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II Insight


January 8 2009,   Edited by Tarquin Coe

Global leaders in Technical Analysis since 1947

Well, what a year 2008 proved to be!  For many investors, New Years Eve proved to be not so much a welcome for 2009, but  a "good riddance" for 2008!  At Investors Intelligence, we are hoping to see some stabilisation and recovery over the year to come, but first some thoughts on the bear market crash of 1932 and the comparisons with the picture today from colleague and stock market veteran of fifty years, Mike Burke.
 
"1932 marked the end of a horrible bear market. In some ways it was quite similar to what we are seeing now. Depositors were hoarding cash and buying short-term government bonds. Bank failures were surging and the Fed countered by buying $1 billion from money center banks ,who were unwilling to lend. Unemployment was surging. The Dow low at 41.22 on 7.8.32 proved to be THE low and the Dow was up 120.8% by 2/05/34, Conditions now are not all that much different from what was seen back then. Dow had its biggest loss since 1931 last year and the economy now is similar in many ways to what was seen back then."
 
Whatever the market brings over the coming year, we look forward to providing our subscribers with timely and accurate analysis on the technical conditions of the markets. On this subject, I have selected some instruments and indicators which we believe may be of particular interest to both traders and investors.
 
Regards,
 
Tarquin Coe, Senior Analyst
 
    
    
    
Chart of the Month Industry breadth recovering from historic lows
 
The Industry Group Bullish % chart is rallying from deeply oversold and has a long way to go before encroaching overbought. The chart illustrates industry breadth and the indicator is the percentage of 197 industry groups with P&F buy signals. The industry groups themselves are weighted and include approximately 6000 US stocks from the NYSE and NASDAQ.
 
The Industry Group Bullish % chart clearly illustrates the oversold nature of the markets and the potential that exists for a sizeable rally in the months ahead. Select industries have led the market out of the abyss, and others are starting to follow. Oversold groups with the greatest upside potential for the New Year include: Oil & Coal, Oil Service, Software, Household Goods, Leisure, Computers, Biomedics & Genetics, Media, Savings and Loans, Semiconductors and Internet.
 
Industries are analysed daily in the Investors Intelligence Stock and Sectors Hotline, part of the US Stocks service.
 
    
    
    
Advisors Sentiment A twelve month trend of declining sentiment is broken
 
Our Advisors Sentiment Index identifies extreme levels of optimism or pessimism. The survey monitors over a hundred independent newsletters from market advisors, categorizing their view as either bullish, bearish or correction. Since its inception 45 years ago, the indicator has proven to be a leading indicator of long-term market bottoms, and is well regarded with in the global investment community.
 
Last month we noted that the series of lower highs and lower lows, since the peak in the equity markets in October 2007, needed to be broken to permit upside potential. That series of troughs and peaks was broken in mid-December and the downtrend of deteriorating sentiment looks to be over.
 
The difference between the bulls and the bears now stands at zero. Historically, after a violent bear-market, a recovery in sentiment will always lead a multi-month stock market rally. 2008 was certainly violent, in percentage terms it was almost twice the size of the 2002 decline and it was the third worse year in the history of the Dow Jones. Only 1907 and 1931 had larger declines.
 
During January, we will be looking for a further improvement in sentiment, with the bull bear spread, moving into positive territory. Such a positive move in sentiment would reinforce our view that the markets are a long-term buy.
 

 
Readings are published weekly in the Advisors Sentiment Report, analyzed every Wednesday before the open.

    

    
    
Equity Markets Significant base formations on the brink of confirmation
 
The bulk of December saw the S&P 500 (SPY) index trading in a narrow range, between support at 850 and resistance at 900. The first trading day of January saw a positive session, albeit on light volume. That rally carried the index above the 900 level and the session was the best opener to a new year since 2003.
 
Providing the break through 900 holds, the move should carry at least as far as 950 over the first week of January.  Beyond that, the next challenge would be 1000, a level that snuffed out rally attempts on the 14th October and the 5th of November.
 
With sentiment moving in the right direction and the market still oversold, we are confident of a positive January.
 
If January does prove to be a good month, we expect the smaller caps to continue their recent outperformance. Since the November lows, the Russell 2000 (RTY) has outperformed by over 10%, as illustrated by the Russell 2000 to DJ Industrials ratio. Investor Intelligence subscribers are able to construct their own ratio charts online.
 
The lower chart window also shows that breadth in the Russell has made a new 10 week high. Breadth here is measured by the percentage of stocks trading above their 30-week moving average. The indicator is still a long way from being overbought, so further index gains will have a favorable tail-wind.
 
Our website offers a range of breadth indicators for all major indices.
 
In Europe, the UKs FTSE 100 (UKX) continues to build a base formation between 3700 and 4600. Going into the New Year the index rallied into the top of this range.
 
The index needs to break through the ceiling of the range as soon as possible.  A break above 4600 would activate the base. The target of the base is 5500, a resistance level from the January and March 2008 lows.
 
