DJIA – 10,303

August 14, 2010

“What we had was a government-prescribed course of amphetamines (to keep it up), antibiotics (to prevent infection) and antidepressants (to make it feel better). It endured regular steroid injections by both monetary and fiscal authorities. And it still has no real muscle.”

-Caroline Baum, Bloomberg, August 9, 2010

The Federal Reserve’s insight shifted, last week’s get together revealing less confidence in the economy, the solution a decision to keep taking the same drugs at maintenance levels to keep Fed bond holdings stable, using the principal repayments on its mortgage bonds to buy Treasury Bonds, about $10 billion a month, not quantitative by any means, but hoping not to spook the market while keeping liquidity in the system, much of which I suspect finds its way into the stocks.

It didn’t take much selling to bring committed bears back into the lead in print and cyberspace, the Hindenburg Omen replacing the Death Cross this time around, track records fuzzy on both. Yet net volume didn’t overbalance despite fear rippling through the Street. It’s times like these that my net volume indicator is worth its weight in flawless diamonds. Despite a 90%-down day Wednesday, peak readings on the break were (60.5) for the NYSE and (61.5) for NASDAQ, neither overbalancing hurdle rates, +72.2 and +62.7 respectively, and unlikely to do so in next week’s trading. S&P 500 (SPX) and Russell 2000 (RUT) net volume readings were in synch with the NYSE and NASDAQ.

S&P 500 - Daily (Source: StockCharts.com)

Net volume indications such as these imply the next intermediate-term upswing is better positioned to carry above the July 21 high (1131.23). It that incurs, it locks in the pattern on the decline from April as corrective. Above 1132, there’s meaningful harmonic resistance between 1140-1150 but above that, there’s mostly clear sailing to the April 26 high (1219.80).

Near-term, when a wedge breaks, the market typically has a sharp break back to where the formation started, in this case the July 20 at 1056.88. The SPX 21-day rule and 3-day swing charts stay in an uptrend unless that level is broken. The Market Trend Indicator (MTI) is NEUTRAL, just barely, the SPX the first to close below its 18% weekly exponential moving average, followed by the Dow Industrials. The SPX’s 18% average is 1093.62 next week and the DJIA’s is 10,343. The New York Advance/Decline is 2,663 net advances above its 18% average.

Deflation is back in the headlines but note the strength Goldman Sachs Industrial Metals Index, still above its 200-day moving average, an unlikely pattern if a double dip were in the offing. The Technology and Industrial sectors led last week’s smash, influenced in part by Cisco’s cautious guidance. Eric Savitz pointed out in Barron’s that the company had added 3,000 employees in the first half and planned on adding another 3,000 over the next few weeks, a move it wouldn’t make if business weren’t improving slightly somewhere south of normal.

Goldman Sachs Industrial Metals Commodity Index - Daily (Source: StockCharts.com)

On the group front, the evidence that momentum is returning to the market is missing, continuing to favor buy low-sell high investors instead of those chasing relative strength. Automobiles, helped by Ford and BMW, have been in the top ten group relative strength list for three weeks, but I wouldn’t count on it be a long lasting run after GM comes public. Detroit-base Urban Science reported 40 U.S. dealerships were opened in the first half by mostly foreign manufacturers, but on a net basis, 258 dealerships closed following a record 1,603 closings in 2009, leaving 18,223 U.S. dealerships, including 5,114 at GM versus 6,049 when it entered bankruptcy.

The U.S. Dollar index, seemingly helped in large part by short covering, had a strong week, but I now expect any move to fall short of its June 7 high. Gold held despite the dollar weakness and moved above its 50-day moving average Friday, triggering a signal to average up long positions. My recommend trailing stop level is just under the July 28 low ($1157.00 2^nd London fix), and I would also move up stop levels for the last round of new buys in the first quarter. If and gold rallies above its June 28 high ($1261), the plan is to begin raising trailing stop sell orders from under last September’s low ($989.50) to a price 5% under the 200-day moving average, the speculative phase underway discounting the specter of money creation out of thin air. When it ends, I expect a sharp drop, much like what happened in 1980.

Gold (continuous contract) - Daily (Source: StockCharts.com)

Gold - Monthly (Source: DecisionPoint.com)

As for my recommended short in long-term government bonds, my stop point was breached on the price spike last Tuesday. Given my more bullish outlook for the stock market, I’m looking to reestablish a short position via inverse exchange traded funds (ETFs) such as ProShares Short Barclay’s 20-year+ Treasury (TBF), iShares Barclays Short Treasury Bond (SHV) and for more leverage, ProShares UltraShort Barclays 20-yr. Treasury (TBT).

30-Year Government Bonds - Weekly (Source: DecisionPoint.com)

Harmonic Preview:

(Higher Probability SPX Turning Point or Acceleration Days)

August 18       (Wednesday)

August 24       (Tuesday)

* An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.

I didn’t expect to publish this week but decided to slip this out Saturday given my more bullish bias. My last chart is Credit Spreads, a weekly differential between high quality and lower quality bonds. It’s starting to weaken a bit, but not to the extent I would expect if the economy were about to double dip.

Credit Spreads - Weekly (Source: Wailuku Capital Advisors)

Conclusion:

My recommend stop position for long positions just under the July 30 lows were hit last week. The plan is to reestablish long positions tied to broad indices, particularly ETFs tied to the SPX and NDX once the dip passes. For remaining short position, I think it makes sense to lower the stop level to just above the August 4 high (1128.75) from just above the June 21 high and perhaps covering once the low is confirmed, shifting to more of a trading range mentality than pure trend following.

For investors, I think it makes sense to stick with cash generating businesses with balance sheet strength and the ability to grow in a recovery likely shaped liked a square root symbol.

The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.

DJIA – 10,698

August 10, 2010

“The only three things that are important are discipline, persistence and psychology. Without those three things, there isn’t a strategy in the world that will work for you.”

-James Altucher, interview in The Kirk Report

Second quarter results at more than 70% of the S&P 500 companies reporting to date topped estimates, the fifth straight quarter over 70%, reflecting the positive side of cost cutting and spoon feeding sandbagging-guidance to willing analysts. Cash continues to build, up six quarters in row to $836.8 billion for S&P 500 companies while the public squirrels more away, savings reaching $725.9 billion in June, a 6.4% savings rate compared to 6.2% for all of  the second quarter and 5.5% for the first quarter, a trend that needs to happen but one that dampens growth.

Politically, the debate rages on between spending more and spending less, but if the Republicans gain control of Congress, it slows new legislation, a positive outcome in my opinion. As Jon Hilsenrath wrote in The Wall Street Journal yesterday, “There are no slam dunks when it comes to solving this economic problem. Which raises what may be the biggest Hail Mary of all: Do nothing, and hope the economy heals itself.”

S&P 500 - Daily (Source: StockCharts.com)

Technically, the S&P 500 (SPX) slithers higher, forming a rising wedge on light volume, refusing to crack as the latest data for consumer sales, factory orders, pending home sales and job creation all fell short of expectations, once green shoots heading towards summer brown like the California hills. The SPX’s rising trendline from its July 1^st low has been tested three times, and once cracked, is likely followed by a sharp break back to an area around the first test.

Economic Cycle Research Institute - Weekly Leading Index (source: dshort.com)

Until then, it’s positive that the SPX moved into the top half of its 2007-2009 bear market range above 1121.44, now just under its June 21 high (1131.23), a level if surpassed locks in the pattern on the 17% decline from the April high as corrective. Since price and time overbalanced for the SPX, I think that high (1219.80) likely marks the top of the cyclical bull market but the technical action since July chips away at that thesis.

Just after a few longer-term models turned negative, different systems tied to intermediate-term and slightly longer signals are reverting to bullish readings. The best money managers stick with their disciplines in trying times, the stock market one tricky devil, transforming itself in a “now you see it, now you don’t” fashion to induce mistakes by bulls and bears alike, my alert for traps and whipsaws still in place.

The Market Trend Indicator (MTI) remains on its UPTREND signal, each key index above its 18% weekly exponential moving average. This week, the SPX’s 18% average is 1096.77 and the DJIA’s is 10,351. The New York Advance/Decline line is 7,522 net advances above its 18% average. Net volume readings remain intact and in synch with the MTI, +72.2 for the NYSE and +62.7 for NASDAQ.

There’s not much change in group action, constant rotation and a buy low-sell high mentality more common than not, resulting in a blend of economically sensitive and defensive groups in the top ten group list as measured by relative strength, Hotels joining the list week while Travel & Tourism climbed to the number one spot, up from the bottom ten group list as recently as the week ended June 7. Home Construction was in the bottom ten list that week as well and it’s still there.

Gold Mining is the worst performing group over the past month, but if my outlook of the metal is correct, it’s a contrary buy if gold confirms my view by rallying above its 50-day moving average. Appropriate exchange traded funds (ETFs) include Market Vectors Gold Miners (GDX) and Market Vectors Junior Gold Miners (GDXJ).

