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II Insight           

3 December 2008     Edited by Tarquin Coe

Global leaders in Technical Analysis since 1947 


In this month’s II Insight we take a look at a variety of asset classes, ranging from overseas index funds to currencies, and of course, not forgetting government bonds, the last bull market in town! But first, it’s worth remembering the importance of seasonality in the investment process. Here’s some thoughts on the subject from Mike Burke, who has edited Investors Intelligence and Chartcraft publications since 1982.


Favorable seasonal period of the years


"Yale Hirsch, founder of Smart Money and the Stock Traders Almanac, noticed many years ago that virtually all the stock gains since 1950 came in the November 1st to April 30th period of the year. Starting with $10,000 in 1950, the November 1st to April 30th period produced a profit of $489,933 in the 55 year period starting November 1st 1950 and ending April 30th 2004.  In comparison, the period from May 1st to October 31st produced a LOSS of $502 over the same 55 year period.  

The bullish period showed 43 profitable periods and 12 losing periods in the same 55 years. The bearish period showed 32 rising periods and 23 falling periods.
These numbers are a little out of date, but his most recent bearish period was a disaster for stocks with both September and October being two of the worst months in stock market history.
Will be higher at the end of April than we are now? Odds favor it as far as this study goes."

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Advisors Sentiment    

Our Advisors Sentiment Index identifies extreme levels of optimism or pessimism. The survey monitors over a hundred independent newsletters from market advisors, categorizing their view as either bullish, bearish or correction. Since its inception 45 years ago, the indicator has proven to be a leading indicator of long-term market bottoms, and is well regarded with in the global investment community.
The difference between the bulls and the bears recovered in November from the October nadir, a month that saw levels of sentiment equivalent to the start of recessions in the early 1970s and the 1990s. However, the recovery in readings has not been enough to break the series of lower highs and lower lows since the peak in the equity markets in October 2007. Unless this sequence is broken, with the bull-bear difference climbing above zero, a further deterioration in sentiment is realistic, unfortunately achieved though further weakness in equities. If that happens, watch for bull-bear differences between -30 and -40 to provide fresh buy signals.

Readings are published weekly in the Advisors Sentiment Report, published every Wednesday before the open.
Equity Markets
On the 19th of November, the US indices closed below their October lows and, as forecast, the subsequent visit to the 2002 lows took place. Indexes made new lows but not with the selling ferocity evident in early October, as highlighted through the selling climax charts in last month’s bulletin.
Last month we noted “evidence is compelling and suggests we are at or close to a significant bottom. We may get new lows in the indices, but those lows are likely to be short-lived. The medium to longer term prospects are excellent.” The fresh lows on the 20th November were sharply reversed and the last week in November saw the S&P 500 (SPX) make its biggest weekly gain in 34 years. The bottoming process is not a one day phenomena but will be spread over a period of time.  We remain confident of higher market levels in the long-term.
In the US, amongst the S&P industries, we have been impressed by the strength in the major Oil Stocks. The S&P Energy Sector (S5ENRS) price chart is building a potential base formation between 320 and 420. A break above 420 would activate the pattern, with a target up to 520. Despite weak crude, relative performance by the sector is excellent, with continued outperformance since mid-October. This sector is likely to make substantial gains when confidence returns to the markets.
Major European indices held their ground relatively well during the late November rout. Britain’s FTSE 100 (UKX) found support above the October lows with strong relative performance against the US markets.

Last month we noted support at 4000 for Germany’s DAX (DAX) and that shelf once again proved it self during the November decline. However, with each attack, support here will become tired, leading to an eventual breach. The next test here could prove to be too much.

With the October lows and also the all important 2002/3 lows still standing, the recent outperformance by Europe may prove to be a Trojan horse. Previous market bottoms have been led by the US, not the other way round. So we would not be surprised to see new lows in Europe, with the US taking its turn to outperform.
In Asia, the Hang Seng (HSI) continues to outperform. Last month we noted that Hong Kong was one of the few indices that still trades some way above the 2002 lows. Further evidence that these lows will remain intact was provided by the November equity sell-off not visiting the October lows.

The 8000 level is the key level on Japan’s Nikkei 225 (NKY). This shelf has history going back to 1981, when it provided resistance and in 2003, when it provided support.  On November 20th and 21st, the index dropped briefly below the 8000 level, but on the next trading day it gapped aggressively back across 8000. Keep an eye on this level over the next couple of weeks, as a break below would be worrying with a possible decline down to 6900.

Each trading day we cover global indices, including emerging markets, in the International Equity Index Hotline. We also provide region specific coverage in the UK Hotline and US Hotline, emailed direct to your inbox before the open.



Last month we discussed the importance of the 250 level for the CRB Index (CRY). The market weakness on the 20th November spread to all asset areas and the CRB was not immune. The CRB fell to a low of 230. With trading still just shy of 250, we still consider this level as undergoing a test - tests of support are never perfect.


