Stockmarket Update 27 August 2012

From my last market update 21 July 2012:

It is the summertime doldrums so it is possible for market players to lift indexes on very little volume. Traditionally there is a "summertime" rally associated with this low volume manipulation but given the current (and very real) prospects of considerable damage to Europe over the next few weeks (not shown today but the Spanish bond auction went HORRIBLE last week with 10 year yields hitting new record highs; this is very, very bad news), it is possible this year may be an exception where the critical debt crisis in Europe over-rides the ability of market players to float the market higher.

Given the current technical indicators, I remain as per my previous post. There is no indication one way or the other that can allow me to "front run" a move higher or lower. As such, the prudent course of action is to remain in a neutral equity position until further technical indicators come into alignment.

I have been on holiday the past 3 weeks but have continued to monitor the markets daily.  The markets have continued to drift upwards on a low volume advance (as discussed previously) primarily driven by a lack of governmental meetings over the European crisis associated with the summer holiday break.  We are now ending that holiday period and the next few weeks should provide a further indication as to whether this advance is "for real" or if a possible Greek exit from the Eurozone again becomes the over-riding issue.

There are number of significant meetings due to occur over the next 3 weeks.  It would appear these meetings, combined with the majority of market players returning from their summer holidays, will result in increased volume and price movement one way or the other.

•On August 31 Ben Bernanke speaks in Jackson Hole.  Last year Bernanke laid out Operation Twist and two years ago he laid out his QE2 plan.  It appears the Jackson Hole meeting is his "place" to announce upcoming policy changes so every word he speaks at this meeting will be monitored closely.

•On September 6 the ECB governing council meets. Mario Draghi was expected to detail his bond purchase program at this meeting but he may wait until Germany’s Constitutional Court (set to rule on Sept. 12) decides on the legality of Europe’s permanent bailout fund before unveiling full details of his plan to buy government bonds.

•On September 7 the August U.S. non-farm payrolls will be reported.  The July report was stronger than expected so any further good news on jobs in the U.S. (which Obama obviously wants to see given the November election) will be a market mover.

•On September 12 the German court rules on the constitutionality of the euro zone’s permanent rescue fund as mentioned above. This ruling is critical to Europe as its passage is necessary to allow the Germans to agree to further bailouts of Greece/Spain/Portugal, etc.

•The September 12/13 FED meeting is shaping up as the make-or-break moment for QE3. It is expected if there will be a QE3 it will be announced at this meeting (and telegraphed at the Jackson Hole meeting at the end of August).  The market has drifted higher on the expectation there will be a QE3; should this not happen the next meeting is not until late October and that is perceived to be too close to the election date.  As such, should there not be a QE3 announcement on Sept 13 the markets will respond accordingly.

Given all the above is current "priced into the market", a close look at the charts reveals some interesting information.  This update will be divided into 3 parts; first a look at ACWI (iShares MSCI ACWI Index Fund; my proxy for the Emirates Provident Fund equity accounts).  Second will be some simple charts of various countries (focus on the "bad children" in Europe and Emerging markets) followed by a couple of "worry charts" I am monitoring.



CLICK ON ALL CHARTS TO ENLARGE:


ACWI Daily:

As I discussed on my last update, the daily chart was bullish and rising on low volume.  Resistance at 44.65 (shown in yellow) was challenged in early and late July with a pullback early August on increased volume.  This potentially looked like a possible topping pattern (double top) but the technical indicators on the daily chart remained bullish.

A second rally attempt ensued on August 3rd after a significant decline on Aug 02 (which remained above the Bollinger Band midpoint and only printed an RSI(2) of 15).  This advance pushed above the resistance zone where it has remained since.  This zone now becomes support on any pullback.

As of today the technical indicators remain positive.  A key note is the RSI(2) continues to stay > 5 on pullbacks but it is important to note on the last rally it could not achieve > 95.  This shows the current advance is slowing but, as long as pullbacks remain with RSI(2) >5, it must be assumed the price action on pullbacks is bullish.

A rising price channel has formed (as shown) and last Tuesday, Aug 21 price hit both the top of the trend channel as well as the current resistance formed by the May 01 top at 46.25.  It could be expected a retracement to the bottom of the channel (which coincides with the support now at 44.65) could be expected.  This would be a good entry for further equity purchases.

The daily chart is BULLISH.


ACWI Weekly:

On my last update the weekly chart was bearish.  This changed as of the weekly close on July 23rd when all technical indicators except the ADX came into bullish alignment.  As of last Fridays close (24 Aug), the ADX has just achieved a bullish cross so now all indicators are bullish.

