Archive for October, 2013

Monday, October 28th, 2013

A quote from the Greenspan interview with John Stewart on “The Daily Show.”
“We really can’t forecast all that well. We pretend that we can but we can’t. And markets do really weird things sometimes because they react to the way people behave, and sometimes people are a little screwy.”
http://www.zerohedge.com/news/2013-10-25/guest-post-alan-greenspans-shock-revelation
N’uff said! We certainly couldn’t improve on that quote!

This is the last week of October and as such mutual funds must close their books for the year 2013. Expect to see gyrations as losses and gains are removed.

The 2013 running of the bulls on Wall Street will end with a goring. The levels of margin debt are at extremely high levels, sentiment is effervescent-bubbly, the street is giddy and this is generally the formula for disaster. The problem, as we all know, is in timing this disaster. It is much like earth quakes, we know where they are likely to occur but cannot get the timing correct. Remember Bob Farrell’s rules:”2. Excesses in one direction will lead to an opposite excess in the other direction, 4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways, 5. The public buys the most at the top and the least at the bottom, and 9. When all the experts and forecasts agree- something else is going to happen.”

An addition unspoken concern is with the measurement of price to earnings ratios (PE). With interest rates near zero, the PE calculations are out of whack because no accommodation for a low interest rate environment is being made. It is our belief that given a fed perpetuated environment of ongoing abnormally low interest rates, PE should be adjusted to reflect the resulting artificially low cost of money, especially if compared with times when the cost of money was much higher. If that measurement were made today, we believe that PEs would not reflect a cheap market, but one that is getting somewhat frothy. As Mr. Farrell said “exponential rapidly rising or falling markets go further than you think” which implies that rallies can last much longer than you think so trying to pick the top is not a good strategy. We believe a main concern on the recent earnings front is seen in the lack of expansion of earnings and increased earnings due to mergers, downsizing and other external factors rather than growth. There have been some articles in the press recently bemoaning the fact that we have no inflation and like the Fed, many of those interviewed believe that some inflation is necessary to expand this economy. Our answer is; just be patient, we are going to have inflation expansion beyond the Fed’s goals. That inflation will get out of control rather quickly….be careful what you wish for!

Our cabby model is flashing a sell-signal. What is the cabby model you may ask? Quite simply, is the free advice a NYC cab drivers will give you on stock market purchases. During a down draft or sideways action this indicator is zero; at the top of a rally, it begins to bubble higher. We are at the bubble point, which can be sustained for a while but generally will end poorly for the investors.

The S&P 500 expanded to the upside in the Friday session. We do have a 9-count on the chart and that can lead to a small or large correction. We believe that there will be a large correction but we cannot tell you when only that it will come. We can say with assurance that the current rally has gone too far too fast and that the upward slope is unsustainable. As to the indicators: all but the Thomas DeMark Expert indicator are pointing higher and are grossly overbought. The weekly charts are giving us the same readings including the Thomas DeMark Expert indicator. The 5-period exponential moving average is 1744.61. The top of the Bollinger Band is at 1768.73 and the lower edge is seen at 1637.06. The daily, weekly and monthly chart of the S&P 500 are very impressive and show the distance this market has traveled in the past three weeks. The current rally has been on less than impressive volume, to us, this is troubling. In the Friday session, 12.0% of the volume was seen at 1749.84. The daily 1% by 3-box point and figure chart and the 60 minute 0.1% by 3-box chart continue to look positive although our indicator on those charts has turned decidedly negative. Short term target for the S&P is 1759.00.