Gold (continuous contract) - Weekly (Source: StockCharts.com)

Gold is closing in on its 50-day moving average and I think a close above that figure creates a buying opportunity for traders, with stop loss orders under the July 28 low ($1157.00 2^nd London fix). In that event, I also recommend raising trailing stop orders from the last round of buying to just under the late July low as well. For long held investment positions, if and gold rallies above its June 28 high ($1261), the plan is to begin raising trailing stop sell orders from under last September’s low ($989.50) to a price 5% under the 200-day moving average.

I expect gold’s long running bull market to go out with fireworks, not a whimper, one potential catalyst being possible return of quantitative easing if deflationary forces take hold. With a semblance of stability in Europe, the U.S. Dollar index fell below the last its last 3-day swing low, ending the rally at seven swings and increasing the probabilities that any rallies from here fall short of its June 7 high.

We may be in whipsaw territory for long-term government bonds as well as stocks. Price action over the next three days could tell the tale. I tightened my stops for recommended short positions to just above the July 30 high (TLT-100.61) from above the July 21 high (TLT-102.28). I’ll add to the short if prices break the rising trendline and fall under the July 29 low (TLT-97.92).

Barclays 20-yr+ Treasury ETF (TLT) - Weekly Equivolume (Source: StockCharts.com)

Oil is back over $80 a barrel, China passing the U.S. as the largest consumer of energy, its use more than doubling over the last decade according to the International Energy Agency (IEA).

For corporate readers wanting to make a killing on Wall Street, successful whistleblowers under the Dodd-Frank bill when payouts to the Securities Exchange Commission are over $1 million are entitled to 10-30% of the payout, the SEC determining the percentage.

POLITICO’s Morning Money asked readers to submit a headline most likely to crash Bloomberg servers. A source wishing to remain anonymous came up POLITICO’s winner, “Warren Buffett Caught with Ivy League Stripper in Goldman Offices. It’s OK to smile here.

There’s likely a delay in my comments next week as compliance and distribution issues are sorted out. I joined a fine Richmond, VA-based firm, Anderson & Strudwick, as Senior Analyst, Investment Strategies.

Harmonic Preview:

(Higher Probability SPX Turning Point or Acceleration Days)

August 11       (Wednesday)

* An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.

I’ve got August 11 listed but on either side, there is a Bradley date and Anniversary date (1982 low), so let’s watch the action closely while much of the Street vacations. Above 1131.23, there are four potential harmonic resistance price levels between 1140 and 1150. The closing chart is my proprietary Market ID (internal dynamics), incorporating eight technical factors, none of which is price. Note how it’s just below its high, poorer volume characteristics holding back better breadth figures.

Market ID (internal dynamics) - Weekly (Source: WailukuCapitalAdvisors)

Conclusion:

I’m raising my recommended stop level for long positions in ETFs tied to the Nasdaq 100 from under the July 20 lows to under the July 30 lows (1088.01 for the SPX and 1833.90 for the NDX). For remaining short positions, I wouldn’t have stops any higher than just above the June 21 high (SPX-1131.23), just a hair’s breath away. If stopped out, the plan is to short again on the next signal, focusing on exchange traded funds tied to small cap, basic materials and industries dependent on robust consumer spending.

As for investors, don’t lose sight of the operating realities of the businesses you own in a world in which the deleveraging process is underway in important developed nations. I would expect my emphasis on large cap defensive issues to underperform on any rally while holding better if and as the trend changes. To quote Warren Buffett, “The stock market is there only as a reference point to see if anybody is offering to do anything foolish. When we invest in stocks, we invest in businesses. You simply have to behave according to what is rational rather than according to what is fashionable.”

The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.

DJIA – 10,674

August 3, 2010

“Deflation isn’t just a topic of intellectual curiosity, it’s happening. It’s an uncertain world that’s tipping toward deflation.”

-Bill Gross, The Wall Street Journal, August 2, 2010

Inventory filling is largely over, the recovery now dependent on consumer spending to stand on its own. Recovery Loses Momentum Outlook for Remainder of 2010 Darkens Even as Businesses Post Strong Profits summed up the lead headline in The Wall Street Journal’s weekend edition while another headline read Revisions Show Slower Recovery, Deeper Recession.

Treasury Secretary Geithner’s op-ed in The New York Times, Welcome to the Recovery, argues “a review of recent data on the American economy shows that we are on a path back to growth” while the president of the Federal Reserve Bank of St. Louis worries that Fed policies could put the American economy at risk of becoming “enmeshed in a Japanese-style deflationary outcome within the next several years.” Instead of keeping interest rates near zero, he thinks the Fed should buy more Treasury Bonds to inject liquidity, the most powerful option left to fight deflation, and one the Street is watching to see if it’s held in reserve or not at next week’s Fed meeting.

On “Meet the Press,” Double Bubble Greenspan thinks the pause could turn into a contraction if home prices decline, but let’s wait to see how home sales trend in September and beyond. It’s likely the slowdown in June home sales after tax credits expired is much like what happened when auto sales slowed after “cash for clunkers” pulled natural auto buyers forward.

From a technical perspective, light volume or not, it’s positive that the stock market continues to rally in the face of the mostly negative headlines, the S&P 500 (SPX) closing yesterday above 1121.44, the halfway point of the SPX’s October 2007 all-time high and March 2009 bear market low. If that point holds and the SPX rallies above its next technical hurdle, the July 21 high at 1131.23, it locks in the April 26-July 1 decline as an A-B-C corrective pattern, increasing the probabilities of more sideways trading between those two levels through the dog days of summer, warnings posted for even more whipsaws and traps, bull and bear alike, and not the best of conditions for trend followers.

S&P 500 - Monthly (Source: Wailuku Capital Advisors)

The SPX, the most important stock index in my opinion and the one I track the closest, is where institutional investors buy and sell, included in the Market Trend Indicator (MTI) to determine what the pros are doing. The 30 stocks in the Dow Jones Industrial Average, the bluest of the SPX’s blue chips and dominated by institutional trading as well, is the index that grabs the public’s attention, leading consumer sentiment surveys in a near-perfect overlay and part of the MTI to reflect public psychology. The New York Advance/Decline line is incorporated to measure how the average stock is doing, the troops leading the generals in this market and the sort of action generally seen when the primary trend is down.

The MTI, designed to identify and follow intermediate-term trends lasting weeks to months, capturing most of the move more often than not, has no predictive value. Signals are straightforward, either uptrend, downtrend or neutral, signaling UPTREND now, each key index above its 18% weekly exponential moving average, the equivalent of a slightly weighted ten-week moving average and standing at 1091.31 for the SPX and 10,285 for the Dow. The New York Advance/Decline line is 7,378 net advances above its 18% average.

S&P 500 - Daily (Source: StockCharts.com)

The other tools I use to confirm the trend include net volume, often the first to suggest a change, and a couple that either indicate uptrend or downtrend but not neutral, the SPX 3-day swing chart (uptrend signaled by higher lows and higher highs and vice versa for downtrend) and the 21-day rule (uptrend when the SPX moves above the high of the previous 21 trading days, staying in effect until there’s a print below the low of the trailing 21 days). Both the 3-day swing chart and 21-day rules indicate uptrend, as is net volume, last week’s late fade not enough to qualify as a short-term downtrend, so peak readings remain intact, +72.2 for the NYSE and +62.7 for NASDAQ.

I would be more excited by these positive readings if weekly net volume figures hadn’t passed their chance to overbalance hurdle rates, (28.3) for the NYSE and (29.8) for NASDAQ, that backed the view that the top of the cyclical bull market is behind us when price and time overbalanced for the SPX in May, confirmed at that time by Dow Theory, which has since shifted back to uptrend status. The SPX would have to trade above its April 26 high (1219.80) to negate the overbalance indications, thus my bias that a trading range is the most likely outcome for now.

Second quarter results in the Consumer Staples sector (Colgate, Kellogg and Procter & Gamble) reveal a lack of pricing power, supporting the case for deflation. Automobiles (helped by Ford and a couple of foreign manufacturers) and Travel & Tourism, the two best performing groups over the past month, leapt to the top of the Top Ten Group List as measured by relative strength weighted between six and nine months. Group performance by the leaders hasn’t lasted long enough yet to indicate momentum returning to the market. The greatest number of new highs and new lows were both in medical-related stocks last week.

30-year Government Bonds - Weekly (Source: DecisionPoint.com)

Much like the stock market, I’m not quite sure what to make of long-term government bonds near-term. I am lowering my recommended stop sell level for short positions from just above the July 1 high to just above the July 30 high (TLT-100.61). As for gold, I suspect that may have been it for the pullback, possibly followed by a powerful advance in coming months, taking it into bubble territory. The bull market in gold is well into its 11^th year, long past the level for rational investments but if it moves above its 50-day moving average (with stop orders just under last week’s low), trade results could be meaningful.