As shown on the chart, a fairly strong resistance zone between 44.13-45.06 going back to Nov, 2010 was breached to the upside as of 06 August.  Price has risen right to the top of a declining trend line from the May 2011 top.  Should price be able to push above this downtrend line as well as the previous weekly closing high at 12 March 2012 at 46.83, there is every reason to believe it could challenge the all time high at 48.86 from 25 April 2011.

The weekly chart is BULLISH.


ACWI Monthly:

As discussed previous, the monthly chart has been stuck in a range between 35.67-49.15 since August 2009.  This range has led to some whipsaw action on the technical indicators as shown by the red and green vertical lines.

As I have discussed before, the monthly chart is evaluated at the close of a given month so it is still too early to assess a value for August.  However, should price close the month of August above both the 8 month Simple Moving Average (blue line) as well as the 10 month Simple Moving Average (blue line) this would be a bullish signal.  It would take a 2.25% decline from current levels to close at the 8 mSMA (remaining bullish) so there is still some room for a moderate pullback from current levels (to allow a better price entry) and still remain bullish.  A close between the 8 mSMA and 10mSMA (up to a 3.56% decline from current levels) would change the current monthly picture to neutral.  A drop > 3.56% (along with associated technical indicators turning bearish) would render the monthly chart bearish.

The monthly chart is currently BULLISH.


Country Study:

As mentioned in a previous post, the world equity markets at this point could be divided into 3 distinct groups:

Bullish:    U.S.
Neutral:  Northern European, Pacific regain, Emerging Markets
Bearish:  Southern Europe, China

Given the lack of ability in the Provident Fund to target specific regions (as can be easily done outside with ETF's), this is the reason the EK Equity accounts have done so poorly over the past several years.

I thought it would be interesting to look at the various regions to assess where we are at.

Greece:

Following the lows achieved 06 June, price has rallied above the 625 resistance zone.  Price is currently between the 50 dSMA (short term bullish) and below the 200 dSMA (long term bearish).  Greece is in a "wait and see" mode technically.

Spain:

Spain achieved a price low July 25.  It has rallied up to the strong resistance zone (shown in yellow) along with top descending trendline.  It attempted to break above the 200 dSMA Aug 20 but failed and is currently stuck between the 50 dma and 200 dma.  Once again, a "wait and see" as short term bullish but long term bearish.

Italy:

Italy achieved a price low July 24 and has since rallied through 2 areas of resistance, the downtrend line and the 200 dSMA.  Price has retreated as of 21 Aug and is currently right on the 200 dSMA remaining bullish both short and long term.  Should the 200 dSMA hold it will remain bullish; a break below and it returns to neutral.

Euro Stoxx 50:

In contrast to the "weak southern cousins", the Euro STOXX 50 (69% composed of companies from France and Germany) has broken well above both the 50 and 200 dSMA as well as the downtrend line.  It has been stopped at resistance currently at 2476 but remains bullish both short term and long term as of today.

Euro:

Probably nothing reflects the current European problems better than the Euro.  A current price low was achieved July 24th and a rally has currently taken it above the 50 dSMA (short term bullish).  However, price remains well below the 200 dSMA (long term bearish) and is facing stiff resistance formed by the downtrend line as well as the well defined resistance at 126.  Should the Euro be able to get through both the trend line/price resistance as well as the 200 dSMA that would be extremely equity bullish.  It will be very important to monitor this going forward.

In contrast to the goings on in Europe, it is important to monitor the Emerging Markets (as well as China) as any hint of speculative money returning to the markets will be very bullish for equities in general.

Brazil:

Brazil is looking moderately bullish.  Price found strong support at 52,500 (attempted to break down but could not) on 3 separate occasions.  It broke out of its consolidation "box pattern" on Aug 07 and has risen to strong resistance along with the 200 dSMA at 59,500.  It's initial attempt to break this level has failed.

Price is now between the well defined levels of 58,100 and 59,500 and is currently neutral as it is stuck between the 50 dSMA and 200 dSMA.  A break above the 200 dSMA and resistance would be extremely bullish as there is little price resistance up to 63,900.

India:

India is also looking even more bullish.  Price has moved well above both the 50 dSMA and 200 dSMA as well as resistance (shown in yellow) at 5360.  This should now act as support on any pullback; a break below would be bearish but currently it is holding above.

China:

One area of concern is China.  Unlike the 2 above, China continues to slide and is bearish both short term )below the 50 dSMA) and long term (well below the 200 dSMA).  An important support level formed in early Jan, 2012 was broken July 26 with an attempted rally above unable to hold.

Given the size of China's economy, a prolonged slowdown will be a disaster to world markets.  As such, it is extremely important this market turn around soon.  As of today there is no sign that is going to be the case.

Contrasting the bearish and neutral countries above, here is an example of where you want your money to be.

U.S.

