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II Insight 


May 2010

Global leaders in Technical Analysis since 1947

 
    
Welcome to the May edition of II Insight.
 
Our chart of the month is the bull bear spread, followed by another important Investors Intelligence survey, the count of buying climaxes. Based on historical behavior, both indicators agree that a sideways market may be just around the corner.  
 
A prolonged pause in the rally is of course long overdue. At the end of this report we look at Goldman Sachs, a stock that may be the first of many through that “correction” door over the months ahead.
 
 
Tarquin Coe, Market Technician
    

Chart of the Month – the bull bear spread 

The Investors Intelligence Advisors Sentiment Survey bull-bear spread is moving towards the 40 danger zone. When the spread last broke above 40, in October 2007, the market topped out. However, the market in October 2007 was at a different stage in the bull's “life-cycle” to where we are now. There were comparable periods to the current market when the bull-bear spread broke above 40 during 2003, 2004, and 2005. The table below shows the outcome for those periods, in terms of duration and degree of correction.
 
Period when spread = 40
Length of consolidation
Depth of consolidation
Mid 2003
6 weeks
-5%
Early 2004
6 months
-9%
Early 2005
4 months
-8%

 

Last week's spread was 36, a small expansion from the 35.9 for the prior week. Readings during May could prove to be most significant for some time as once that spread exceeds 40 investors need to look at positioning their portfolio for a sideways market that could last for months.

 

The Advisors Sentiment Survey  is available on its own or as part of the US Market Timing Service. The survey's results are published every Wednesday before the open.
    
    
Investors Intelligence Proprietary Indicators – Buying Climaxes
 
At Investors Intelligence we have been counting buying and selling climaxes for around twenty years. The last week of April saw the buying climaxes exceed 1000, the highest number ever recorded!
 
A Weekly Buying Climax occurs when a share makes a new 52-week high only to end the week with a loss. They indicate buyer exhaustion.
 
Buying climaxes do not give immediate sell signals but they do suggest caution as corrections or tops typically follow a few months later. In line with the chart of the month at the top of the report, we see a correction as the most likely outcome of the recent high counts.
 

Every Monday we publish the buying and selling climax data, including a list of every stock making a climax (the 3rd of May report was twenty pages long). This data and accompanying report is part of the US Market Timing Service.

    

    
Stocks – Goldman Sachs
 
The direction of the financial sector has been at the mercy of the Goldman Sachs (GS) chart over the past few weeks. When news broke of the impending investigation by the SEC we immediately took a look at the chart in the Coe Report for the 16th of April. That chart is reprinted below and used just straight forward use of support and momentum - more often than not it's the most basic techniques that are most effective. Our analysis from that day concluded “the drop appears incomplete. A visit to the $148/150 region is expected”.
 

    

Subsequent trading saw the stock consolidating for a week and bouncing back up to $166, before a sharp drop through $150 on the final trading day of April. On the next session (3rd May) the share recovered back to the $150 region, closing at $149.5. Going forward the recent low is now key, should it give way we will reassess. Either way it is clear that Goldman has started what the rest of the market needs to do - consolidate its rally off last year's low!
 
In the Coe Report, the past 54 closed portfolio trades have all been positive (not including fees and stock dividends). If you have never subscribed to the service then email our subscriptions manager, Sarah, to organize a free trial. We will not ask for any payment information. Sarah can be reached at support@investorsintelligence.com.
 
Note: Colleague Mark Glowrey recently covered Goldman Sach's bonds in the www.fixedincomeinvestor.co.uk website. This service is free to view and covers the fixed income markets in the UK from the perspective of a Sterling-based investor.    
    
    
Currencies – The US Dollar Index
 
The US Dollar Index Bullish Fund (UUP) is an ETF play on the US Dollar Index, itself an instrument that measures the performance of the greenback against a basket of currencies.
 
This fund has rallied into a formidable resistance level at 24. How the fund reacts to this level will have a big influence on the rest of the ETF universe. Failure here would likely boost the commodity ETFs, the most obvious being Gold and Oil, as well as currency ETFs.  Should equities embark in a sideways market then the best trading opportunities are likely to be found amongst these non equity ETFs.
 
 
Currency ETFs are covered each week in the ETF Review by Tarquin Coe.  We also analyze global currencies on a daily basis in the FX Hotline.
European equity markets struggle

If you follow the European stock markets, you will not want to be without the Investors Intelligence European service. In addition to II's daily market statistics email and our great online charting tools, our weekly analysis coverage includes the major regional indices, European sectors and of course long and short picks on individual stocks.  

II's European analyst is Michele Affortunati. A native of Florence, Micky joined the team in 2005 and has worked on the intitutional team in London before picking up responsibility for II's European coverage last year. Spotting a breadth divergence on our "All Europe" breadth group back in January this year, here's what he had to say on January 26:

"Stock indices in Europe declined sharply over the last week. The combination of increasing uncertainties in the banking sector and the tightening of the monetary policy in China are the main causes for these corrections.

The DJ Euro Stoxx 50 broke the 100-day MA and tests today sideways support at the December lows at 2800. The 14-day RSI is oversold, but made new lows, highlighting the depth of the correction and signalling the probable end of the uptrend commenced in March last year. Although oversold rallies are possible, we think they will be short lived."

A bold call to make in January, some might say, but the subsequent volatile and rangebound behaviour of the major indices bears the theory out.

Given the problems the Eurozone faces - exploding public sector debt, slow economic recovery and political friction building up between the wealthy northern states and the poorer southern members, investors will continue to see plenty of both risk and opportunity going forward.   

To sign up for the Investors Intelligence European service, go to "my account" (existing users) or click here.   

    


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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