Barclays 20-yr+ Treasury ETF (TLT) - Daily (Source: BigCharts.com)

Gold (continuous contract) - Daily (Source: StockCharts.com)

Gold - Monthly (Source: DecisionPoint.com)

The lack of sovereign debt concerns in Europe may have helped stocks but punished the dollar. The U.S. Dollar index is barely above its last 3-day swing low and weakness from here would cap its advance at seven swings and move momentum indicators into oversold territory.

U.S. Dollar Index - Daily (Source: DecisionPoint.com)

Back to housing, Census Bureau statistics show U.S. homeownership continues to fall, down to 66.9% in the second quarter from a peak of 69.4% in 2004. John Burns Real Estate Consulting estimates that six million of the approximately eight million homeowners behind on their payments could lose their homes in the next two years. As the chart from Morgan Stanley shows, sales of non-distressed real estate in San Francisco slipped last month, begging the question of what happens to consumer spending if both stock and housing prices fall together.

San Francisco Non-Distressed Home Sales (Source: Oliver Chang, Morgan Stanley Research)

With the Texas Rangers franchise in bankruptcy, yet leading the American League West, sportswriters  are starting to suggest the Rangers should replace the Cowboys as “America’s team.” Sticking with sports but switching to the NFL, Willie Brown wrote in Sunday’s San Francisco Chronicle, “Al Davis is watching the TV news one night and he sees a kid in Baghdad elude a squad of baton-wielding cops and hurls a brick 100 yards through a window. ‘He’s the answer to all our problems,’ Davis says, and promptly dispatches his aid to sign the kid for the Raiders. The kid comes over and indeed turns the team around. The night before the Super Bowl, he calls his mom to tell her of his success. ‘That’s very nice, my son,’ the mother says. ‘But since you have been away, your brother has been shot, our house has been ransacked twice and our car has been set on fire. ‘Son, why did you bring us to Oakland?’”

Harmonic Preview:

(Higher Probability SPX Turning Point or Acceleration Days)

August 9         (Monday)

August 11       (Wednesday)

* An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.

I’ve listed August 9 and August 11 but there are possible harmonics including anniversary dates each day through the August 9-12 period. It’s positive if the SPX can maintain its uptrend through this period and hold above the bear market halfway point (1121.44); otherwise, it negative.

S&P 500 - Hourly (Source: Wailuku Capital Advisors)

Conclusion:

My recommended stop level for long positions in ETFs tied to the Nasdaq 100 is under July 20 3-day swing low (1056.88 for the SPX and 1784.55 for the NDX). For remaining short positions, I wouldn’t have stops any higher than just above the June 21 high (SPX-1131.23). If stopped out, the plan is to short again on the next signal, focusing on exchange traded funds tied to small cap, basic materials and the VIX.

As for investors, don’t lose sight of  the operating realities of the businesses you own in a world in which the major economic powers are still deleveraging. I would expect my emphasis on large cap defensive issues to underperform on any rally while holding better if and as the trend changes. Of course, you can’t spend relative performance in a bear market.

The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.

DJIA = 10,525

July 27, 2010

“The Satan of bad news always hits hard and suddenly. It is his nature. The good news ‘angels’ work gently and slowly. That is why a market drops by itself, but it takes hard work to push it up.”

-George Seamans,1954

The Street just sighed when Europe released stress test scores for its banks last week, a better outcome than the quick selling triggered by sovereign debt fears accompanying first quarter earnings releases, indicating potential bad is mostly priced in for now, including a new 2,300-page bill regulating the lifeblood of U.S. capitalism. Rowdy day-to-day swings, positive more often than not, compelled momentum traders back to the long side. Technically, it’s important for price to follow-through enough to drive prices over the halfway point of the March 2009 low-October 2007 all-time high (SPX-1121.44) and then above the June 21 highs (1131.23).

S&P 500 - Daily (Source: StockCharts.com)

As it often is, NYSE net volume was first to signal a possible change in the downtrend, a +74.0 peak reading on July 9 overcoming its (61.0) hurdle rate. The Market Trend Indicator (MTI) confirmed on last Thursday’s close, switching to UPTREND, followed Friday by the 21-day rule and 3-day swing chart pattern for the S&P 500 (SPX). Dow Theory and NASDAQ net volume joined the parade yesterday, nearly a clean sweep. Those not interested in technical minutiae may want to jump forward a few paragraphs.

The 21-day rule signals uptrend when the SPX trades above its highest level of the previous 21 trading days and the indication stays in effect until the SPX trades under the lowest point of the prior 21 days. As for the SPX’s 3-day swing chart, an uptrend is indicated by a pattern of lower lows and higher highs. Within the MTI, the New York Advance/Decline line was the first index to close above its 18% weekly exponential average, the troops leading the generals, but the SPX and DJIA are now back in step, both above their 18% average, 1089.05 and 10,246 respectively this week. The A/D line is 7,074 net advances above its 18% average and only 1,102 net advances below its all-time high.

New York Advance/Decline Line - Weekly (Source: StockCharts.com)

Net volume recycled on the last short-term decline after the close July 20 with a peak readings of (43.5) for the NYSE and (18.0) for NASDAQ, neither greater than the prior short-term rally peaks, followed yesterday by the NYSE reconfirming uptrend with a +72.2 and NASDAQ indicating uptrend with +62.7. Weekly net volume was +24.3 for the NYSE and +23.7 for NASDAQ, still under their (28.3) and (29.8) respective hurdle rates but a strong rally this week could swing this indicator. For new readers interested in understanding how I use net volume, it’s time well spent, in my opinion, to read my June 6, 2010 post, Tactics and Discipline Matter.

Dow Theory indications are based on closing prices. The following charts show the pattern of lower highs and lower lows (below the flash crash lows) in May, revealing the primary trend as down under Dow Theory. However, note the nonconfirmations on that decline when the DJIA fell below its February low but the DJTA held above its. Both the DJIA and DJTA closed above their June highs yesterday, indicating uptrend and the possibility the bear market signal was invalid. I would give yesterday’s signal greater credence if price and time hadn’t overbalanced for the SPX but they did. Still, it’s the sort of market action that is generally followed by further gains.

DJIA - Daily Close (Source: BigCharts.com)

Dow Jones Transportation Average - Daily Close (Source: BigCharts.com)

Here’s one last technical observation I picked up from Ken Winans to minimize whipsaws after long-term market reversals. Prices often rebound after the first signal to an area around or just above an index’s 200-day moving average. Confirmation that the primary uptrend is reasserting itself (or vice versa) comes when the candlestick bodies on daily charts trade above the 200-day moving average of the highs for three consecutive days, or 1120.97 on the SPX as of today.

After underperforming a couple of weeks, small cap stocks rose the most last week, likely aided by short covering to some degree. Small cap companies start reporting earnings in earnest next week and it’s always fascinating to track the stocks react on both makes and misses.

Much like small cap, the Materials and Industrial sectors were up the most, with strength in Steel, Coal, Copper and commodity-based emerging markets as well as Home Builders. Tobacco moved up to number one on the top ten group relative strength list as Gold Mining fell to sixth place. Healthcare stocks were hit last week for multiple reasons, including earnings and guidance. There’s little in group action to confirm the market’s rise to date will carry it out of its trading range, thus raising another dilemma for trend followers such as myself. “Range-locked price action is prima-fascia evidence of control by contrarians, who ten to blunt advances by selling into rallies and then support prices by buying into strength,” explained Gary Anderson in this week’s equityPM commentary (www.equityPM.com).

Among groups, second quarter results at major U.S. banks confirmed bad debts are shrinking but there’s not much demand for credit in a soft economy, The Economist headline summing up the situation, Surviving but not thriving. Deleveraging is ongoing with no easy way out of the debt burden in developed countries. At some point the U.S. is likely to have a hard time selling its debt and the Fed will have to be the buyer, greatly expanding the money supply.

Barclays 20-yr_ Treasury ETF - Daily (Source: BigCharts.com)

Note how Barclays 20-year+ Treasury ETF (TLT, my proxy for long-term government bonds) is sitting right on its rising trendline, a trendline I think is likely to break if and as the rally in stocks continues. The easiest way for stock traders to go short this market is via inverse ETFs, including ProShares Short Barclays 20-year+ Treasury (TBF) or for more leverage, ProShares UltraShort Barclays 20-year Treasury (TBT). My recommended stop position on any shorts is just above the TLT’s July 21 high (102.28).

As for gold, I’m still receiving “get rich” direct mailings but there are no shortage of warnings in the financial press, reminding me of  Internet stocks in the back half of 1999. I suspect the pullback doesn’t last as long or carry as far as the cycle guys expect but that’s bias and remains to be proven. A 2^nd London fix below 1136.50 would warn me I’m wrong. My recommended trailing stop sell levels are just under the February 5 low ($1058 2^nd London fix) for more recent purchases and under last September’s low ($989.50) for long held investment positions. There’s nothing new on the dollar at this point other than it’s back to being one sick puppy.