The Dow Jones Industrial Average has been on a steady rise since its recent low in early Oct, 2011.  It remains above both its 50 and 200 dSMA as well as the uptrend line.  Price has pushed up to the previous top achieved in April and May, 2012 and is currently bullish both short and long term.

The only area of concern is the recent pullback from the highs.  There is a chance a "triple top" may be forming.  Should price be able to push above this level it would be extremely bullish.  Alternately, a pullback to the current support along with the rising trend line near 12,700 (staying above the 200 dSMA) would be a good low risk entry point.

USD

In line with the bullish stock market has been a bullish U.S. dollar.  Previously there was a strong inverse correlation between the USD and US markets but that has changed somewhat since the fall of 2011.

The USD is currently short term bearish (below the 50 dSMA) and long term bullish (above the 200 dSMA).  It has pulled back from its peak of 84 set the 3rd week of July into a strong support zone shown in yellow.  It remains above the uptrend line and 200 dSMA and at current levels represents a good low risk entry with a well defined stop below the 200 dSMA.


Worries:

As discussed above, the short term looks mildly bullish and, should Europe begin to get sorted out, it would be very equity bullish.  However, there are a number of charts I monitor that are worrying.  I will only present 3.

DJIA vs TRAN

One important market indicator that has been around since the turn of the century is the relationship between the Dow Jones Industrial stocks and the Dow Jones Transportation stocks.  The relationship between the 2 is known as "Dow Theory".  The theory is the 2 must match performance as industrial products must be transported.  As such, any indication where one is not supporting the other results in a "Non-Confirmation" and is a bearish signal.

As can be seen, since the last short term low 04 June the Industrials have continued to rise in a well defined rising price channel.  The have recently reached (and have been repelled from) the strong resistance level of 13,300 which has been unable to have been broken on a daily closing basis after attempts on Mar 16, Mar 27, Apr 02, Apr 27, May 01, May 02, May 03 and now Aug 21.  In contrast the Transports have remained within a well defined "box pattern" well below their previous attempts to break resistance at the 5360 level.  This "non-confirmation" is a very bearish signal.

In order to regain a bullish signal, both the Industrials and the Transports would need to break above their respective resistance levels (Industrials 13300 and Transports 5360).  Until then Dow Theory is on a bearish "sell signal".

Copper:

Of all the industrial materials, there is none that better indicates industrial production better than Copper.  In fact, in investment terms it is often referred to as "Dr. Copper" given its PhD in indicating industrial production worldwide.  As such, many times it acts as the "canary in the coal mine" in telling us how well the world is doing economically.  As can be seen, Dr. Copper is currently answering that question with "not so well".

Price has been on a protracted decline since it's high of 4.65 achieved mid-Feb, 2011 (not shown on the chart).  Strong support was broken 14 May, 2012 through 3.63 (a huge down day) and since then price has remained within a tight "box pattern" between 3.30-3.53.  Until price can break out of the box pattern and ultimately above the previous strong support at 3.63 (now resistance) it must be assumed the worlds economy is not in expansion mode and therefore equities remain vulnerable.  Alternately, should price break below the box pattern this would be EXTREMELY bearish for equities.


Volatility Index vs. S & P 100 Index:

I include this chart as it is one I often use to decide on when to increase/decrease equity exposure.  Without getting into too much detail, note every time the VXO:OEX ratio has dropped below 0.024 (the solid red line) this has resulted in a short term market decline.  We are currently there.  As such, current market conditions are very favorable on a risk : reward basis towards shorting the market (speculating the market will go down) and very unfavorable towards speculating the markets will go up.  The best opportunities to buy equities is when the ratio is > 0.077 (shown by the green dotted lines).

(Geek Info: I use a 10:50 EMA crossover as the short trigger when in the "Sell Zone" for a High Opportunity Short and a 10:50 EMA crossover as a long trigger when in the "Buy Zone" for a High Opportunity Long).


Given the above, this is not a favorable time to be adding to long equity positions on a risk : reward basis.


Bottom Line:

Both the daily and weekly ACWI charts are bullish.  The monthly chart is currently bullish and will remain so unless price declines > 2.25% from current levels before the end of August.  However price has risen to a level where short term the risk : reward does not favor equity purchases until a short term price decline occurs.

The ideal situation would be for price to pull back to support near 44.77 to allow for further equity purchases.  Given the possible dangers in the market over the next 3 weeks it is unwise to chase prices as the rug could be pulled out from under this current rally by any of the given events outlined at the open of this update.

Given such, I am comfortable holding my current 50% equity/50% USD cash position in the hope a market pullback will allow an entry at a more favorable price level.

As of today I remain in a 50% Equity/50% USD Cash position as I indicated in my last post:


-Russell Global 90 Fund: 40%

-Fidelity International Fund: 10%

-Russell USD Liquidity II Fund: 50%


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