The net-change on the NASDAQ 100 was positive for the Friday session, not wildly positive but good enough for a plus for the day. That said, the market did close below the opening levels of the day and that left a red candlestick on the chart. This occurs when the closing level is below the opening level. In this case, the closing level for the day was above the previous day’s closing level yielding a positive number for the day but a negative candlestick due to the fact that the opening was higher than the closing level and the market was not able to defend that level on the close. The NASDAQ 100 made a new high for the year in the Friday session. The new high was not sustainable and quickly lost ground closing the session with a small gain. Both the weekly and the daily chart of the NASDAQ 100 are overbought. We have a 9-count on the daily chart and signs of exhaustion. The stochastic indicator has just issued a sell-signal, our own indicator is in agreement with that and the RSI is flat at overbought levels. The 5-period exponential moving average is at 3353.56. The top of the Bollinger Band is at 3404.77 and the lower edge is seen at 3117.95. We do have continued signs of exhaustion. Last week, we projected that the market would rally: “short term target is 3384.07 plus or minus two points.” On a closing basis, that goal was not reached but intra-day, it was seen. The 1% by 3-box daily point and figure chart continues to looks positive. The 60 minute 0.1% by 3-box chart has an upside target of 3408.18. This chart is also positive although our own indicator is giving us warning signals that the direction could be getting ready to change. Getting ready because the ADX continues to show a trending market, remember, the trend is your friend.

The Russell 2000 traded lower in the Friday session. We do have a 9-coount and signs of exhaustion. We are overbought for the daily, weekly and monthly time-frames. We are above the Ichimoku Clouds for both the daily and the weekly time-frames. The 5-period exponential moving average is at 1111.58. The top of the Bollinger Band is at 1129.84 and the lower edge is seen at 1040.40. All the indicators that we follow herein are pointing lower. The Russell 2000’s volume was extremely light for the week. 10.5% of the Friday volume occurred at 1115.18. Although the market is marching higher it seems to be losing some of the thrust it once possessed. Perhaps it needs a rest.

The new low this week for crude oil was 95.95 seen in the Thursday session. The market rallied in the Friday session ending crude oil up 0.81% on the day, a good showing but nothing to write home about. We are getting buy-signals issued from all the indicators that we follow herein. This could merely be a bounce which eventually fails. So trade cautiously and remain a skeptic until the product crosses above the 5-period exponential moving average at 98.12. The top of the Bollinger Band is at 105.45 and the lower edge is seen at 96.81. We are below the Ichimoku Clouds for the daily and the monthly time-frames and continue above the clouds for the weekly time-frame. The 1% by 3-box daily chart shows a possible violation of an uptrend line. The RSI and own own indicator are both negative. The 60 minute 0.4% by 3-box chart is negative but not as negative as the daily chart is, that said, you have downtrend lines which will be difficult to remove.

Gold rallied in the Friday session. This week has been a good week for gold which was able to trade above and stay above the downtrend line. All the indicators that we follow herein are pointing higher but are becoming overbought. The 5-period exponential moving average is 1337.95. The top of the Bollinger Band is at 1357.86 and the lower edge is seen at 1264.64. It does appear that gold is trying to recover some of its lost luster. There will be a lot of resistance as this market continues to trade higher. Remember there are many who jumped into this market at higher levels that are just waiting to “get even” and will sell as their positions are made whole. This is overhead supply and it is heavy. The daily 1% by 3-box point and figure chart continues to have both uptrend and downtrend lines with an unfulled downside target of 1146.92. The RSI and our own indicator on this point and figure chart are positive. The 60 minute 0.5% by 3-box chart is positive. The market has traded above the downtrend line and looks as though it want to go higher. 13.3% of the week’s volume occurred at 1312.20 so you might expect to see that level defended.

The US Dollar Index had a really bad week but managed to close the Friday session slightly positive on the day with a long tailed candlestick which expanded the previous day’s range. The small bodied candlestick called a doji, is an indication that the power of the decline is failing and that a change of direction could be seen in the very near future. These candlesticks are not that reliable but do tell the viewer that something has changed. To us it looks as though the market is washed out for now. To understand how serious this decline has been, you need to look at the monthly chart. The index stopped just short of its line in the sand 78.91 and 78.60. Below that level, it is likely that the retreat will be fast and furious as any remaining longs look to get out of the trade. For the moment, so long as the market doesn’t remove these numbers for two days on a closing basis, it looks as though we will bounce. We are below the Ichimoku Clouds for the daily and the weekly time-frames and in the clouds for the monthly time-frame. The daily 0.2% by 3-box chart shows downtrend lines and a downside target of 74.566. The 60 minute 0.1% by 3-box chart is equally bearish, the downside target is 78. We think that the US Dollar Index will bounce but for how long and how much is not clear.