The investment landscape has changed in the past decade. Measures of investor investments are not quite as accurate as they have been in the past. In today’s market, we have more choices than we did a decade ago. The mutual fund investor has the choice between the usual types of mutual funds but today can also allocate money to closed end funds. While these funds have been in the investment arena for more than a decade, they have expanded their products and have now grown to include portfolios like those held in mutual funds. These closed end funds, ETF’s, are sold at net asset value or NAV. You can buy an ETF to satisfy any market allocation that you can dream up, well, most any. They trade on the exchanges just like stocks do and can be bought or sold at anytime the markets are open. Mutual funds may only be bought/ sold at 4:00 EST. This limitation is a devastating liability in an emotionally driven highly volatile market. Investors and their advisors, feel that they need more control and have been migrating to closed end funds because of their flexibility with regard to entry/exit strategies and, perhaps, lower fee structure. Mutual funds continue to have a huge presence in pensions and other retirement and educational vehicles. The landscape is changing and we believe that any statement indicating the movement of investor money in or out of mutual funds needs to include ETFs in that measurement.
As “baby boomer” approach retirement, risk is diminished. This is the mantra of financial planning, risk tolerance and time horizon. When approaching retirement these numbers change to reflect less risk and a time horizon that is shorter. Just think about it, at retirement you have a fixed amount of money to draw upon for your expenses. You no longer can risk a loss in that portfolio because this is the money which needs to support you for the rest of your life. Then, there are “baby boomers” who will never retire. Even that class of investor has less tolerance for risk. Why? Because there is less time to make up for any loss that the portfolio might experience. We dread looking at these portfolios should the markets move from deflation to inflation. Should that occur, the fixed income portfolios will burst as the bubble in the fixed income arena burst. Boom and then there was none! So what is the clever way to play this market? Watch the duration of your portfolio. Make sure that you are not too long-term and that you can move easily out if you need to. That, in plain English, means make sure that you can dump your bonds if you have to do so, and make sure that there is enough liquidity in the ETF you are investing in so that you can sell without pushing the market on your sale. In other words if a sale of 1000 shares will push the market lower, you should be out of that market. Remember also, as we move into October we will begin to see swaps come into the market. This is a good time to buy bonds. This is also a good time to create a loss by swapping one bond for another bond. This is done by finding a similar bond with a similar coupon and rating, sell your bond and replacing it with the new bond. In this way you create a paper loss without a loss to income or change in your portfolio. With interest rates this low, it isn’t likely that there will be much need for a bond swap. Nonetheless, it is a good time to look for bonds. Regarding bonds; steer clear of bonds which do not have a revenue stream to count on. Stay away from GO’s of communities that are under duress and buy bonds based on revenue like toll bridges, turnpikes, and Build America bonds.
Monday: Chicago Fed releases its index of national Activity.
Tuesday: Existing home sales.
Wednesday: July durable goods is released at 8:30 and July new home sales are released at 10:00.
Friday: 2nd quarter GDP is released at 8:30, University of Michigan’s sentiment index is released between 9:45 and 10:00 and Fed Chairman Bernanke speaks.
From last week’s letter: “We believe that the US Dollar Index can rally further but will see some resistance at 83.64. The weekly chart for the US Dollar Index looks impressive but supports the resistance level of 83.64. We see further resistance at 84.65 and at 85.70 or so. The point and figure chart also supports these targets. Above 85.70 we should see a melt to the upside, should the US Dollar Index rally to that level.” We continued in the same pattern with resistance at 83.64 and then at 84.65 and at 85.70. All of the indicators are pointing to higher levels. The stochastic indicator is overbought but shows no signs of curling to the downside. The RSI continues to point higher and has more room to the upside before becoming overbought. The Thomas DeMark Expert indicator is pointing higher with room to the upside and our own indicator is pointing higher with plenty of room to the upside. That said, we do have the first signs of exhaustion in this market. We also are significantly above the uptrend line and at the very least could see a retreat to 82.50ish levels. Should we break below 81.995 we will test the longer uptrend line at 81.68. The 5-day moving average is at 82.59 (remember the uptrend line is at 82.50) and a break of this level will lead to a return to the 81.995 and 81.68 levels. The top of the Bollinger band is at 83.53 and the lower edge is seen at 80.203. We are below the Ichimoku clouds for the daily time-frame and above the clouds for both the weekly and the monthly time-frames. The monthly chart looks like it is rolling over and the weekly chart looks positive. Our read continues to be positive with the expectation that the US Dollar index will retreat to the uptrend line and then continue to the upside. That action will relieve some of the overbought condition and will support the bullish view of the US Dollar index.