Breadth for the FTSE 100 is positive, with just over 80% of stocks now showing P&F buy signals. Although this figure could be considered overbought, on the flipside it provides the necessary conditions for a broad rally. But as already stated, this needs to happen soon to provide the all-important follow-through, otherwise investors will lose patience. If that happens, the index will slide sharply back down to the floor of the range.
 
Potential bases are repeated across major global indices, including the Emerging markets. In Brazil, the Bovespa Index (IBOV) is developing a potential triangle-bottom. A break above 40000 would trigger the pattern, proving an initial target to 50000.
 
Additionally, the Bovespa index is showing favorable moving-average action. The price is making a second attempt in a month to get a foot hold above the 50-day exponential MA. Interestingly, if the base detailed above is activated, then the price could be lifted above the 200-day EMA. That would be a very bullish development that would put the nails into the bear market coffin.
 
Each trading day we cover global indices, including emerging markets, in the International Equity Index Hotline. We also provide region specific coverage in the UK Hotline and US Hotline.    
    
    
Commodities Golds luster expected to fade
 
Gold (GOLDS) is likely to struggle to go higher during January as the precious metal encounters firm resistance.
 
The MACD momentum indicator is wandering into overbought territory, in fact more overstretched than it was at the March 2008 price high of $1032.
 
Additionally, price resistance hangs directly overhead from a trendline drawn between the March, July and October 2008 highs.
 
Expect a drift lower to unwind the tight conditions, most likely down to 800. If that shelf is weak, then the next level due a visit is 700.
 
The chart will turn bullish on a break of the series of lower highs and lows, achieved by a close above 931.58, the intraday high from the 10th of October. However, such a move is unlikely for the time being
.

We analyze all major commodities daily in the Daily Commodity Hotline, emailed direct to your inbox.
    
    
    
Currencies Dollar bull-trap?
 
In the summer of 2008, the Dollar Index (DXY) broke a downtrend line drawn off the 2002 high. The move also reclaimed ground above a long-term resistance level at 80, a level that previously provided support in the 1990s. 
 
The summer rally accelerated to 88.5, developed a head & shoulders top, and then collapsed back down to the key 80 level. This whole move could prove to be a bull-trap and that should become apparent over the next month or two. Confirmation of the bull-trap will come with a sustained move beneath 80.
 
Alternatively, a recovery from support at 80 and then a break above the November 2008 high at 88.5, would negate the bull-trap scenario and concrete a fresh multi-month uptrend.
 

We analyze a range of currency spreads in the FX Hotline, emailed direct to your inbox.
ETFs Moving averages provide directional clues
 
Over the last couple of months, the application of moving averages has been particularly useful in forecasting direction of the major ETFs.
 
In the report of the 7th November 2008, we brought attention to the failure of prices at their 20-day exponential moving averages.  On the Diamonds Trust (DIA), an ETF that mirrors the Dow Jones Industrial Average, we also noted classic behavior on the momentum indicator. We stated Oversold rallies often result in the RSI recovering to 50 and then rolling over as the downtrend reasserts. DIA is not oversold, so a visit of the October lows is likely. Violation of those lows would see a certain drop down to the 2002 low at 72. The first chart below shows the momentum and moving average failure in early November; the second chart shows the current picture.
 
In the most recent ETF review, we highlight the testing of 50-day moving averages on many international ETFs, along with the likely outcome.

 

 

 

 

 

 

 

 

  

Tarquin Coe in New York analyses ETF charts every Friday in the ETF Review.

  
    
Fixed Income  
 
In the previous Investor Insight, we highlighted the impressive bull run in the US bond futures, particularly at the long maturity sector. We also expressed concern about the sustainability of the rally and advised traders not to chase the future. This run-up was caused by a combination of deflationary scare, safe haven buying and momentum chasing.
 
Now, it appears that the upward momentum has slowed significantly. As a matter of fact, over the past few sessions, prices have fallen sharply. A look at its daily candlestick chart shows that the uptrend support has been compromised, leading to a near ten-point correction from the resistance at 142 (see below). 
 
Given that the uptrend consistency has been broken, long positions here should be reduced. However, we would not recommend going short at the tail-end of a four-day down move. There is potential support at the prior range low at 132. A better tactic would be to go short on a rebound, preferably at high thirties.
 

Dr Jackson Wong, working with our London team analyses the major international benchmark bonds daily. Get the Fixed Income Hotline, emailed direct to your inbox.
   
    
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US Sentiment holds the key
The Advisors Sentiment Survey continues to provide advance warning of major market turning points.  
The analysis and data regularly feature in the international financial press as a key indicator of market reversion.
Examples of these articles can be found on Barrons, NY Times, and Investor's Business Daily.
Read what CNBC said about the biggest switch in sentiment for 7 years.
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Historic Advisors’ Sentiment data since 1963 is also available; please contact us for further details.

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