Archive for December, 2010

Wednesday, December 29th, 2010

This will be the last letter for the year 2010. The last two weeks are the slowest weeks of the year. In general there will be a flurry of activity at the end of the year, specifically on the last day of the year, when last minute losses are taken. Beyond that, we do not expect to see much in the way of market moving events unless they are of the really bad kind, like terrorist attacks or unrest. For the most part the year is over and we focus our effort on preparing for a New Year’s celebration.

This year, we believe that the Christmas shopping season was a good one for retailers, certainly when compared to last year’s dreadful numbers. Consumers felt better and spent their money, not so much on luxury items, but rather on items of necessity, like clothing and items for the home or business. Luxury will have to wait until the economy is on better footing. Speaking of sentiment, investors feel much better, as reflected by the risk trade and the advances seen in the markets during the month of December, as measured by AAII numbers, bulls vs. bears numbers, etc. which are all at levels not seen since 2007. These fearless readings reflecting a period of no worry no stress. Extreme levels like these, although they may persist for a while, are precursors to tops and certainly not indications of a new bull market.

Because interest rates are so low, money is flowing into the markets seeking growth and yield from securities. The tax-favored treatment of dividends also acts as a support mechanism for stocks and is putting a natural floor under the market. As we press on into January, the small capitalization stocks should, if tradition holds, enjoy an upside lift. Once that is completed, we probably will see the short term action come to an end. While we do not feel that the bottom will fall out of the markets in 2011, we do harbor some concern about excessive cash sloshing about in the markets. We know the banks aren’t lending and both investors and portfolio managers are facing negative returns therefore they are more willing to take a chance on the risk trade again.

Predications for 2011:
1. Stocks will out-perform bonds.
2. Commodities will continue to perform well.
3. Interest rates at the long end of the market will continue to rise.
4. Mergers and acquisitions will continue at a better pace.
5. Employment will improve but only marginally.
6. We won’t feel better really.
7. Real-estate has not seen the bottom of the market.
8. The middle class earner will continue to struggle.

Wednesday: December chain store sales will be released, December consumer confidence will be released at 10:00 and Case-Shiller home price indices for November will be released at 9:00
Thursday: November mutual fund sales and redemptions, and Chicago purchasing managers’ report is released at 9:45.
Friday: New Year’s Eve.

The US Dollar Index retreated in the Thursday session in quiet pre-holiday trading. The stochastic indicator continues to point higher although the fast stochastic is issuing a sell-signal. The RSI is pointing to lower levels and our own indicator has just issued a sell-signal. The Thomas DeMark Expert indicator is issuing a sell-signal. The 5-day moving average is at 80.939. The top of the Bollinger band is at 81.674 and the lower edge is seen at 79.544. We are above the Ichimoku Clouds for the daily time-frame but are below the clouds for both the weekly and the monthly time-frame. Technically, the US Dollar looks as though it is in position to challenge 83.63 and then possible 89.10. Frankly, we do not expect to see much action in any of the currencies this week as most traders have closed their books for the year.

The S&P 500 March futures contract left a doji-like candle on the chart in an exceedingly slow pre-holiday trading session. We have been overbought for the entire month of December and continue to see that all the indicators remain overbought. Only our own indicator is curling over and has issued a sell-signal. The 5-day moving average is at 1247.60. The top of the Bollinger band is at 1270.28 and the lower edge is seen at 1177.16. We are above the Ichimoku Clouds for the all time-frames. The stochastic indicator, RSI and our own indicator have just issued a sell-signal, but until the 80 level on the stochastic and the 63 level on the 9-period RSI are decisively broken we will view this and nothing more than a shallow retreat in an up trending market.

The NASDAQ 100 March futures declined in the pre-Charismas Eve trading session. The stochastic indicator, our own indicator and the RSI are all issuing a sell-signal. The Thomas DeMark Expert indicator continues to issue a buy-signal at overbought levels. The 5-day moving average is at 2227.05. The top of the Bollinger band is at 2259.01 and the lower edge is seen at 2131.36. We are above the Ichimoku Clouds for all time-frames. Although we have a sell-signal, we wonder if this is just another shallow retreat or something of more substance. We observe that unless or until the stochastic indicator trades significantly below the 80 level, this will just be a pause in a continuing up market. On the other hand should the stochastic indicator close below the 80 level and the RSI close below 60.57, this retreat will just be a pause and not a tradable event.

The Russell 2000 is the home to many of the beneficiaries of the “January Effect” and as such, if there is to be a rally in January, this is likely where it will be seen. The 5-day moving average is at 78.376. The top of the Bollinger band is at 80.088 and the lower edge is seen at 72.359. The stochastic indicator, the RSI and our won indicator are issuing a sell-signal. The same caution exists in this index as did in the other indices; the signal might not be a good one given the one month track record of shallow retreats. The bar is slightly higher on the RSI for this index; it is at 70 or so. We are above the Ichimoku Clouds for all time-frames. The uptrend line is at 783.80 on the daily chart. Proceed with caution.

Crude oil broke out to the upside even though the US Dollar remained strong. We cannot blame this advance on a weak currency but rather on strong demand which becomes apparent in this product. All the indicators that we follow herein are pointing higher. The 5-day moving average is at 89.95. The top of the Bollinger band is at 92.07 and the lower edge is seen at 85.28. We are above the Ichimoku Clouds for all time-frames. This is a strong market and we would not fight the trend, which, obviously is to the upside.

Gold is going sideways and retreated in the last trading session of the week. All the indicators that we follow are pointing lower and are on the negative side of neutral. We are above the Ichimoku Clouds for all time-frames. Gold looks as though it is consolidating. The 5-day moving average is at 1384.40. The top of the Bollinger band is at 1414.57 and the lower edge is seen at 1362.30. We continue to like gold on dips. Actually, the chart looks as though gold is coiling. Stay nimble and alert.