SPX – 1096.78
DJIA – 10,196
January 26, 2010
“The financial markets generally are unpredictable. So one has to have different scenarios. The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.”
-George Soros
The intermediate-term trend turned down last Friday under the 21-day rule when the S&P 500 (SPX) traded under its low of the preceding 21 trading days. Under this rule, the downtrend stays in effect until the SPX trades above the high of the previous 21 trading days. Net volume overbalanced and is also suggesting lower prices lie ahead. NYSE net volume recorded (69.6) compared to a +47.0 peak reading its last short-term rally and NASDAQ posted a (50.7) figure compared to +48.4. My recommended stop level for long positions tied to the SPX was breached.
The Market Trend Indicator (MTI) is Neutral. Both the SPX and DJIA closed under their 18% weekly exponential averages, 1107.76 and 10,343 respectively this week. The New York Advance/Decline line is 2,941 net advances above its 18% average but I expect it to join the show. Time will tell.
S&P 500 - EquiVolume Daily (Source: StockCharts.com)
The SPX was 1115.10 at year-end and investors are focused on the January indicator; a down January indicates a down year and vice versa for an up January. Less noticed was that Friday’s close triggered the December low indicator by the skin of its teeth, a warning that went into effect when the SPX closed below its December closing low (1091.93). Lucien Hooper developed this indicator using the DJIA and the Dow gave the same signal.
Most pros seem to anticipate a correction to be followed by new recovery highs in the first half but the glib confidence professed by so many rouses suspicions. At the same time, Elliott Wave extremists crawled out of their cave. In reality, the depth and duration of any decline are unknown. Price and time have yet to overbalance and indicate anything more than a correction but the count is live. I plan to let the market tell its own story.
I think it’s too early to read anything into sector and group action. From high to low, small cap stocks traded in line with large cap while leading cyclical groups fell the most. I expected small cap to fall more than the market but if they hold better and outperform on the next rally, it adds credence to the case for new recovery highs later this year.
Financials were the first sector to put in a high (last October) while most sectors recorded their highs to date in January, including Healthcare on January 20. The Healthcare and Energy sectors have the highest percentage of stocks above their 50-day moving averages (75% and 72% respectively courtesy of Bespoke Group). Telecommunications and Utilities has the lowest percentage of stocks above their 50-day moving average (22% and 41% respectively).
Bespoke also put together a table comparing price/earnings ratios with 2010 GDP growth estimates, the equivalent of a country PEG ratio. Here is the United States compared to the BRIC countries.
Country P/E 2010 GDP Growth Est. PEG (P/E, GDP)
United States 24.5x 2.6% 9.4x
Brazil 21.7x 4.8% 4.6x
Russia 29.5x 3.0% 9.8x
India 26.2x 8.0% 3.3x
China 13.3x 9.4% 3.7x
EEM (iShares MSCI Emerging Markets) - Daily (Source: StockCharts.com)
Speaking before San Francisco’s technical analyst society (www.tsaasf.org) on January 16, Martin Pring and Joe Turner (Pring Turner Capital Group) proposed “2009 could mark only the mid-point in this secular bear market” in a presentation entitled Are You Prepared For Another Lost Decade? They asked, “Why at one time are fearful investors only willing to pay $6.64 for $1 of earnings (i.e. 1982 Secular Bottom) while at another time investors are eager to pay $44.20 for the same $1 of earnings (i.e. 2000 Secular Peak)? The answer lies in the extremes of confidence or lack thereof only seen at major secular turning points.”
Secular Bear Market Table (Source: Pring Turner Capital Group
Harmonic Preview:
(High Probability SPX Turning Point or Acceleration Days)
January 27 (Wednesday)
January 29* (Friday)
February 1 (Monday)
February 9 (Tuesday)
February 16 (Monday)
February 19 (Friday)
*An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.
In case you weren’t paying attention, the SPX’s first day at 1150 (January 12) and last Wednesday and Thursday’s crack occurred on dynamic price divisions. That tells me squares are kicking and could be particularly important on the final square. I’ll keep you posted.
In other markets, my bias is unchanged that counter trend rallies in long-term government bonds and the dollar have further to run while a buying opportunity is near (but not yet in place) for gold. I suspect it gets sorted out after the State of the Union address and after the “fat-cat” movers and shakers leave Davos.
Gold - Daily Close (Source: DecisionPoint.com)
On Main Street, a Kaiser Foundation study found that with multitasking, Americans aged 8-18 pack about 11 hours of media content each day into 7½ hours spent on an electronic device (smart phone, computer, television). Media use above 16 hours a day was associated with lower grades and behavioral problems (you think?). Perhaps that’s what’s behind a Washington Post report that teenagers quest to get a driver’s license on their sixteenth birthday is waning.
Conclusion:
Technical evidence indicates an intermediate-term downtrend is likely underway. Confirmation comes when the MTI signals downtrend. I think speculators should be out of ETFs ties to the SPX; my recommended level for trailing stop sell orders (1093.38) was breached last Friday.
I believe some of the best shorts are likely ETFs tied to cyclical groups or small cap indices. Potential short candidates include Russell 2000 iShares (IWM), Russell Microcap iShares (IWC), Real Estate iShares (IYR) and S&P 500 Consumer Discretionary SPDRs (XLY). For more leverage, traders could go long inverse ETFs including ProShares UltraShort Russell 2000 (TWM) and ProShares UltraShort Real Estate (SRS).
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.
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