Technical Talk: Intermediate Trend is Down, Short Term Indicators Overbought, Not Yet Peaked (August 13, 2012)

Monday, August 13th, 2012

by Don Vialoux, timingthemarket.ca

Economic News This Week

July Producer Prices to be released on Tuesday at 8:30 AM EDT is expected to increase 0.2% versus a gain of 0.1% in June. Core PPI is expected to increase 0.2% versus a gain of 0.2% in June.

July Retail Sales to be released on Tuesday at 8:30 AM EDT are expected to increase 0.3% versus a drop of 0.5% in June. Ex autos, July Retail Sales are expected to improve 0.4% versus a decline of 0.4% in June.

The August Empire State Manufacturing Index to be released on Wednesday at 8:30 AM EDT is expected to slip to 7.2 from 7.4 in July.

July Consumer Prices to be released on Wednesday at 8:30 AM EDT are expected to increase 0.2% versus no change in June.

July Industrial Production to be released on Wednesday at 9:15 AM EDT is expected to increase 0.5% versus a gain of 0.4% in June. July Capacity Utilization is expected to increase to 79.2 from 78.9 in June.

July Housing Starts to be released on Thursday at 8:30 AM EDT are expected to slip to 752,000 from 760,000 in June.

August Philadelphia Fed to be released on Thursday at 10:00 AM EDT is expected to improve to -4.0 from -12.9 in July.

August Michigan Consumer Sentiment to be released on Friday at 9:55 AM EDT is expected to slip to 72.2 from 72.3 in July.

July Leading Indicators to be released on Friday at 10:00 AM EDT are expected to increase 0.2% versus a 0.3% decline in June.

Earnings Reports This Week

Equity Trends

The S&P 500 Index added 14.88 points (1.07%) last week. Intermediate trend is down. Support is at 1,266.74 and resistance is at 1,415.22. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking.

Percent of S&P 500 stocks trading above their 50 day moving average increased last week to 80.20% from 74.80%. Percent is intermediate overbought, but has yet to show signs of peaking. Percent has reached a level where an intermediate peak above the 80% level normally leads to at least a short term correction.

Percent of S&P 500 stocks trading above their 200 day moving average increased last week to 70.60% from 63.60%. Percent is intermediate overbought, but has yet to show signs of peaking.

The ratio of S&P 500 stocks in an uptrend to a downtrend (i.e. the Up/Down ratio) increased last week to (273/142=) 1.92 from 1.40. The ratio is intermediate overbought, but has yet to show signs of peaking.

Bullish Percent Index for S&P 500 stocks increased last week to 67.80% from 63.00% and remained above its 15 day moving average. The Index remains intermediate overbought, but has yet to show signs of peaking.

The Up/Down ratio for TSX Composite stocks increased last week to (131/90=) 1.46 from 1.02. The ratio is intermediate overbought but has yet to show signs of peaking.

Bullish Percent Index for TSX Composite stocks increased last week to 55.91% from 51.63% and remained above its 15 day moving average. The Index is intermediate overbought, but has yet to shows signs of peaking.

The TSX Composite Index gained 228.30 points (1.96%) last week. Intermediate trend is down. Support is at 11,209.55 and resistance is at 11,936.16. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains negative.

Percent of TSX stocks trading above their 50 day moving average increased last week to 66.26% from 52.44%. Percent is intermediate overbought, but has yet to show signs of peaking. Peaks near the 70% level normally lead to at least a short term correction by the Index.

Percent of TSX stocks trading above their 200 day moving average increased last week to 40.65% from 35.37%.

The Dow Jones Industrial Average added another 111.78 points (0.85%) last week. Intermediate trend is up. Resistance is at 13,338.66. The Average remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains negative.

Bullish Percent Index for Dow Jones Industrial Average stocks was unchanged last week at 83.33% and remained above its 15 day moving average. The Index remains intermediate overbought.

Bullish Percent Index for NASDAQ Composite stocks increased last week to 52.42% from 49.75% and moved above its 15 day moving average.

The NASDAQ Composite Index gained 52.95 points (1.78%) last week. Intermediate trend changed from down to up on a break above resistance at 2,987.94. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains negative.

The Russell 2000 Index added 13.07 points (1.66%) last week. Intermediate trend is down. Support is at 729.75 and resistance is at 820.44. The Index remains above its 50 and 200 day moving averages and moved last week above its 20 day moving average. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains negative.

The Dow Jones Transportation Average fell 22.76 points (0.45%) last week. ‘Tis the season! Intermediate trend is down. The Average fell below its 20, 50 and 200 day moving averages last week. Short term momentum indicators are neutral. Strength relative to the S&P 500 Index remains negative.

