Stockmarket Update 23 December 2010

Market update as of the market close on Tuesday, 21 Dec 2010.


From my last update:

All of my technical indicators have now switched back to bullish in all time frames (short term, intermediate term, long term, Provident Fund ratio charts).

Combined with the bullish cycle period we are currently in (yearly cycle bullish, 4 year cycle bullish), we have entered the technical "sweet spot" for equity investing.

In my last post I mentioned I would use either a pullback to 1200 or a close above 1227 to add to my equity positions. We got above 1227 as of the close on Wednesday.

Looking at the charts on Thursday morning I was struck by the DOW non-confirmation and the New highs/New lows dilemma. That did not change into Friday so I have yet to make a move.

It is very disconcerting that the market internals/breadth (many of which I did not show today) are not confirming the recent price action. This, combined with the current overbought nature of the indexes, has me sitting on my hands.

I still believe this bull market has a long way to run with much higher prices before it is over but we have come too far/too fast in this rise. The market needs to backfill and scare the over-bullish nature of current market participants before we head much higher.

December options expiry is next week and based upon the structure of the options market there is a good chance we may see SPX 1250'ish. If this uptrend continues, that is logically where it would all fall apart.

The markets continue to drift upward on the typical holiday period low volume, poor breadth advance. All technical indicators remain bullish (with the exception of the majority of my market breadth indicators which are flashing warning signs).

I have nothing new to add to my previous comments. To boldly step into this market given the price rise on limited participation would be (in my analysis) foolish.

Having said the above, once again I want to remind everyone that I am not a "perma-bear" nor have I ever been a "perma-bull. I have over the years developed an ability to totally detach myself from the market hype and trade only upon the technical data. I cannot stress enough how important it is to treat your investments in this manner. Do not believe your commission based "investment advisor" (especially if he/her is a "long-only" commission based advisor), do not believe your neighbor and his latest stock tip, and do not believe CNBC.

As the year ends it is common for brokerage firms to postulate their "forecast" for the next year. Given the incredible complexity of the world’s financial markets those forecasts should be looked upon as the equivalent to consulting a fortune teller to guide your financial way forward. Nothing better; nothing worse.


However ...............

As everyone at this time of year tends to want to glean some sort of "crystal ball" gazing advice, here is what I can offer.

1) The previously discussed poor market breadth and the overwhelmingly bullish sentiment almost unanimously suggests a pullback is imminent sometime in January. However, based upon my technical study of market data since 1950, statistically both the month of January and the 1st quarter of year 3 of the Presidential Cycle are both 14-1 respectively in preelection years, for an average gain of 4.48 and 7.62%, respectively (an average advance of 4.48% for the month of January and an advance of 7.62% for the 1st quarter in Year 3 of the Presidential Cycle).

These bullish statistics are hard to argue with.

2) On the other hand, those really poor breadth numbers are concerning. The really heavy investment in the markets has dried up over the past month. What is going on?

I suspect what is going on is investment firms have racked up billions of dollars in paper profits this year. The average S&P 500 stock has risen nearly 12% and the average Nasdaq stock is up more than 16%. This is not even close to the emerging market returns (which hedge funds have been very active in during 2010). For example, Philippine’s stock market is up 38%, Indonesia up 47%, Peru up 59%, etc.

I believe large hedge funds, mutual funds, pensions and wealthy investors are anxious to realize some of those gains to rebalance their portfolios and do not want to add to current positions. But if they take their profits before December 31, they’ll get hit with a big tax bill on April 15, 2011 (the U.S. cutoff to file based upon realized capital gains accrued and realized in 2010).

If I was one of those U.S. based hedge funds who have unrealized paper profits I would wait until the first trading week of 2011 to take those profits so I wouldn't have to pay capital gains taxes on those profits for 16 months (not until April 15, 2012). Then I would wait for the forthcoming decline in the markets to reposition myself for the 2011 advance.

That is what my crystal ball tells me is the road for 2011: Up in Jan (with a correction during the month); down in Feb; up for the rest of 2011 for a 15% advance. I will be in on that advance.

I will forego with the usual charts and focus on Elliott Wave patterns for a moment. I have written about Elliott Wave theory previous (search the blog or Google to learn further). I am a "casual" user of EWT (Elliott Wave Theory) only to the extent as I use it as somewhat of a "roadmap" to where I think we may be headed based upon basic EWT.



