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II Insight 

June 2011

Global leaders in Technical Analysis since 1947

   
Welcome to the June edition of II Insight.
 
Markets have certainly been frustrating over the past month, with the S&P 500 zigzagging lower. However to the relief of investors the correction has so far been mild, with the index easing back just over 4% high to low. The big question on investor's minds -- “has the correction got further to go?”
 
Though we don't have a crystal ball we do have reliable indicators. Amongst those is our Advisors Sentiment Survey which has proved its worth many times over in the past five decades. This month's report starts with a brief look into recent survey readings and we then consult one of our proprietary tools to look for harmony. At the end of the report we review a simple and quick, yet very effective, idea generating system which aims to beat the market.
 
 
Tarquin Coe, Market Technician
On May 25th our Advisors Sentiment Survey generated an enlightening reading for the correction camp. The “correction advisors” are those who suggest moving into cash and waiting to buy following a deeper pull-back.
 
Newsletter advisors forecasting a correction jumped to 37.6% on May 25th, the highest level since the 39.8% on February 5th 2010. As we detailed in a Bloomberg article at the time, when investment advisers collectively advocate selling with the intention of buying back after a correction, the opportunity to buy back at a lower price rarely materializes. Back in February 2010, immediately following that lofty correction figure the market went on to rally 16% over the subsequent three months, leaving those who were waiting for a deeper pull-back on the side-lines. It will be interesting over the next few weeks to see if indeed history repeats (ed - it often does).
 
 
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.

Supporting the potential for a resumption of the market's uptrend to new highs, without dropping significantly any further, is the action amongst our proprietary indicators.

 

The Investors Intelligence short-term-composite indicator has reversed up from just above oversold and is now in rally mode. Typically, as has been the case over the past few years, this indicator will go onto rally back up to the overbought region of 70% to 90%, last visited at the end of April when the equity indexes made their recovery highs. That area is still some way off, so technically conditions are not overbought. There is no strong chart evidence to suggest that the S&P 500 cannot make a new recovery high during June.

 

Coupled to the message from the Advisors Sentiment Survey; going into June our US portfolios are fully invested.

 

 

Our 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.

 

With the equities still in a primary up-trend off the 2009 lows the best stocks to hold are of course those which are hitting new relative highs (as they are trouncing the market). This is an important points. 2011 has seen trends produced at the stock (and sector) level showing significantly more consistency than those exhibited by indexes.   
 
Following the close each day our website generates a list of all NYSE and NASDAQ traded stocks making new relative highs, both all-time and 52-week.  These lists are worth paying attention and they present the outperformers in a easy to use scroll-through format. To view the stocks, subscribers simply click on the “Signals” tab and from the drop down list select either “All Time Relative Highs” or “52-week Relative Highs”.
 
On down days, such as June 1st, Tarquin consulted the new 52-week high list from a few days previously to generate two buy ideas for the Coe Report. that day. The immediate prior session's list was not used as typically buying new highs too soon ends up with an loss (outperformers do not go up in straight lines).
 
The two stocks chosen that day were Telus (TU) and Melco PBL Entertainment (MPEL). The commentary and charts are reprinted below.
 
 
“Telus (TU), a Canadian telco, made a new 3 year relative high last Friday versus the S&P 500.
On the bar chart the on-balance-volume is plotted. That is highly bullish as it breaks out and leads price action. Also shown on the chart is 14-day RSI which is a good distance away from being overbought.
Longer-term charts show a strong rally underway and a test of the 2007 high of $62.46 is likely in the months ahead.
The share offers a yield of 4.3% and it goes ex-dividend on June 8th. We shall buy TU at 2pm. Trade would be exited following three consecutive end-of-day closes beneath $50.”
 
 
“Melco PBL Entertainment (MPEL) is a Hong Kong based casino gaming group. The ADR is trending strongly with favorable volume. The on-balance-volume chart is making new highs, leading the price chart which is still shy of the all-time price high of $22.34 from January 2007. The rally should extend further towards that prior high as conditions are not overbought.
MPEL is a market outperformer, with a new 52-week relative high against the S&P 500 today. We shall buy MPEL at 2:30pm; the portfolio allocation will be 2.5%. Trade would be exited following three consecutive end-of-day closes beneath $9.75.”
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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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Historic Advisors’ Sentiment data since 1963 is also available; please contact us for further details.

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