bothers me.

The daily closing low near 1110 now becomes very important along with the recent closing high near 1170. This 1110-1170 range can be considered as the consolidation zone; a break above a bullish indication and a break below a bearish indication. Right now it is neutral but the technical indicators suggest more downside is yet to come.

Another thing I don't like about this chart is the increased volume on the down day on Friday compared with lesser volume on the Mon/Tue/Wed up days. This is classic bearish divergence.

The short term charts remain BEARISH.



Bottom Line:

I remain long term bullish on the markets. There is nothing in the longer term charts that indicate we have begun a new bear market decline. As such, until they do so I remain in "Buy" mode.

A significant amount of panic has come into the market in the past week. My proprietary breadth indicators remain neutral to bearish so short term we could have some more downside. Also Friday is options expiry day so that will increase the volatility this week.

The short term looks neutral to bearish so I have not committed my remaining 25% into equities. I think the uncertainty that is currently in the markets may become a great buying opportunity but it is still too early to commit the last of my cash. As such, I am keeping my powder dry for the next week and see what unfolds.

The ECAM Asset Allocation Fund (my personal C account) remains at a 45% invested/55% cash position as of this weekend. It is strictly technical analysis driven and is currently invested in U.S. stocks (large cap and small cap), U.S. Real Estate, U.S. bonds (both domestic and inflation protected) and gold stocks.


Emirates Provident Fund:

As of today my "strategic positioning" within the Emirates Provident Fund A and B accounts is a 75% Equity/25% USD cash position.**


Current positions as of 14 May 2010:

-Equities: 74.6%

-USD Cash: 25.4%


** "Strategic positioning" percentages are as per how funds were originally allotted. Due to daily market price fluctuations and ongoing equity monthly purchases within the provident fund account these amounts will vary several percent from that posted. Consult "current positions" for updated actual positions held.


Emirates Capital Asset Management (ECAM) Asset Allocation Fund:

The ECAM Asset Allocation Fund is currently 45% invested (40% core holdings invested + 5% discretionary invested) and 55% cash.

As mentioned last week,the fund rotated out of non U.S. Developed Markets, Emerging Markets and Commodity positions several weeks ago. I am comfortable with it's somewhat defensive positioning at this moment given current market conditions.

Currently only gold stocks (GDX) are held in the discretionary portion of the fund. Gold continues to outperform all asset classes at present.

Current holdings:

Core Strategic Asset Holdings (90% of holdings):

-U.S. Large cap equities:10% (VTI)
-U.S. Small cap equities: 5% (VB)
-U.S. Real Estate Investment Trusts (REITs): 10% (VNQ)
-U.S. Domestic bonds: 10% (BND)
-U.S. Inflation protected bonds: 5% (TIP)

-Cash: 50%

(in cash for portions of fund allocated to non-U.S equities, non-U.S. Real Estate, Emerging market equities, hard and soft commodities and managed timber assets).

Discretionary (10% of holdings):

-Gold mining stocks: 5% (GDX)
-Cash: 5%



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

Stock Market and Currency Update 08 May 2010

Stock market and currency update as of the week ending Friday, 07 May 2010.

A huge down week in the markets. The decline to alleviate the overbought conditions I have been discussing for weeks finally came. The question is where do we go from here?

Fundamentally the key issue is Greece and it's debt issue. It is not that Greece is unto itself a big deal (the GDP of Greece is about the same size as the GDP of the City of Philadelphia); it is the possibility of the contagion spreading beyond Greece to Portugal, Spain, Italy and Ireland......to be followed thereafter by the U.K., Japan and then back to the U.S. (which has been out of the "debt" spotlight recently thanks to the good work of the Greeks).

Essentially there is a battle going on between the ECB/Jean-Claude Trichet and the debtor nations. The debtor nations would like to receive a "substantial" monetary ECB handouts combined with them applying "limited" structural reforms to their economies . Trichet/the ECB is dead set against this and would like the debtor nations to make "substantial" structural reforms to their economies combined with providing "limited" ECB monetary relief (600 billion Euros has been announced). This has created tremendous uncertainty in the markets as to the future of not only Greece but the Euro and European Union itself.

The problems in Europe are spilling over into the rest of the world. If the Greece situation had been handled sooner we would probably be up another 2000 points in the DOW.

Fundamentally in the U.S. there appears to be the perfect combination of factors to promote an ongoing stock market advance:

-stable earnings growth
-low inflation
-low interest rates (with the FED on hold for probably another year +)
-high worker productivity
-unemployment starting to improve (hiring appears to have begun; the unemployment rate should come down soon).

The liquidity is being gradually drained from the U.S. system and, while still fragile, it appears there is a good chance the U.S. may actually experience a "V" shaped recovery.

I am confident if the ECB announced their commitment to provide unlimited liquidity to backstop the European Union there would be a a huge market advance. Whether that will happen or not remains to be seen.

There are times in the market when a combination of factors leads to excessive moves in prices. At times like these, I have found it necessary to take a step back from the day to day action and look at the big picture. That is what this blog will be about today.

