Andy Mayo | finance blog, financial planning, investment

Gold at the Turning Point

Mon, 18 Aug 2008 03:10:04 PST

Gold and the Dollar are on the line -- Gold threatening to break down through a bull market trendline that began in 2005, the Dollar threatening to break up through a bear market trendline that began in 2002.

If the Dollar breaks out into a new bull market for the currency, it's curtains for gold bugs.

As with so many things today, this is not an entirely logical situation. Gold should be a buy. We have a negative interest rate environment -- inflation is higher than the interest rate on the highest yielding Treasury Bond -- The 30-year is yielding 4.44% (Bloomberg). Anyone who believes inflation is lower than that is smoking funny cigarettes.

The explanation would seem to be fear of a crash on Wall Street and consequent flight to the safety of bonds. Yields were lower today and stocks showed signs of rolling over. The Bear Market continues.

Dollar Up, Interest Rates Down? | Stock Market Investing

Wed, 13 Aug 2008 09:25:48 PST

Is the dollar rally for real? It's curious. Since the dollar broke out (vertical dotted green line) the yield on the 20-year treasury has trended down -- not what one would have expected. The middle chart is the price of the 20-year bond, the reverse price action of the yield. Bond prices have trended up.

The short-term moving average for the yield is trending down; the moving average for the bond price is moving up -- yes, that's as it should be -- but doesn't the dollar rally need rising interest rates, not falling? Something has to give.

Copper has certainly given in. The chart shows price falling from a massive ascending triangle. This could be a harbinger of global recession.

Similarly, the industrial metals index also appears ready to collapse, possibly foretelling global recession.

Despite a sharp drop, precious metals, the lower graph, remain in a bull market. Interest rates are lower than the inflation rate (even the bogus rate published by our government) so gold continues to make sense -- that is, if anything makes sense in the current environment.

Beware the Short Trend | Stock Market Investing

Sun, 10 Aug 2008 12:52:32 PST

Last week the Dollar broke to the upside. Oil broke down. Stocks rallied. Gold dropped. Call me a cynic but I don't believe any of it is a genuine change in trend. But time will tell.

In the meantime, consider how bleak the mortgage business appears -- and its consequent drag on the US economy:

That is about as ugly a chart as one can eve hope to see.

Financials don't look much better -- there is no sign yet of a leveling off from this waterfall, taking the long-term view. If there is another leg down the index will crash through the last Bear Market's lows.

As for oil, it has not reached the first "give-back" level of 38%, from its low at the beginning of 2007. Note how the prior uptrend was broken, also beginning in July, but recovered at an accelerated pace.

Charts courtesy of stockcharts.com.

Pull Back or Rally | Stock Market Investing

Wed, 06 Aug 2008 08:20:44 PST

Since July the S&P 500 Index has tried and failed to break through resistance at 1292. It reached 1291.67 today and fell back to close at 1289.19. The up trend (the solid blue line) needs to hold for our rally to continue.

The US Dollar is at a similar critical point.

The dollar managed to squeak by the 200-day moving average (by .03) but fell short of breaking out to the upside.

The yield on the 10-year Treasury Note closed solidly above its long-term moving average as oil continued to fall, which should all be good news for the stock market. If we don't get a continuation of this short rally it spells considerably more gloom ahead.

Smart Money Wins | Stock Market Investing

Fri, 01 Aug 2008 08:51:58 PST

Yesterday we wondered if the "smart money" sell-off in the last hour of trading yesterday would predict a down day today. Sure enough.

Stocks remain in the grip of the bear with small caps looking like the first to wriggle out of the bear's grasp.

The dollar may be about to break out. That would mean higher interest rates. Note how the 20-week moving average has started to turn up for the first time in a long time.

And interestingly enough, the utilities exchange traded fund XLU has developed a major head and shoulders formation. If it proves to hold -- the fund needs to drop a few pennies further -- then the downside price projection is $30 and change.

Chart courtesy of stockcharts.com.

Smart Money Test | Stock Market Investing

Thu, 31 Jul 2008 04:42:38 PST

Here's a test of the smart money theory -- that is, investors who are really in the know execute their trades in the final hour of the market. Prices on all the major indexes -- except the Russell 2000 -- closed sharply lower in the final hour of trading today. What happens tomorrow? Tthe employment report is released. A negative report will send stocks sharply lower. Did smart money have a clue? We'll see when the report is released on Friday.

The Bounce This Time | Stock Market Investing

Wed, 30 Jul 2008 09:16:30 PST

The market is making noises that some positive action is in the offing but before we get to that -- what a day we had in the exchange traded fund representing the MSCI emerging markets index (EEM).

The red box surrounding the last five trading days shows a huge daily range -- the length of the bars -- for each day's trading -- as much as a 5% price change in a single day. If that doesn't represent a war between Bulls and Bears I don't know what does.