The Australia All Ordinaries Composite Index added 59.80 points (1.41%) last week. Intermediate trend is down. Support is at 4,033.40 and resistance is at 4,515.00. The Index remains above its 20 and 50 day moving averages and moved above its 200 day moving average last week. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains neutral.

The Nikkei Average jumped 336.33 points (3.93%) last week. Intermediate trend is down. Support is at 8,238.96 and resistance is at 9,136.02. The Average moved above its 20 and 50 day moving averages last week, but remains below its 200 day moving average. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index is negative, but showing early signs of change.

The Shanghai Composite Index added 36.01 points (1.69%) last week. Intermediate trend is down. Support is forming at 2.100.25 and resistance is at 2,478.38. The Index remains below its 50 and 200 day moving averages, but moved above its 20 day moving average last week. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index is negative, but showing early signs of change.

The London FT Index gained 64.23 points (1.11%), the Frankfurt DAX Index added 99.33 points (1.45%) and the Paris CAC Index improved 82.52 points (2.45%) last week.

The Athens Index gained 20.11 points (3.36%) last week. Intermediate trend is down. Support is at 471.35 and resistance is at 662.49. The Index remains below its 200 day moving average and above its 50 day moving average. Last week it moved above its 20 day moving average. Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index remains slightly negative.

Currencies

The U.S. Dollar Index added 0.17 (0.21%) last week. Intermediate trend is up. Support is at 81.16 and resistance is at 84.10. The Dollar remains above its 200 day moving average and below its 20 and 50 day moving averages. Short term momentum indicators are trending down.

The Euro fell 0.87 (0.70%) last week. Intermediate trend is down. Support is at 120.42. The Euro remains below its 50 and 200 day moving averages and above is 20 day moving average. Short term momentum indicators are trending higher.

The Canadian Dollar added 1.03 cents U.S. (1.03%) last week. Intermediate trend is neutral. Support is at 95.76 and resistance is at 102.05. The Canuck Buck remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking.

The Japanese Yen added 0.45 (0.35%) last week. Intermediate trend is down. Support is at 124.12 and resistance is at 128.77. The Yen remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are trending down.

Commodities

The CRB Index added 1.12 points (0.37%) last week. Intermediate trend turned positive on a break above resistance at 305.04. The Index remains above its 20 and 50 day moving averages and briefly tested its 200 day moving average. Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index is neutral/positive.

Gasoline gained another $0.08 per gallon (2.73%) last week following news of a fire at a California refinery. Gasoline remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains positive.

Crude oil added $1.97 per barrel (2.16%) last week on growing Middle East tensions and declining inventories. Intermediate trend changed from neutral to up on a break above resistance at $93.25. Crude remains above its 20 and 50 day moving averages and below its 200 day moving average. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains positive.

Natural Gas fell $0.09 per MBtu (3.12%) last week. Intermediate trend is up. Resistance may be forming at $3.28. Gas remains above its 50 and 200 day moving average and below its 20 day moving average. Short term momentum indicators are trending down. Strength relative to the S&P 500 Index remains positive, but showing early signs of a change.

The S&P Energy Index added 12.38 points (2.34%) last week. The Index is testing resistance at 544.25. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains positive. ‘Tis the season!

The Philadelphia Oil Services Index gained 7.13 points (3.22%) last week. The move above a reverse head and shoulders pattern continues. The Index remains above its 20 and 50 day moving averages and moved above its 200 day moving average last week. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains positive. ‘Tis the season!

Gold added $15.30 per ounce (0.95%) last week. Intermediate trend is down. Support is at $1,526.70 and resistance is at $1,642.40. Gold remains below its 200 day moving average and above its 20 and 50 day moving averages. Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index remains neutral/positive. ‘Tis the season!

The AMEX Gold Bug Index gained 22.62 points (5.55%) last week. Intermediate trend is down. Support is at 372.74 and resistance is at 464.76. The Index remains below its 200 day moving average and above its 20 day moving average and moved above its 50 day moving average. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to gold has turned positive. ‘Tis the season!

Silver gained $0.31 per ounce (1.12%) last week. Intermediate trend is down. Support is at $26.10 and resistance is at $28.44. Silver remains below its 200 day moving averages and above its 20 and 50 day moving averages. Short term momentum indicators are trending higher. Strength relative to gold remains neutral.

Platinum fell $2.90 per ounce (0.21%) last week. Intermediate trend is down. Platinum remains below its 20, 50 and 200 day moving averages. Short term momentum indicators are trending higher. Strength relative to gold remains negative.