Click on all charts to enlarge:


Stock Markets:


SPX 11 year monthly:



The first chart is the 11 year chart of the S & P 500 Index. As I have mentioned previous, this is one of my "long term view" charts. This chart turned bullish in July, 2009 when the months closing price closed above the 12 month simple moving average. It has remained bullish ever since and continues to be so as of today.

Note that during the past bull market there were numerous months where price mid-month crossed below the average (shown as "tails" on the candlesticks) yet by the end of the month price continued to hold above the average (April 2003-Dec 2007). I count 13 months where these "tails" broke the moving average line but in all cases they closed above the line by the end of each of those months.

As can be seen on the chart, we are in the same position again. This bears watching as price may continue to decline but it would take a closing monthly price at the end of May below the current 12 mMA (currently at 1073.07) to turn the chart bearish.

As such, the long term view of the markets remains BULLISH.


SPX 3 year weekly:



The next chart is a 3 year weekly chart of the SPX. I have shown the previous 2 market corrections since the bull market began in March, 2009. In each of those declines, the length of the decline was 4 weeks and the decline was 9.1% each. The current decline is 2 weeks in length and has been 8.9%. As such, it is too early to "panic" and think the world is coming to an end. We need to give the market a little more time to prove itself before we start to make drastic changes to our portfolio's.

A reminder those 2 previous corrections turned out to be excellent buying opportunities. Might this be another one? More on this below.

The weekly chart remains BULLISH.


SPX Point and Figure Traditional:



The SPX point and figure chart cuts all the noise. It turned bullish on a price print of 935 and still projects a target of 1295.

I've included the volumetric levels on the chart. It can be seen there is a strong level of resistance at the 1090-1100 level. This was tested this week and held.

The PNF chart remains BULLISH.


SPX Daily with Volumetric:



The daily volumetric chart from the March, 2009 bottom shows the strong level of support between 1040-1120 (strongest @ 1080-1120 with the next level @ 1040-1080). A break below 1040 would be cause for real concern.

Note price broke the uptrend line on Thursday. This is common during both bull and bear markets and it can be seen we have had numerous breaks of previous trend lines during the current advance. Therefore, breaking a trend line does not mean the start of a downtrend; it means the market has turned neutral and could go either way.

As such, this chart is neutral until either:

-price exceeds 1219.80 resulting in a newly established uptrend with a re-draw of a new support line (and the continuation of the bull market advance); or

-price breaks 1044.50 resulting in a newly established downtrend (and perhaps the 1st indication that the bull market is over). Only the price action going forward will determine which it is.

The daily chart is currently NEUTRAL.


CBOE Equity Only Put/Call Ratio:

I spoke previous about panic. One of the most important things you learn when investing is the tendency for the general public to panic. The ability to act counter to the masses (contrarian investing) can result in above average gains.

When within a bull market, panic selling can be used to buy shares at a tremendous discount. And just the opposite, during a bear market panic buying can be used to short shares at a tremendous discount.

One of the charts I use to monitor "sentiment" is the Chicago Board Options Exchange (CBOE) Equity only put/call ratio. Without getting into too much detail, a "call" is an option bet that the price of stock/commodity/currency/etc will rise in the future. A "put" is an option bet that the price of the stock/commodity/currency/etc will fall in the future.

Options are used in a variety of ways by professionals as "portfolio insurance" (hedges) or as bets on the future direction of the market. These same instruments are also used by individual investors to speculate on their perception as to the future direction of the market.

Ironically approximately 90% of all individual purchases of these options result in losses for the individuals. As such, they can be used as an contrary indicator (along with many, many more I follow) to judge the degree of fear in the market.

On Friday individuals buying "puts" (bets the market will decline in the future) vs those buying "calls" rose to an extremely high level.





As can be seen on the chart (which unfortunately only goes back to 2003), there have been very few times when the ratio of equity puts to calls has risen to the 1.15 ratio or higher. In fact, Friday was only the 6th time in the past 6 1/2 years where that has happened and only the 3rd time it has happened during a bull market (twice during the 2003-2007 bull market). Both times turned out to be excellent buying opportunities.

Given there are approximately 250 trading days/year, that is only 6 times in the past 1625 trading days where that has happened (0.3692%). In short, it is a rare "panic" occurrence.

In a bear market it makes sense to have "panic selling" on occasion but during a bull market many times these "panic sells" lead to excellent buying opportunities. This may be just such a time.

I am watching close for the open Monday and may add to my positions.



Currencies:


USD 2 year daily:



A nicely established up trending channel in the USD. It has gotten a little ahead of itself so it would not be unexpected to see a pullback to the bottom of the channel and the support around 83.

The USD remains BULLISH.


Euro 2 year daily:



The Euro continues to get hammered on the uncertainty surrounding Greece. It is at the bottom of it's channel and it would not be surprising to see a rise back up to 133 before the next decline. It remains on track to test 124 and below.

The Euro remains BEARISH.