Gold (continuous contract) - Weekly (Source: StockCharts.com)

Highlights from 1910

Beyond immediate concerns, there’s little doubt democracy and capitalism are accelerating the path of progress. A friend sent me a list (making the rounds via Internet) of what life was like just 100 years ago.

1910 Ford Model T (Source: unknown)

The Eiffel Tower was the tallest structure in the world.

The American flag had 45 stars.

There were only 8,000 cars and only 144 miles of paved roads.

The maximum speed limit in most cities was 10 mph.

Fuel for the Model T and other cars was sold only in drugstores.

Marijuana, heroin, and morphine were available over the counter in drugstores.

The average life expectancy for men was 47 years.

Pneumonia/influenza was the leading cause of death.

More than 95% of all births took place at home.

Ninety percent of all doctors had no college education.

Only six percent of all Americans graduated from high school.

Two out of every ten adults couldn’t read or write

The average U.S. wage in 1910 was $0.22 per hour.

The average U.S. worker made between $200 and $400 per year.

A mechanical engineer could earn about $5,000 per year.

Hetty Green was worth more than $150 million.

Only 14% of the homes had a bathtub and only 8% had a telephone.

Sugar cost $0.04 a pound, eggs $0.14 a dozen and coffee $0.15 a pound.

Most women only washed their hair once a month, using Borax or egg yolks.

Canada prohibited poor people from entering into their country for any reason.

There were about 230 reported murders in the entire U.S.

The population of Las Vegas was 30. How desperate were these folks?

Canned beer, and iced tea hadn’t been invented yet.

The Milken Institute reported California lost 10,600 jobs in the ten years through 2008 plus approximately 25,000 related jobs, totaling about $2.4 billion in lost wages over the decade. Making matters worse for Hollywood types, radio frequency tags are making it harder to steal underwear from Wal-Mart.

Harmonic Preview:

(Higher Probability SPX Turning Point or Acceleration Days)

August 3*       (Tuesday)

August 9         (Monday)

August 11       (Wednesday)

* An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.

Conclusion:

I know I said I would defer counter-trend trades, but I’ve got a rule to buy when the MTI, net volume, 21-day rule, and 3-day swing charts all signal uptrend, regardless of how wary and distrustful I may be. These sort of conditions often carry higher than anticipated but no one really knows. Given the contrary nature of group action, I’ll stick to ETFs tied to the Nasdaq 100 with stops under July 20 3-day swing low, 1056.88 for the SPX and 1784.55 for the NDX). For existing shorts, I wouldn’t have stop positions any higher than just above the June 21 high (SPX-1131.23). If stopped out, the plan is to short again on the next signal. As for investors, don’t lose sight of  the operating realities of the businesses you own in a world in which the major economic powers are still deleveraging.

The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.

DJIA – 10,154

July 20, 2010

“Bull markets, it is said, climb a wall of worry…Bear markets, on the other hand, fall into what I like to call the pit of doom. Forget about worries- actual bad stuff happens, until nothing bad is left to happen and the market bottoms as there is no one left to sell.”

-Andy Kessler, The Wall Street Journal, June 16, 2010

Headlines last weekend summed up the fundamental predicament, including Skating closer to deflation in the Los Angeles Times and Deflation Worries Stir as Consumer Confidence Slips in The Wall Street Journal. Policy options range from bad to worse, the battle on between spending more and spending less, zealots on either side fighting for each scrap of advantage, the U.S. long past the point of optimal solutions.

From The New York Times, Wealthy Reduce Buying in a Blow to the Recovery, citing Gallup statistics that consumer spending by those making more than $90,000 a year increased 33% year-over-year in May to $145 per day but in June after the stock market cracked, fell to $119. In another article, Floyd Norris pointed out that the unemployment rate for those out of work more than six months is the highest since the government started keeping statistics in 1948.

Technically, and after the S&P 500 (SPX) successfully tested its May 25 low and held by the skin of its teeth, the headline on my June 15 letter read No Man’s Land. The bears took that battle in the back half of the month but once again, there’s barbed wire strung along the front lines, the bounce-back high (1131.23) ended June 21 and the July 1 low (1010.91), mixed technical indications in between, intermingling with land mines, high frequency trading and untold graves, willing volunteers on either side, myopic bulls with little conviction ignoring the 24,000-pound elephant (a government spending over $30 billion a week it doesn’t have) and the bears, too bold for my liking, at least those poking their heads up for the press, wounded as well, chopped up by their own deserters in a contrary market lacking momentum.

There’s no change in the separate net volume readings, NYSE net volume on the last short-term rally reaching a peak of  +74.0 to overcome a (61.0) hurdle rate while NASDAQ net volume didn’t, a peak reading of +56.8 unable to overbalance its (60.1) hurdle.

S&P 500 - Daily (Source: StockCharts.com)

My favorite tool to identify and follow trends lasing weeks to months, the Market Trend Indicator (MTI), is NEUTRAL, positioned to swing either way. The New York Advance/Decline line 1,326 net advances above its 18% weekly exponential moving average while the SPX and DJIA are each just below their 18% averages, 1086.06 and 10,207 respectively. Beyond that, the 21-day rule would signal uptrend if the SPX trades above its June 21 (1131.2), a development that would also break the downtrend reading in the SPX’s 3-day swing chart.

From April’s cyclical bull market high (1219.80), the SPX 3-day swing chart started its seventh swing yesterday. If this swing drops below the July 1^st low without reversing, it would confirm other technical indications the primary trend is down, including price and time overbalance for the SPX and a bear market pattern from the grandfather of technical analysis largely ignored by most but not by me, Dow Theory. If the SPX holds above the July 1 low and rallies above the June 21^st high, it increases the probability of even higher prices and a possible summer trading range. Such a move, if it occurs, would not contradict the bear market message revealed in May, but that message only indicates the top is in, not the extent, duration or pattern to follow.

Turn-on-a-dime short squeeze rallies aside, the cyclical bull market’s leaders, including small cap stocks, Basic Materials and Financials, are weaker than the broad market, particularly small cap falling more two weeks ago and bouncing less last week than the SPX. Defensive groups dominate the top ten group list (as measured by relative strength) including utilities and addictions, Tobacco, Brewers and Vintners. Despite last week’s clobbering, Gold Mining remains the number one group.

Market Vectors Gold Mining ETF (GDX) - Daily (Source: BigCharts.com)

One surprise newcomer to the bottom ten group list is Platinum & Precious Metals, drug down over the past month by weakness in palladium and platinum and a handful of poorly performing gold mines, bringing to mind Mark Twain’s observation, “A gold mine is a hole in the ground with a liar standing in front of it.” Defense dropped to the bottom ten list as well, joining Home Construction which has been there six straight weeks and counting and both known for their ripple effects on other businesses.

SPDR S&P Homebuilders ETF (XHB) - Daily (Source: BigCharts.com)

Long-term government bonds remain strong and look to be heading higher despite a reduction in holdings by China and Japan, the largest foreign buyers. I expect near-term action to remain highly coordinated with the stock market and I think it’s too early to initiate short positions. As for corporate bonds, a Washington Post article quoted Standard & Poors that about $1.7 trillion in non-financial corporate debt comes due in the next three years, much of it junk-like and probably difficult to refinance if the economy slips.

30-Year Government Bonds - Daily (Source: DecisionPoint.com)

Weakness in the U.S. Dollar index is greater than I anticipated, it’s 3-day swing chart in its eighth swing, but I still think a ninth swing is possible, carrying the dollar above its February 2009 high. Gold backed off as well, below its 50-day moving average and starting today just below a rising trendline from its December 2009 low, I suspect shaking out weak hands and potentially setting the stage for a rapid rise. A 2^nd London fix below 1136.50 would warn me I may be reading the pattern wrong. My recommended trailing stop sell levels are just under the February 5 low ($1058 2^nd London fix) for more recent purchases and under last September’s low ($989.50) for long held investment positions.

U.S. Dollar Index - Weekly (Source: DecisionPoint.com)

Gold (continuous contract) - Weekly (Source: StockCharts.com)

Last week at the Global Hunter conference, I met with a Chinese company attempting to roll up a fragmented industry, cash rich from a recent public offering when it promised investors accretive acquisitions. The game is afoot but it warned the acquisitions won’t be accretive because the private companies are selling for more than its public valuation.

From the miscellaneous file, airline charges for food, headphones and bags brought in $7.8 billion in 2009. From The New York Times this morning, Amazon reported that electronic books outsold paper editions by more than 1.4 to one over the past three months.

