Sunday, November 29, 2009

Dubai Doubts Dampen Markets

Negative financial news from the middle east put a damper on stock prices worldwide last week. This was the impetus needed to weaken the US markets in order to complete the bottoming process we are observing. While the Dubai news rattled US investors, US banks apparently do not have much exposure to Dubai debt and the market weakness in all sectors seems more of a cash raising action than anything else.

The McClellan Oscillator is continuing its correction and suggests that we could easily see a few more days of weakness without signaling anything more negative that what I have previously suggested. In the chart below I've drawn in the measure for a head and shoulders reversal pattern and the initial price SPX targets.

The McClellan Oscillator for the week ending 11/27/09.
Click to enlarge.

Added midday 11/30/09
SPX 65 minute chart at midday 11/30/09
There should be a cycle low about noon tomorrow 12/1.
Click to enlarge.

Sunday, November 22, 2009

Tax Loss Selling

So far it appears that the intermediate term bullish move in the market remains intact and should achieve higher prices over the next year. In my opinion the recent correction is primarily the result of tax loss selling. Considering the severity of last years crash most of the public is probably not participating in the current rally. This leaves the brave and foolish, hedge funds and other professionals. Considering that the SPX has rallied over 60% off its March lows we should expect some profit taking and the offsetting tax loss selling as we near year end.

SPX 65 minute chart with cycles for 11/20/09
Click to enlarge

Another observation. The cycle stuff got really noisy in the crash last year, so I haven't been giving them much weight this year. However, the market is settling down and I'm starting to see the cycles working a bit better. Simple ones, 10 day and 21 day have started to look promising. The next low should be around the end of the day on 12/1 or early to mid day on 12/2. The 65 minute technical indicators (RSI, STO, MACD) also indicate we may need a bit more work before a reversal can get established.

Note: So far Monday's premarket looks like we will see a strong opening, it's possible the retest finished up Friday but I'm skeptical.

At the start of November the MCO went below -300 which is quite oversold and generally results in a bounce which is what occurred. At the same time the 10% Index held above the -500 threshold which is encouraging. Currently the MCO is again showing some weakness which could be a retest of the recent lows. There has been a fairly clean 20-21 day trading cycle on my 65 minute chart which suggests that after another 4-5 days of testing the upward trend should resume.

MCO for 11/20/09
Click to enlarge

Since we did not see a sharp correction in the Indexes it would indicate that we are experiencing a rotating correction among the individual issues and continuing accumulation which is keeping the index prices firm. We are in a seasonally strong period as retirement fund capital looks for a place to go. In my opinion bonds not only have low yields but also face pricing risks over the next 18 months as the Fed will eventually have to raise interest rates. This leaves equities as the only real choice and should provide support for blue chip issues.

Percent of NYSE issues above key moving averages.
Click to enlarge

The chart above tracks the percentage of stocks above their key moving averages. At the start of November both the 20 day and 50 day dropped into the general oversold level and bounced. Both are showing a bit of weakness which concurs with the MCO action and could last another 4-5 trading days. The percent of stocks above their 200 day average has broken the down trend and most likely will stay above the 50% level for the simple reason that it moves much slower.

Historically the end of the 2nd year of the presidential cycle is weak but it is hard to tell given how bad the crash was. One thing for sure, the rise since march, at least the first 50%, was mostly just a recovery of the extreme overshoot/panic on the downside. It is unlikely the markets will continue moving higher at the same rate we saw over the last 8 months. All of this still allows for the rally continuing towards my 1200-1300 SPX target followed by a fall 2010 decline back towards the 1000 area (roughly 20%)

One final note. Since I was missing in action for the last few months, I've received a couple of emails from some of the readers of this blog. I'm here but I don't know who is following along unless I hear from you every once in awhile.

Have a great Thanksgiving everyone.