Copper added $0.04 cents per lb. (1.19%) last week. Intermediate trend is down. Support is at $3.24 and resistance is at $3.56. Copper remains below its 20, 50 and 200 day moving averages. Short term momentum indicators are bottoming and trending higher. Strength relative to the S&P 500 Index remains negative.

The TSX Global Metals and Mining Index jumped 47.21 points (5.71%) last week. Intermediate trend is down. Support has formed at 781.13. The Index remains below its 200 day moving average and above its 20 day moving average and moved above its 50 day moving average last week. Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index has been negative, but is showing signs of change.

Lumber gained $15.29 (5.35%) last week. On Friday, it broke to a 17 month high. Lumber remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains positive.

The Grains ETN slipped $0.06 (0.10%) last week. Intermediate trend is up. Resistance has formed at $64.83. The ETN remains above its 20, 50 and 200 day moving averages.

The Agriculture ETF added $0.52 (1.04%) last week. Intermediate uptrend resumed on a break above resistance at $50.54. The ETF remains above its 20, 50 and 200 day moving average. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains neutral/slightly negative.

Interest Rates

The yield on 10 year Treasuries increase 0.072 (4.57%) last week. Intermediate trend changed from down to neutral on a break above resistance at 1.686%. Short term momentum indicators are overbought, but have yet to show signs of peaking.

Conversely, price of the long term Treasury ETF fell another $1.72 (1.35%) last week. It briefly broke support at $123.56.

Other Issues

The VIX Index fell another 0.90 (5.75%) last week. It broke below support at 15.45 last week. The Index remains below its 20, 50 and 200 day moving averages. Short term momentum indicators are oversold, but have yet to show signs of bottoming.

Second quarter earnings reports are winding down. The focus this week is on reports from the retail merchandisers.

Economic reports this week are expected to be neutral/positive for equity markets. The next major economic event to watch is the Jackson Hole Economic Conference hosted by the Fed from August 30^th to September 1^st. Bernanke previously announced Quantitative Easing at the Jackson Hole Conference. Will he announce QE III at this conference?

Macro news is relatively quiet this week. European economic data to be released on Tuesday could attract attention.

Short and intermediate technical indicators currently are overbought, but have yet to show signs of peaking.

North American equity markets have a history of moving flat to lower in mid-August

North American equity markets have a history of moving higher from July to August during a U.S. election year. However, equity markets also normally show at least a shallow correction in September and into early October.

Cash on the sidelines on both sides of the border is substantial and growing. However, political uncertainties (including the Fiscal Cliff) preclude major commitments by investors and corporations.

The Bottom Line

Equity markets on both sides of the border have had a good ride since their lows set on June 4^th. The Dow Jones Industrial Average is up 9.7% and the S&P 500 Index has gained 11.0%. Investing in equity markets has become less attractive. Accumulation of seasonal trades on weakness continues to make sense as long as the seasonal trades are outperforming the market. Sectors in this category include agriculture, energy, leisure & entertainment, software and gold. A cautious bullish stance appears appropriate.

Tom Rogers’ Weekly Elliott Wave Blog

Following is a link:

http://www.tomrogers.net/signpost.htm

Special Free Services available through www.equityclock.com

Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.

To login, simply go to http://www.equityclock.com/charts/

Following is an example:

Platinum Futures (PL) Seasonal Chart

ETF News

The latest weekly update on ETFs in Canada to August 10^th is available at

http://www.etfinsight.ca/

Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.

Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc

Horizons Seasonal Rotation ETF HAC August 10^th 2012

Copyright © timingthemarket.ca

Tags: Amp, Canadian, Canadian Market, Capacity Utilization, Core Ppi, Decline, Don Vialoux, Earnings, Economic News, Empire State, ETF, ETFs, Intermediate Trend, Leading Indicators, Michigan Consumer Sentiment, Momentum Indicators, Moving Averages, oil, Philadelphia Fed, Producer Prices, Resistance, Retail Sales, Signs, Stocks, Term Indicators
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U.S. stock market – long-term indicators favor bulls

Tuesday, August 7th, 2012

I published a post yesterday on the short-term technical outlook of the U.S. benchmark S&P 500 Index (SPX 1401.35 �‘0.51%), referring to conflicting indicators but stating that the rally could have more legs. When the message of the short-term charts is murky, it is often useful also to consult long-term indicators to provide some guidance.

Let’s consider, by means of example, monthly data for the S&P 500. A simple 12-month rate of change, or ROC, indicator seems to pick up the major turning points quite well. Let me say straightaway that monthly indicators are of little help when it comes to market timing, but they do come in handy for defining the primary trend. The ROC line below zero depicted bear trends quite clearly, as in 1990 (not shown), 1994, 2000 to 2003, and from 2007 to March 2009. Right now, the ROC line is “safely” in positive territory after threatening to breach the zero line in June.

