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  Analysis: II Highlight   Archive

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II Highlight 
10 January 2011

Welcome to the "teens". This will be the seventh decade of Investors Intelligence's operation and we hope it will bring as many profitable opportunities as the decades preceeding it. No doubt, the ride will not be a smooth one (they never are!) but as experienced investors will know - there is always a bull market going on somewhere..... the price action seen over the past couple of years in mining stocks, technology and small caps have lent ample proof to this maxim.

 

The blue-chip indices such as the Dow and the S&P remain constrained by major ranges - the long-term chart of the Dow  (log scale) displays this clearly. What is also evident is that we are closer to the top of the range than the bottom. But not all indices display this pattern. Small and medium-cap stocks show uptrend renewal and we would highlight the Value Line Composite as a good example of this. Looking further afield, numerous "emerging" market indices continue to show technical strength, although we are wary of overbought conditions and/or loss of momentum in some of these.   

Mark Glowrey, Investors Intelligence, London

    
Crude oil to struggle?
Despite all the seemingly one sided analyst calls for Crude Oil (CL1) to strengthen during 2011, the black-stuff has slipped up on just the first week of the New Year.
 
A 50% retracement of the 2008 bear market decline stands at $89.835 and although there was a brief ‘pop' to open the New Year, oil has since dropped back beneath that key level. Clearly resistance from that level is still very much in affect. Failure here, as is looking more likely given the poor lack of upside follow-through over the past week, should see a pull-back down to $76.28, a 38.2% retracement of the bear market (prior resistance, now support).
 
We feel the trade to start the year is to short oil. Vehicles to achieve that include ETFs such as the ProShares UltraShort Crude Oil (SCO) or the PowerShares Db Crude Oil Short (SZO). The stoploss would be to exit should Crude Oil break the high from the first session of the year at $92.58. These funds are often traded in the ETF Review.

 

Tarquin Coe, New York.

 

    
Sorting stocks by performance

Conversations with our subscribers tell us that many of our customers are not using the www.investorsintelligence.com website to its full extent. Many of the tools and features on the website are simple and easy to use, but are none the less powerful for that. Sorting groups of stocks by performance and "technical strength" is one simple but useful application.

First select your group of stocks - this could be an index (such as the Dow or the NASDAQ100, or a sector). I'm selecting the "Banks, Money Sector" industry groups.  You can do this by selecting charts/stocks and then (left hand menu) "By IBD Sector/Banks/Money Centre".

Users can then simply click on the column headers to sort the stocks by y-t-d, monthly or daily performance. This simple technique gives a quick overview of where the money is going.

Alternatively, why not let our P&F-based "technical score" do the work for you? Using this technique throws out JP Morgan as the top scorer (+21) in the banks group. The chart shows a healthy move above the summer sideways range.  

    
Free trial to UK Hotline

For January, we are offering readers of the II Insight a free trial to our UK Hotline Service. Edited by Jackson Wong (PhD) from the London office, this service covers the UK market from indices, through large-caps and down to the lower reaches of the small-cap market.

The service brings the usual II approach to analysis - straightforward TA combined with our highly regarded breadth indicators. The Hotline is dispatched each morning as the market opens and features our view on the index, stock action, new signals and of course the Chart of the Day. In addition to this, subscribers have access to the usual chart library, index and sector breadth, automated signal scanners and more.  

As usual with our free trial, there is no financial commitment. Existing subscribers can add on the service to their current package and new users can sign up in just a few minutes - please note, no credit card details wil be taken. Simply click here to take up this offer.

    
KOSPI index reacts to increased tension
Is it often said that bad news is good news and with trading, the same can also be said. When tensions reached a head in South Korea at the end of November it proved to be a great buying opportunity for South Korean equities. ETFs provide a simple vehicle to buy emerging markets and we bought the iShares South Korea Index (EWY) on the 23rd of November at $53.50 in the Coe Report. Although we didn't run the trade for the full 15% of the subsequent rally, it did provide a reminder of how trades on macro news driven sell-offs are often the most lucrative.

 

Tarquin Coe, New York

A countertrend view on the Swiss Franc

For last column of this month's II Insight, we take a look at the EURCHF currency pair - a trade that has been almost a "one way bet" for the last couple of years.

 

In  2010,  the  Eurozone  suffered  from  a  surfeit  of  (1) ratings downgrade, (2) refinancing diffculties, and (3) political  uncertainties  (eg,  Germany  vs  Greece).    No wonder, the Swiss Franc benefited from the ‘safe haven' status.   However,  we  think  such  Euro  pessimism  is overdone. The reasons to favour the Euro over the Swissie in 2011:

 

  • German political will: In her New Year message, the German chancellor affirmed: “We  have  to  strengthen  the  Euro,  and  it  is  not  a question  of  money.  The  Euro  is  more  than  just  a currency...A  united  Europe  is  the  guarantor  for  our peace and our freedom.  The Euro is the basis of our economic well-being.  Germany needs Europe and our common currency, for our own good, and for coping with global challenges. Therefore, a Euro breakup is unlikely: The  amal-gamation  of  Estonia  in  January  2011  testifies  to their commitment on the Euro project.  Moreover, much of Eurozone's troubles are already priced inby the currency and equity markets.
  • Economic strength: Do not underestimate the export powerhouse Germany in bailing out the rest of Europe.  German export growth was impressive last year. 2011 could be better.
  • Reforms initiated: Debt-laden PIGS have started the process of consolidating their finances.  While the possibility of a default by one of the PIIGS is ever present, these countries may ‘muddle through' in the next few quarters
  • China: The country's renewed commitment to buy PIGS bonds (€ 6 billion Spanish bonds) will buy time for these indebted countries.  So while their collective borrowing costs are up, at least the ‘ponzi financing' is still in play.
  • Interest rate differential: Money  normally  flows  to countries  where  interest  rates  are higher.    This favours the Euro.  The Eurozone rate is currently 25bps higher than Switzerland.  The 2-year Euro bond yield is almost doubled that of Swiss.
  • Downtrend acceleration: EURCHF's  downtrend  is nearly three years old, and at long-term oversold territory.  Moreover, the trend has accelerative features - usually a trend-ending signal. Therefore, a rebound in 2011 is not to be ruled out.
  • A strong Franc hurting the Swiss economy. This may  not  be tolerated by Bern. Tourism (3-4% of GDP) is hit; exports are down. Advancing Franc puts her at a competitive disadvantage (see Figure 2). 

Conclusion: The Euro's weakness is well priced in by the market.  The currency's underlying strength, however, is overlooked.  The short EURCHF trade is very crowded, and hence, vulnerable to a rebound. A contrarian bet is advised in 2011. We will be monitoring the situation in the FX Hotline.  

 

Jackson Wong, Phd


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