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II Insight 


3 July 2009, Edited by Tarquin Coe

Global leaders in Technical Analysis since 1947

    

Welcome to the July edition of II Insight.

 

Trading has entered the so called summer “doldrums”. Trading during these periods is typically difficult, given the light volume, and the best investors can hope for is outperformance. Towards the end of the report we demonstrate a simply strategy that can help identify those “outperformers”.

 

We start this month’s report by considering an ominous signal emerging from one of our longer-term indicators, the NYSE Bullish Percent. Following that we note some important levels being tested in a broad global index, the volatility index and long-term Bond ETFs plus a soft commodities index.

 

Happy holidays!

 

Tarquin Coe, Senior Analyst

www.investorsintelligence.com

 

Chart of the Month – NYSE Bullish %

 

At Investors Intelligence we pioneered the use of bullish percentage charts as an indicator of market breadth way back in 1957. One of the broadest measures of the market is the NYSE Bullish %.

 

 

 

June saw eyebrow raising moves by this indicator. On June-17 it turned down from a high of 72%, near resistance from December 2004. Following that, it gapped down two boxes on June-22.  

 

When this indicator reverses from a high level, from above 70, and then gaps lower soon after, historically it has been a bearish omen for the months ahead. The indicator works best on longer time frames as it could well spend a many weeks building a top before the market breaks down. 

 

This indicator, along with around 100 others, is analyzed daily in the US Stocks Service. 

    
    

Indices – Global Equities & the VIX

 

The S&P Global 1200 Index (SPGLOB) gained for three consecutive months in a row following the March-6 low. June however, broke that trend, as it slammed into a major resistance level. Winding back the clock, that same level ended the 2002 bounce. It did though provide support to a pull-back in 2004, but the level has since turned to resistance once again.

 

If July trading fails to achieve a break above this resistance level, then odds are that the market will slide lower over the next few months.

 

The Volatility Index (VIX) is screaming complacency as it trades down to its lowest level in nine months at the end of June.  The chart is also testing a rising trend line off the 2007 low.

 

 
The chart implies caution and it is further bearish evidence. If the index starts rising again, and moves back above 30, investors should be on their guard.

 

Each trading day we highlight investment opportunities, both up and down, in the International Equity Index Hotline.  Near-term analysis on the direction of the S&P 500 is also considered in the The Coe Report.            

Fixed Income – Long-term Bond ETFs

 

Long-term bonds found support at some important levels during June. In The Coe Report we adopted a cautious stance soon after the May index highs, unwinding the majority of our long trades. We then bought into longer-term bond ETFs, buying the iShares 20+ year T-Bond Fund (TLT) at the end of May and then the PowerShares 1-30 Laddered Treasury Portfolio (PLW) in mid-June.  Both trades were high conviction, so we allocated 10% of the portfolio, as opposed to the regular 5% stake.

  

The PowerShares 1-30 Laddered Treasury Portfolio (PLW) chart reversed from medium-term support at 26 in June. The MACD also turned up the same time, providing a bullish momentum divergence, when compared to the February low. Momentum is not overbought and we sense this ETF has further to go.

 

Likewise the iShares 20+ year T-Bond Fund (TLT) turned up in June from an important support shelf, in this case 90.  A rally is underway here too, with more gains to be had.

 

We highlight ETF trading opportunities each week in the ETF Review.  The service has two active portfolios and year to date the defensive “Investment” portfolio has generated an average profit of +7.2% per trade (with 20 out of 24 trades closing out with a gain), outperforming the S&P 500 which is negative for 2009. The ETF Review is available on a monthly basis for a mere $15 a month. Great value! Here are three ways to subscribe:

  • If you are already an Investors Intelligence subscriber, go to "my account" in the top right hand corner of the website (you will need to be logged in). You can then select monthly or annual subscription options.
  • If you are not a subscriber, register online here.
  • Alternatively, give Grace Ann a call in the US office on 914 632 0422, who will be happy to process the subscription for you.              
    
    
    

Commodities - Softs

 

 

With the black stuff getting all the lime light, we thought we’d take a quick look at the soft commodities.

 

 

Like everything else, the DJ Softs Index (DJAIGSO) rallied from a low in March (the index did print a new low in December). The March rally got as far as resistance at $51 from May 2007. On June-5 it reversed to the downside, reasserting the longer-term downtrend.

 

The index is now testing support from the January high but with breadth unwinding from overbought, support is expected to fail. A test of 40 is expected later in the year, with new lows a high probability. Avoid longs.

    
    

Strategy – Using relative charts

 

In a sideways market, turning a profit is much harder than in a trending market, and the best investors can hope for is market outperformance. Relative charts simplify the process of identifying those “outperformers”.

 

From the Investors Intelligence website, relative P&F charts can be plotted by just selecting the “Relative P&F” radio box as the chart type when in the chart window. 

 

Additionally, the website allows users to select the market that the instrument is to be plotted against. For instance, a S&P 500 stock would be best plotted against its parent, the S&P 500 index.

 

At Investors Intelligence we would also use the S&P 500 index as a benchmark to analyze the performance of ETFs.  

 

Earlier in the report we discussed the merits of the PowerShares 1-30 Laddered Treasury Portfolio (PLW) chart. Plotting this ETF against the S&P 500 shows the fund attempting a recovery with a spurt of outperformance in June. Trendline support was broken in May but a recovery back above this line would reinstate the long-term bullish uptrend.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defensive sectors, such as Utilities, Consumer Staples and Healthcare showed bullish reversals in June against the S&P 500. Surfing through the S&P sectors, with the relative P&F button activated, is a good weekly exercise that gives an idea of the bigger picture plus current active sector rotations. 

 

Subscribers to the US Stocks Service get full access to all the technical analysis tools on the Investors Intelligence website plus over 6000 US stocks to work with.    

    

Looking for some profitable summer reading?
 
Why not consider the latest Monthly P&F Chartbook from Investors Intelligence. While nothing can replace the timeliness of online data, there is much to be said for the portability and ease of use of this 330 page volume. All major NYSE and NASDAQ stocks are presented in an easy-to-read format that allows for quickly flipping between their charts and easy comparisons for attractive or dangerous formations. Add a few ‘post-it’ tabs for reference and note and you will be set at the beach or by the tennis court. You won’t even have to worry about the sand. Almost 3,000 individual charts for just $50, including priority shipping in the US. The new July edition includes data through the close June 30, so order today for quick shipment!  Call  Grace Ann Iommazzo in our New York Office on 914 632 0422.
  
    
    
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