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Welcome to the August edition of II Insight.
Going into August it has all been about the uncertainty regarding the U.S. debt ceiling and the continuing problems of European sovereign debt. That debacle has created fear amongst investors which has been reflected in the charts for the safe haven assets of Gold and the Japanese Yen. The technicals of both those assets are considered in this month's issue.
We also take a look at the Advisors Sentiment survey - a long-term market timing tool that looks set to be an important indicator over the late summer months.
Tarquin Coe, Market Technician
Advisors sentiment readings
Our Advisors Sentiment Survey
, a contrarian indicator running since 1963 and widely adopted by investment professionals, showed an increase in bullishness over the final week of July.
Typically when the bull- bear difference reaches the +40% region we advise defensive measures. As illustrated on the chart, previous readings in that percentile were registered in April of this year, May 2010 and January 2010. On each of those three occasions the market went on to correct a couple of weeks later. The magnitude of those corrections on the S&P 500 were -8%, -7% and -9% respectively. A less reliable signal occurred in January of this year where the market pull-back took several weeks to materialize.
Users of this indicator should consider that it is not a day-trading tool. Investors can remain over-optimistic for extended periods of time. Generally, when the AS indicator hits the top of the range, there is no hurry to sell. A gradual process of taking some money off the table will be enough.
Oversold lows (extreme pessismism) are another matter. The reaction to such situations are generally sharper. At the moment, the AS indicator is in broadly neutral territory. Should the current sell-off continue or accelerate, this will be the indicator to watch. There is still a considerable amount of air below this week's reading 21.6 (Bulls-Bears).
As the new data fills in from the advisories (note: some are weekly, some are monthly) we will update the index and our subscribers accordingly.
Are you receiving the Advisors Sentiment Index
? Subscribers to our USMT and "Combo" packages are updated every Wednesday. Alternatively you can subscribe on to the "AS-only" service. Call Grace Ann in the New York office on (914) 632 0422.
Correction likely soon in Gold
Gold has been on a tear over the past few years as evident from the strongly trending SPDR Gold Trust (GLD) ETF. Recent debt worries in both Europe and in the US have fueled the buying frenzy even further.
On the logarithmic chart a line drawn between the lows of mid-2005 and late 2008 defines the trend. An extraction of that line and placement at the high from 2008 identifies upper resistance. That ceiling is fast approaching. A test of that level, or failure to reach it, may coincide with mitigation of headline global uncertainties, concerns which have driven this traditional safe haven skywards.
Going into August, increased optimism towards the yellow metal has failed to extend the uptrend and that is a cause for bullish concern. More worrying is that with the debt ceiling mess resolved buying interest in gold will dry up, precipitating a potentially nasty correction.
Given nearby overhead resistance, lack of short-term follow-through and diminishing macro uncertainties, we are now wary about chasing the trend at current levels. Rather, we would wait for some form of mean reversion; the most logical being an unwinding back to the 200-day exponential moving average. That average is currently rising through $140 on the GLD, around 10% beneath current trading.
Overstretched Japanese Yen reverses
The flight- to-safety crowd stretched the CurrencyShares Japanese Yen Trust (FXY) ETF to a dangerous condition which has previously resulted in sharp corrections.
A trendline drawn across the highs of November 2010 and March 2011 presented resistance on the first day of this month. Momentum is also as overbought as it was at those two prior two highs, as evident from the 14-day RSI hitting 80.
Based on the chart action we went short FXY in the Coe Report
at 1pm on August 1st
. Our target was to $122 and we would cover following three consecutive end-of-day closes above $130. That stop looks unlikely to be hit anytime soon. Today the Bank of Japan intervened to weaken their currency. That had the effect of accelerating the failure from trendline resistance. At the time of writing the FXY is trading with a 124 handle ( the move will not be updated on our charts until after the market close.)
We plan to trail our stop with the decline.
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As markets continue to sell off sharply, it's worth having a plan of action. Long-term investors will not be spooked by such moves, but will seek opportunity. Here's what Warren Buffet has to say on the subject:
"To refer to a personal taste of mine, I am going to buy hamburgers for the rest of my life. When hamburgers go down in price, we sing 'Hallelujah Chorus' in the Buffett household. When hamburgers go up, we weep. For most people, it's the same way with everything they will be buying - except stocks. When stocks go down and you can get more for your money, people don't like them anymore."
Have you prepared the 'Hamburger list' of stocks that you always wanted to buy? Have you figured out their potential value, growth, earnings, and long-term competitiveness? Have you worked out the favourable entry points for buying these stocks?
We have no doubt that the current volatility in equities has - gradually - opened up a window for long-term buyers of stocks. Fortunes have been made by investors who bucked the trend and buy stocks when no one wanted them. But, not just any stocks; rather, good, durable ones. The 'hamburger list' of stocks should be carefully filtered after months of painstaking research (it always pay to do one's homework before hand!), as Loius Pastuer advises: "Fortune favours the prepared mind."
What's on your shopping list? Drop us a line at email@example.com .