Elliott Wave theory can be quite complicated for those who are casual users so I will try to simplify this below.


Elliott Wave Pattern (complete cycle basic):



Shown is the complete Elliott Wave cycle through a standard bull "cycle" followed by a "bear" cycle. This cycle is composed of 5 wave advances identified by those numbers shown surrounded by ( ). This is the "Bull" market.

Following this is 3 leg "Bear" market decline shown as an (A)-(B)-(C) before the market advance.

Note waves (1), (3). and (5), known as up-trending waves, are built upon 5 sub-waves (1-2-3-4-5) as opposed to waves (2) and (4), know as counter-waves, which are 3 wave declines (A-B-C).

Similarly in the declining phase waves (A) and (C) are composed of 5 waves (down-trending waves) with a (B) wave countertrend wave composed of 3 sub waves.

This is a standard Elliott wave advancing cycle.


Elliott Wave Pattern (complete cycle indepth):



In this more indepth pictorial, note that the major advancing waves 1-3-5 discussed previous are also subdivided into 5 waves as shown.


Elliott Wave 5 Wave Basic:



A further breakdown of the 5 wave advance along with an explanation of the "reasons" behind the waves.

So where are we currently?






In the short term we are in the process of completing a 5 sub-wave move as shown above.




In the longer term we have completed wave 2 down and are just about to complete the 1st 5 wave advance within wave 3 up (as shown above).




Coming back to the full Elliott Cycle, I have shown where we are on the "roadmap". If this count is correct (and there is nothing to indicate it is not), then we have a long way to run before this bull market is over.


Bottom Line:


My comments from the previous blog are unchanged.

-All of my technical indicators have now switched back to bullish in all time frames (short term, intermediate term, long term, Provident Fund ratio charts).

-Combined with the bullish cycle period we are currently in (yearly cycle bullish, 4 year cycle bullish), we have entered the technical "sweet spot" for equity investing.

-I still believe this bull market has a long way to run with much higher prices before it is over but we have come too far/too fast in this rise. The market needs to backfill and scare the over-bullish nature of current market participants before we head much higher.

We are in the midst of the year end rally that I think will be followed by an A-B-C correction in January. I will use any correction to reposition long equities.



Emirates Provident Fund:

As of Thur, 23 Dec I remain in a strategic 25% equities/75% USD cash weighting as follows:**

-BlackRock US Dollar Cash Portfolio Fund: 75%
-Russell Global 90 Fund: 15%
-Fidelity International Fund: 10%

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


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 11 December 2010

Market update as of close of trading Friday, 10 December.


From my last ECAM update:

All of my technical indicators have now switched back to bullish in all time frames (short term, intermediate term, long term, Provident Fund ratio charts).

Combined with the bullish cycle period we are currently in (yearly cycle bullish, 4 year cycle bullish), we have entered the technical "sweet spot" for equity investing.

I would REALLY have preferred to see my 10% correction I was hoping for materialize before reinvesting into equities. However, the market seldom gives you exactly what you want.

As I see it now, there are 2 ways for me to play this:

1) wait for a pullback to the 1200'ish level to make a purchase, or
2) confirm a close >1227 to make a purchase.

Whichever of these 2 occurs 1st will dictate my actions (I would prefer #1) and once either condition is met I will reinvest into a 75% equity/25% cash position in the Provident Fund. I will hold my final 25% cash position for any pullbacks into year end.

I once again reiterate that the markets are not cheap at this level. They present a level of risk that many might not be comfortable with given one's personal circumstances. Having said that, as long as the worlds Central Banks continue to provide artificial support to prop up their respective economies, it must be assumed stock markets will continue to rise.

Cash is "a position" but it should not be the "default position" in an actively managed account. It is the place to be when the odds are in favour of a significant market decline or a place to sit and wait for future opportunities. As such, I tend to favour an "invested" position unless I have a technical reason to do otherwise.

There is currently nothing on the charts technically nor cyclically that preclude me from being invested in equities. That is the way I will play it.

For the week the major indexes were up approximately 1%. A notable exception to that was the Dow Jones Industrial Average which was up only 0.25%. This underperformance has resulted in a "DOW Theory Non-Conformation" signal based upon the Dow Jones INDUSTRIAL Average not confirming a breakout along with the Dow Jones TRANSPORT Index (as shown on the chart below). That, along with the DJIA not confirming with the breakouts in the other indexes, is a possible warning sign that this recent breakout is not indicative of true market strength.