A Primer For Planned, Deliberate Speculation

Whatever strategy you choose, make sure it’s in synch with your own personality. I favor planned, deliberate speculation, a matter of self control, money management and market analysis. The strategy is relatively easy, the trick is working on the psychology, discipline and money management. The emotional burden is substantial, requiring balance to avoid seduction by the successes or being carried out during the inevitable “oops.” The three most important speculative attributes are discipline, discipline and discipline. Whether trend perception, timing or tactical error, success demands accepting responsibility for mistakes, guarding against certainty to execute on what must be done. Rigid long-term views lead to mistakes.

The rules are simple- trade with the trend, cut losses and let profits run. The three most important technical factors are trend, trend and trend. If you want to trade counter to the trend, take of walk or lie down until the feeling passes. While I favor ETFs, if you’re buying individual stocks, buy strong stocks in strong groups during uptrends and short weak stocks in weak groups when the trend is down. It’s a relative strength approach that works best in strong trending markets.

Plan ahead. It’s easier to put on a trade if you’ve done your planning and anticipated market moves either way. Forget about the ego of being right. The object is to make money. There only one side to the market and it’s not the bull side or the bear side; it’s the right side. The market wields the ultimate scale of profits; no one is smarter.

Figure out in advance the amount you are willing to lose on a trade. There will be losing trades; accept this fact. Losses shouldn’t bother you. What should bother you is poor risk control when you put yourself in a position of having to take a large loss. If you don’t manage your risk, you will be carried out. Keeping your risk small and constant is crucial. Always honor your risk points. This discipline enables you to establish and build aggressive positions.

The time to act is when something is happening. Buy the breakout. The action should have been planned in advance, so don’t over-analyze, procrastinate or hesitate when it’s time to act. You want the trade to go in your favor from the start. Buy or sell more as the market moves in you favor. Buy and average up on the long side on breakouts and as reactions pass, and just the opposite when trading the short side. The dollar amount of each additional purchase should be steady or decreased. Don’t lose site of the importance of money management. Move up stop sell orders as a stock moves higher. Don’t let winners turn into a loser.

Handling profits can be a hard as handling losses. It takes discipline and patience to stick with positions. I think it’s foolish to trade with time horizons under one month because big winners are needed to overcome losing trades, skid and commissions.

Money management is more important than timing. The most important question is what percent of equity to risk. In general, the risk per trade should be 1-2% of core equity, never more than 5%, including skid. Do not overtrade by buying too much in relation to your capital. Core equity is equity minus the risk in open trades to the stop point. Every time a position is added, core equity declines. Performance is generally optimized when the risk of the overall portfolio is around 25% of core equity. Returns tend to decline when the risk level is greater than 25%. When the risk is less than 25% of core equity, returns aren’t maximized.

Harmonic Preview:

(Higher Probability SPX Turning Point or Acceleration Days)

July 22*               (Thursday)

August 3*           (Tuesday)

* An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.

S&P 500 - 10 minute chart (Source: DecisionPoint.com)

Conclusion:

My recommended stop level for short positions is above the June 21 high (SPX-1131.23); I wouldn’t place them any higher. If stopped out, the plan is to short again on the next signal. I’ll defer counter-trend trades on the long side, leaving that to nimble, short-term traders. I think short positions tied to small cap indices, Basic Materials and other economically-sensitive sectors and groups make the most sense. A tighter stop above the July 13 high (1099.42) could be appropriate for newer positions.

As for investors, money can be lost in more ways than won. Winning investors in a bear market are those who lose the least. I think professionals should stay as defensive-minded as possible, keeping in mind valuations and the operating realities of the underlying business.

The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.

DJIA – 10,198

July 12, 2010

“The stock market, that great self-organizing supercomputer that weighs all possible futures, is telling us to be very careful here. Pro-growth tax and regulatory policies that encourage business confidence and job creation can keep our fragile recovery alive. But make no mistake about it, stocks are warning that we’re still in a fragile state. We avoided 1932. Now let’s avoid 1938.

-Donald Luskin, Trend Macrolytics, The Wall Street Journal, July 9, 2010

Last week’s turn-on-a-dime rally wasn’t surprising but the degree of follow-through buying was to me, enabling NYSE net volume to reach +74.0, overbalancing a (61.0) hurdle rate and signaling that I was probably viewing the pattern incorrectly, that this rally could carry higher than anticipated. NASDAQ net volume didn’t keep pace, a peak reading of +56.8 unable to overbalance its (60.1) hurdle rate.

On Friday’s close, the Market Trend Indicator (MTI) jumped back to NEUTRAL with New York Advance/Decline line 1,235 net advances above its 18% weekly exponential moving average. The DJIA is close, its 18% average at 10,231 and not far behind that the S&P 500 (SPX), its 18% average at 1090.71, also a potential resistance level (retracing 38%  of the April 26-July 1 decline) but that’s just coincidence.

S&P 500 - Daily (Source: StockCharts.com)

I’m no fan of head-and-shoulders patterns, tracking trend instead, an uptrend defined by a pattern of higher lows and higher highs and vice versa for a downtrend. When the trend shifts, there’s often enough symmetry that technicians discern head and shoulders patterns, including this year with the January 2010 SPX high (1150.44) marking the left shoulder, the April high (1219.80) the head and June high (1131.23) the right shoulder, the pattern completed when the neckline was violated when prices sliced underneath the May 25 low (1040.78).

S&P 500 - Weekly (Source: StockCharts.com)

When prices power back above the neckline, particularly on higher volume, the head-and-shoulder pattern fails, often followed by robust rallies. A Dow Theory divergence first noted by Richard Russell occurred when the Dow Transportation Index held above its February low while the Dow Industrials didn’t, a possible precursor to greater strength. Investor sentiment, already sliding quickly, fell even more near the low.

DJIA - Daily Close (Source: BigCharts.com)

DJTA - Daily Close (Source: BigCharts.com)

The SPX 3-day swing chart is in its sixth swing from the April high (1^st, 3^rd & 5^th down; 2^nd, 4^th and 6^th up). If swing six carries above the June 21 swing four rebound high, it increases the probability of even higher prices and a possible summer trading range. None of these technical perceptions negates the bear market message revealed in May, but that message only indicates the top is in, not the pattern, extent or duration of what follows. If the 3-day swing chart reverses before surpassing the wave four high, and is followed by a decline below the July 1 low (1010.91), it would be seven swings, a count that is typically reached only in union with the primary trend.

Fundamentally, the government threw a lot at the wall during the 2008 credit meltdown, enough sticking to avert the second Great Depression. But my technical interpretation of the stock market tells me the next phase of instability may be at hand, the economy on a tightrope over a treacherous gulch, on one side the threat of a double dip and declining asset prices if some measure of fiscal discipline is imposed on the government’s spending-gone-wild strategy, and on the other side, the risk of currency debasement and a potential bond market crash.

It’s kick off time for second quarter earnings reports and guidance with expectations of 25-30% earnings growth versus easy comparisons for the S&P 500. What counts technically is the stock market’s reaction. Prices sold off amid mostly positive first quarter reports, overridden by sovereign debt concerns impacting the economy.

Sectors, groups and companies most tied to the economy, those that rose the most over a nearly 14-month cyclical bull market fell the most into the June low. The stocks that held the best into that low rallied the least on last week’s bounce. The hardest hit sectors rallied the most, led by Basic Materials, Financials and Energy. Utilities were also up a lot, now dominating the best performing group relative strength list along with other defensive groups and topped by Gold Mining. Economically-sensitive groups dominate the bottom ten list, including Automobiles and Media Agencies as new additions.

Gold (continuous contract) - Weekly (Source: StockCharts.com)

Looking through the best performing mutual fund lists at the close of the quarter, it is notable that gold funds dominate the five and ten-year winners. Near-term, gold traded in tandem with the government bonds and the dollar (the other “flight-to-safety” markets) for awhile, but I expect it to pull away from the pack. I’m receiving “how to make big money in the gold market” direct mailings but it’s not yet front page news and I still think a “blow off” rally is more probable than not. Consequently, my recommended trailing stop sell levels are relatively loose, just under the February 5 low ($1058 2^nd London fix) for more recent purchases and under last September’s low ($989.50) for long held investment positions.

30-year Government Bonds - Weekly (Source: DecisionPoint.com)

Government bonds sold off last week as stocks improved but I expect that market to remain highly correlated to stocks for now, rallying when stocks sell off and vice versa. Since there’s no change in my thinking on the stock market’s primary trend, I wait to establish short positions. The U.S. Dollar index 3-day swing chart is in its eighth swing (down) but I expect a ninth swing to carry it above its first quarter 2009 high.

U.S. Dollar Index - Weekly (Source: DecisionPoint.com)

A page one headline in The Wall Street Journal last Thursday caught my attention. To Fix Sour Property Deals, Lenders ‘Extend and Pretend. According to Foresight Analytics, commercial real estate values are 42% below peak levels achieved in October 2007 and roughly two-thirds of commercial real estate loans held by banks are worth less than the loans. To slow defaults, banks are extending maturities or charging below-market interest rates and the reluctance to take a hit takes a toll on new lending. Three banks were closed by regulators in 2007, 25 in 2008, 140 in 2009 and it’s 90  and counting so far in 2010. Reality always intrudes eventually.

