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.