Simple trend lines are one of the many useful tools that help us determine possible future direction of the market. While nobody knows the future, value is gained by knowing what the market is doing at the moment. Moreover, looking back at how the market behaved historically from time to time can also be of value. The breaking of trend lines in the past can give us a clue as to where the market may go next. This is just one more bit of information that when added to other bits of evidence begin to build a case for bullishness or bearishness.
Look at today's chart and see what conclusions you might come to.
(Click on chart to enlarge it for easier viewing)
I won't know if this dip should be bought or sold until I accumlate more evidence. So for the moment I will do nothing.
Major stock price indexes firmed slightly on Monday, consolidating last week’s losses. Indexes closed below their 50-day simple moving averages on Friday 1/22/10, which is bearish for the short-term trend. Still, all indexes remained well above their rising 200-day simple moving averages, which is generally considered to be bullish for the intermediate-term trend.
The market appears to be working off excessively bullish sentiment registered earlier this month, a process that could last from a few days to a few weeks.
Fortunately, we don’t have to be too concerned about the day-to-day volatility in the stock market since we are now primarily invested in low-volatility bond/debt funds. It is not that these funds are likely to trend up while the stock market trends down, but rather, that these funds tend to change trend direction slowly, allowing us more time to make logical, reasoned decisions.
The S&P 500 Composite (SPX) fell 5.08% over the past 3 trading days. It was the 4th decline in the 5% to 10% range since the bottom on 3/9/09 (based on closing prices only). The largest decline was 7.09% over 28 calendar days from 6/12/09 to 7/10/09.
Price pullbacks lasting a few days to a few weeks and declining less than 10% are common in Bull Markets. For example, there were 9 declines more than 5% but less than 10% from the low in March 2003 to the bull market top in October 2007. There were no pullbacks of as much as 10%, and no pullback lasted as long as 3 months.
The recent highs in the major stock market indexes are significant resistance. This morning's bounce will establish Friday's close as significant support. A decisive move through one of these two levels will likely establish the next significant trend direction.
The Market has declined for the last three sessions. On Friday alone the markets were down as follows:
The chart of the S&P 500 gives some clues as to why. After two years of steep bear market declines the market has astonished everyone by retracing more than 50% of it's loss in a very short time. Historically the 50% retracement area is a big source of resistance. Also, the lower chart shows us that momentum has been steadily declining.
The Obama attack on the banks last week is being blamed, however, the chart shows us that a correction was already in the cards.
We are still in a longer term uptrend and this move down should be considered a short term correction only.
We are probley looking at a decline of no more than 10%, if that.
I did, none the less, liquidate our positions in QQQQ on Thursday and SPY on Friday and will be looking to re-enter the market at lower prices.
President Barack Obama spooked the market Thursday after asking Congress for limits on how large big banks can be and to end some of the risky trading large financial companies have used in recent quarters to boost profits.
In my opinion, the primary driving force for the whole bull market advance since March has been easy money provided by the US government and the Federal Reserve, primarily through large banks. Now, the administration is starting to take a hard line with banks.
I don’t know whether this attack of the banks is just political rhetoric or something that indicates a real policy change. Either way we have to be a little concerned that the primary conduit of easy money used to drive the bull market in stocks may be hampered.
I suspect it is more talk than reality. The stock market however does not care what I think. The Dow lost 213 points Thursday and has given up 336 points, or 3.1 percent, during the past two trading sessions. The losses have erased all the early gains seen in 2010.
The market sold off today, even in the face of good earnings reports from a number of companies. I believe that headwinds are developing, for gold and commodities in particular.
The culprit is the dollar. The chart pattern (below) is confirming the recent uptrend in the dollar. At this point I expect the dollar to continue its rise near term. The stock market may be able to buck the trend, but commodity related investments will suffer.
China suggested they will tighten up lending to help slow their economy down a little. The Fed is planning to curtail their purchase of mortgage securities. The specter of governments withdrawing liquidity may be enough to weigh on the markets in general.
The market had factored in a win for Brown (a republican) in the Massachusetts senatorial race, so we got a little "buy the rumor - sell the fact" today for healthcare stocks.
All said we may need to prepare ourselves for a long overdue correction. We will see how things develop tomorrow.
Bill Ackman, of Pershing Square Capital Management (hedge fund), made billions for himself and his investors by selling the sub-prime market short early on in the real estate and mortgage debacle. His stock picking acumen is widely known and is considered to be the new Warren Buffet. When he speaks you should listen.
Early this morning he was a guest on CNBC. He made the following comments that caught my attention.