Venture capital legend Arthur Rock (83) was interviewed in the same day’s Journal. His outlook for that industry poor. “In fact I’ll make a prediction,” said Rock, “that returns of the venture-capital industry will be next to zero over the next 10 years because there is so much money around. Some of the good firms will do well, but I think the majority will have negative returns.”

Harmonic Preview:

(Higher Probability SPX Turning Point or Acceleration Days)

July 14*            (Wednesday)

July 16               (Friday)

July 22*            (Thursday)

August 3*            (Tuesday)

• An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.

Wednesday (July 14) is not only a dynamic square that’s kicking but it’s also 55 trading days from the April 26 high. For you Fibonacci fans, the 34^th day was a non-event but there were turning points on the 3^rd, 8^th, 13^th and 21^st trading days. This week is also  the 144^th week (key fixed square) from the SPX’s all-time high in October 2007. The March 2009 low was 73 weeks from the high, missing the halfway point by one week. I realize these esoteric observations are at odds with the simplistic approach I use for planned, deliberate speculation. They certainly don’t hold the secret to stock market profits; money management, trend following and discipline (cutting losses, letting profits run) are the key in that regard.

S&P 500 - Hourly (Source: Wailuku Capital Advisors)

I’m publishing a day early this week, in part due to last week’s net volume indication and I’ll be at the Global Hunter Securities China Conference (Year of the Tiger) Monday and Tuesday.

Conclusion:

My recommended stop level for short positions is above the June 21 high (SPX-1131.23); I wouldn’t place them any higher. If stopped out, the plan is to short again on the next signal. I’ll defer counter-trend trades on the long side, leaving that to short-term traders.

Look at any broad list of securities you choose and you’ll see few are escaping the damage. Winning investors in a bear market are those who lose the least. I think professionals should stay as defensive-minded as possible, keeping in mind valuations and the operating realities of the underlying business. Small Investors Flee Stocks, Changing Market Dynamics is today’s front page headline in The Wall Street Journal. It’s been going on since the 2007 top and a trend I expect to continue for more than two years, eventually ending in apathy before the next secular bull market begins.

The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.

DJIA – 9,686

July 6, 2010

“The bears have had the upper hand for two months, yet we don’t see the shorts  pressing their bets. The bulls argue that earnings are good, companies have clean balance sheets, and growth is supposed to slow after the initial post recession surge. Yet they don’t seem to back up their arguments with cold, hard cash.”

-Barry Ritholtz, July 1, 2010

A quiet session kicked off last week’s trading, followed by lopsided selling Tuesday, teaching traders that the rule to never short a dull market doesn’t apply when the primary trend is down, as is the case now. Most of the mainstream research I peruse still believes stock market weakness, peeling off more than $2 trillion in U.S. market capitalization alone and counting, is merely a correction, at least in print, each pointing out that bearish sentiment is too widespread. They’ll figure it out eventually but that’s the nature of markets. What really counts are tactics and discipline, trading but not overtrading with the trend, cutting losses and letting profits run.

The Market Trend Indicator (MTI) has no predictive value, designed instead to identify and follow trends lasting weeks to months. It is signaling DOWNTREND, a reading that stays in effect until one or more of the MTI’s three key indices close above their respective18% weekly exponential moving average. The SPX’s 18% average this week is 1093.51 and the DJIA’s is 10,238. Down five trading days in a row and 11 of the last 13, the New York Advance/Decline is 4,091 net declines below its 18% average.

S&P 500 - Daily (Source: StockCharts.com)

Net volume indications often reveal a change in trend before the MTI but both remain in synch with the downtrend, peak net volume readings increasing slightly on last week’s break to (61.0) from (60.6) for the NYSE and to (60.1) from (57.3) for NASDAQ. These peak figures need to overbalanced (surpassed) by larger positive readings on the next short-term rally to indicate a potential change in the intermediate–term trend. Peak readings for the cyclical advance starting March 2009 were recorded early in the advance,  +73.2 for the NYSE and +70.2 for NASDAQ, each of which was overbalanced by negative readings of (80.6) and (74.0) respectively in early May.

Here’s how I figure and use net volume. Keeping demand and supply simple, there is a buyer and seller on every trade, prices rising when buyers outnumber sellers and prices fall when sellers out number buyers. Net volume is my attempt to measure the battle between these two forces, helping resolve which way the market is likely to trend and serving as one of my most important technical tools.

Advancing volume is the volume of all stocks that advanced for the day and declining volume is all the volume on stocks that fall each day. To determine net volume, I subtract declining volume from advancing volume and divide by total volume. The result is a percentage, either positive or negative territory. For example, if advancing volume was 780 million shares and declining volume was 525 million shares and total volume was 1.4 billion shares (including the volume for unchanged issues), net volume for the day would be +18.2. If declining volume were greater than advancing volume, and using the same numbers reversed (525 million shares advancing volume and 780 million shares declining volume) the result would be a negative percentage (18.2).

I always had trouble “reading” bar-type volume charts, so I started experimenting in the mid-1980’s. The idea to chart net volume horizontally came from George Seamans; a technical analyst in the 1930’s and 1940’s who charted total volume horizontally. These are interesting charts in their own right, known as “Equivolume” charts. I experimented with various moving averages to smooth out the daily volatility, settling on three days as the best balance between smoothing results and identifying change early in the cycle. I just use the numbers now but when charting, the percentage change in net volume is charted horizontally to the right, colored in green for positive net volume and red for negative net volume.

Over time I discovered that net volume holds the key to the intermediate-term trend lasting weeks to months. Specifically, as long as the peak net volume on each short-term rally stays above the peak net volume reading of each prior short-term decline, the uptrend remains intact. In a typical rally, net volume peaks early or in the middle of a move. The uptrend remains intact as long as the peak net volume reading on the rallies exceeds the peak net volume readings on the declines. Markets can bottom on a peak reading but do not top on peak readings.

Net volume is not a tool to pin point tops and bottoms but rather it typically confirms a reversal early in the move. For example, once the peak net volume on a short-term rally exceeds the peak net volume of the preceding short-term decline, the trend change is confirmed. The net volume signal typically precedes 3-day swing chart patterns and moving averages that I use to confirm the change in trend. I also maintain weekly net volume readings following the same methodology with three weeks worth of volume. The signals come too late for trading intermediate-term swings, but are helpful in determining and confirming the primary trend.

The way I’m counting, the May 25 low ( SPX-1040.78) ended the first section down in the bear market and the June 1 high (SPX-1131.23) ended the intervening reflex rally and marking the start of the second section down. Peak weekly net volume readings during the first section were (28.7) for the NYSE and (29.8) for NASDAQ. Peak weekly NYSE net volume readings during the second section are (17.9) so far and (20.7) for NASDAQ. If my section count is correct, we’ll likely experience weekly net volume readings larger than the first section figures before the next meaningful secondary reaction.

The first sign that I’m reading the pattern wrong would require enough follow through buying to sharp, interim short-covering spikes be to overbalance peak net volume readings now in effect, (61.0) for the NYSE and (60.1) for NASDAQ. Another important issue with regards to net volume is the shift of trading in NYSE to alternative markets. It hasn’t impacted results yet but bears watching. I track net volume records for the S&P 500 and S&P Small Cap 600 as well but don’t have the history with those indexes.

As for sections, the rule is to count three and expect a fourth, at which point we’ll apply the rules for price and time overbalance to watch for first indication a new bull market is underway, particularly if the sentiment and valuation backdrop is amenable. Meanwhile, how long the bear market lasts and how far the stock market drops are unknown, dependent on the interplay of fundamental factors and investor psychology yet to happen. I suspect prices fall enough (bias) to return stocks to their rightful owners, causing the financial press to regularly shift its focus to the most dire forecasts. The bulls would retort that is already happening, including a Robert Prechter interview in last Friday’s New York Times. I am in agreement with one of Mr. Prechter’s statements, “It’s pretty benign advice to opt for safety for a while.”

S&P 500 - Quarterly (Source: Wailuku Capital Advisors)

For the record, I think the top in 2000 marked the end of a secular bull market starting in 1974, followed by an “A” leg into the 2002 low and a liquidity-driven “B” leg into the all-time high the 2007. The “C” leg since has yet to finish, the March 2009-April 2010 cyclical bull market an “echo” rally in a longer-term unwinding of financial excess. Whether it finishes above or below the 2002 low remains to be seen. In any event, the outside reversal on the SPX quarterly candlestick chart is a particularly negative pattern warning that lower prices lie ahead.

Groups that were in the top ten list (as measured by relative strength) not long ago now dominate the bottom ten list, including Consumer Electronics, Home Construction, Recreational Products, Home Improvement Retailers, Recreational Services, Mortgage Finance, Automobiles, Travel & Tourism, and Business Training Employment. The top ten groups as of last week’s close are Gold Mining, Reinsurance, Brewers, Waste Disposal, Mobile Telecom, Multiutilities, Water, Fixed Line Telecom, Computer Hardware and Computer Services.