The critical factor is that the price of EEM stays above it's old low at 41.58. But this month's action certainly looks like it could be a 'double bottom' which would be bullish for emerging markets. For that to become a reality, volume has to pick up. Note that the downside projection from the head and shoulders formation has been met.

Our domestic stock market -- the NYSE -- also appears to be at a turning point. If the NYSE composite can break above 8262 -- it closed at 8565 today -- we may see a good reversal take place. Note how the slope of the 50-week moving averages (lower graphs) for stocks above their 200-day moving average and in a bullish point-and-figure formation are flattening out -- that could be a good sign, preparatory to an upmove. We'll have to wait and see.

Finally, looking at the New Highs minus New Lows index, we can see, first, that we're solidly in a Bear Market -- our 20-day moving average is at the lowest point since the end of the last Bear Market, far below the zero line on the chart.

However, up volume on the NYSE is positive and, given the spread between the 100-day and 20-day moving averages, a rally could have some room to run, if it gets started.

Charts courtesy of StockCharts.com.

Still Waiting | Stock Market Investing

Mon, 28 Jul 2008 09:00:25 PST

The NYSE is in danger of falling out of the downtrend price channel that began with the August 2007 low. As the chart shows, the NYSE Advance-Decline line broke the lower boundary last week, rebounded, but is once again in danger.

If the channel isn't penetrated this week, it should mean a bounce for stocks.

Our Bear Market status is evident in the trend (the red line) of new highs minus new lows on the NYSE. The NYHL needs to break above the zero line and stay theret, as it did during the March rally.

Another key indicator will be small caps, which have been stronger than large company stocks. The Russell 2000 Index (weekly chart) formed a head and shoulders pattern in late 2007 which projected a low price of 657.33. The subsequent low was 643.28. The index then rebounded all the way to 750 before falling back but closing above the prior low. That's a good sign.

If those old low prices hold then a rally for small caps could be at hand. Note in the lower chart how the S&P 500 Index (OEX) needs to hold its prior low as well.

The Bounce and Now | Stock Market Investing

Sun, 20 Jul 2008 08:19:30 PST

We got the bounce in stock prices we were looking for, but it may be short-lived.

It was also nice to see the bearish wedge formed on the weekly chart for the commodity index, that we pointed out earlier, come through with a big down-move last week. But that move doesn't make a trend.

Looking at oil's weekly chart we can see that it has repeatedly broken its uptrend line and then promptly resumed its march to higher prices. It's too early to say what will happen next.

Unfortunately a drop in commodities is not necessarily good news for stocks. It may simply signal the onset of a global recession. Copper, which has formed a triple top -- for the second time in two years -- is nearing the point in an ascending triangle where a decisive breakout can be expected.

For stocks, the 20-day moving average of New Highs minus the New Lows on the NYSE hit the lowest point ever, at least as far as I can see, before turning up, just a tiny bit, last week. That's a lot of fear.

On the one hand, it could signal a sustained bounce -- like the one following the deep trough formed in August of 2007. On the other hand, that was the climax of the bull market that began in 2003 -- and we are definitely not in a bull market now. It looks like we have a long way to go before seeing the bull romp again.

In fact, our bear market might be just beginning. The monthly chart for the S&P 500 shows a negative moving average cross over just taking shape. If at the end of this month that cross-over remains in force, the bear could be with us for a long time.

On the lower portion of the same chart, note how much higher the momentum line was when it turned down in 2000 -- and how low it fell before reversing up. We started our descent from a lower point and have yet to hit the zero line.

Fannie & Freddie - Flat | Stock Market Investing

Sun, 13 Jul 2008 10:05:46 PST

Freddie Mac deflated any bounce possibilities last week. Maybe this week we'll get around to a little up action (still in a Bear Market).

Freddie Mac is now at an all-time low; below the price at which it went public in 1992. Either this is the end of the world as we know it or a great time to buy.

As far as the market-at-large is concerned, we're are at the bottom of the NYSE Advance-Decline Line's declining channel; the net new highs fell to -764 on Friday, definitely in the low end of the range.

Another indication that the price of oil is in fact artificially high is the lack of correlation between the exchange traded commodities fund for oil, USO, and the Powershares Wilderhill Clean Energy Portfolio (PBW) and the energy sector ETF, XLE.

The clean energy fund had risen right along with XLE and the price of oil -- as oil gets more expensive, alternatives become more cost-effective -- until last December, when PBW hit the skids while XLE and USO continued to climb.

Finally, the interest rate on the 10-year Treasury shot up Friday -- no doubt because of the fright Freddie and Fannie threw into the market -- and closed right at its (declining) 200-day moving average. The trendline is still down and given all the bad economic news, it's hard to see interest rates skyrocketing. If the price of oil does drop, it will be a big day for bonds.