Click on all charts to enlarge:


Dow Jones Industrial Average 1 year daily:




Along with the Dow non-confirmation I have been closely monitoring the internal structure of the market. The news is not encouraging.


NYSE New Highs vs New Lows:



Note that during the highs set on the NYSE in the 1st week of Nov there were 458 new highs vs new lows. On Friday we broke to new price highs for this rally yet the new highs vs new lows closed at 146. What this is telling us is price is being pushed higher by fewer and fewer "strong stocks". This is a negative sign.


SPX 50 DMA Standard Deviation Monitor:



In the above chart I show my Standard Deviation Monitor. It is the 50 day moving average of the S and P 500 Index along with 1, 2, and 3 times Standard Deviation bands.

I use the bands as follows:

Blue Band (1 standard deviation above/below 50 dma): Moderately Overbought/Oversold
Red Band (2 standard deviations above/below 50 dma): Severely Overbought/Oversold
Green Band (3 standard deviations above/below 50 dma): Extremely Overbought/Oversold

In general terms, it can be seen in up trending markets price will remain within the dotted and red bands. Whenever price rises above the red band (> 2 standard deviations above the 50 dma) this nearly ALWAYS results in either a range bound market (to let the overbought condition reduce over time) or a decline (to correct the overbought condition).

As of Fridays close we were above the red band.


VIX 6 month daily:



As if sensing something is wrong, the VIX increased on Friday on a day when the indexes were up.

Without getting into details as to the specifics of the VIX, suffice it to say the VIX is broadly a measure of the expected volatility market traders are expecting in the S & P 500 index over the next 30 days. Also referred to as the "fear index", in general a rising VIX tends to be associated with market declines.

On Friday the VIX printed a "bullish engulfing" candlestick. This type of candlestick formation has a 63% reversal rate so should be watched closely over the next few days. A higher VIX close on Monday would confirm the pattern and telegraph lower stock market prices over the near term.


SPX 60 minute 8 month:



Last chart is the 60 minute chart of the SPX. Based upon today’s signals I discussed above, there is a chance that wave V of the 5 wave Elliott Wave pattern I showed last time has been completed below my 1250 price target.

If so, we would expect an a-b-c downtrend over the next several weeks/months to retrace at least 38.2% of the up move to the 1153 area. That would represent a 7% decline from current levels.


Bottom Line:


All of my technical indicators have now switched back to bullish in all time frames (short term, intermediate term, long term, Provident Fund ratio charts).

Combined with the bullish cycle period we are currently in (yearly cycle bullish, 4 year cycle bullish), we have entered the technical "sweet spot" for equity investing.

In my last post I mentioned I would use either a pullback to 1200 or a close above 1227 to add to my equity positions. We got above 1227 as of the close on Wednesday.

Looking at the charts on Thursday morning I was struck by the DOW non-confirmation and the New highs/New lows dilemma. That did not change into Friday so I have yet to make a move.

It is very disconcerting that the market internals/breadth (many of which I did not show today) are not confirming the recent price action. This, combined with the current overbought nature of the indexes, has me sitting on my hands.

I still believe this bull market has a long way to run with much higher prices before it is over but we have come too far/too fast in this rise. The market needs to backfill and scare the over-bullish nature of current market participants before we head much higher.

December options expiry is next week and based upon the structure of the options market there is a good chance we may see SPX 1250'ish. If this uptrend continues, that is logically where it would all fall apart.


Emirates Provident Fund:

As of Friday, 10 Dec I remain in a strategic 25% equities/75% USD cash weighting as follows:**

-BlackRock US Dollar Cash Portfolio Fund: 75%
-Russell Global 90 Fund: 15%
-Fidelity International Fund: 10%

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



ECAM Asset Allocation Fund:

As of Friday, 10 Dec the ECAM Asset Allocation Fund remains almost fully invested (and fully unhedged) with a slightly increased cash reserves and decreased bond exposure as follows:


-Core Equities: +32.4%

VTI (US Large Cap ETF) 10.5%
VB (US Small Cap ETF) 5.7%
VWO (Emerging Markets ETF) 16.2%

-Core Bonds: +5.0%

TIP (US Inflation Protected Bonds ETF) 5.0%

-Core Real Estate: +9.9%

VNQ (US Domestic Real Estate ETF) 9.9%

-Core Commodities: +11.4%

DBC (Commodity Basket ETF) 5.6%
DBA (Food Commodity ETF) 5.8%

-Core Managed Timber: +5.5%

CUT (US Managed Timber ETF) 5.5%

-Discretionary: +12.9%

VPU (US Utilities ETF) 5.1%,
UNG (Natural Gas ETF) 2.6%
YCS (Short Yen ETF) 5.2%

-Hedge 0%

ECAM is currently unhedged

-Cash +22.9%

UUP (Long USD ETF)


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 Update 06 December 2010

Market update as of the market close on Friday, 03 Dec 2010.