The performance differential between the two groups narrowed for much of the decline as investors (particularly those forced to stay fully invested by charter) shifted at the margin to more defensive areas that had lagged. Now that the switch is well underway, the worst performing groups started to fall more last week. Gary Anderson at Equity PM (www.equitypm.com) explains, “When the volatility of laggards approaches that of leaders, as it is now, the likelihood of crossover, and a subsequent episode of downside momentum increases.”

In other markets, the action in bonds presents a conundrum of sorts, with strength in long-term government bonds bringing up thoughts of a “double dip” while the performance in riskier bonds is barely beginning to discount such a possibility, as reflected in my credit spread chart based on differentials between Barclays Government and Corporate Bond indexes and iShares Investment Grade and SPDR High Yield Bond ETFs as well as the Confidence Index. In 2009, 151 issuers defaulted on a record $118.6 billion in bonds, a 13.7% default rate. Through the first five months of 2010, nine issuers defaulted on $1.7 billion of bonds, a full year default rate under one percent (www.paul.kedrosky.com).

Barclays 20-yr+ Treasury ETF - Weekly Equivolume (Source: StockCharts.com)

Credit Spreads - Weekly (Source: Wailuku Capital Advisors)

Dealogic reported that second quarter stock and bond offerings by U.S. investment banks totaled $1.36 trillion in the second quarter, down 33% year-over-year. The slowdown started in mid-April and it doesn’t bode well for brokerage profits in the back half, as is starting to be reflected in the charts of the StreetTRACKS KBW Capital Markets ETF (KCE) and DJ U.S. Broker-Dealer ETF (IAI).

PowerShares launched a triple-leverage long-term treasury ETN (exchange traded note) and a 3x short ETN as well. LBNB is symbol for the PowerShares DB 3x Long 25-yr+ Treasury Bond ETN and SBND for the PowerShares DB 3x Short 25-yr+ Treasury Bond ETN. When it comes time to short, there’s also the ProShares Short Barclays 20-yr Treasury (TBT) and Direxion 30-year Treasury Bear 3x (TMV).

As for gold, the uptrend remains intact and I suspect a “blow off” move lies ahead, a thesis I plan to stick with until its parabolic uptrend is broken.

Gold (continuous contract) - Weekly (Source: StockCharts.com)

According to National Association of Realtor data, pending home sales fell 30% in May from April after the homebuyer tax credit expired. I suspect there was a lot of forward buying in prior months, much like what happened to automobile sales following the “cash for clunker” expiration. Unfortunately, I don’t have much hope for meaningful recovery in the housing market buying my take on the stock market. I am including an outstanding long-term chart of home prices from Novato, California-based money manager, Ken Winans (www.winansintl.com).

Dealogic reported that second quarter stock and bond offerings by U.S. investment banks totaled $1.36 trillion in the second quarter, down 33% year-over-year. The slowdown started in mid-April and it doesn’t bode well for brokerage profits in the back half, as is starting to be reflected in the charts of the StreetTRACKS KBW Capital Markets ETF (KCE) and DJ U.S. Broker-Dealer ETF (IAI).

According to National Association of Realtor data, pending home sales fell 30% in May from April after the homebuyer tax credit expired. I suspect there was a lot of forward buying in prior months, much like what happened to automobile sales following the “cash for clunker” expiration. Unfortunately, I don’t have much hope for meaningful recovery in the housing market buying my take on the stock market. I am including an outstanding long-term chart of home prices from Novato, California-based money manager, Ken Winans (www.winansintl.com).

Winans International Home Price Index - 1830 to Present (Source: Winans International)

Harmonic Preview:

(Higher Probability SPX Turning Point or Acceleration Days)

July 9              (Friday)

July 14*          (Wednesday)

July 16            (Friday)

July 22*         (Thursday)

*An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.

Conclusion:

I recommend maintaining stops on short positions with stops above the June 21 high (SPX-1131.23). The plan is to maintain short positions until the bear market is over, adding to positions if and as secondary corrections fail. My favorite inverse ETFs include the ProShares Short S&P 500 (SH) and for double leverage, ProShares UltraShort S&P 500 (SDS), ProShares Short Russell 2000 (RWM) and ProShares UltraShort Russell 2000 (TWM). Other leveraged inverse ETFs I think could fall more than the  general market include ProShares UltraShort Basic Materials (SMN), ProShares UltraShort Consumer Goods (SZK), ProShares UltraShort Financials (SKF) and a little further out the risk curve, the iPath S&P 500 VIX Short-Term Futures exchange traded note (VXX).

For investors who followed my advice, doesn’t it feel better to be in cash, waiting to put money to work after the downtrend is over? For professionals who stay invested, remain defensive-minded as possible, never overlooking the operating realities of the underlying business.

The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.

DJIA – 10,138

June 29, 2010

“Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend.”

-Jesse Livermore

If we were just looking at fundamental data, there would be little to anticipate beyond the summer doldrums, a trading range bound by slowing earnings growth capping the upper end of the range while a lean corporate-driven cash buildup supports the low end. That’s not how I operate, believing instead that stock market action itself is the best forecaster of future business conditions as well as its own future, a belief proven time and time again after tracking markets for more than three decades. Mr. Market doesn’t always reveal its intentions but when it does and that indication is bearish, pay attention or pay up as it will cost you plenty.

I only see two bull markets, gold and inverse short exchange traded funds (ETFs) tracking stock markets around the world, or to quote General Douglas MacArthur, “We are not retreating. We are advancing in the other direction.”

After a four section advance, price and time overbalanced for the S&P 500 (SPX) in May and its 3-day swing chart pattern confirmed with a pattern of lower highs and lower lows, indicating the primary trend was down, an indication confirmed by Dow Theory and other lesser signals, including the SPX falling under its 200-day moving average. All we know is the stock market has already discounted the best that is likely to occur over this cycle. How far the market drops and how long it lasts are unknown but it is not a good sign that it plunged on the first section down in May, hinting of a test of the March 2009 lows or worse.

Fundament factors behind “or worse” were summed up in a headline in the Financial Times over the weekend, Spectre of deflation is back to haunt investors, particularly if economies slip back into recession, increasing the risk of outright deflation against a backdrop when last year’s policy tools (the stimulus package and Fed injections) are politically untenable. Nothing is preordained but the stage may be set for a crisis. Can the economy stand on its own? Stay tuned; the answer will be revealed in the fullness of time. Near-term, The Wall Street Journal asked yesterday, Will Earnings Surprise the Bears? The results and guidance are what analysts and investors judge and their reaction will leave a trail we can follow.

Net volume readings on last week’s decline reached (60.6) for the NYSE and (57.3) for NASDAQ, surpassing  respective peak readings of +44.8 and +49.1 and indicating the SPX’s June 21 intraday high of 1131.23 likely marked the end of the rebound rally. Friday’s letter in PDF had the numbers wrong (70.9) and (71.3) but the first set is what would need to be exceeded to cancel last week’s indication.

S&P 500 - Daily (Source: StockCharts.com)

The Market Trend Indicator (MTI) is signaling DOWNTREND, reach index below its respective 18% weekly exponential moving average. The SPX’s 18% average is 1109.08 this week and the DJIA’s is 10,359. The New York Advance/Decline line is 400 net declines below its 18% average so it wouldn’t take much strength for the MTI to shift back to neutral territory.

There’s little on the group front to warrant optimism. Oil & Gas was the hardest hit sector last week but the weakness was widespread. Real Estate Investment Trusts dropped out of the top ten group list as measured by relative strength, replaced by Marine Transportation, just as Baltic Dry Index (tracking dry bulk packaging shipping rates) drops sharply from its May 26 peak, so I don’t expect an extended run. From a longer term perspective, sectors that performed best in the 14-month cyclical bull market were the same that did well in the 2002-2007 bull market, but gold aside, it looks to have been an echo bounce.

Baltic Dry Index (Source: WikiCharts.com)

A reflected in this table from Bespoke Group (country price/earnings multiples and the ratio that P/E multiple to GDP Growth estimates), the best values and growth prospects are in emerging markets but that’s no place to hide in highly correlated markets as a likely double dip in Europe and weakness in Japan slow exports and likely expose excesses hidden in centrally run regimes.

­Country P/E P/E to GDP Growth

United States                  16x                                          5.1x

Germany                          16x                                          8.6x

Japan                                34x                                        14.2x

Brazil                                 14x                                          5.1x

Russia                                  8x                                          1.9x

India                                   18x                                          2.1x

China                                  19x                                          1.9x

As for other key markets, flight-to-safety buying continues to drive buying in long-term government bonds. There will come a time to short but not yet. The U.S. Dollar index has backed off but I expect another rally carrying it higher than its early 2009 peak. It will be interesting to see how gold reacts beyond short-term weakness. I don’t plan to stick around if it breaks its parabolic rising curve seen on long-term charts.

