Archive for July, 2011
We have had an unusually high number of high volume down days lately, which were topped off with a massive down yesterday, July 27th. The Nasdaq with its 2.6% had its largest loss in five months. Market action in the major indexes constituted yet another 90% panic selling down day.
I have said several times earlier that third year bull markets typically are trendless, and this year is continuing to prove to be typical in that respect. The S&P 500 has mainly traded between 1,250 and 1,350 all year. IBD illustrates the lack of trend in the market well in today’s newspaper: “Last year, the Nasdaq had an eight-week win streak in the first half and then rose in 10 of 11 weeks in the second half. Those kinds of streaks make for good trading. So far this year, the longest up streak on the Nasdaq has been three weeks.” This market action calls for increased patience and continued adherence to your trading rules. Remember that a new trend will eventually emerge.
The reason for increased volatility lately is due to the lack of agreement between US politicians on how to handle the debt situation. But such discussions are not a new phenomenon; they have been going on for about three quarters of a century. As Ritholtz.com reports: “The regular debt ceiling limit dance seems to evoke a fairly standard set of behaviors in the two major US political parties: Whichever party is out of power (White House, or Congress or both) threatens not to support raising the debt ceiling. Which ever party is in power talks about how irresponsible and dangerous such a move would be.”
I don’t think the market has much to fear as I assume that they will reach a solution shortly. Yet another short-term solution that is. But yesterday, uncertainty became a little too high for the market participants to handle and a enough collected their chips to turn the market around. There is a clear risk that the US will be downgraded, and as I have stated many times before I believe this will eventually happen, and I also believe that the US will go bankrupt, or come into a situation that would seem like a close relative to it. But if that decline to bankruptcy starts with this downtrend or not I cannot tell. History shows that no systematic changes are made until our whole financial system collapses, first at that point is there enough political will to make any substantial changes. And substantial changes are what is needed. The way we run our economy, on borrowed and printed money, is not sustainable in the long term. This is an economic experiment that we to a more or less extend have been running, and gotten addicted to, since the Great Depression. The longer it has run the more we have gotten addicted to it. If you feel like reading more on this topic read this excellent column from Bloomberg News.
I have no clear perspective on the exact time for this collapse, and since I do not do any short term forecasting (only medium term and long term) I continue following my model which will in due course indicate when it is safer to enter a long-position in the market again. Remember that this is the same model that kept you out of the stock market during the crash of 2008 and indicated that it was “safe” to enter the market again on March 16th, 2009 just a few days after the market bottomed out. The model would have helped you avoid one of the last 100 year’s largest declines and also let you know when to return to the market again to participate in one of the last 100 year’s most rapid upturns!
Friday July 1st was a 90% panic buying up day, indicating that more investors are entering the market. The S&P500 was testing resistance off the 200DMA between June 15th and June 26th and has been moving upward since then. The upward move has not been as strong as I would prefer to see it (going up in below average volume), but it has crossed through the 50DMA and stayed above this line. The major indexes are now 6-8% off the recent lows. All in all the market action has turned my model into UPTREND which historically has significantly proven to redue risk when buying stocks.
The stock market has been really choppy this year, which research shows is very typical for third year bull markets. There’s no guarantee the choppiness won’t continue. What usually happens in the market is that we have seasonal strength in January, then weakness in February, strength in March-April, and weakness in May-June and then again a summer rally in July until early August. We can hope that the choppiness lessens and that we will get a healthy market over the summer. But no one has ever made money over time by relying on hope. Time will tell if this will be a typical summer, but the market will clear signals as to wether it holds up or not. Until the next market update is out (indicating a new downtrend), things to look for includes the next levels of major resistance which sits at 1,350.
Looking to other asset classes for indication for how the stock market will do in this uptrend and over the next summer months can also give a good indication for what we have in store. It is unfortunately not pleasant reading. See chart below of the RJA (Elements Rogers Intl Commodity Index).
Agricultural commodities have been leading the stock market by several months during QE1 and QE2. They peaked in February 2011, well ahead of the stock market’s May 2nd peak. Since that February peak they have crossed below the 50DMA and met resistance to this line from the downside several times before eventually also breaking down through the 200DMA on June 22nd. They are now well below the 200DMA and in addition the 50DMA is very close to crossing the 200DMA. That would be another negative if it were to happen.
The picture for several other commodities including oil looks equally bad. As I have written many times before, which still holds true: gold is the only market with no major breakdown since the start of the financial crisis. Gold is still the go-to-market for financial safety.
I remain cautious and keep looking for signs of further strength and weakness both in the stock market itself and in other markets attracting capital, despite the fact that we are in an uptrending market.