British Pound 2 year daily:



The Pound continues to struggle as a result of the election and the resultant political uncertainty associated with the hung parliament. Unlike the Euro, there is some support at current levels and significant support down to 137. As shown on the chart, the area between 137 and 156 is a "chop zone" where directionless trading could be expected to take place.

The Pound remains BEARISH with a bearish, choppy trading bias.


Australian Dollar 2 year daily:



The Aussie has been unable to break above the 93.67 level. It has now broken below the uptrend line from the March, 2009 bottom and the 50 and 200 day moving averages.

The area between 86.21 and 93.67 is another "chop zone" with no clear direction. However, given the technical break of the 200 day moving average, there is a bearish bias to the Aussie.

The Aussie Dollar is currently NEUTRAL with a bearish, choppy trading bias.


Gold 2 year daily:



Gold continues to perform extremely well and should be a part of every one's portfolio. The chop zone between 1063 and 1150 has been broken to the upside and gold closed at a new all time high weekly close this week.

It has yet to break the all time high but now wants to challenge it. I expect some pullback near that level which might set up the "handle" of a "cup and handle" formation I have tentatively put on the chart. Should this occur the price target on a break above 1216 would be 1369. I have a different pattern I have followed for some time that projects a target of 1333 so those are the areas I am looking at for this move.

Pullbacks towards 1150 would be excellent buy opportunities in my opinion.

Gold remains BULLISH



Bottom Line:

As per a previous blog, I added an additional 15% equity exposure to my Provident Fund account. This currently has me at a 75% equity/25% USD cash position.

I have been holding back on going to a 100% equity position for months based upon the markets being overbought and overpriced. The overpriced is still here but the overbought has been eliminated.

I remain long term bullish on the markets. There is nothing in the longer term charts that indicate we have begun a new bear market decline. As such, until they do so I remain in "Buy" mode.

Should there be any resolution to the European crisis (via any hint from the ECB that they will stand ready to backstop Member countries), I am expecting a tremendous boost to the markets. Should it not come I think we continue to drift lower on debt default concerns.

Given the Put/Call ratio on Friday, any hint over the weekend of a softening of the ECB stance and I will commit to a 100% Equity position in my Emirates Provident Fund A and B accounts on Monday. Barring that, I will sit on my hands and remain at my current holdings until the dust settles.

The ECAM Asset Allocation Fund (my personal C account) currently stands at a 45% invested/55% cash position as of this weekend. It is strictly technical analysis driven and wisely moved it's non-U.S. and Emerging markets exposure to cash several weeks ago.


Emirates Provident Fund:

As of today my "strategic positioning" within the Emirates Provident Fund A and B accounts is a 75% Equity/25% USD cash position.**


Current positions as of 07 May 2010:

-Equities: 74.8%

-USD Cash: 25.2%


** "Strategic positioning" percentages are as per how funds were originally allotted. Due to daily market price fluctuations and ongoing equity monthly purchases within the provident fund account these amounts will vary several percent from that posted. Consult "current positions" for updated actual positions held.


Emirates Capital Asset Management (ECAM) Asset Allocation Fund:

The ECAM Asset Allocation Fund is currently 45% invested (40% core holdings invested + 5% discretionary invested) and 55% cash.

The fund rotated recently, having taken profits on it's Developed Markets (non-U.S.) and Emerging Markets positions. I am comfortable with it's somewhat defensive positioning at this moment given current market conditions.

Biotech funds were sold early last week and currently only gold stocks (GDX) are held in the discretionary portion of the fund.

Current holdings:

Core (90% of holdings):

-U.S. Large cap equities:10% (VTI)
-U.S. Small cap equities: 5% (VB)
-U.S. Real Estate Investment Trusts (REITs): 10% (VNQ)
-U.S. Domestic bonds: 10% (BND)
-U.S. Inflation protected bonds: 5% (TIP)
-Cash: 50%

Discretionary (10% of holdings):

-Gold mining stocks: 5% (GDX)
-Cash: 5%



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dwaynemalone1@gmail.com

Thursday meltdown

Just a brief comment on Thursday's price action.

It appears panic (or maybe "reality" might be a more appropriate term) may be setting into the markets.

Click on all charts to enlarge:


S & P 500 Index 1 minute chart:




Dow Jones Industrial Average 1 minute chart:




There is a lot of speculation as to what caused the crash and subsequent recovery in the markets (1000 point move on the Dow; down 481 points in 6 minutes and then back up 502 points in 10 minutes).

There is talk of "finger trouble" at a major brokerage firm whereby a trader incorrectly set an out sized sell order on Proctor and Gamble shares (NYSE: PG). This led to a sharp decline that was recognized by High Frequency Trading programs (computer based prop trading by the major brokerage houses). These in turn kicking in and began taking out sell stops.

Whether this was the case or not, the markets are very fragile now (mostly due to the European debt situation and the Euro decline). This may turn out to be a great buying opportunity or it could be the start of a major move to new lows. It is still too early to tell.

I plan on sitting on my hands today and watch the action. The technical picture will become more clear after today's market close.

I will have an updated blog post on Saturday or Sunday.

My positions remain unchanged.