Emerging Markets - Uh Oh | Stock Market Investing

Wed, 09 Jul 2008 08:49:57 PST

Vanguard's emerging markets exchange traded fund VWO broke the neckline of a head and shoulders pattern today, making emerging markets the next victim of the Bear Market. The iShares emerging markets ETF, EEM is 1.6% away from breaking the neckline of its similar pattern. Here's the picture for VWO:

If the pattern holds -- if price doesn't cross back above the neckline at 44.46 -- then the minimum price objective is 31.08, down -28.27% from today's close.

Stocks Up Oil down | Stock Market Investing

Tue, 08 Jul 2008 06:02:31 PST

We got the bounce we were looking for today -- the exchange traded fund tracking the small cap Russell 2000, IWM, was up 3.72% while the ETF tracking oil, USO, was down 4.38%. It's not enough to make a trend, but it will make for an interesting Wednesday.

Waiting to Bounce | Stock Market Investing

Sun, 06 Jul 2008 12:57:36 PST

The Bear Market drags on, and down, but there are a few things to keep an eye on.

Copper had a significant "inside day' on Friday, usually indicative of lower prices to come.
The exchange traded fund representing the Energy Sector, XLE, closed just below the consolidation zone it had maintained for the past month. It could be a 'whipsaw' and mean nothing or it could be indicative of lower prices to come.
The parabolic rise in the price of oil -- a 100% return in a year -- equals the parabolic rise in the Nasdaq during the dot-com boom. Trees don't grow to the sky. Or maybe this time it's different.

Barring a catastrophic crash from some exogenous event, it appears that the major indexes are approaching the point where a bounce seems probable.

The NYSE Advance-Decline Line is approaching the bottom of its downward sloping channel.
The NYSE New Lows index is rising to a point where reversals begin to happen. Friday's close brought the 10-week moving average to 142.9, and the 50-week moving average to 143.36. The index closed the week at 424, clearly in the territory for a reversal as soon as the moving averages get above the 150 level.
Finally, both the exchange traded fund SPY representing the S&P 500 and the exchange traded fund DIA representing the Dow 30 stocks closed Friday with a lower low, confirming the Bear Market. Curiously the exchange traded fund QQQQ (representing the Nasdaq 100, large technology companies) closed at 44.63 on Friday, still above its old low of 42. QQQQ needs to reverse up quickly if it is to avoid the fate of the other two indexes.

All charts are at Newsletter. Charts are courtesy of StockCharts.com.

Commodities Are Over-Extended | Stock Market Investing

Tue, 01 Jul 2008 04:01:24 PST

Commodities in general and oil in particular seemed ready for a fall.

Negative divergences have appeared in the Reuters-CRB Commodity Index (CCI) -- price has reached a higher high than in March while momentum oscillators are at lower highs (weekly basis). And as the chart below shows, a bearish wedge pattern has developed. Although the wedge points up, the probability of a downward breakout is high.

A similar wedge appears in the exchange traded fund tracking oil, USO and momentum for oil has also stalled.

This of course could simply be a period of consolidation before another advance in price but I would look for a pullback first. Commodities seem awfully over-extended in price.

On the other side of the ledger -- the losing side -- the Philadelphia Bank Index is headed for 1997 prices. The buy-and-hold investor is looking at a zero return (or worse), excluding dividends, over a 10-year period.

Tragedy or a Bounce

Mon, 30 Jun 2008 03:53:52 PST

On the last day of June, markets are poised to move much lower or bounce.

As this chart shows, the S&P 500 is at a critical point -- a 38% retracement of gains from the 2003-2007 bull market. The next stop, a 50% retracement, is another 100 points down.

A bounce from this point, on the other hand, just might give us a double bottom pattern and that would be bullish. We'll need to see a break-out in New Highs for that to happen (lower chart).

Of course the financial sector exchange traded fund XLF has crashed through its 62% retracement headed for a 100% give-back of gains from 2003. It is only 0.74 percentage points away from that mark. A downturn from that point will be tragic.

Financials have been trash before -- for example during the dot-com boom during 1999 and early 2000.
But taking the long view we can see -- the heavy red line connecting the two red arrows -- just how far Nasdaq had to fall before washing out the excess of its boom.

We can also see that technology, as represented by the Nasdaq Composite Index, is right on its long-term trendline (the black line under the green line) as the Financials (the dotted blue line) have plunged. Will Technology lead us out of our current wilderness as Financials led us out of the last Bear Market? The Nasdaq will have to hold that trendline first.

Bubble Masters & Secular Change | US Economy

Sat, 28 Jun 2008 12:20:47 PST

We're mired not just in the Bear Market that our corporate Bubble Masters have dumped us in. We're facing a secular change in how our economy functions, a change that will determine how we live over the next several decades. Two factors, already evident, will control our future: (Due to technical difficulties, please click Newsletter to read more.)

