Archive for November, 2010

Sunday, November 28th, 2010

As we enter the month of December we are nearing the close of tax selling season and the beginning of the “January Effect.” While we are on the subject of portfolio reallocation, remember the 31 day wash sale rule. That rule helps the “January Effect” because those issues sold for tax loss cannot be purchased until January or, specifically 31 days after the sale of the securities. You can sell your securities anytime you wish to but you must wait 31 days before repurchasing those same securities to avoid a wash sale. In general, non-dividend paying stocks are the target for tax loss sales and that is why, the small capitalization stocks are generally used for these purposes.

Remember also that the roll begins on the second week in December and you will begin to see some portfolio adjustments as we approach that time. As you recall, quarterly futures such as S&P 500, NASDAQ 100, currency contracts, the Russell contracts etc. all expire on the third Friday of December. At that time, the December futures contract and the spot cash will merge. Currently, the futures prices are below that of cash so, the futures contract will move towards the value of the spot contract. Naturally, these futures contracts, when held, expire and settle for cash. Thus if you are long or short and hold the contract into expiration, you will see a cash adjustment, either a credit or a debit after the contract settles. Generally, those wishing to hold a position in the market will move that contract from the expiring month to the next expiring month. Thus those with interest in the current front month, December, will roll to the next month or March. On the second week of the expiring month on a Thursday, the next contract expiry will become the front month thus, March will be the front month on December 9, 2010.

Unlike other futures contracts, the front months are the actively traded contracts and the spread is generally traded only starting a week or so before the roll and continues to expiration. A spread, for these comments, (not an option spread or a spread between two different contracts like Libor and Treasuries etc.) is the difference between the current month’s value and the value of the next expiry. Say the S&P 500 December futures contract is trading at 1183.25 and the March S&P 500 contract is trading at 1178. The spread is the difference between the current contract and the future contract or 1183.25-1178 = -5.25. You might ask why the March contract is cheaper than the current contract, and the answer is the risk-free rate of money and the dividends that this basket of stock deliver (naturally futures contracts do not pay dividends while the basket of securities do pay dividends). As interest rates go higher that number will go positive, right now, because the cost of money is negative the exchange is negative. Another way to become alert to the roll is to watch the volume of these contracts. Right now, the S&P 500 December mini traded 1.8 million and the S&P 500 March futures traded 14.6 thousand, obviously the action is in the front month at the moment.

Tuesday: November consumer confidence is released at 10:00, September Case-Shiller home price is released at 9:00, November Chicago purchasing managers’ report is released at 9:45 and November Dow sentiment indicator is released at 9:45.
Wednesday: Challenger Gray & Christmas issues November index, 3rd quarter productivity is released at 8:30, October construction spending is released at 10:00, November ISM is released at 10:00, the Beige book is released at 2:00, and Dallas Fed President Fisher speaks.
Thursday: November chain-store sales are released.
Friday: November non-farm employment and the jobless rate are released at 8:30.

The US Dollar index broke out from its trading range in the Friday session closing near the high of the day at 80.433. We are overbought as measured by all the indicators that we follow. That said, we can stay in this overbought condition for some time. Right not all the indicators continue to issue a buy-signal. The 5-day moving average is at 79.719. The top of the Bollinger band is at 80.716 and the lower edge is seen at 75.876. We are above the Ichimoku Clouds for the daily time-frame but are below the clouds for both the weekly and the monthly time-frames. We do see signs of exhaustion in the market. The channel lines are 78.883 and 81.32. We see resistance at 81.53. The US Dollar index looks extended but positive.

The S&P 500 futures contract seems to be moving in a sideways fashion consolidating. We did see this index close below the uptrend line. For this index to remain positive, it needs to stay above 1171. Although the low of the Friday session was above the low seen in the Thursday session and the high of the Friday session was higher than the high of the Thursday session, there will be some concern until or unless it breaks above 1206. The stochastic indicator, our own indicator and the RSI all continue to point lower. The Thomas DeMark Expert indicator is sort of bending higher. The indicators on the weekly chart are all pointing lower. The 5-day moving average is at 1191.20. The top of the Bollinger band is at 1226.22 and the lower edge is seen at 1170.27. We are above the Ichimoku Clouds for both the daily and the weekly time-frames. When you look at the point and figure chart, you become aware of the importance of staying above 1183 and certainly above 1175. The Market Profile chart tells us that we will be in a quick move area at 1219 to 1224 and will likely melt to the upside. Again 1174 appears as an important number for the bulls to defend.

The NASDAQ 100 futures contract did not make a higher high but did almost match the Thursday high. All the indicators that we follow herein are curling over to the downside. No sell-signal has been issued but could appear within a day or so. The only indicator that is overbought is the Thomas DeMark Expert indicator. We are above the Ichimoku Clouds for all time-frames. The 5-day moving average is at 2147.80. The top of the Bollinger band is at 2203.12 and the lower edge is seen at 2094.50. The top of the channel line is at 2178.50 and the lower channel line is at 2122.16. Clearly, anything above 2185.50 would be very positive for this market and would cause a melt to the upside.

The Russell 2000 closed down in the Friday session leaving a large red candlestick on the chart. The market failed on an attempted rally but managed to close above the low of the day although it traded below the previous day’s low, leaving a lower low on the chart. All the indicators that we follow herein are issuing a sell-signal. The 5-day moving average is at 729.76. The top of the Bollinger band is at 744.45 and the lower edge is seen at 701.85. We are above the Ichimoku Clouds for both the daily and the weekly time-frames. The lower up channel line is at 720.80 and the upper line is at 742.10. We would be cautious with this index which could be viewed as a source of funds. Remember also, the stocks in this index stocks will likely be candidates for end-of-year tax sales. That said, these are the stocks that likely will rally in January contributing to the “January Effect.” Your melt up number for this index is 738.75.

Crude oil left a hangman on the chart for the Friday trading session. The 5-day moving average is at 82.95. The top of the Bollinger band is at 89.26 and the lower edge is seen at 79.99. The stochastic indicator is pointing higher and the RSI is pointing lower, so right away we notice there is a problem. Given the candlestick formation and this divergence, we would recommend caution. We are above the Ichimoku Clouds for the daily time-frame but not for the weekly time-frame. When looking at the weekly chart, it appears that this market has been going nowhere fast since April and remains in the trading range. Unless or until we close either above 89.13 or below71.39, it is likely that we will remain trapped in this range.

Gold was disappointing in the Friday session leaving a long tailed red candle on the chart. Although we are above the Ichimoku Clouds for all time-frames, we do not like the action and fear that we could retreat further. The 5-day moving average is at 1369. The top of the Bollinger band is at 1415.30 and the lower edge is seen at 1324.85. The downtrend channel line is at 1374.50 and the lower channel line is at 1347.20. So long as the market stays above 1329, we should see a resumption of the rally. All the indicators that we follow are uniformly issuing a continued sell-signal. We like gold on retreats, however; that bullish behavior would be tempered should the market close below 1315 which, would open the door to 1276 where, there should be some good support.