Saturday, July 31, 2010

Stock Market Update 31 July 2010

Welcome to the ECAM update for the market as of the close 30 July, 2010.

I want to start by reviewing my comments from 05 July (where I pointed out that the technicals on the charts had signalled the beginning of a a new bear market):

The markets had exhibited a significant amount of strength the past year but have signaled they are now entering into a bear market correction phase.

The degree to which this correction will take unfold is unknown but in a future blog I will publish my anticipated targets. In the short term (given my personal time constraints), I thought it prudent to get out this short blog asap.

I will be moving my Emirates Provident portfolio back into 100% cash position to preserve capital. The daily charts are oversold so I am expecting a short term bounce to alleviate the current oversold condition. I will hold my current positions but sell into any significant rally.


As mentioned, at the time the markets were extremely oversold and I was looking for a "dead cat" bounce to sell into. Well, from those comments back on July 05 it has been one heck of a bounce. To be honest, it was much more than I expected we would get out of it but I have remained patient with my current positions within the Provident Fund and have recovered a significant amount of the decline from May/June.

I cannot recall a time where the markets have "dumbfounded" so many in such a short period of time. It is not that the sentiment is one-sided; it is just that there have been so many cross-current, confusing technical and fundamental indicators this past month that it has been very difficult to judge to any great degree which way we are headed.

For the month of July the S & P 500 index was up 6.88% and year to date it is down 1.22%. In other words, for this entire year so far we have gone absolutely nowhere. It doesn't seem like it with the daily 1-2% spasms up and down but it is what it is.

The market action in July has changed the long term, intermediate term and short term charts significantly. As such, my long term outlook is bearish-to-neutral and short term bullish. I will detail these below.


Click on all charts to enlarge:


SPX 20 year monthly:



The 1st chart is a 20 year monthly view of the SPX with a 12 month simple moving average (blue line). As discussed before, this is one of the two "Long term" indicators I use to define bull vs bear markets.

As can be seen, it has had a great track record over the past 4 market cycles (bear market 2000-2003, bull market 2003-2007, bear market 2007-2009 and our current bull market) of getting me in and out of the markets in a timely manner. Of significance is the fact June closed out below the 12 mSMA and this is one of the indicators I used to indicate that a new bear market has begun.

Given the unusually strong market action in July, I had a look back to times where this indicator has been "head faked" and has given a false bear market signal.

In 1998 there was a similar market condition to the present (but with some significant differences so not "exactly" the same"). Another "head fake" occurred in 1994. I have shown them both on the chart.

In 1994 there was a relatively mild market correction below the 12mSMA followed by a full year of consolidation in a tight range before the advance resumed. Given our correction from the recent highs was not "mild", I think we are more like 1998 than 1994 in terms of the type of market response.


SPX monthly 1998:



As can be seen, in 1998 we had a "head fake" of the 12mSMA. The month of Aug, 1998 had a huge down month followed by a positive consolidation month in Sept (that still was unable to break back above the 12mSMA) followed by a rise back above the 12mSMA in Oct, 1998. From that point the bull market resumed in earnest for another 2 years.

It is key to note that THE CLOSING LOW OF THE CANDLESTICK THAT BROKE THE 12 mSMA WAS NOT VIOLATED ON A MONTHLY CLOSING BASIS IN THE SUBSEQUENT MONTHS (note the "flat bottom" formed by the Aug-Sept 1998 candlesticks). I think this is the key to this chart.

In our current case, we had a huge down month (May) followed by a candlestick that broke the 12mSMA (June) followed by a candlestick that did not violate the closing low (July). This has formed a similar looking "flat bottom" on the 2 candlesticks to those that occurred at the 1998 bottom. If so (and if history repeats), we could be on the verge of a new breakout and the resumption of the bull market.

At the close of July price closed above the 12mSMA (close 1101.60, 12mSMA 1090.07) and has therefore reversed back to positive.

The long term monthly chart has turned around and is now BULLISH.


SPX 6 month weekly:



The second of my long term indicators is the 13 week vs 34 week exponential moving averages on the SPX. As I noted previous, they crossed over the 1st week of July and were a further indication that a bear market had begun.

As can be seen on this "up close" view, they have yet to cross back (ie. the 13 is still below the 34 wEMA).

The long term weekly chart is unchanged and remains BEARISH.


SPX weekly 1998:



Given the similarities on the monthly chart to 1998, I thought I would have a study of the weekly chart of 1998 to see if we have any similarities.

The first thing to note is the 1998 correction occurred after a much longer market advance than we have had currently. As such, price was above both the 100 and 200 week simple moving averages (red and green lines on the chart) before the correction began. In other words, the "stock market climate" was stronger in 1998 than current to support such a correction and subsequent rebound.

