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II Insight


February 3 2009,   Edited by Tarquin Coe

Global leaders in Technical Analysis since 1947

    
Well, January certainly managed to continue where 2008 left off. The first month put in one of the worst performances since 1970 when the S&P then lost 7.6%.  Many market commentators highlight the so called “January effect”, which states that the first month of the year sets the tone for the market for the rest of the year. This theory holds good around 75% of the time, but we note the predictor failed to work in 1970, with the index ended up 0.1%. Fingers are crossed that the phenomena fails too in 2009!
 
One thing is for certain, 2009 will be another emotional roller coaster, with volatility expected to continue. With this in mind, we will be introducing a new intraday product in early February; it will be initially free. Yes, free!
 
The increase in volatility is not a bad thing as canny investors can now make profits over shorter time frames. The new Intraday Bulletin will compliment our existing end-of-day and pre-open services, albeit on a shorter time frame.
 
The report will be published half-way though the trading day but sometimes timed to analyze important market moving events, such as Fed announcements. The focus will be on US stocks and indices and will highlight a handful of the best intraday trading opportunities as they happen.
 
Also in this months report, we go back in time, to the 1987 crash and recession of 1990, to learn from the behavior in our Advisors Sentiment survey. The state of play in hot investment areas is also analyzed and we explain how the website features can be effectively utilized as part of a Top-Down investment Strategy.
 
Regards
 
Tarquin Coe, Senior Analyst
 
Chart of the Week - Advisors Sentiment Bull-Bear Difference
 
 
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 46 years ago, the indicator has proven to be a leading indicator of long-term market bottoms, and is well regarded in the global investment community.
 
The end of 2008 saw the bull-bear difference (BBD), the bullish number of advisors minus the bearish count, break a twelve month downtrend. The final week of January looked to of dampened that excitement with a drift back in to negative territory.
 
Looking at the period leading up to and following the 1987 crash, BBD downtrend (in pink) breaks were often followed by pull-backs of between zero and -10%, but no deeper. So the current retreat is normal action, providing it remains above -10%. The long-term buy signal from the indicator in the fall of 2008 is still valid.
 
We will be monitoring the BBD particularly closely in the coming weeks. A move by the BBD to positive territory for at least two consecutive weeks would provide a further, reinforcing, buy signal.
 
Readings are published weekly in the Advisors Sentiment Report, analyzed every Wednesday before the open.
 

    

    
    
    
    
    
    

Indexes

 

 

The S&P 500 (SPX) is one of the best measures of global market strength. It is a weighted index of 500 US stocks with the largest market capitalizations.

 

We looked for a positive January in the last report but after a positive first week, the rest of the month was weak. The market failed to lift with the new US Administration and that is a concern. However, looking back at post-election years since 1900, Januarys have typically been flat, with a bottom in February and then a strong rally into August.

 

With the market no longer oversold and the constant barrage of bad news, there is little to stop the S&P from revisiting its November low at 741 over the next month. The lower window shows breadth for the S&P, something we cover in greater detail later in the report. Breadth, here measured by the number of stocks in the S&P in P&F uptrends, stands at a neutral reading of 50. That reading is a good distance away from oversold (10 and below).

 

If the indices do get back down to the lows and beyond, we will be looking for bullish divergence in indicators such as breadth. We discuss the Advisors Sentiment in this report and here too, we look for divergence. The November lows saw a fantastic bullish divergence in the Advisors Sentiment indicator relative to the October lows, providing a great buy signal. 

 

Each trading day we cover global indices in the International Equity Index Hotline. We also provide region specific coverage in the UK Daily Hotline and US Daily Hotline.        

    
    
    
    
    

Currencies

 

The GBPUSD  rate, known as “Cable” in the FX markets has gone down like a barn fire, with the pound hitting lows not seen since 1985.

 

Sentiment for the British Economy hit a new low in the final week of January, with the IMF predicting, that amongst the developed nations, the UK with its large financial services sector will suffer the most from the Global slow down. Much of the bad news must now be close to being priced in and that was evident with Cable rallying last week.

 

Technically the Cable chart is now presenting a great long-term trading opportunity. The rate sits at the bottom of a twenty year range and has bullishly turned on a sixpence to rally back above 1.40. A similar recovery occurred in April 2001.

 

A long-term recovery looks to be underway, back towards the top of the range. We would be very surprised to see the recent lows revisited for any length of time.

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We analyze a range of currency spreads in the FX Hotline, emailed direct to your inbox.        

    

Commodities

 

In the December issue of Investors Intelligence Insight we discussed the long-tem chart support provided by $40 on the Crude Oil (CL1) chart. Since then, crude has built a potential complex head-and-shoulders pattern across that support shelf.

 

The base will be confirmed on a sustained move above the patterns neckline at $50, should that happen, expect oil to spurt up to $67. On confirmation, these patterns have an impressive 94% success rate according to Bulkowski (click here for more details on this author’s well known work, The Encyclopedia of Chart Patterns). Mr Bulkowski calculates their average rise is 37%.

