Welcome to the March edition of Investors Intelligence Insight. This month, we take a look at this year's bull market and ask; correction, or far enough?
From our London office, Jackson Wong takes a look at the situation in Europe and the recovery potential for that Cinderella market - Japan.
From Investors Intelligence's US office, Tarquin Coe examines some technical levels in the S&P500 and draws some parallels between the current situation and the Russian debt crisis of 1998. Tarquin also examines how the NYSE 10wk MA reacted to the recent pullback.
Finally, we take a look at an update on the functionality of the Advisors Sentiment, and a tip on how best to set up personal preferences for charting on the website.
Markets correct, but...
In last month's report, we highlighted five reasons for staying medium-term bullish. Has any of these factors changed? Well, no.
The ECB, for example, has handed out another package of 3-year loans to European banks in February. The €0.5 trillion worth of loans is liquefying the entire European banking system and supporting peripheral debt markets. The Italian 10-year bond yield, shown here, dropped to its lowest level since mid-August (see right). This shows that a systemic European crisis is unlikely to flare up over the near term - unless, of course, the situation in Greece completely breaks down.
So, despite the recent market setback, chances of a further rally are high.
One market that has good upside potential is Japan. This is due to Bank of Japan's unexpected easing last month, which resulted in profound Yen weakness. Recall that Japan is a huge exporting nation. Thus, the falling Yen has resulted in a sharp rally in the domestic equity market (see right). Thus, we would watch to buy the market on setbacks, provided that the Yen stays weak.
At the end of February in the Coe Report we made a comparison between the recovery over the past several months to the period following the Russian Debt Crisis in 1998. In the report we noted “The 2011 correction and subsequent recovery is now looking very similar to the Russia debt crisis of 1998. For that period the index consolidated at the prior high before commencing an advance which culminated at the 2000 market top, a 68% rally off the crisis low. The rally so far off the Euro region debt crisis low in October has been 28%. History never repeats exactly but the similarity so far between the two cases is striking.”
As we enter March the rally has stalled and March 6th saw the largest decline for many weeks. However, this pull-back may just be a consolidation beneath resistance from the prior uptrend high as per 1998, so history may still be repeating.
A near-term correction was inevitable as highlighted in last month's “Insight” where we discussed short-term breath for the market. Whether this slight retreat is just a shallow retreat or pause for breath as per December 1997 remains to be seen and that will certainly become clear over the next few weeks. We would suggest standing on the sidelines for the time being and wait for directional cue, something we discuss three times a week intraday in the Coe Report.
Should the S&P 500 reassert, break and hold above the 2011 high of 1370.58, then levels of potential resistance are 1381.5 (a Fibonacci 78.6% retracement of the 2008/9 bear market), round number 1400 and then 1440.24 (May 2008 high). Clearing those would likely result in a test of the all-time high of 1576.09 from October 2007 but that of course could take some time, with plenty of backing and filling on the way.
In last month's report we discussed the then overbought condition of short-term breadth by illustrating the NYSE % 10-week moving average indicator. One of the many indicators we have utilized since the early 1980's in the U.S. hotlines.
To recap, in that February report we noted “Its current condition reflects the present overbought state of the overall market. This breadth indicator measures the percentage of stocks in the NYSE trading above their own 10-week moving average. Typically in a year the indicator will only reach current levels (this week's high was 86.36%) a handful of times, after which equities would correct or consolidate. Over the past two years there have been three overbought instances as per the current overbought condition. In April 2010 the S&P 500 corrected 17%, in October 2010 the index went sideways and in October 2011 the index shed 10%. The corrections do not always follow immediately but certainly inside of a few weeks.This indicator stresses short-term caution.”
The unwinding of that overbought condition has commenced since the S&P 500 hit a high of 1378.04 on February 29th. The March 6th retreat would have dragged the indicator closer to the 50% region, a level where the market may stabilize and attempt to reassert north. The indicator is analyzed daily in the U.S. hotlines and should it base and turn up it will imply some accumulation.
Updated features for the Advisors Sentiment indicator
At Investors Intelligence, we have been running the Advisors Sentiment indicator since 1963. We continue to believe that this slow-moving indicator is the best medium-to-long term timing tool available.
We certainly have no intention of changing this survey's collection or calculation method, but we have made a small change to the presentation of the data on website, as follows.
In addition to the weekly email on Wednesday, subscribers can view the indicator and overlay it against the S&P500. Various studies such as "bulls minus bears" (see below) can then be viewed to establish market entry, exit, or sentiment confirmation.
This month, we have also added the ability to view the "Correction" series data (see red circled button on screengrab below).
And also available: Professional subscribers may benefit from the full back history of the AS data. This is available for back-testing and modeling (license restrictions apply). The data is available for a one-off payment of $995.
And finally; from next month, the AS data will be available for subscribers through the Morningstar/LIM system. Please contact Morningstar for more details.
Do you have favourite types of chart? For medium-term stock trades I prefer to look at six-month candlestick charts with 50 & 200 day EMA overlays. However, when looking at government bond charts, I favour a three-month chart with a 10/20 day EMA. It takes time to switch between these views. Is there a better way? Yes.
A good tip for setting up the website for multiple personal preferences is as follows:
1) Set up the chart to your liking. I've chosen the UK-listed Gulf Keystone Petroleum (GKP) as an example. Here, I have chosen Candlestick format, MA (select 50/200 periods) and relative overlay (for this UK stock I'm using the FTSE100 base index). Then chose period (6 months) and size of chart.
2) Go the Chart Settings button at the top of the right-hand navigation bar and click the small "save" button. You can now give this type of chart a name - for instance "UK equity candle"
You can then repeat the exercise for other types of chart "long-term index", "futures trading" etc . There is no limit to the number of types of chart view you can select. Setting up pre-sets will speed up your use of the website, and importantly, enable you to view chart for each asset class in a consistent context.
The Chart Seminar comes to the USA
Behavioural Technical Analysis
With 40 years of investment and trading experience, David Fuller of www.fullermoney.com has developed a unique system, which he named Behavioural Technical Analysis. This approach combines theories of crowd psychology with factual charting disciplines, generating a set of investment principles that work in all market conditions. The Chart Seminar encapsulates David's analytical development and considerable investment and trading experience. Since 2008, Eoin Treacy, David's colleague and co-editor of Fullermoney has picked up the baton. Eoin has taught the techniques established by David to investors around the globe. Last year saw Eoin take the Chart Seminar on a sell-out tour of London, Singapore and Australia.
What will you learn? Eoin reviews candlestick, point & figure and bar chart theory, translating chart patterns into what people are thinking as they buy and sell. The insights give delegates a practical framework for generating profits when technical conditions are favourable and staying out when they are not.
In addition, the sessions are interactive, stimulating and the examples of behavioural psychology often amusing. This is as much to do with the quality and experience of the delegates as Eoin's own wealth of trading and investment experience.
Bearing in mind the adage: “Wealth is accumulated in down markets and realised in up markets, this is a good time to develop and hone one's behavourial, technical skills.”
Come along to learn, contribute, profit and enjoy.
Also available online at www.investorsintelligence.com. Unauthorized forwarding, copying or reproduction of this report will be treated as a breach of copyright. To subscribe, visit the website or contact Investors Intelligence on +1 914 632 0422.
To unsubscribe from this newsletter, please click here and hit 'Send'.
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