The S&P 500 futures contract left a small bodied candle on the chart which can be called a doji. Doji candles describe a market which generally is in transition. It is a market where both bulls and bears fail to win the battle of the day and there is a no progress to either side of the chart. Friday’s session was that sort of day. When the bears had the advantage, they could not muster the support to push the market lower. Then when the bulls stepped in they could not push the market higher therefore the open of 1070.75 and the close of 1070.25 signifies a day painting the picture of a tug of war where both parties fail to win. The S&P 500 futures chart is very interesting this week, not only do we print a lower low for the week in the Friday session, but we also touch the lower edge of the Bollinger band and bounce from that level. The indicators are also interesting in that they look like the negative of the US Dollar index. The stochastic indicator is oversold but is curling to the upside still without issuing a signal. The RSI is close to oversold and seemingly going sideways. The Thomas DeMark Expert indicator is on the negative side of neutral and actually going flat. Our own indicator is showing no direction at all. We are in the Ichimoku clouds for the daily and the weekly time-frames and below the clouds for the monthly time-frame. Actually the monthly chart doesn’t look that bad and looks as thoufh the market is trying to find a bottom. Unfortunately both the daily and the weekly chart look as though this market has more room to the downside. We see a resistance level at 1087 or so for the Monday session, by Friday, that resistance line is at 1070. The 5-day moving average is at 1078.85. The top of the Bollinger band is at 1138.65 and the lower edge is seen at 1061.84. We expect to see a rally in the index this week, perhaps as early as the Monday session. The rally will tell us volumes about the strength and or weakness of this market. We would remain very nimble in this market. We see a head and shoulders top and although we are not in the Hindenburg camp, we are concerned. Remember under 1062 we see trouble and should expect to see a drop to 1040, 1025 and 1002.75.
The NASDAQ 100 performed better than did the S&P 500 in the Friday session. On Wednesday of this coming week, we should have some fire-works in this index as the downtrend and uptrend lines meet. The level is 1822 and change. The downtrend line for the Monday session is at 1837 and the uptrend line is at 1817. The 5-day moving average is at 1828.35. The top of the Bollinger band is at 1931 and the lower edge is seen at 1798.11. The stochastic indicator is making higher lows and will, within a day or so, issue a buy-signal. The Thomas DeMark Expert indicator is going flat just below the neutral level. The RSI is also on an uptrend and pointing to the upside below the neutral level. Our own indicator is very iffy. The market looks as though it wants to rally. The first resistance level will be seen at 1835.73 then, 1878.12 and 1920.51. We are inside the Ichimoku clouds for the daily and the monthly time-frames but above the clouds for the weekly time-frame. This index was the best performing index last week.
The Russell 2000 futures weekly chart printed a true doji in the Friday session. This index closed and opened at the same level measured from Friday to Friday. The same doji is seen on the daily chart as well. We must mention that there seems to be a difference between the close quoted on e-signal and the close quoted on CQG we do not know which is correct but they are fairly close together. We are below the Ichimoku clouds for the daily-time frame and just barely above the clouds for the weekly time-frame. The 5-day moving average is at 616.22. The top of the Bollinger band is at 679.41 and the lower edge is seen at 598.51. The stochastic indicator is making higher lows and is curling to the upside but has not issued a buy-signal. The RSI is going flat near oversold levels, the Thomas DeMark Expert indicator is issuing a sell-signal and our own indicator is flat. The downtrend line is at 620.41. We would not be surprise to see this index rally to that level and then, fail. From last week’s letter: “The market profile chart warns that should we trade below 586.50 we will likely move quickly to the downside. The point and figure chart tells us big trouble looms below 606. On the upside, above 620 will lead us higher and back to the 640 levels.” This week’s point and figure chart shows some home should the market close above 611 which would lead to a rally to 615 and then 625. The market profile chart remains the same with grave concern should this index trade below 586.50.
Crude oil is reflecting the market’s concern with the economy. An economic expansion would demand increases in energy while a recession would not. Thus it would appear that the market is weighing in on the recession theory rather than expansion, deflation rather than inflation. We continue to have concern that should the 71-70 level fall that there is little in the way of support below that level until 68. Under 68 we have 64 and then 58. We are below the Ichimoku clouds for the monthly and daily time-frames and we are in the clouds for the weekly time-frame. The stochastic indicator is very oversold but continues to point lower. The RSI is almost oversold and continues to point lower. The 5-day moving average is at 74.86. The top of the Bollinger band is at 83.88 and the lower edge is seen at 72.61. Stay very nimble in these markets.
Gold continues to plod along making progress to the upside and slowly making its way back to the all-time high. Gold did retreat in the Friday session. We are overbought as measured by the indicators that we follow. All the indicators are issuing a sell-signal. The 5-day moving average is at 1228.36. Top of the Bollinger band is at 1243.78 and the lower edge is seen at 1154.25. We are above the Ichimoku clouds for all time-frames. We continue to like gold although we do believe that it needs to rest and regroup a bit.