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)


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dwaynemalone1@gmail.com