A Sick Market | Stock Market Investing

Thu, 26 Jun 2008 03:08:59 PST

The top graph shows the NYSE Advance-Decline Line -- the number of stocks advancing in price minus those declining. The bottom graph shows the NYSE High-Low Index -- the number of new highs in price recorded on the New York Stock Exchange minus the number of new lows. Note the zero line in the lower graph. Both indicators tell the same story: The market has been sick since July 2007.

When the High-Low index breaks out above its moving average, the advance decline line also moves up and, while I don't show the exchange price chart, trust me on this one, stock prices will also advance. You can also see the depth to which the High-Low Index has to fall before we get a rally. We have a way to go.

Stocks Down Bonds Up | Stock Market Investing

Sun, 22 Jun 2008 12:19:12 PST

There is gloom and doom in the stock market, perhaps best exemplified by a chart from Smith Barney that shows an ominous similarity to the Dow Jones Industrial Average in 1938 to its position in 2008.

And if we look at the NYSE New Highs minus New Lows index, we can see a serious red flag waving: The long-term moving average, which has not been above the zero line since last November, and has now crossed below its short-term moving average. The last six times this happened, falling stock prices followed. The chart is here.

And the darling of the Bull Market -- emerging market stocks -- are also in a precarious position. The exchange-traded fund EEM closed Friday at 137.20 Support is at 134. Not much margin for safety.

On the positive side, the relative strength of small cap stocks to mega-caps has turned decisively positive. Small cap stocks typically lead the economy out of a recession. And while the exchange-traded fund IWM, which tracks the Russell 2000, is still below its 50-week moving average, it is in considerably better shape that the exchange-traded fund OEF, which tracks the 100 largest companies in the S&P500. This chart tells the story.

Then of course, there is the possibility that oil really is in a bubble formation. As we see here (I wont make you click over to Newsletter) first it was the dot-com bubble, then it was the real estate bubble and now oil has reached the same fulsome level. A popping of the oil bubble (if that is indeed what it is) would be a boon to stocks.

(Another reason to consider the possibility of falling commodity prices is regulation. Two new bills have been introduced in Congress and the anti-speculation drumbeat is clearly being sounded in the media.

"Close the London Loophole Act" which would require the Commodity Futures Trading Commission (CFTC) to impose speculative limits and reporting requirements on traders of US energy commodities using a foreign exchange; "Policing US Oil Commodities Markets Act of 2008" would require trading of all US commodities on domestic terminals for US delivery to register and be regulated by the CFTC.)

Finally, there are bonds. This chart is quite cluttered but here are the main points:

Bond prices peaked at the March low-point for stock prices. They fell steadily until last week.

Bond yields and stock prices moved up in lockstep from the March lows to the second week of June, when stock prices began to fall while bond yields continued to rise (and consequently bond prices continued to fall).

Bond yields are now at a decisive support trendline. A drop in yields in the coming week should spur bond prices and such a drop could occur regardless of inflation concerns -- when investors bail out of stocks and buy bonds, bond prices go up and yields go down.

Why would they switch now? The relative strength of the 20-year bond (exchange-traded fund TLT) to the S&P 500 has rallied, surpassing its 50-week moving average, also last week. So it seems probable that stock prices will continue to fall and bond prices will rally, at least in the near-term (barring, of course, the popping of that so-called oil bubble). Charts courtesy of StockCharts.com.

All Time High for CCI | Stock Market Investing

Sun, 15 Jun 2008 09:07:03 PST

Commodities rallied to a new all-time high as measured by the Reuters-CRB Index (CCI) last week while international stocks fell sharply -- the Emerging Markets ETF (EEM) fell -2.41% and the developed markets ETF (EFA) fell -2.53%.

The major domestic indexes were mixed: S&P 500 was down slightly (-0.05%) while the Dow Jones Industrial Average was up 0.80% and the Nasadaq 100 was down -1.22% and the small cap Russell 2000 index was down -0.91%.

What's significant is that the US share of world market cap in stocks is now just below 30% -- it was 45% at the start of 2004, according to Bespoke Investment Group. All the charts are in Charts. Charts are courtesy of StockCharts.com.

Another Bottom | Stock Market Investing

Sun, 08 Jun 2008 08:51:23 PST

Commodities rallied last week, the stock market gyrated and then headed south, leaving us with only one question -- will small caps will follow suit?

For the S&P 500, the head and shoulders pattern I originally posted still controls. A visit once again to the 1270 range would not be unexpected. Note the declining number of new highs in the lower chart.

Comparing the big caps to the small on a shorter time frame chart (60 minutes) presents quite a different picture:

For the mega caps -- the Dow Jones Industrial Average -- it looks like its divergence with the transportation average may be at end; unfortunately, transports may follow to the downside. The Industrials are the falling red line in this chart.