The combination of a series of higher lows (i.e. rising bottoms) and positive longer-term momentum probably gives the bulls the benefit of the doubt, but needless to say I will be watching this space quite closely.

Source: StockCharts.com

Tags: Amp, Benchmark, Benefit Of The Doubt, Bottoms, Bulls, Guidance, Legs, Lows, Market Timing, Momentum, Rally, Spx, Technical Outlook, Term Charts, Term Indicators, U S Stock Market, Zero Line
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U.S. Stock Market – Long-Term Indicators Could Go Either Way

Monday, May 7th, 2012

During times of great uncertainty regarding the outlook for stocks, I often focus on long-term indicators to provide some guidance.

Let’s by means of example consider the U.S. benchmark S&P 500 Index (SPX 1369.58 �‘0.04%). A simple 12-month rate of change, or ROC, indicator seem to pick up the major turning points quite well. Let me say straightaway that monthly indicators are of little help when it comes to market timing, but they do come in handy for defining the primary trend. The ROC line below zero depicted bear trends quite clearly, as in 1990 (not shown), 1994, 2000 to 2003, and from 2007 to March 2009. Right now, the ROC line is on a knife’s edge and is perched only 1.9% above the zero line.

I will, needless to say, be watching this space quite closely.

Source: StockCharts.com

Tags: Amp, Benchmark, Focus, Guidance, Market Timing, Nbsp, Roc, Spx, Stocks, Term Indicators, U S Stock Market, Uncertainty, Zero Line
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Stock Market – Long Term Indicators Could Go Either Way

Thursday, January 19th, 2012

During times of great uncertainty I also often focus on long-term indicators to provide some guidance.

Let’s by means of example consider the S&P 500 Index (SPX 1308.04 �‘1.11%). A simple 12-month rate of change, or ROC, indicator seem to pick up the major turning points quite well. Let me say straightaway that monthly indicators are of little help when it comes to market timing, but they do come in handy for defining the primary trend. However, the ROC line below zero depicted bear trends quite clearly, as in 1990, 1994, 2000 to 2003, and from 2007 to March 2009. Right now, the ROC line is on a knife’s edge and is perched right on the zero line. I will, needless to say, be watching this space quite closely.

Source: StockCharts.com

Tags: Amp, Focus, Guidance, Market Timing, Roc, Spx, Stock Market, Term Indicators, Uncertainty, Zero Line
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Double Top Breakout on this Morning’s Gap Up

Tuesday, January 17th, 2012

As we mentioned Friday, it’s not so much the news but the reaction to the news that was important to take note of.  Markets shook off bad news quite easily, and we are seeing the celebration of that translated in this morning’s gap up.  Thus far 2012 has been an interesting year at the index level.  Aside from 1 session (Friday’s) we’ve only seen completely flat opens – with very little volatility all session – or gap ups (this morning’s will be the third).  Gap up, flat, flat, flat flat, gap up, flat flat flat, etc.   And one session all year that differed from that pattern.  Interesting.

While almost the entire rally has been contained to 3 sectors, we have to look at the indexes and respect the movement.  As we exited 2011, it was a coin flip in terms of the next move – there was no clear set of signals at the time.  However, over the past few weeks we see there has been a break to the upside, and some intermediate term indicators are flashing far more positive.  This morning’s gap will take the S&P 500 over November highs creating a ‘double top breakout’.  Further we can see an inverse head and shoulder that has resolved to the upside with the action of the past 4-6 sessions.  This is generally quite positive.

We can see the next major resistance area is not until 2011 highs of 1350ish, which is about 4% higher from where the index should open.

Now with that said, the move since Dec 19th has been relentless in nature with only two sessions of any real selling – and even those two were very modest by second half 2011 standards.  Thus the move this morning will certainly have those who are missing it anxious and throwing in the towel and wanting to chase.  Generally when the last holdouts want to buy the market you are most prone to shorter term corrections, so these holdouts should begin converting soon.  But with the intermediate term market structure changing to a more positive tone, any of the nearer term (and necessary) corrections would be seen as buying opportunities, rather than “run to exit” calls, by those who read this market in a technical way.

What does this have to do with the real economy?  Not much at all – indeed there are some very real concerns growing.  (Adding to that is more news of slowdown in the “official” GDP numbers out of China – but as we now know, slowdowns are good because they mean more intervention)  And the market is not the economy… and even less so in an era of near constant intervention by governments and central banks.  As outlined last week, if we do get a new round of quantitative easing, this part of the rally will be the “those in the know get in” part.  And as long time readers know from many stories posted in latter 2011, “those in the know” is a broadening group.. which certain circles can now pay for for access.

