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)


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dwaynemalone1@gmail.com