From my last update 14 November:

The markets remain technically bullish over the intermediate/long term and bearish in the short term.

We have entered the best time of year to be in the market based upon the yearly cycle and the 4 year presidential cycle. On the other hand, the decennial cycle is bearish so it is important to keep an open mind and be prepared to reverse course if it turns out to be correct.

For now I need to give the benefit of the doubt to my technical indicators to keep my on the right side of the trade. They are telling me we have further upside in this market once the current correction completes.

Ideally I would like a 6-10% correction to bring price back down to more reasonable levels. It will be interesting to see if we get it or not.

The markets are not cheap. I believe we are entering a period where Bernanke/The Fed continue to provide unlimited liquidity to re inflate the stock market. It is obvious given the losses the Democrats took in the mid-term elections that there is very little room for Obama to use fiscal stimulus to pump up the employment numbers and give Americans the "feel-good" bump necessary to get him re-elected in 2012. As such, I believe his only outlet is to go the "monetary" route and use the money supply to push the stock markets up. This will create the "wealth effect" where the average American looks at his stock portfolio over the past 2 years and feels wealthier given it's huge rise (of course, priced in USD. This may not be the case priced in other foreign currencies; more on this in another blog).

Given the above, I see no technical reason for not being in the markets once the current correction completes. As such, once the short term charts have again turned bullish I will begin to re-invest back into equities in the Provident Fund. Until then, I will remain with my current safe positions and look for an opportune time to switch back into equities.

At the time I wrote that update the markets had just gone short term bearish within a longer view bullish market configuration. My hope was the market would pull back approximately 8-10% based upon a pattern I saw developing in a number of different asset classes (stocks, gold, currencies). This pattern was what appeared to be a "head and shoulders" topping formation.

As I said to a colleague recently, I had rarely seen so many different asset classes with the same head and shoulders pattern forming. Below I present just one to give you some idea as to what I was seeing:


CLICK ON ALL CHARTS TO ENLARGE:


NYSE 6 month daily:



This is a 6 month daily chart of the NYSE Composite Index. As can be seen, I had drawn what looked like a head and shoulders topping pattern which was in the progress of forming along with it's "expected" path (dotted line) should the pattern complete. Had it done so, it would have targeted a price target of 7017 for a 10% price correction from the 7817 peak. This would have presented a very nice buying opportunity.

Unfortunately, the markets were juiced on Wed last week on seemingly little economic data. This resulted in the "head and shoulders" topping patterns being blown out of the water (this is a good example of watching for patterns on your radar but not "front-running" them until they are confirmed).

Given the strong market action, there is a strong possibility Central Bank intervention is again taking place in the markets, thereby putting in an artificial price floor. This resulted in the huge moves on Wed and Thur (+2.16% and +1.28% on the SPX index). Friday provided a nice consolidation day (+0.26%) on a weak jobs number for the month of Nov; another encouraging sign of strength.

Given my planned entry at lower levels appears to have been taken away, I now need to re-establish when to increase equity exposure given the market strength, the cycles, and the current price structure.


Here is the view as of the market close on Friday, 03 December 2010.

Short Term: Bullish

Intermediate Term: Bullish

Long Term: Bullish


I have only included the short term charts today as they are the ones that have changed from my last blog post (the intermediate and long term charts remain unchanged from my last post; they are bullish).


SPX 60 minute short term trading:



The 60 minute chart shows the "price goose" that occurred at the open on Wednesday turned the trading chart back to bullish. Price broke through both the 1197 and 1200 resistance right at the market open and did not look back. Since then price has risen to challenge the previous high at 1227 (Fri close 1224).

We now have 2 fairly strong levels of support on any pullback (1197-1200 followed by 1173) with overhead resistance at 1227. A close above 1227 would be very bullish.


SPX Point and Figure (1 box):



The short term 1 box point and figure turned bullish when price broke >1199 on the Wednesday open. It remains bullish as of today.