This week we enter the heart of earnings season – Thursday being the most interesting day.  Certainly sometime here in the next 2 weeks we shall see someone of note blow up, and we have to see how a now increasingly extended market absorbs that.  If the answer is “well” it puts another feather in the cap of a potential multi month move to the upside ahead.   Keep in mind a Fed meeting comes the  week after this and market expectations for even more ‘assistance’ on Bernanke’s behalf grow.  Of course, no one asks what is so fundamentally wrong that this economy needs constant and ever growing assistance … as long as it gooses asset values (even if temporarily), that’s all that matters to the speculator class.

Disclosure Notice

Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog

Tags: Bad News, Breakout, Flat Gap, Gap, Gap Ups, Head And Shoulder, Holdouts, Index Level, Indexes, Market Structure, Positive Tone, Rally, Second Half, Sectors, Signals, Term Indicators, Third Gap, Throwing In The Towel, Ups, Volatility
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ECRI Sticking to Recession Call Despite Market’s Swing Upward

Monday, November 7th, 2011

After the historic run up in markets in October, we asked if the market was correct (the market supposedly being an efficient forecaster) or if ECRI was correct in its recession call?  [Oct 21, 2011: Does the Market Have it Wrong? Or Does ECRI?]  With a tremendous track record, the two seemingly diverged but as Lakshman Achuthan points out the market is far more focused on coincident indicators, or very near term future indicators rather than longer term points of interest.  Indeed, often as the ECRI is making a call for the beginning of a recession , the market is rallying and ignoring said calls.  Even more interesting, most recessions start in a quarter where GDP is positive…. (of course like all government data, GDP is subject to revision down the road).

This morning, Achuthan returned to CNBC for the first time in about 6 weeks – or right before the market went on its rampage – and stuck to his guns.  Unfortunately, half the interview is wasted by Steve Liesman trying to pry the long term indicators which make up the brew of ECRI’s recession call, which are the basis of their for profit business.  Liesman also seemed shocked anyone could be calling for recession when the brain trust on Wall St. (which missed the debacle of 2008) says everything is fine and dandy in the U.S. economy.

7 minute view – email readers will need to come to site to view

Tags: Brain Trust, Cnbc, Coincident Indicators, Debacle, Economy 7, Ecri, Email, Forecaster, GDP, Government Data, Guns, Lakshman, Points Of Interest, Profit Business, Rampage, Recession, Recessions, Steve Liesman, Swing, Term Indicators
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Put Gold Miners on Your Radar Screen

Monday, October 17th, 2011

Ever since I started my investment career as a mining analyst in 1984, I have taken a keen interest in gold stocks. The behavior of the miners in recent times warrants special attention.

I always keep a close eye on the relative strength of the miners versus the metal as stocks often lead bullion. The chart below was constructed by dividing the MarketVectors Gold Miners ETF (GDX) by the SPDR Gold Trust (GLD). A rising trendline indicates outperformance by gold stocks against bullion, whereas a declining line shows the metal having the upper hand. After a period of outperformance until the beginning of 2011, the miners have been drifting lower until finding a possible bottom (in relative terms) over the past few weeks. Based purely on this chart, more evidence is required that the curve of mining stocks has in fact turned upwards.

Source: StockCharts.com

In addition to the nascent outperformance by gold stocks, the Gold Miners Bullish Percent Index (BPGDM) shows only 23% of the 32 stocks in the Gold Miners Index are now in point and figure uptrends. The sentiment indicator is used like all bullish percent indices: readings over 70 are overbought while drops below 30 are oversold.

Importantly, the last two times an oversold condition existed were at the end of 2008 and during the first quarter of 2010. The late 2008 upturn signaled a major rally in gold shares. While the BPGDM has just turned up, the “all clear” for the group will only be signaled when more than half of its stocks are in new uptrends (i.e. above 50). However, given the very low level of the indicator, and buy signals being given by short-term indicators such as MACD and ROC, it would not be surprising if better tidings for gold and silver shares lie ahead.

Source: StockCharts.com

The fact that most gold mines are situated in developing countries contributed significantly to their underperformance as the currencies of these countries tend to come under pressure during crisis times as investors shy away from high-risk assets.

Source: Plexus Asset Management (based on data from I-Net Bridge).

Furthermore, the gold stocks are included in the main stock indices of the respective emerging markets and are therefore vulnerable when foreign investors hedge their exposure to the developing countries.

Source: Plexus Asset Management (based on data from I-Net Bridge).