Having said the above, note in 1998 the false 13 vs 34 wEMA crossover (thick pink and black lines on the chart).

Things to note:

-the false crossover signal took 5 weeks to correct
-price remained below the 20 wSMA (dotted black line) for 12 weeks
-price never broke below the 100 wSMA (though it tried)
-RSI low: 34.27
-Full Stochastic low: 9.86
-MACD low: 17.57
-ADX: Red high 34.95/green low 12.97

SPX 3 year weekly:



Note the similarities to today's indicators:

-we have now had 4 weeks of the 13/34 crossover signal
-price has remained below the 20 wSMA for 13 weeks now (and we are currently right below it)
-price never broke below the 100 wSMA (red line) though it tried
-RSI low 37.96
-Full Stochastic low: 18.98
-MACD low: 9.05
-ADX: Red high 35.07/green low 12.05

While not exactly the same, it is eerily "close enough" that this needs to be kept in mind for those who are bearish.

Back the the present, the intermediate term weekly chart of the SPX turned bearish the 1st week of May (as indicated on the chart) and remains unchanged as of this week.

The intermediate term weekly chart remains BEARISH.


SPX Point and Figure traditional:



The point and figure chart turned bullish July 23 on a close of 1102. It remains on a buy signal with a projected price target of 1250.

The intermediate term PnF chart is BULLISH.


SPX 6 month daily:



The 6 month daily chart shows the down trending channel that has been broken to the upside. Price has currently formed what appears to be a fairly steep (and therefore unsustainable) uprising channel.

For those who are wondering what I used as a signal the market was oversold and due for a bounce, refer to the RSI(14) and the level of 30. We hit it in early May and bounced. We hit it in the 3rd week of May and bounced. We hit it again July 1st so it was rational to expect we would bounce. We did.

The short term chart turned bullish 09 July and remains so. Price is currently trapped between the 50 dSMA (above and therefore shorter term bullish) and the 200 dSMA (below and therefore longer term bearish). As such, we are in no-man's land as far as calling a short term directional move.

Should price push (and hold for more than a day or two) above the 200 dSMA that would be very bullish. Should price break below the 50 dSMA next week that would be a short term bearish indication.

The short term daily chart is currently NEUTRAL-TO-BULLISH.


SPX daily from 2009 bottom (with volumetric):



A view of the SPX from the Mar, 2009 bottom to present. It can be seen there is very strong volumetric support and resistance as defined by the beige congestion zone. The upper volumetric bar is 1080-1133 and the lower bar 1041-1080.

It would be expected price will be range bound between these bars until either the bulls can push price higher or the bears can push price lower. It is a tug-of-war between the two and there are no clear winners at present.



BOTTOM LINE:


The markets have had a nice correction since their lows in late June. This has put the long term and medium term technical indicators in the unusual position of contradicting each other (the last time this occurred was 1998).

-The two "long term" charts are in disagreement (monthly chart bullish/weekly chart bearish).

-The two "intermediate term" charts are in disagreement (weekly chart bearish/PnF chart bullish).

-The daily chart is bullish

We are now within a trading range that could go either way. Until the technical discrepancy can be sorted out (which will only occur by way of price action going forward) it is wise to sit on your hands, watch, and wait. That is what I am doing in my Provident Fund.

Interestingly, the ECAM Asset Allocation Fund has rotated back into equities and is currently invested at nearly the same level as the Provident fund (currently 72.5% as indicated below).

Should the coming week(s) result in the short and intermediate term charts turning bearish, this would bring them all (with the exception of the monthly) back into bearish alignment. That would be my signal to exit the Provident Fund equity positions in the expectation the monthly would follow by the end of August.

On the other side, should all the charts realign positive (short-intermediate-long term) then I will commit my last 25% into equities and be 100% long. My 'gut" tells me this is a low probability event but only market price action will determine the way this market wants to go.


Emirates Provident Fund:

My provident fund remains in a strategic 75% equities/25% cash weighting.*


*Actual positions will change daily based upon price action and market volatility.



ECAM Asset Allocation Fund:

The ECAM fund is currently in a 72.5% invested/27.5% cash position as follows:


-Core Equities: 30% (VTI 10%, VB 5%, VWO 15%)

-Core Bonds: 15% (BND 10%, TIP 5%)

-Core Real Estate: 10% (VNQ 10%)

-Core Commodities: 5% (DBA 5%)

-Core Managed Timber: 5% (CUT 5%)

-Discretionary: 7.5% (VPU 5%, ITB 2.5%)

-Cash: 27.5%


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

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