"Now is a great time to buy a home. You will be happy that you did 10 years from now."
"While the values in the stock market are not as compelling as last year, investments in good companies are still a good bet." (Paraphrased)
The economy is getting better and fear is subsiding.
Bill Gross's $200 Billion Fund Flees U.S. Bonds into Foreign Assets
Jan. 20, 2010, 12:08 AM
Latest data from PIMCO's Total Return bond fund shows how manager Bill Gross has massively shifted his fund's allocation into the foreign bonds of developed countries.
As shown in the table below, taken from the latest fourth quarter Pimco report, 'Non U.S. Developed' debt has jumped to 16% of the portfolio vs. just 3% the quarter before. That's an enormous shift in exposure given that it happened over just three months for this $200 billion fund.
(Click on chart to enlarge it for easier viewing)
Furthermore, he's slashed his exposure to both U.S. 'Government-Related' (to 32% from 48%) and 'Mortgage' (to 17% from 22%) securities. 'Net Cash Equivalents' meanwhile spiked to 8% of the fund vs. 2% in September. It's pretty clear Mr. Gross expects a rocky road ahead for U.S. fixed income:
PIMCO Q4 Total Return Fund Report: While PIMCO does not expect the Fed to tighten any time soon, there is still the question of how negatively markets will react as the Fed winds down its unorthodox policies that were designed to inject liquidity into the financial system. These policies include the Fed’s program of purchasing mortgage-backed securities.
The current environment is characterized by a high level of policy uncertainty and relatively rich valuations for many fixed income assets. This setting argues for caution in terms of overall risk exposure in portfolios, but PIMCO believes there are still a number of prudent strategies available to enhance potential.
Emerging Markets and Currency – PIMCO plans to take exposure to high quality EM credits such as Mexico, Brazil, Korea and Russia, which have low levels of debt relative to the size of their economies. We also will look to take positions in select EM currencies, such as Brazil and China, anticipating that faster growth in these economies should allow their currencies to gain versus the U.S. dollar.
In light of the shift in the asset mix of the world's largest bond fund, I have put PIMCO's Total Return bond fund (PTTAX) back on the potential buy list.
The markets gave back most of their 2010 gains in one fell swoop to close out last week. There have been recent fears that the markets might correct with the onset of earnings season. Intel Corp. and Alcoa Inc. both closed negatively after their reports.
This week's earnings reports will likely be the catalyst that pushes the markets either into a deeper correction or resumption of the rally.
Despite the weakness in the S&P 500, as represented by the etf, SPY, it is still above its recent base and above its rising 20-day moving average. If SPY were to close below the $111.50 support level we could expect a further decline.
We will have to wait to see what transpires this coming week.
The Federal Reserve has been very clear about the fact that they intend to stop their quantitative easing program at the end of March. What that means in practice is that they are going to stop buying mortgage backed securities. Those mortgage purchases helped keep mortgage rates low. Interest rates on government bonds have begun rising in anticipation of the Fed’s plan to curtail the mortgage purchase program.
I recently liquidated funds holding mortgage back securities (Pimco Total Return Fund and TCM Total Return Fund). Our moving average stop strategy, which is based on share price trends, gave us a clear sell signal in December. Our decision to sell was further supported by the Fed’s plan to end their mortgage purchase program.
We continue to favor high yield (junk) bond funds. They remain in a low volatility uptrend. Also, high yield funds are generally immune to the day to day ups and downs of the stock market. At the moment these funds offer the highest risk/reward ratio available to investors. We like 'em!
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The US financial system and the market have come back from the brink of disaster. While fear has resided significantly, serious problems remain. Housing has yet to recover, commercial property is in trouble, consumer spending is continuing to contract and the economy is not creating new jobs.
Don't let the dismal economic picture stop you from recognizing that the stock and corporate bond markets are in bull market uptrends. That is just the result of the massive infusion of cheap government money.
Regardless of whether you agree with the current monetary and fiscal policies, easy money always makes its way into the financial markets before it really has any effect on the economy.
In the long term we need to have jobs come back, ironically however, the current joblessness my actually be a plus for the stock and bond market. Why? A jobless recovery will keep a lid on both interest rates and inflation. Rising interest rates and inflation are negative for the market. Stable interest rates and low inflation are a big positive for the market.
Because of the unique circumstances of this cycle, there is legitimate concern about just how much the massive infusion of liquidity will actually stimulate economic growth, but there should be no question about its impact on the stock and bond markets.