Although the gold miners (GDX and its younger brother GDXJ) have more work to do before confirming the stocks are back in secondary uptrends, I doubt one could go too far wrong by starting to nibble on this neglected sector.

Tags: Buy Signals, Crisis Times, Gdx, Gold, Gold And Silver, Gold Bullion, Gold Miners, Gold Mines, Gold Shares, gold stocks, Investment Career, Keen Interest, Macd, Mining Analyst, Radar Screen, Relative Strength, Relative Terms, Term Indicators, Tidings, Trendline, Upturn
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ECRI’s Lackshman Achuthan Continues to be Bearish on Economic Conditions as Longer Term Indicators Remain Negative

Friday, July 29th, 2011

by Trader Mark, Fund My Mutual Fund

I’m watching the ECRI interviews very closely since they have had a far better track record than any Wall Street strategist or economist the past half decade.

About 4-5 months ago ECRI said their long term indicators were turning down, and sure enough we’ve hit (at best) a ‘soft patch’.   Apparently there has been no improvement in said indicators (not turning back positive) so the intermediae term still looks soggy.

Very interestingly, when asked about the dichotomy between economic figures and corporate profits, Achuthan believes profits will mean revert to the economy and not vice versa.  If accurate, the market will be in for a bit of a surprise as that is certainly not banked into the cake.

7 minute video – email readers will need to come to site to view.

Copyright © Trader Mark, Fund My Mutual Fund

Tags: 5 Months, Copyright, Corporate Profits, Decade, Dichotomy, Economic Conditions, Economic Figures, Economic Indicators, Economist, Economy, Ecri, Interviews, Mutual Fund, Soft Patch, Strategist, Surprise, Term Indicators, Video Email, Wall Street
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Three Reasons to Believe in $100 Oil

Saturday, May 14th, 2011

Three Reasons to Believe in $100 Oil

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

After selling off nearly 14 percent last week, oil prices finished this week slightly higher at $99.65 per barrel. While the end result was a net positive, the volatility continued. Oil prices per barrel reached $104, then fell to around $96, before nesting just below $100.

As an investor, this volatility can be difficult to handle. Throw in the uncertainty of today’s geopolitical environment, and investors feel the need to downsize their positions in commodity investments, such as oil.

We think markets could remain volatile in the short-term, but here are three long-term indicators to support $100+ per barrel oil prices.

1) Long-Term U.S. Dollar Weakness

The U.S. dollar was up over 1 percent again this week and has increased nearly 4 percent since hitting a 52-week low on April 29. On a five-day rate of change, the dollar is up about 1 standard deviation.

As I said last week, this move is less about the vigor of the U.S. dollar and more about the relative weakness of the eurozone and other fledgling countries. In addition, it’s likely we’ll continue to see relative strength in the U.S. dollar as we get closer to the end of the Federal Reserve’s QE2 program, set to wind down in June.

We think these are short-term drivers and don’t accurately reflect the long-term headwinds facing the dollar. I’ve discussed these often and in an attempt to keep this note brief, I’ll let the following picture tell the story.

This snapshot from USdebtclock.org (taken late in the afternoon on May 13) shows the precarious fiscal and monetary situation of the U.S. As you can see, the overwhelming color is red. Even if Washington decided on a comprehensive plan to fix entitlement overspending, trim defense spending and reduce the U.S. deficit today, it would take years to see any meaningful shift in these figures.

Therefore, we feel the recent uptrend in the U.S. dollar is a short-term reprieve from a long-term downtrend.

2) Demand from Emerging Markets Outpacing Developed Market Demand

While developed world demand has struggled to retrieve its previous strength, emerging markets have captured a significant share of global demand over the past three years. Emerging market countries have narrowed the oil usage gap between developed and emerging markets from roughly 12 million barrels per day in 2007 to just 4 million barrels per day as of late 2010.

This week, the Paris-based International Energy Agency (IEA) and the U.S. Department of Energy both communicated softness in global oil demand. The IEA noted that preliminary March data shows the first “marked slowdown” in annual growth for the first time since 2009. The IEA is forecasting growth of 1.3 million barrels per day in demand for crude oil in 2011, down from 2.8 million barrels per day in 2010.

This represents a significant slowdown in year-over-year growth and added to negative sentiment around oil this week, but it’s important to put things into context. You can see from the chart that global oil demand grew at an incredible pace in 2010. The 1.3 million barrels of demand growth that is expected for 2011 is less than last year, but is more along the lines with historical rates and maintains the forward momentum for rising oil demand.

Emerging markets, driven by China, are the main source of the increase in demand. You can see from this next chart how China’s demand for crude oil imports has grown over the past decade or so. China imported an average of just under 1.4 million barrels a day of oil in 2002 when prices were hovering around $20 per barrel.