 

The black stuff is also grouping beneath the 50-day exponential moving average and its presence is likely to speed up events. So expect a resolution over the couple of few weeks.  

 

 

        

We analyze all major commodities daily in the Daily Commodity Hotline, emailed direct to your inbox.

    
    

Using Index Breadth as part of a Top-Down Strategy

 

The Investors Intelligence website provides subscribers with a range of tools and features that can be used to find trading ideas. For instance, the first steps in a top-down strategy could utilize our Index Breadth tools. We have breadth indicators for all the major investment areas: USA, UK, Europe, Japan, Asia plus Currencies, Commodities and Fixed Income.

 

 

With in each area, members can sort each universe by bullish % (percentage of constituents in bull trends) to find the most overbought and oversold areas, or those that are trending.  Our system also ranks the P&F status of an instrument, whether it is bullish or bearish, or correcting a bear or bull trend. The date of the last status change is also listed, so

sorting by this field will show the most recent area to change direction on its P&F chart. Hence, index trends can be detected virtually in their infancy.

 

US index breadth in the final week of January, on the 26th, showed a point and figure status change for the S&P 100 to Bear Correction. Bear correction is a countertrend move during a bull trend and indicates that stocks are going to pull-back and in doing so, provide a good entry opportunity lower down.

 

Clicking on the S&P 100 will reveal  further breadth studies for that area, such as % relative strength (percentage of stocks in relative uptrends), % 30 week moving average (percentage of stocks trading above the 30-day MA) and the % 10- week moving average. It is also possible to drill down further and see the constituents of the index, in this case the S&P 100, to do further research.

 

 

With the constituents listed, it is then possible to browse industry groups or concentrate on a particular sector (breadth can also be analyzed by industry).

 

In the screen shot, we have sorted by P&F breakouts and at the top of the list is Burlington Northern Santa Fe (BNI). Year to date the stock is down -10% but the last week of January saw a sizeable recovery. The far right column shows the Strength for the stock, and at +11, it is in the favorable buying zone, between 10 and 15. Strength is a scoring system that measures the price and relative performance of a stock; it ranges between -21 and +21.

 

 

This top down approach, using the features on the website, has brought Burlington Northern on to the investor’s radar. The next step is to find the best entry price. We know that its index, the S&P 100, is in correction mode, so there is no rush to buy immediately on the 26th. Patience is called for to let the bear correction, bearish countertrend move, run its course. The last trading day of January saw Burlington pull back to its breakout level, whilst still maintaining the P&F buy signal.  The stock then sat at a nice entry level, as a stop could be placed nearby, should the buy signal be negated with a drop below 65. As an investor you know that limiting losses is just as important as running winners.

 

Next month we will run through detailed examples of how subscribers can utilize the website features in a Bottom-up strategy.

    
    
    
    
    
    
    
    

 

 

 

 

From time to time we highlight other newsletters, advisories and services that we believe may be of interest to our readers. This month, we highlight IntelligentValue.com, written by Christopher Michaels.

IntelligentValue.com was launched in September 2004 and has brought a new, active approach to classic value investing. They use our Market Timing service to trigger the purchase and sale of the stocks of undervalued companies. Using this approach, their model portfolio has beaten the S&P 500 by an amazing 182%. Get an insightful analysis of the market, identification of the current trends, and specific stock picks that produce amazing returns. Investors Intelligence subscribers can get an extra 22% discount off the already low annual subscription cost by using coupon code ’SCUBE’!  Your discounted subscription will cost just $149 - click here to read more and take up this great offer.  

    

Disclaimer
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This report has been produced and compiled by Investors Intelligence, a division of Chartcraft Inc, and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. From time to time Chartcraft and any of its officers or employees may, to the extent permitted by law, have a position or otherwise be interested in any transactions, in any investments (including derivatives) directly or indirectly the subject of this report. Also Chartcraft may from time to time perform other services (including acting as adviser or manager) for any company mentioned in this report. The value of securities can go down as well as up, and you may not get back the full amount you originally invested. Derivatives in particular are high risk, high reward investment instruments and an investor may lose some or all of his/her original investment. If you make an investment in securities that are denominated in a currency other than that of US dollars you are warned that changes in rates of foreign exchange may have an adverse effect on the value, price or income of the investment. The investments referred to herein may not be suitable investments for all persons accessing these pages. You should carefully consider whether all or any of these are suitable investments for you and if in any doubt consult an independent adviser. This report is prepared solely for the information of clients of Chartcraft who are expected to make their own investment decisions without reliance on this report. Neither Chartcraft nor any officer of Chartcraft accepts any liability whatsoever for any direct and consequential loss arising from use of this report or its contents. This report may not be reproduced, distributed or published by any recipient for any purpose without the prior express consent of Chartcraft.    

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.
Want to know more?  Click here  - and you can subscribe for just $335 annually.

Historic Advisors’ Sentiment data since 1963 is also available; please contact us for further details.

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