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II Insight 


2 Nov 2009, Edited by Tarquin Coe

Global leaders in Technical Analysis since 1947

        
    
Welcome to the November edition of II Insight.
 
October 2009 avoided the catastrophes of the past but it did provide investors with volatility in the final week.
 
Despite the month end wobble, overall, indexes effectively traded sideways for the month. November though is a month to look forward to, as it is typically one of the best months of the year. It marks the start of the NASDAQ’s best three month period of the year.  Since 1971 on average the NASDAQ has gained 7.1% from November 1st to the 31st of January, 1.5 times greater than gains shown by the S&P 500!
 
In this month’s report we analyze the NASDAQ to see if it has the potential to live up to its reputation. Later in the report we apply the Technical Analysts stethoscope to see if the tech index has the necessary fitness. We know from October’s performance that the tech heavy-weights of Amazon, Apple and Microsoft have the strength but how fit is the market as a whole?
 
Also in this months report we take a look at the Oil chart and Jackson Wong provides a great feature on the Chinese Renminbi - possibly the first great trade of the coming decade. First, let’s take a look at the Advisors Sentiment index….
 
Tarquin Coe, Senior Analyst
    
    
    
    
    
Market Psychology - Advisors Sentiment
 
The bull bear difference from the Advisors Sentiment Survey has been consolidating for the past two months. The bull-bear difference has traded between +20 and +30.
 
The market has become comfortable with the current range for the bull bear difference. As a result it is necessary to raise the overbought boundary. The new bull-bear difference range to watch is from +30 to +40, an area last visited in late 2007 ahead of the market collapse.
 
As long as the bull-bear difference remains in its current range, we expect the equity markets to maintain their uptrend and declines such as those at the end of October are healthy part of that trend.
Advisors Sentiment figures are published every Wednesday as part of the US Market Timing Service. Alternatively, this indicator can be subscribed to as a weekly stand-alone service.   
 
 
    
Equities – Technology
 
In November 2008, the NASDAQ 100 (NDX) was one of the first major US indexes to bottom. Others had to wait until March 2009.  Leaders in a rally are often the leaders in a decline, so this index is an important one to follow.
 
During early October the index tested 1773, an important Fibonacci level as it represents a 61.8% retracement of the whole decline from the 2007 high. The level also coincides with a resistance level just overhead at 1800. The next Fibonacci retracement level stands at 1978, a level that also coincides with a lateral chart level, the top of the August 2008 level.
 
The uptrend still remains up as the series of higher highs and higher lows still stands. That series came close to an end with the drop in the final week of October but the last pivot low at 1656.57 from Ocotober-2 looks to of survived by the skin of its teeth. Providing there is no sustained break of that low, the trend is expected to continue to test the target of 1978 proposed above.
 
Finally, note the lower chart window which shows the performance against the broader market. The NASDAQ has been outperforming impressively and for those who like to cherry pick their stocks, the technology area is where the tastiest fruits are to be found.
 
 
 
Each trading day we highlight long and short investment opportunities in the International Equity Index Hotline. We also provide region specific coverage in the UK Daily Hotline and the US Daily Hotline for indexes like the NASDAQ.

        

 

    
Commodities - OIL
 
We looked at front month NYMEX Crude Oil (CL1) in the September report. At the time oil was trading at $69 and here is what we had to say:
 
“This (momentum) should provide the slack for another attempt towards the 38.2% Fibonacci level at $76.28. Fib tests are rarely perfect so there could even be a price spike up to $80”
 
The price did manage a spike up to $80, occurring last month, hitting $82 on October-21, but where does Oil go next?
 
Fibonacci retracements tell us the next levels to watch are $89.83 and then $103.39, 50% and 61.8% retracements of the sharp 2008 decline. To achieve those levels the uptrend needs to hold. A strong indication that the uptrend is holding up would come from no sustained move beneath $75 over the next few weeks.  Providing that happens, the up trend should resume into the year end.
 