The Market is down this morning, but the recent pattern is for the stock market to strengthen towards the end of the trading day. It will be interesting to see if that pattern holds today, but it really does not make too much immediate difference to us because we only have a 20% position in stock ETFs. The remainder is invested primarily in low-volatility high yield (junk bond) mutual funds that tend to react very slowly to changes in the market environment. A major shift in the environment for stocks would affect junk bond funds, but it would likely take a week or two before there was enough effect for us to even become concerned. That is what makes these low-volatility funds are so attractive when they are trending up.
(Click on ETF Definition below to enlarge for easier viewing)
While the economy appears to be on the mend, I remain skeptical about the prospects for a meaningful long-term economic recovery. The stock market is often out of sync with economic reality. However, the basis of investment decisions should be what the markets are doing, not what we think they should be doing, and right now, stocks and high yield bonds are trending up.
Investing in high yield bond mutual funds (in conjunction with our moving average exit strategy) carries much less risk than stocks, and many of these funds are in strong uptrends. I am very confident about my ability to effectively and safely manage high yield bond funds. The risk/reward ratios on these types of investments remain very high and volatility remains very low. Consequently, I will continue to overweight the sector in a big way for all conservative and moderate account.
Some times it is just fun to engage in a little conspiracy theory. Here's a little speculation from Charles Biderman of TrimTabs.
Are Federal Reserve and U.S. Government Rigging Stock Market?
We Have No Evidence They Are, but They Could Be. We Do Not Know the Source of Money That Pushed Market Cap Up $6+ Trillion since Mid-March.
The most positive economic development in 2009 was the stock market rally. Since the middle of March, the market cap of all U.S. stocks has soared more than $6 trillion. The “wealth effect” of rising stock prices has soothed the nerves and boosted the net worth of the half of Americans who own stock.
We cannot identify the source of the new money that pushed stock prices up so far so fast. For the most part, the money did not come from the traditional players that provided money in the past:
• Companies. Corporate America has been a huge net seller. The float of shares has ballooned $133 billion since the start of April.
• Retail investor funds. Retail investors have hardly bought any U.S. equities. Bond funds, yes. U.S equity funds, no. U.S. equity funds and ETFs have received just $17 billion since the start of April. Over that same time frame bond mutual funds and ETFs received $351 billion.
• Retail investor direct. We doubt retail investors were big direct purchases of equities. Market volatility in this decade has been the highest since the 1930s, and we no evidence retail investors were piling into individual stocks. Also, retail investor sentiment has been mostly neutral since the rally began.
• Foreign investors. Foreign investors have provided some buying power, purchasing $109 billion in U.S. stocks from April through October. But we suspect foreign purchases slowed in November and December because the U.S. dollar was weakening.
• Hedge funds. We have no way to track in real time what hedge funds do, and they may well have shifted some assets into U.S. equities. But we doubt their buying power was enormous because they posted an outflow of $12 billion from April through November.
• Pension funds. All the anecdotal evidence we have indicates that pension funds have not been making a huge asset allocation shift and have not moved more than about $100 billion from bonds and cash into U.S. equities since the rally began.
If the money to boost stock prices did not come from the traditional players, it had to have come from somewhere else.
We do not know where all the money has come from. What we do know is that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?
As far as we know, it is not illegal for the Federal Reserve or the U.S. Treasury to buy S&P 500 futures. Moreover, several officials have suggested the government should support stock prices. For example, former Fed board member Robert Heller opined in the Wall Street Journal in 1989, “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.” In a Financial Times article in 2002, an unidentified Fed official was quoted as acknowledging that policymakers had considered buying U.S. equities directly, not just futures. The official mentioned that the Fed could “theoretically buy anything to pump money into the system.” In an article in the Daily Telegraph in 2006, former Clinton administration official George Stephanopoulos mentioned the existence of “an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem.”
Think back to mid-March 2009. Nothing positive was happening, and investor sentiment was horrible. The Fed, the Treasury, and Wall Street were all trying to figure out how to prevent the financial system from collapsing. The Fed was willing to print whatever amount of money it took to bail out the system.
What if Ben Bernanke, Timothy Geithner, and the head of one or more Wall Street firms decided that creating a stock market rally was the only way to rescue the economy? After all, after-tax income was down more than 10% y-o-y during Q1 2009, and the trillions the government committed or spent to prop up all sorts of entities was not working.