The only bright spot is the Yen -- it has yet to break the neckline of its head and shoulders pattern, holding out a faint hope for US stocks.

Of course, oil's fantastic rise last week may just be the blow-off. But don't count on it.

June Turns Sour | Stock Market Investing

Wed, 04 Jun 2008 01:58:37 PST

The happy ending in May has turned rapidly sour in June. Short-term charts show some negative patterns for both the S&P 500 and the Dow Jones Industrials and for Emerging Markets (EEM). Small caps, however, continue to inch up, battling to cross, and stay over, their long-term moving average.

So the Bear still rules.

In another Bear market, the Dollar appears ready to rally -- the US Dollar Index closed at 73.49 today. A breakout is signaled with a close above 73.50. Although that remains far below a reversal in the dollar's long-term downtrend, which began back in 2002.

At the same time, the Yen appears ready to hit the skids, closing below a well-formed head and shoulders pattern. This, presumably, bodes well for US stocks.

The 4% Solution | Financial Planning

Tue, 03 Jun 2008 04:15:06 PST

Several of the comments to my article, Risk of Ruin, in addition to those posted here, focused on my "mistake" in using a flat dollar amount rather than a 4% withdrawal rate and one even faulted me for increasing the withdrawal rate by a 4% rate of inflation.

As if the purpose of the withdrawal was to preserve capital rather than to provide food, shelter and clothing in an inflationary environment.

My theory was simple. I figured $10,000 plus a Social Security benefit was the minimum that would keep a person alive, though perhaps not enjoying it -- regardless of the starting value of the portfolio. Was I being extravagant? Apparently some readers thought I was.

But the real point of the article was the impact of the sequence of annual returns once you start taking distributions. (As well as the danger of looking at past returns as the template for a financial product illustration, such as an annuity.)

As reader Ken commented, "Your point about showing returns from 1987-2003 vs. 2003-1987 was a real eye-opener. It helps [me] realize those things that really affect an account as you begin to draw it down."

And while some were critical of my reference to tactical asset allocation -- seeing it as "market timing" -- I felt great reading this comment from Roger:

I enjoyed your article about timing of withdrawals for retirees. A group of my peers that I worked with, creating and evaluating proposals and assessing the risk, have been observing the importance of timing caused by compounding as we approached retirement. We coined the term "Income De-Averaging" for those that make regular/periodic withdrawals of their retirement funds. You just amplified our observations of how costly that is. . .

I have been retired for nearly 5 years and learned quickly to move some of my investment gains to less risky investments (like money markets) to save for a rainy day when riskier investments go very negative as they will. I also try to time/set aside my savings for major spending (cars & trips) to coincide with those highest gains. While that doesn't get the very most gains possible, I'll take 50-85% of possible gains and take small losses. I want to enjoy my retirement while having a higher probability of having funds later, by leveraging the compounding.

What Roger is doing may sound like market timing to people still in the accumulation phase, but it makes sense to me. It is also the point I made in my book, The Joy of Stock Market Investing -- win by not losing.

And this leads me to a conclusion about all financial advice (i.e., rules of thumb, like 'never try to time the market.') All of that conventional wisdom is correct some of the time and none of it is correct all of the time. It depends on each individual's circumstances. The problem is that our financial advisory system isn't built to deliver that kind of service, except to those who don't really need it -- the people with million dollar-plus portfolios.

Positive Shifts in Primary Trend | Stock Market Investing

Sun, 01 Jun 2008 01:09:27 PST

May was a big month in the stock market, though most people haven't noticed.

Bearish sentiment reigns. The market has seen below average volume (volume is the weapon of the Bulls); high levels of short interest (expecting lower prices); high levels of Bearish sentiment, and, low levels of consumer confidence. Not to mention recession, deficits, etc., etc.

On the other hand, low volume in a Bear Market is bullish and short interest, sentiment and consumer confidence are contrary indicators.

In fact, there are many positive signs. Consider the Primary Trend -- the position of the monthly (closing) price to the 10-month moving average. Major Indexes that closed out May at or above their moving average include:

Emerging Markets (EEM)
Nasdaq 100 (NDX)
Developed Markets (EFA) - fractionally below
Materials Sector (XLB)
Energy Sector (XLE)
Utilities Sector (XLU)
Industrials Sector (XLI) - fractionally above
Technology Sector (XLK) - fractionally above
Small Cap Stocks (Russell 2000, RUT) - fractionally below

That left these indexes still in a Bearish Primary Trend: Dow Jones Industrial Average, S&P 500 (SPX), Financials Sector (XLF), Health Sector (XLV), Consumer Discretionary Sector (XLY).

It's important to note that during the 2000-2003 Bear Market, monthly prices closed above the 10-month moving average several times only to close sharply lower in the succeeding months. Given today's widespread Bearish sentiment, however, we may see a market rally into the summer.