 
 
 
 
Commodities are covered daily in the Daily Commodity Hotline, with analysis from Cornelia Dichio in the UK. Commodity ETFs from the US market are covered each week in the ETF Review by Tarquin Coe.

    

 

    
    
The Chinese Renminbi - the first great trade of the next decade?

With the benefit of hindsight, just one good trade a decade would be enough to make us all wealthy men.....  buy gold in the 70’s, Japan in the eighties, tech stocks in the 90’s and property this decade. Of course, you would have to take profits at the right time in all of these asset classes - so that’s getting it right twice!

However, these trades look relatively easy to identify when looking back through the mists of time. Frequently, the best entry point would have been just before the turn of the decade, so are there any "obvious" trades staring us in the face as we roll into the next ten year period?

Colleague Jackson Wong thinks that the Chinese Renminbi (also known as the Yuan) fits the bill. The currency continues to be pegged against the US dollar, with only minor revaluation over the last few years. But can this last? The economic fundementals for a RMB revaluation are compelling. Here are Jackson’s arguments:

GDP: China is racing ahead (expanding); US is slowing down (contracting). Implications: Chinese economy is inflationary; US deflationary. Thus, theoretically, the RMB should go up against Dollar, as both economies adjust. For example, higher inflation -> higher interest rates. Attract capital inflow.

But, the RMB is pinned down. Because of the peg, when USD declines, RMB declines. To shed some light on where the RMB might trade at if not controlled: the Brazilian trade weighted exchange rate is up almost 30% against USD this year.

For the US, a depreciating USD is logical since the country needs to increase exports and reduce imports. So Bernanke prints like mad. However, for China, to maintain the peg results in massive credit creation (via stimulus). But does China really need so much stimulus? Excessive credit creation creates one big problem: Inflation. In China, inflation is taking place in both assets (property and stocks) and consumption sectors. Also, excessive credit lowers returns on projects and increase bad loans.).

To control inflation, China may well need to revalue the RMB at a higher level over the next few years.   

So how might one play this trade? The plan is to harness the appreciation of the Chinese Renminbi against the USD, but how can a US-dollar based investor achieve this?   Luckly, there is an ETF that can offer this exposure. In our ETF portfolio this week we opened a long position in the WisdomTree Drefus Chinese Yuan Fund (CYB).

The range of instruments tradeable through ETFs expands every day. To sign up for the Investors Intelligence ETF service, click here. Existing subscribers can add coverage of this asset class by clicking on the "my account" button on the top right hand corner of the website. 

    
Investors Intelligence Proprietary Indicators – the NASDAQ Bullish %
 
 
Last month we considered the NYSE Bullish %, pioneered by Investors Intelligence in 1955. We monitor bullish % charts daily in the US Hotlines for all the key indices.
 
Having covered the NASDAQ index earlier in the report, we thought it useful to take a look at its internals via the NASDAQ Bullish %. This indicator is a Technical Analyst’s stethoscope, providing a clean overview of market health.
 
For those who are unfamiliar with the indicator, a bullish % chart measures the percentage of point & figure bull trends amongst an indexes constituents. The mechanics are not just applied to indices but also industries, all of which are available on the Investors Intelligence website.
 
The NASDAQ Bullish % shows that the late October pull back caused a correction in the breadth. The correction was necessary following the incredible 24 ‘X’ boxes in a row run. Looking back to the period following the 2003 bottom, the bullish % chart reversed in October 2003. It then dropped 4 boxes before reasserting to a new high at the end of 2003. So nothing untoward about the pull-back we have just experienced and if history repeats, the NASDAQ should firm into year end.
 
Point and Figure charts have been a staple of analysis at Investors Intelligence since the 1950’s. Veterans Mike Burke and John Gray have amassed 76 years experience between them of P&F chart reading. P&F analysis of the Bullish % indicators and others is presented daily in the US Hotlines.

    

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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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