One way to manipulate the stock market would be for the Fed or the Treasury to buy $20 billion, plus or minus, of S&P 500 stock futures each month for a year. Depending on margin levels, $20 billion per month would translate into at least $100 billion in notional buying power. Given the hugely oversold market early in March, not only would a new $100 billion per month of buying power have stopped stock prices from plunging, but it would have encouraged huge amounts of sideline cash to flow into equities to absorb the $300 billion in newly printed shares that have been sold since the start of April.
This type of intervention could explain some of the unusual market action in recent months, with stock prices grinding higher on low volume even as companies sold huge amounts of new shares and retail investors stayed on the sidelines. For example, Tyler Durden of ZeroHedge has pointed out that virtually all of the market’s upside since mid-September has come from after-hours S&P 500 futures activity.
If we were involved in a scheme to manipulate the stock market, we would want to keep it in place until after the “wealth effect” put a floor under the economy of, say, three quarters of positive GDP growth. Assuming the economy were performing better, then ending the support for stock prices would be justified because a stock market decline would not be so painful.
We want to emphasize that we have no evidence that the Fed or the Treasury are throwing money into the stock market, either directly or indirectly. But if they are not pumping up stock prices, then who else is?
Equity Mutual Fund Cash Equal to 3.8% of Assets in November, Just above Record Low of 3.5% in Mid-2007. U.S. Equity Funds Get Estimated $5.1 Billion in December, First Inflow in Five Months.
The Investment Company Institute reported Wednesday that equity mutual funds held just 3.8% of their assets in cash and equivalents in November. To put this percentage into perspective, the record low was 3.5% in June 2007 and July 2007. While the amount of cash increased $8.1 billion in November, assets shot up $229.1 billion, leaving the ratio of cash to assets unchanged.
Source: Investment Company Institute.
U.S. equity fund flows reversed sharply in December. After posting fairly large outflows from September through November, U.S. equity funds received an estimated $5.1 billion (0.1% of assets) this month.
Apart from the shift in U.S. equity fund flows, mutual fund flows did not change much in December. Global equity funds continued to post moderate inflows, taking in an estimated $7.1 billion (0.7% of assets). This month’s inflow is in line with the inflows of $7.8 billion in October and $6.0 billion in November.
Finally, bond funds continued to rake in huge amounts of cash. They received an estimated $25.8 billion (1.2% of assets), putting them on track to post an unprecedented ninth consecutive monthly inflow exceeding $25 billion.
Note: Flows for December 2009 are estimates based on our daily survey and data from the Investment Company Institute.
I have mentioned several times that this is a liquidity driven market. The government has flooded the system with money. Much of the time the economy and the stock market seem disconnected, as has been the case for the better part of last year. History has shown us that markets can and do have strong upward moves when liquidity expands and drop when liquidity contracts. This principle applies even when the economic outlook seems bleak.
Liquidity in the Market and Stock Market Prices ...
If Liquidity is moving up, stock prices have to increase. If Liquidity is moving down, stock prices have to decrease.
Common sense isn't it?
Now, with those basics, take a look at today's chart and draw your own conclusion relative to "what Liquidity is doing in the market right now".
The January 2010 edition of THE GERRITZ LETTER has been posted. Please click the link below to view it right now.
The S&P 500 and Nasdaq Composite held up today, even after yesterday's big advance and bad news for real estate new home sales today. Market internals are still looking good for the moment. I did initaite new positions in SPY (S&P 500 Index etf) and QQQQ (Nasdaq 100 etf) this morning. As usual I will use a 7% trailing stop to protect these new positions.
I have completely liquidated all traditional bond fund holdings for all accounts. These include PTTAX, TGLMX and MBB. Government bond have begun what may be a longer term price decline.
Our High Yield (junk) bond funds continue to rise in a low volatility uptrend. I use our moving average stop loss strategy to protect these positions.
The performance of the market the last 10 years makes one thing crystal clear. The buy and hope strategy has failed miserably.
Even in light of the failure of the buy and hold strategy, the great majority of commission based brokers continue to tout it as the answer to building wealth. We at Gerritz Wealth couldn't disagree more. Even traditional asset allocation models have failed. The bear market of the 2000's saw all asset classes, with the exception of US Treasuries, fall dramatically. While the market has rallied this year, the Dow Jones Industrial Average is still down more that 25% from the high in 2007.
Investors at Gerritz Wealth Management, Inc. have one thing that most investors don't have. That one thing is capable of delivering peace of mind and the promise of a more secure retirement. That one thing is a system of risk management. If you do not have an advisor that helps protect your account from large loses during periodic market downturns you may face more disappointments in the future. To learn more about our active portfolio management services call us for a free consultation at 1-800-877-1967.
A picture is worth a thousand words. (View chart below)