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.


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