The biggest constituent of the CRB index is Crude Oil and that too is close to an important level. NYMEX Crude Oil (CL1) made its last significant low in 1999 at $10.35, from there it rallied to a high at $147.27 in July of this year. Oil has now broken a Fibonacci 61.8% retracement of this bull-run at $62.67, the next important Fibonacci level is only a few dollars away at $42.94, a 76.2% retracement. An interesting chart level, given that on the long-term chart there is also solid horizontal support at $40, formed from the Gulf War I spike in 1990 and the 2003 high.


Given the oversold condition in Oil, the price is going to find it difficult to break beneath $40. We expect the commodity to find a floor around $40, followed by a tradable rally using stops just beneath support.

We analyze all major commodities daily in the Daily Commodity Hotline, emailed direct to your inbox.




Terrorist attacks in India’s financial capital of Mumbai impacted related ETFs over the final trading days of November. Surprisingly the Indian Rupee Fund (ICN) was relatively unscathed.


The muted reaction by the fund, with trading still some way above the late October low could be construed as bullish. A break of downtrend resistance from the August high at 25.71 would provide a signal to go long.



Each week we analyze all the important movements in the ETF field in the ETF Review.    



The British Pound has been the whipping boy over the last three months but the second week of November may have been the final crack following dire economic news. The thrashing pushed the Sterling/Euro rate to its lowest level for well over a decade.  The move was a technical break through a seven month sideways consolidation with, at its widest point, a range of 0.08, from 1.22 to 1.30. Breaks from ranges have measured targets in the direction of the break from the breakout point, calculated by adding or subtracting the depth of the prior range. In this case the target was 1.14, and with the recent low at 1.15, the target looks to be satisfied.


A recovery back in to the summer trading range looks now to be underway. However, for the general downtrend to be broken, the rate needs to break though the 200-day moving average which has penned action for the last year.



We analyze currencies in the FX Hotline, emailed direct to your inbox.

Fixed Income

Over the past month we have seen a tremendous run-up in US Treasuries. Bonds across the curve have been in great demand. In particular, the 30-year T-Bond future soared to a new long-term high, way above the long-term resistance at 123-124 (see right). As a result, the corresponding yield plunged to its lowest level in decades. At the time of writing, the yield on the Long Bond is 3.2%.

One of the reasons behind this move was deflationary fear. As the recession in US deepens - a fact that has already been confirmed by the National Bureau of Economic Research, - the general level of prices is expected to come down. This view is backed by the sharp falls already seen in commodity prices. The other reason for the sudden jump in US Treasuries is the US Fed's announced that it may purchase Treasuries, providing more liquidity to boost the contracting economy.

From the trading perspective, such a pace of bond price rallies cannot be sustained beyond the medium term. Price acceleration - both up and down - is typically a trend ending feature. While we are not forecasting an end to the price uptrend in the 30-year T-Bond yet, a correction in the coming month should not be ruled out. Thus, we would not recommend chasing the T-bond now, preferring to wait for a setback to add.

In the previous edition, we highlighted the plummeting US TIPS bonds.

Specifically, we pointed out that the 2016 US TIPS Bond was oversold on the downside and could rebound. A glance at its chart here shows that this view has indeed materialized. The downtrend has leveled out and swiftly reversed.

With the bears beating a hasty retreat, some longs may be established, especially on technical retracements.


Dr Jackson Wong, working with our London team analyses the major international benchmark bonds daily. Get the Fixed Income Hotline, emailed direct to your inbox.

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This report has been produced and compiled by Investors Intelligence, a division of Chartcraft Inc, and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. From time to time Chartcraft and any of its officers or employees may, to the extent permitted by law, have a position or otherwise be interested in any transactions, in any investments (including derivatives) directly or indirectly the subject of this report. Also Chartcraft may from time to time perform other services (including acting as adviser or manager) for any company mentioned in this report. The value of securities can go down as well as up, and you may not get back the full amount you originally invested. Derivatives in particular are high risk, high reward investment instruments and an investor may lose some or all of his/her original investment. If you make an investment in securities that are denominated in a currency other than that of US dollars you are warned that changes in rates of foreign exchange may have an adverse effect on the value, price or income of the investment. The investments referred to herein may not be suitable investments for all persons accessing these pages. You should carefully consider whether all or any of these are suitable investments for you and if in any doubt consult an independent adviser. This report is prepared solely for the information of clients of Chartcraft who are expected to make their own investment decisions without reliance on this report. Neither Chartcraft nor any officer of Chartcraft accepts any liability whatsoever for any direct and consequential loss arising from use of this report or its contents. This report may not be reproduced, distributed or published by any recipient for any purpose without the prior express consent of Chartcraft.

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.
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