Finally, consider the worst of it -- the Mortgage Finance Sector. While there's still no sign of a turnaround, it's not hard to see that this index (Philadelphia Mortgage Finance Index, MFX) may be bouncing along on a bottom. This chart and others are in Newsletter. Charts are courtesy of StockCharts.com.

Risk of Ruin | Retirement Investing

Fri, 30 May 2008 03:40:33 PST

The concept of risk of ruin is important to more than poker players. Anyone in or nearing retirement ought to understand this important concept. And it's easy to do. Simply read my new article on Risk of Ruin at Investopedia, a Forbes Media Company.

Happy Days for Now | Stock Market Investing

Thu, 29 May 2008 01:59:20 PST

Commodities are down. Stocks are up. Happy days are here again.

Well, maybe. Bespoke Investment Group reported today that short Interest in the major brokerage firms, which has an historical average of 2.31%, has hit 7.16%, about 2 percentage points higher than in mid-March. Can this be the crowd that is missing the turn? Short interest is normally thought to be a contrary indicator.

It's particularly significant because brokerage firms tend to lead the market. Something to keep an eye on.

For now, the story is the declining price of commodities as seen in the Reuters-CRB Index. But this isn't spelling the end of the commodity bull run, not yet. As the charts below show, commodities have a long way to fall (the red line, below) before that happens.

[The CCI is 17.6% energy, 17.6% grains & oilseeds, 11.8% Industrials (copper & cotton), 11.8% livestock, 17.6% precious metals and 23.5% "softs" (cocoa, coffee, orange juice, sugar).]

Gold is beginning to trace out a large triangle pattern indicating investor uncertainty; however, the probability for a breakout from the triangle goes to the previous trend, which was up.

In other words, this may be a brief decline in commodity prices and a brief upsurge in stocks, setting up the unwary for missing the switch back to the commodity bull and the stock bear markets. We are still in a bear market for stocks, as this chart demonstrates. Keep those stop-losses in place.

Charts courtesy of StockCharts.com.

Not All Small Caps | Stock Market Investing

Wed, 28 May 2008 07:53:12 PST

In yesterday's post I pointed out the rally in the Russell 2000 small cap stock index. While the index was down slightly for most of the day, it rallied at the close on good volume. Here's the picture at 30-minute intervals for the exchange traded fund IWM which tracks the Russell 2000. Note the nice uptick in volume as the price rallied.

On the other hand, not all small cap stocks are powering forward, relative to large caps. Yesterday I compared the Russell 2000 to the Russell 1000 to show the favorable break-out in the small caps. There's no such thing going on in Nasdaq. The 100 biggest stocks (NDX) still dominate in relative strength. Note how NDX is above its 50-day moving average and the composite (COMPQ) is below it.

Small Caps Are Outperforming | Stock Market Investing

Tue, 27 May 2008 09:00:46 PST

Small cap stocks lead the stock market out of a recession. It appears to be happening now. The Russell 2000 turned bullish on point-and-figure charts today and as the chart below shows, it has begun to outperform relative to large caps. In the top graph, the last time the small caps had better relative strength than the large was in 2006. In the second graph you can see higher lows for the Russell 2000 (RUT) and lower lowers for the Russell 1000 (RUI). This doesn't mean the Bear Market is over, but it is a positive sign.

Tough Sailing | Stock Market Investing

Sun, 25 May 2008 02:34:47 PST

Last week gave us an ominous short-term indicator in the S&P 500 -- an outside bar with a greater range -- 67 points, from a high of 1440 to a low of 1373 -- than that of the preceding three weeks. That means more sellers than buyers and that's not good for prices. Unfortunately, the long-term indicator -- the slope of the 50-week moving average -- is also negative.

Even the Energy Sector, here represented by the exchanged-traded fund XLE, showed signs of weakness. Here you can see XLE closed a gap that opened on rising prices, a move that typically signals lower prices to come.

More bad news: two indicators that correlate with lower prices -- the put/call ratio and the Japanese Yen (FXY). The put/call ratio has been in a cyclical rising trend since 2004 and appears ready to shift back up, which correlates with lower stock prices. The Yen's rise does not seem ready to break down yet; again, a rising Yen has not been good for stocks. Both charts are in Newsletter.

Nervousness about stocks seems to be supporting the defensive sector, Utilities, (exchange-traded fund XLU), despite rising interest rates, usually not considered a good thing for the utility industry.

Pretty much, the only place to be invested remains diversified Emerging Markets. China, however, appears suspect.

Finally, I pointed out in my commentary on the May 16 close that there were similarities in the NYSE Up/Down Volume with the summer of 2006, when the market recovered and roared ahead for the next seven months. I also pointed out what was different, and that this time a recovery seemed less likely. Unfortunately, events now seem to be confirming that view, as Up/Down volume broke below the triangle pattern. The chart is also in Newsletter.