In the years since, China’s crude oil imports have increased more than 260 percent despite per barrel oil prices jumping nearly four-fold. This is indicative of the insatiable demand that emerging markets have for oil.

3) Majority of Global Oil Reserves Located in Geopolitically Unstable Regions

In the April 11 update “Why High Oil Prices Are Likely Here to Stay,” we highlighted how a large portion of the world’s proven oil reserves and production comes from unstable countries and regions, including Nigeria, Venezuela, Iraq, Iran and Libya. According to some estimates, as much as 80 percent of the world’s oil reserves lie beneath these shaky regions.

Civil wars and attacks on oil facilities can create production slowdowns or even shut down production entirely. The conflict in Libya and unrest in several other Middle East countries shows just how quickly this can affect global oil markets. Iraq is another example of the difficulties inherent in production expansion in these regions. Last week, the country’s former oil minister said it would only be able to meet half of its stated production goal by 2017. The original forecast, clearly a lofty one, called for roughly 12 million barrels per day in oil production.

Over the years, the proximity of oil reserves to unrest has led to a reduction in global spare capacity or the excess amount of oil that can be produced, if desired, to meet demand. When the turmoil broke out in Libya, the general consensus was that Saudi Arabia’s spare capacity would be more than enough to meet market demand. That hasn’t been the case as Saudi Arabia has moved to calm its own population to prevent unrest.

The result is little wiggle room to meet demand should we experience a boom in demand or an event disrupting production. In general, these supply/demand dynamics support historically high prices.

Tags: Barrel Oil, Chief Investment Officer, Commodity Investments, Crude Oil, Defense Spending, Dollar Weakness, End Result, Federal Reserve, Frank Holmes, Geopolitical Environment, Monetary Situation, Oil Prices Per Barrel, Qe2, Relative Strength, Relative Weakness, Standard Deviation, Term Indicators, U S Global Investors, Uptrend, Vigor, Volatility
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Three Profit Metrics to Avoid Earnings Season Myopia (Hester)

Sunday, April 10th, 2011

by Bill Hester, Hussman Funds

Alcoa, the aluminum producer, announces its earnings on Monday. So begins the reporting season of first-quarter company results. During this period in particular, it may be easy to become enamored with past corporate performance and miss potential forward-looking risks. To counterbalance the deluge of earnings reports to be delivered over the next few weeks, here are a few intermediate-term indicators and trends that investors may want to watch to gauge earnings conditions.

Watch Sales Growth for Clues to the Direction in Profit Margins

The current profit margin of the S&P 500 Index is sky high. During the past 40 years it was only higher during 2006-2007, fueled substantially at the time by record margins and earnings of financial companies that would eventually disappear into the ether. The current profit margin is 50 percent above its long-term average.

One of the primary drivers of profit margins is sales growth. But the important role that sales growth plays is often left out of the discussion. Year-over-year changes in revenue have a strong correlation with changes in profit margins historically. This makes sense, because a large part of company expenses are fixed for a period of time, especially contractual ones like those for labor and supplies. So over the short-term, revenue growth often falls straight to the bottom line. So when sales growth comes in faster than recent trends, those new sales help deliver higher profit margins.

Recent data show a divergence in sales growth, which is moderating, and margins, which continue to expand. This is likely the result of corporate executives who continue to be uncertain of the durability of the economic recovery. Even though sales growth has been strong during the last few quarters, corporate cost structures haven’t changed materially, which has boosted margins. The graph below compares the year-over-year change in sales in the S&P 500 with the Index’s profit margin.

It’s important to highlight the recent rate of growth in sales, which is moderating. Even if corporate executives continue to move slowly in hiring and raising wages, if sales growth continues to moderate, margins are likely to be dragged lower over the next few quarters. Even now, profit margins look extended based on their relationship with sales growth. Typically, high profit margins follow strong sales growth. As sale growth moderates, margins decline. This helps explain why there is also a strong inverse correlation between profit margins and subsequent profit growth, as John Hussman has frequently noted.

There has also historically been a negative correlation between profit margins and subsequent stock market returns. The current trailing 5-year return – which began with profit margins close to current levels – is a bit less than 3 percent annually (with intense volatility and drawdown). Based on historical correlations, current profit margins suggest similarly low returns over the next few years.

Valuation Differences Across Sectors

The first graph above shows that S&P 500 profit margins are near peak levels. And we know that by looking at valuation models that normalize fundamentals, the level of valuation of the Index is also extended. Are the sectors within the Index equally overextended on both a profit margin and valuation basis?

