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II Insight 


July 2010

Global leaders in Technical Analysis since 1947

  
Welcome to the July edition of II Insight.
 
Last month we anticipated a rally, which we got. However, it conked out two weeks later and rolled over to new lows. Being a monthly report a warning of the turn missed these pages but our daily and weekly services took the necessary action ahead of the rout. All of our US portfolios effectively moved into cash soon after the mid-June highs.
 
So what are we doing now that we are pretty much out of the market? Nothing! The start of July has seen a rally but technicals are ambiguous. Sometimes the best advice is no advice and now is one of those times.
 
As Warren Buffett once said “In this game the market has to keep pitching, but you don't have to swing. You can stand there with the bat on your shoulder for six months until you get a fat pitch.”
 
However, given the current volatility we don't expect to drum our fingers for six months. The next opportunity could present itself at anytime and with indexes moving 5% a week, as the S&P 500 did last week, it's important to catch the turns on the nose. Our daily services, utilizing our proven proprietary short-term indicators can achieve just that. We provide an illustration of this in the report below and bear in mind that trial subscriptions to our dailies are available for as little as $1 a day!
 
Tarquin Coe, Market Technician
    
Sentiment – the bull bear spread 
 
We last looked at the bull-bear spread from our Advisors Sentiment Survey in the May edition when the reading was 36. That reading screamed caution as it implied equities were toppy. Since then, the spread has unwound considerably and now stands close to neutral. A similar neutral spread reading occurred in July 2009 following that market correction. However, the same reading occurred in February 2008 but the market on that occasion broke lower, pulling the spread beneath zero. Current readings suggest patience, at least until the market plays its next hand.
 
Readings from the survey over the next few weeks will no doubt shed light on the situation, whether it proves to be a buying or selling opportunity.
 
 
 
 
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.
    
    
    
    
    
    
Indexes – the S&P 500 & our short-term-composite indicator
 
The sell-off in the second half of June broke through the 23.6% retracement level cited in last month's report. The Index then fell to with in a whisker of the 38.2% Fibonacci retracement of the rally off the March 2009 bottom at 1008.55 (the July 1st low was 1010.91).  The market then bounced sharply off that low, correcting the oversold condition. This oversold state was clear from our short-term-composite indicator. On the chart observe the timely calls by this indicator. Drops by the indicator beneath 10 almost always call market rallies.
 
The short-term-composite has now unwound its oversold condition and is moving towards neutral. From there, it could go either way. In early June the market reasserted where as in February the market climbed to new recovery highs.
 
We like to give advice as to where the market is heading but this month we are on the fence. Summer months, with their light volumes, are notorious for difficult trading and this July looks no different. 
 
We compile and report on the short-term-composite daily in the US Hotlines. When the next clear signal comes along it will appear on those pages.
 
 
The short term composite is generated from scores awarded to 29 market indicators (un-weighted) and is only concerned with the most recent action. The Indicator oscillates between values of 0 and 100. Above 90 is super overbought and beneath 10 is super oversold.
    
    
    
The US Industry Bell Curve
 
The Investors Intelligence Industry bell-curve below shows the distribution of industries based on their bullish % charts. The bullish % charts represent the percentage of stocks in a given sector with P&F bull trends.
 
The US market has unwound considerably from the highs in late April and some areas are particularly beaten up, one of the most oversold industries is Energy-other. Only 18% of the constituents in this group are in P&F bull trends. The group consists of just over thirty stocks that specialize in solar energy and other renewable energy technologies.
 
Subscribers can click on the “Energy-other” box on the bell curve and further breadth indicators for that group will appear covering different time scales. Also all of the constituents can be tabulated and from there a subscriber can then scroll through the charts, apply our suite of technical analysis tools and ultimately seek out trading opportunities.

 

 

Overall, this bell curve shows that the market is oversold but has someway to go before reaching historically oversold. Long-term readers may remember when all the industries on this table fell to the 10-20% category, in October 2008 and March 2009. At present only 2 of the 46 industries are in the lowest category.
 
 
Subscribers to the US Hotlines have round the clock access to these breadth features.
    
    
    
    
Fixed Income service - can you help us?
In addition to our well-known services in the equity market, Investors Intelligence also produces daily hotlines for Currencies, Commodities, International Equity Indices and Fixed Income.
 
This month we are contacting the current and past subscriber to the Investors Intelligence Fixed Income service to ask about their activities in the bond markets. The aim is to find out what type of trading in investment activities our subscribers enagage in, so that we can taylor the service to their needs. With this in mind, I have put together a short online survey (just ten questions) which you can access at this link: http://www.surveymonkey.com/s/JWZW3X3
 
No doubt, you are all busy individuals, but if you could spare a few minutes to let us know something about your activities in the bond markets, it will help the Investors Intelligence team build a better service for you. Please note, this survey is recorded anonymously and no names, email addresses or personal details are required.
 
Thank you all  in advance for your help with this survey. If you would like to see a sample of our fixed income output, please see the section below, drawn from today's hotline.
Chart of the day: US 30-year T-Bond breaks 20-day MA....

US Treasury bonds have had a good rally over the past few weeks - on rising risk aversion, deflationary expectations, and momentum buying.

During the rally, it is visible that the 20-day moving average had been a good technical support in both the 10-year and 30-year futures. For example, throughout the choppy trading in June, 30-year T-Bond prices frequently rebounded from this line.

Therefore, the break of this indicator yesterday could be an indication that rally is withering. Coupled with an increasing risk appetite, we envisage a further price decline. A short position is advised.

 

One way to gain downside exposure to the falling long-term bond prices - apart from shorting the future directly - is to use the UltraShort Barclays 20-year ETF.

Because this instrument is a 'short', it rises when Treasuries fall; and vice versa.

Technically, a long position is attractive because there is good support right at the 2009 lows (see right). Moreover, being oversold, we expect a sharp rebound in the next few weeks. 

 

An upside target is pencilled in at 45, where there is a small bearish gap to be covered. We open a long position here.

Similarly, because of the rising risk appetite, we expect investors to release some Swiss bonds into the market - Swiss bonds accumulated during the May and June crisis. 

A 20bps rise in the 10-year bond yield is a distinct possibility. This is just the top of the base. We do not, at least for now, expect the yield to return to the April highs (see right). 

 

 

    

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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