Net Volume Tell

SPX – 1079.25

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.

Slithering Sidewinder

SPX – 1127.79

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.

Warning Posted for Possibly Even More Whipsaws and Traps

SPX – 1125.86

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.