SPX 6 month daily:



The 6 month daily chart turned bullish on Wednesday as well.

I have drawn in pink what appears to be a newly formed price trend channel. Should the overhead resistance at 1227 be taken out the next target would be the top of the channel.

As can be seen, the RSI (14) is currently at 62 so there is room to run before the market becomes technically overbought once again (RSI>70 as it was back in early Nov as shown on the chart).


SPX 60 Minute 1 year:



Looking at the current patterns, I have drawn various indications as follows:

1) an inverse head and shoulders formed in the summer and confirmed mid September. It currently targets a price objective of 1250.

2) the current breakout has formed a classic 5 wave Elliott Wave advance (as shown on the chart) within a rising bearish wedge pattern. The wave IV down completed at 1173 and we appear to now be in wave V up.

A natural target for the move would be the top of the wedge where it meets the inverse head and shoulders target (1250).

3) as shown by my "free-hand drawing", price has formed what could be considered a "cup-and-handle" formation. The structure is not ideal (as you would like to see a more rounded cup as opposed to the "V" shaped cup bottom) but it technically does satisfy the requirements.

If this pattern is valid, we have currently just completed the "handle" portion of the pattern with the Wave IV decline. A break above 1227 would confirm the pattern is in play with a price target of 1325.


Provident Fund Daily Ratio Chart:



The short term Provident Fund daily ratio chart switched from USD cash back to International Stocks on Friday.

Provident Fund Weekly Ratio Chart:



The intermediate term Provident Fund Ratio chart remains bullish for stocks as per the last update.


Bottom Line:


All of my technical indicators have now switched back to bullish in all time frames (short term, intermediate term, long term, Provident Fund ratio charts).

Combined with the bullish cycle period we are currently in (yearly cycle bullish, 4 year cycle bullish), we have entered the technical "sweet spot" for equity investing.

I would REALLY have preferred to see my 10% correction I was hoping for materialize before reinvesting into equities. However, the market seldom gives you exactly what you want.

As I see it now, there are 2 ways for me to play this:

1) wait for a pullback to the 1200'ish level to make a purchase, or
2) confirm a close >1227 to make a purchase.

Whichever of these 2 occurs 1st will dictate my actions (I would prefer #1) and once either condition is met I will reinvest into a 75% equity/25% cash position in the Provident Fund. I will hold my final 25% cash position for any pullbacks into year end.

I once again reiterate that the markets are not cheap at this level. They present a level of risk that many might not be comfortable with given one's personal circumstances. Having said that, as long as the worlds Central Banks continue to provide artificial support to prop up their respective economies, it must be assumed stock markets will continue to rise.

Cash is "a position" but it should not be the "default position" in an actively managed account. It is the place to be when the odds are in favour of a significant market decline or a place to sit and wait for future opportunities. As such, I tend to favour an "invested" position unless I have a technical reason to do otherwise.

There is currently nothing on the charts technically nor cyclically that preclude me from being invested in equities. That is the way I will play it.



Emirates Provident Fund:

As of Friday, 03 Dec I remain in a strategic 25% equities/75% USD cash weighting as follows:**

-BlackRock US Dollar Cash Portfolio Fund: 75%
-Russell Global 90 Fund: 15%
-Fidelity International Fund: 10%

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



ECAM Asset Allocation Fund:


As of Friday, 03 Dec the ECAM Asset Allocation Fund remains almost fully invested (and fully unhedged) with a small cash reserve as follows:


-Core Equities: +32.3%

VTI (US Large Cap ETF) 10.3%
VB (US Small Cap ETF) 5.6%
VWO (Emerging Markets ETF) 16.4%

-Core Bonds: +14.7%

BND (US Domestic Bonds ETF) 9.6%
TIP (US Inflation Protected Bonds ETF) 5.1%

-Core Real Estate: +10.1%

VNQ (US Domestic Real Estate ETF) 10.1%

-Core Commodities: +11.5%

DBC (Commodity Basket ETF) 5.6%
DBA (Food Commodity ETF) 5.9%

-Core Managed Timber: +5.5%

CUT (US Managed Timber ETF) 5.5%

-Discretionary: +12.7%

VPU (US Utilities ETF) 5.2%,
UNG (Natural Gas ETF) 2.5%
YCS (Short Yen ETF) 5.0%

-Hedge 0%

ECAM is currently unhedged

-Cash +13.2%

UUP (Long USD ETF)


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