Given where things stand, it would appear that any weakness in precious metals or commodities would be buy opportunities. Financial assets do not seem to be gaining strength.

The Dow Down | Stock Market Investing

Thu, 22 May 2008 04:07:51 PST

Yesterday the Dow Jones Industrial Average closed down for a lower low this month and today's action did not heal that wound. The DJIA has now broke its uptrend, both on a daily and weekly chart basis. Will the other indexes follow suit? Tomorrow may tell.

Note the brief breakout above the neckline of the Head and Shoulders pattern appears now to have been a 'whipsaw.' Friday's close will confirm.

The Rally's Over - Now What? | Stock Market Investing

Wed, 21 May 2008 04:24:22 PST

The next few days will confirm whether recent stock market action was just a Bear Market rally or the beginning of something new. Right now it looks like the former.

While the NYSE Advance-Decline line is not a perfect gauge, because so many non-operating company stocks trade on it, it has not lost its usefulness, especially over long periods of time.

Applying two moving averages -- 4-week and 26-week -- we can see that the trend remains negative: both the short and long MAs are below the zero line with the shorter crossing below the longer average today. This does not bode well.

Of course, in 2006, it made no difference. The chart clearly shows a falling A-D line moving average while stocks rocketed up. We bought a credit crisis with that move. It seems doubtful we will see a reprise in stock prices.

It is notable that the recent rally in the S&P 500 Index was not able to penetrate the neckline of the Head & Shoulders formation that I've showed in past posts. We will probably see the index revisit 1276 before this is over.

Complacency Is Back | Stock Market Investing

Sun, 18 May 2008 12:08:37 PST

Rising stock prices are feeding a remarkable level of complacency in the market despite ominous signs of greater inflation ahead. Historically, inflation has not been good for stock prices.

First the complacency. The put/call ratio has dropped precipitously (heavy blue line, top graph) as the S&P 500 Index has risen since the March lows. This indicates investors believe stock prices will rise in the future and is a contrary indicator. The good news is that the upward trend that began in October has been broken. But as the many peaks in the graph demonstrate, reversals are inevitable. A low in the put/call ratio would seem to be a risky time to become a buyer of stocks.

A longer-term view of the Volatility Index (VIX) shows that it too has dropped significantly, a sure sign of complacency in the market. Tops occur when investors are complacent. Peaks in the VIX, on the other hand, indicate bottoms in stock prices.

However, if this decline signals a trend, we could be looking at a months-long rise in stock prices, as the first green arrow on the chart in Newsletter shows occurred in 2006.

So the question is -- are we in a similar situation to 2006? From a fundamental position, certainly not. We're in a recession with rising inflation. How is the market behaving vis-a-vis 2006? One way to compare is looking at the volume in advancing stocks versus the volume in stocks whose prices are declining. It's a measure of market breadth. The charts are here.

In both 2006 and 2008 the Advance-Decline Volume formed a triangle pattern. In 2006 stocks broke to the upside. The difference is that in 2006 the 10-day moving average rose from the July low in the market to its take-off in late August. Today, the moving average is clearly sideways. Rising prices without rising volume spells a weak rally, at least so far.

But there is no question that prices have risen, and other indicators of market breadth have improved with price. The percentage of S&P 500 stocks trading above their 50-week moving average broke solidly above its 50-week moving average last week, and the percentage of stocks in a bullish point-and-figure pattern also advanced well-beyond it moving average.

Two problems confront the market: Inflation and the Financials. The exchange-traded fund for Broker-Dealers, IAI, appears locked in a trading range between 40 and 43. Historically, Broker-Dealer stocks have been bellwethers.

Bank stocks do not offer any rosier of a scenario. But the difference between the big bank index (BKX) and the regional bank index (KRX) is striking. Big banks, of course, participated in the "asset"-backed derivative junk -- CDOs, SIVs, CLOs -- which the financial engineers fantastically claimed was reducing risk by spreading it around further. Those guys hadn't heard of moral hazard, I guess.

We have negative divergences in place between both bank indexes and the broad market, as these charts comparing BKX and KRX to the Wilshire 5000 show. It seems like a time to be cautious.

And a good reason to be cautious about stock prices is inflation. One inflation measure is the ratio of the price of lumber to the price of the long US bond. This ratio has turned around dramatically and closed on Friday right t its 50-week moving average. Quite a reversal up. As you would expect, the yield on the long bond (TYX) has also advanced, driving bond prices lower.

Finally, there's gold. I've talked recently about the head and shoulders pattern in the exchange-traded fund GLD. That pattern appears to have failed. As this chart shows, GLD broke well above the neckline and closed just below its 50-week moving average on Friday. So higher gold prices seem likely. Commodities (CCI) also have maintained their upward trend after breaking out of a triangle pattern earlier this month.

