Resilient Advance Extends

SPX – 1212.05

DJIA – 11,205

“To follow the good principles and not let fear, greed and hope interfere with your trading is tough. You’re swimming upstream against human nature.”

–Richard Dennis

The stock market’s climb continues, a broad advance led by small cap stocks, reconfirmed yesterday under Dow Theory for the umpteenth time, but an extended move with the New York Advance/Decline up eleven weeks in a row, persisting beyond the Jerry Favors “sell-the-next rally” S&P 500 (SPX) daily swing chart pattern. It seems like much of the buying is short sellers covering yet again, relentlessly squeezed for picking at the top. After nine swings from March 26, the same “sell-the-next-rally” pattern is now in play for the SPX 3-hour swing chart. It’s no time for complacency.

The generally positive economic data is summed up by headlines in the financial press, including Big Manufacturers See Rebound from The Wall Street Journal today and Consumer Mojo Lifts Profits yesterday as well as From the Mall to the Docks, Signs of a Rebound from yesterday’s New York Times. That’s already been discounted. The stock market looks months ahead and the flip side of strength is the withdrawal of quantitative easing and a tightening of excess liquidity. The stock market will sniff that out in advance too. Not only that, I believe the stock market is its own best forecaster of future price action; that’s what’s behind these studies.

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

For now, the UPTREND reading for the Market Trend Indicator (MTI) remains intact. The SPX is well above its 18% weekly exponential average, 1167.02 this week. It tracks the psychology of institutional investors who dominate the buying and selling in this important index. Institutions also control the action in the Dow Industrials, an index followed around the world and included in the MTI for its influence on public psychology. The DJIA’s 18% average is 10,812. The NY Advance/Decline line monitors whether the troops are performing inline with the generals. They are; it is 9,159 net advances above its 18% average.

Net volume readings are in synch with the uptrend but a potential warning could be setting up for the NYSE. Selling in mid-April didn’t produce a lower high-lower low pattern but lasted long enough to register as a short-term decline for the net volume indicator, producing a (36.0) peak reading, positive compared to its +53.3 hurdle rate but the peak reading since is only +22.1. Watch out if this reading isn’t exceeded today and tomorrow, both harmonic days so be alert for a reversal if prices don’t accelerate. There hasn’t been enough NASDAQ weakness since late February to qualify as a short-term decline and its +44.5 peak reading is still in force, but  the peak was recorded on March 10 and hasn’t been bettered since.

Group action bears out the headlines. Gambling remains the top performing group as measured by relative strength and Pharmaceuticals the worst. Other top performers include Hotels, Recreational Products, Real Estate Holdings/Developers, Mortgage Finance, Transportation Services, Paper, Life Insurance, Furnishings and Building Materials. Mostly defensive groups round out the bottom ten list, including Biotechnology, Reinsurance, Medical Supplies, Nondurable Household Products, Health Care Providers, Utilities, Aluminum, Fixed Line Telecommunications and Soft Drinks. There’s some evidence of the leaders pulling away from the pack over the past three weeks but it’s too early to confirm a change from “buy low-sell high” outperformance to relative strength. How these groups hold up on the next correction should give us a better indication.

In other markets, my recommended trailing stop for short positions in the long-term government bond market hasn’t been reached yet (using TLT- Barclays 20-year+ Treasury ETF- as a proxy, just above the March 18 high of 91.98). I don’t plan to go long if stops are triggered as I think the primary trend is down and higher interest rates lie ahead as the economy improves. I would rather wait for the rally to end to reestablish short positions. Who really thinks our elected officials will have the discipline to implement whatever the presidential commission recommends?

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

I suspect Milton Friedman had it right when he explained, “Central bankers always try to avoid their last big mistake. So every time there’s the threat of a contraction in the economy, they’ll over stimulate the economy, by printing too much money. The result will be a rising roller coaster of inflation, with each high and low being higher than the preceding one.” As for the U.S. Dollar index, its performance is relative to other currencies but it continues to mark time despite the woes in Greece (interest rate spike eliminates the possibility of going to the market to roll over its debt). Perhaps that changes with Portugal also tainting the Euro mix. A close above the March 25 high (82.24) would portend even higher prices in my opinion while a close below the March 17 low (79.50) would indicate lower prices despite the problems in Europe.

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

Gold is outperforming all currencies. I don’t expect a bull market, now in its 11th year to go out with a whimper and I suspect a viral spread of “gold fever” lies ahead. It’s near a point where prices should begin to accelerate once again. If not, I’m maintaining recommended stop sell positions just under the February 5 low ($1058 2nd London fix) for recent purchases and under last September’s low ($989.50) for longer-held positions.

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

As for stocks, there’s no change in my bias that the SPX is near the end of an intermediate-term advance. As evidenced by the new high in my Market ID (internal dynamics, eight technical indicators, none of which is price), I think any weakness is a correction in an ongoing cyclical bull market.

Market ID (Internal Dynamics) - Weekly (Source: Wailuku Capital Advisors)

Beyond that, there have been three secular bull markets since 1900: 1921-1929, 1949-1966 and 1982-2000. The stock market remained “range bound” for years following these periods, a condition which I don’t believe has run its course. Major excesses ($60 trillion plus of derivatives at the peak) are invariably corrected in three stages. The first stage takes the form of a sharp, extensive decline, sometimes lasting one to two years. The second stage is a snap back, partial recovery lasting a year or longer and where I believe we are today. The third stage is drawn out and often the longest until it ends in disinterest, neglect and undervaluation. We had capitulation into the March 2009 low but I suspect disinterest lies somewhere ahead, albeit at a higher price level than that low.

Harmonic Preview:

(High Probability SPX Turning Point or Acceleration Days)

April 28                (Wednesday)

May 3                    (Monday)

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

Conclusion:

Institutional cash levels are about 31⁄2% of assets, a level that typically leads to a correction. At the risk is being prematurely stopped out, I recommend keeping trailing stop sell orders at tighter than normal levels. For exchange traded funds (ETFs) tied to both the SPX and Nasdaq 100 (NDX), I recommend a point just a few ticks the 20-day moving average or 1194.01 as of today for the SPX and 2002.56 for the NDX.

When the trend reverses, I plan to short the strongest areas not the weakest as I expect institutions to shift at the margin to defensive groups. Size positions for a counter trend move. Appropriate inverse ETFs include SBB (ProShares Short S&P SmallCap 600) and RWM (ProShares Short Russell 2000) and for double leverage, SDD (ProShares UltraShort SmallCap 600), TWM (ProShares UltraShort Russell 2000) and SMN (ProShares UltraShort Basic Materials).

For investors, the SPX is a long way from any sort of signal that would say to run for cover but it’s a good time to kick out issues you really don’t want to hold during a potentially sharp correction.

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.