The graphs below attempt to provide some insight. The data for these graphs is provided by Ned Davis Research . NDR’s analysts have calculated sales and income totals for the main sectors of the S&P 500 going back to the early 1970′s, which I’ve used to calculate profit margins. They have also calculated a set of historical median valuation ratios for each sector. To separate the level of valuations from the impact of peak profit margins, I’ve used the median sales yield (sales/price) in the calculations below.

As an example, the first graph presents the data for the Consumer Discretionary Sector. The top half of the graph shows profit margins for the sector – which are at record levels. The bottom half of the graph shows sales yields – which are at record low levels (implying high levels of valuation).

The graph below extends this concept by comparing each sector’s current profit margin and sales yield to its historical range (as a percentage). For example, sectors in the lower right quadrant have profit margins and levels of valuation that are higher than average for those sectors. The lower and further right you go on the graph, the more extended the current profit margins and valuations are. Keep in mind that by using sales yield we are focusing on how expensive sectors are, relative to a fundamental that isn’t influenced by year-to-year fluctuations in the sector’s profit margins.

The S&P 500 itself is in the lower right-hand corner. You can see how extended the Index is based on both the level of profit margin and valuation, compared with historical norms. The Consumer Discretionary sector (COND) is even more extended on both measures. Also interesting are the cyclical components of the S&P Index. The Materials, Energy, and Industrial sectors are all at peak levels of valuation (independent of margins) and have near-record profit margins as well. Consumer Staples and Financial sectors are less overvalued relative to their history (keep in mind how highly valued financials were in 2007 prior to their declines, which likely distorts their current level of relative valuation). The Healthcare sector appears least extended on these measures.

It’s clear from the graph that any argument that the market and the majority of its sectors are fairly valued relies strongly on the assumption that profit margins will remain near their all-time peak levels. Valuation metrics that aren’t influenced by year-to-year fluctuations in profit margins are showing record levels of overvaluation. Near-record profit margins with near-record levels of valuation for most industries suggest potential for risk to the stock market in the event earnings disappoint investors over the next couple of quarters.

Investors May Be Running Out of Surprises

One of the worst-kept secrets in the financial markets is that earnings surprises are not true surprises. Company executives have learned over time that if they provide modest earnings guidance, then beat that guidance, even marginally, their management and company performance look better. Stock prices often react favorably to those ‘surprises’. You can see the development of this sort of “pact” between executives and analysts by looking at the upward drift of earnings surprise rates – which measure the percentage of companies that beat estimates. Surprise rate have generally moved higher from the mid-1990′s when a little less than half of companies typically beat estimates, to the recent high where more than 80 percent of companies beat estimates.

This doesn’t mean that tracking the earnings surprise rate is without merit, as long as you’re mindful of its upward drift. Because of the upward trend in the data, the most useful signals are based not on the level of surprises, but on noticeable reversals of that trend. Bloomberg keeps an index of these earnings surprises, which I’ve mentioned before as a tool for monitoring potential risks. The graph below shows the index on a monthly basis, with a 12 and 24-month moving average that track its smoothed performance.

It’s a relatively short data series that begins in the early 1990′s. But over that time, when the 12-month moving average of the index has fallen below its 24-month moving average, especially from a noticeable peak, poor returns have generally followed. For example, the shorter-term moving average dipped below the longer-term average in early 2001, following a noticeable peak in 2000. The two crossed again in 2007, prior to the profit surprise rate collapsing from 70 percent to almost 50 percent in 2009. During both periods the 12-month moving average stayed below the 24-month moving average until a substantial amount of the decline in stock markets that followed had already occurred. There were less effective signals given in 1996 and 2005. The indicator is plotted against the performance of the S&P 500 Index below.

The 12-month moving average of the surprise line fell below the 24-month moving average last week, which is noted on the graph. Again, it’s a data series with limited history so the signal alone shouldn’t be used for investment decisions. But the deterioration in the positive surprise index will clearly be worth watching as the coming earnings season unfolds.

Earnings reporting season always brings an intense scrutiny of profit metrics, but not always the most helpful ones. During these periods it’s easy to lose focus on intermediate term indicators that can provide useful information. The metrics that track some of these trends – the level of profit margins in relation to sales growth, sector valuation, and a downward drifting earnings surprise rate – are currently highlighting potential intermediate-term risks on the earnings front.

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Tags: Alcoa, Aluminum Producer, Company Expenses, Corporate Executives, Corporate Performance, Deluge, Divergence, Earnings Reports, Earnings Season, Economic Recovery, Enamored, Hester, Hussman Funds, Metrics, Myopia, Profit Margin, Profit Margins, Reporting Season, Term Indicators, Watch Sales
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