Gold (continuous contract) - Daily (Source: SockCharts.com)

Gold - Monthly (Source: DecisionPoint.com)

30-Year Treasury Bonds - Weekly (Source: DecisionPoint.com)

Harmonic Preview:

(Higher Probability SPX Turning Point or Acceleration Days)

July 1*                        (Thursday)

July 9                          (Friday)

July 14*                      (Wednesday)

July 16                        (Friday)

July 22 *                     (Thursday

* An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.

The next two paragraphs are for young male readers debating making a change and perhaps wondering where to live. Everyone else can skip to the Conclusion section. San Francisco is a city of mostly old and young as couples met, get married and move to the suburbs to raise families. I was on my own Sunday when my wife was celebrating a 60^th birthday with a lifelong friend. Walking through the neighborhood, I noticed bars were packed for World Cup matches, an enthusiasm I don’t share, so I headed into Golden Gate Park for a free concert put on by a local radio station.

It was a nice San Francisco summer day, warm by local standards with temperatures near 80 degrees and just right for slight summer fashions by thousands of young women at the concert. There seemed to my eye to be about two women for every man or at least a three-to-two ratio. Of course there was a Gay Pride parade in another part of the city that swung that ratio and revealed the true odds for single males.

Conclusion:

Speculators following my lead were stopped out of long positions last Friday. Establish short positions with stops above the June 21 high (SPX-1131.23) and average down if and as the 21-day rule confirms the MTI and prices break under the June 8 low (SPX-1042.17).

Inverse ETF buy candidates to establish short positions include the ProShares Short S&P 500 (SH) and for double leverage, ProShares UltraShort S&P 500 (SDS). For an index likely to fall more than the SPX, I think the ProShares Short Russell 2000 (RWM) and ProShares UltraShort Russell 2000 (TWM) make sense. Other leveraged inverse ETFs based on sectors I think could fall more than the  general market include ProShares UltraShort Basic Materials (SMN), ProShares UltraShort Consumer Goods (SZK) and ProShares UltraShort Financials (SKF). A little further out the risk curve and after the next short-term rally fades, I may also take a shot with the iPath S&P 500 VIX Short-Term Futures exchange traded note (VXX).

Investors should sell all positions you don’t want to hold through a bear market. The SPX quarterly chart is sure to close with an negative outside reversal pattern and my technical studies indicate lower prices and panic lie ahead in coming months and that’s when you want to buy, not sell.

The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.

DJIA – 10,152

June 25, 2010

“Profits always take care of themselves but losses never do. The speculator has to  insure himself against considerable losses by taking their first small loss.”

-Jesse Livermore

I still think most pros remain in the bull market camp, explaining levelheadedly that following an attractive risk/reward bottoming process higher prices and a more speculative psychological phase lie ahead. I noticed several quoting Warren Buffett on buying when others are fearful, sound advice once panic is prevalent but dangerous, in my opinion, early in a bear market before the depth of the bad news is understood. It’s clear these folks don’t understand or believe the SPX’s price and time overbalance indication or Dow Theory bear market signals.

I think the bear market’s “complacency” psychological phase is behind us but it’s early in the “concern” phase. A good example this phase is underway are business story headlines, including several these I’ve plucked from The Wall Street Journal in the back half of this week offset by a few more positive this morning.

June 23, 2010 = States Face New Pinch as Federal Stimulus Money Ebbs

Outlook for Housing Prices Worsens

Middle-Class Tax Boost Is Broached

Business Group Slams ‘Hostile’ Policies on Jobs

Obama Tangles With Insurance Executives Over Pay

U.K. Unveils Severe ‘Unavoidable Budget’

June 24, 2010 = Fed Grows More Wary on Economy

Sales of New Homes Plunge

Confidence Waning in Obama, U.S. Outlook

Negotiators to Ease Finance Rules

Merkel Rejects Obama’s Call to Spend

June 25, 2010 =  Jobless Bill Dies Amid Deficit Fears

Cost-Cutting Detroit Will Close 77 Parks

Lennar Reports Profit, But Home Orders Slip

WPP Sees Advertising Improvement

Seeing Rebound, Firms Spend

Jobless Claims and Layoffs Decline

Further confirmation the concern phase is underway is shown by stock price action as the news unfolds, no better example than the persistent weakness in retailers since the top and as shown in the following Retail HLDRS (RTH) chart. The concern phase is generally the longest in a bear market and once it evolves, the third phase (capitulation) is sure to follow, bringing real fear to the forefront as investors liquidate stocks regardless of value.

Retail HLDRS ETF (RTH) - Daily (Source: StockCharts.com)

After the bear market’s first section down ended on May 25, the S&P 500 (SPX) retraced slightly more than 50% of that decline in an A-B-C rally before reversing Monday, at which point I thought at least one more short-term rally retracing even more of the first section was possible. Market action since indicates that scenario is unlikely.

Peak net volume readings on the rebound, +44.8 for the NYSE and +49.1 for NASDAQ were not only were unable surpass their hurdle rates but were overbalanced yesterday, (60.6) for the NYSE and (57.3) for NASDAQ, indicating the trend looking out weeks to months is back in synch with the primary trend. The Market Trend Indicator (MTI) swung back to DOWNTREND yesterday as the New York Advance/Decline line fell 1,657 net declines below its 18% weekly exponential moving average, joining the SPX and DJIA which were already below their 18% averages, 1116.18 and 10,406 respectively.

S&P 500 - Daily (Source: StockCharts.com)

Next week, if June ends with the SPX below 1122.30, it would show an outside reversal pattern on quarterly candlestick chart, yet another indication of lower prices in coming months. That’s close to the 50% level for the 2002-2007 bull market of 1121.44 and it’s also negative from a longer-term technical perspective if the SPX is unable to rise and stay above that point.

Fundamentally, reality eventually intrudes. Broad definitions of money supply are shrinking despite trillion dollar plus deficit spending. If people want to hold more money as opposed to buying goods and services, prices decline, home prices particularly vulnerable despite the lowest average 30-year fixed mortgage rates on record. It looks like nothing but bad choices for the Federal Reserve and Treasury attempting to keep the economy afloat in an increasingly hostile political climate regarding deficit spending, potentially resulting in a dangerous decline in the prices of risky assets, including commercial real estate loans stuffed in bank portfolios. On the other side, there’s the risk of currency debasement and a bond market crash if central banks keep cranking out paper money at full speed.

30-year Government Bonds - Weekly (Source: DecisionPoint.com)

How is all this reflected in the price action of other key markets? I threw in the towel on looking to short long-term government bonds. Prices rose steadily despite the reflex rally off the May lows in stocks and I don’t like the way markets are acting as though potential deflation is a concern. Ten-year bonds are the strongest.

Despite the recent new highs, I’m not crazy about the light volume on the last rally as reflected in the gold ETF. However the price action looks better in other currencies as flight-to-safety capital moves to the dollar.

SPDR Gold Trust ETF (GLD) - Daily Equivolume (Source: StockCharts.com)

Gold Prices in Major Currencies - Weekly (Source: DecisionPoint.com)

Harmonic Preview:

(Higher Probability SPX Turning Point or Acceleration Days)

June 25            (Friday)

June 28*          (Monday)

July 1*            (Thursday)

July 9              (Friday)

July 14*          (Wednesday)

July 16            (Friday)

July 22*          (Thursday)

*An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.

S&P 500 - Hourly (Source: Wailuku Capital Adivisors; data- FreeStockCharts.com).com)

Conclusion:

I recommend maintaining stops for long positions for ETFs tied to the SPX just below the June 1 low (1069.89) and under the June 2 low for the NDX (1832.58). I would prefer to initiate shorts as the rally fades but you can’t always get what you want. I would place stops for new shorts above the June 21 high or below the equivalent low for inverse short exchange traded funds (ETFs).

Inverse ETF buy candidates to establish short positions include the ProShares Short S&P 500 (SH) and for double leverage, ProShares UltraShort S&P 500 (SDS). For an index likely to fall more than the SPX, I think the ProShares Short Russell 2000 (RWM) and ProShares UltraShort Russell 2000 (TWM) make sense. Other leveraged inverse ETFs based on sectors I think could fall more than the  general market include ProShares UltraShort Basic Materials (SMN), ProShares UltraShort Consumer Goods (SZK) and ProShares UltraShort Financials (SKF). A little further out the risk curve and after the next short-term rally fades, I may also take a shot with the iPath S&P 500 VIX Short-Term Futures exchange traded note (VXX).

For non-investment professionals, especially those with retirement at risk, it is no time to be exposed to stocks. I recommend raising cash and holding Treasury Bills if you haven’t already taken this action. My technical studies indicate lower prices and panic lie ahead in coming months and that’s when you want to buy, not sell.

The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.