Historically, the period between June and a presidential election day has been positive for stocks and it may hold true this year as well. But that doesn't change the negatives hanging over this market -- weakness in the financials, rising interest rates and inflation.

Stocks Hold Off Bad News | Stock Market Investing

Tue, 13 May 2008 04:56:36 PST

Despite oil at another all-time high and the second month of declining retail sales, stocks closed mixed, with the major indexes basically unchanged. When investors shrug off bad news, that's bullish.

But expect a pullback in stocks anyway.

The Volatility Index (VIX) is at its lowest level since the last October's high in stock prices. And the Put/Call ratio, at .79, is the lowest it's been since a .82 reading last October. These contrary indicators will not remain benign forever. A reversal is in the cards.

The strength of the pullback will tell us whether the recent stock market rally is nothing more than a "bull trap" -- the Bear Market will continue -- or just a pause in a new Bull Market.

It would not surprise me, after the pull-back in stock prices, to see commodities pull back as well. The head and shoulders pattern I pointed out in gold several weeks ago is apparently going to hold and that means lower gold prices. If commodities follow suit then a rotation into stocks might set off a massive rally. Here's the chart for the exchange-traded gold bullion fund, GLD:

Chart courtesy of stockcharts.com.

Will the Yen Spoil the Party? | Stock Market Investing

Tue, 06 May 2008 02:24:59 PST

I've commented a number of times in the past that there is a perfect negative correlation between the strength of the Japanese Yen and the US stock market. When the price of the Yen falls, US stock indexes rise and vice versa.

The Yen topped out in March as our stock market hit its low for this year (so far). Since then, the Yen has declined and the US market has roared ahead -- up some 11% from the low. Not too shabby. But is the Yen now ready to resume it's upward trend?

In the chart below, the vertical lines indicate the change of direction -- red dotted lines mark the beginning of a rise in the exchange traded fund that tracks the Japanese Yen (FXY) and the corresponding fall in the exchange traded fund SPY which tracks the S&P 500 Index. Green dotted lines show the reverse.

Recently, the FXY dipped below its 50-week moving average and then rebounded. It's definitely something to keep an eye on as market internals have weakened a bit since my last post.

Short-term Indicators Are Positive | Stock Market Investing

Sun, 04 May 2008 11:54:41 PST

The past week's rally closed out the week showing signs that it may be more than a bull rally in a Bear Market. Numerous indicators are all positive for the short term, and after all, the long term is just the short-term repeated.

But as I've said before, expect a pullback -- the market moves steady by jerks. The depth of the pullback will reveal whether this is a genuine change in trend from negative to neutral or positive or if it is only a "bull trap," that brief rally in a Bear Market that catches investors buying in to a short-term move too late.

For those following the Primary Trend, we are right on the cusp -- the slope of the 10-month moving average is flat or just starting to turn up. The monthly price for the Emerging Markets exchange-traded fund EEM has crossed abve it's moving average and the other exchange-traded funds tracking major indexes are hovering, with DIA (the Dow Jones Industrials) and QQQQ (the Nasdaq 100) just above and the SPY (S&P 500 Index) just below.

All of the major domestic indexes have traced out an inverse head and shoulders pattern or a 'W' bottom, and these patterns typically indicate that the worst is over. You can see the pattern for the S&P 500 Index in Newsletter. It's critical that the S&P 500 not break the neckline by closing below 1395. It closed at 1413, so our uptrend margin is still very slim.

Breadth indicators -- that tell us whether it's just a few stocks pushing up the index or whether the rally is more broadly distributed -- are all positive:

The percentage of New York Stock Exchange stocks above their 50-week moving average and in a point-and-figure bullish pattern, broke above their long-term moving average on Friday; the same for those indicators for S&P 500, though not as robustly.

The Nasdaq 100 broke above its 50-week moving average, although the S&P 500 remains about 30 points below its moving average.

The put/call ratio appears favorable in the short-term.

The level of net new highs in the NYSE composite has held support at a point where previous rallies have occurred. The chart is here.

The rising trend in the Volatility Index (VIX), on a daily basis, has been broken, but just by a hair; the prior low was 18.28; Friday's close was 18.18. If this trend can continue, it is a definite positive for stocks. See the chart here.

On the international front: The strongest of the major market indexes is Emerging Markets (ticker EEM) which is well above its 50-week moving average. Developed foreign markets (the exchange-traded fund EFA), just touched its moving average on Friday. Charts courtesy of StockCharts.com.

Are Happy Days Here Again? | Stock Market Investing

Thu, 01 May 2008 02:13:44 PST

Today may have been the pivotal rally in changing our trend from bearish to bullish. The Nasdaq 100 closed above its 200-day moving average and the S&P 500 Index closed above 1400, though still shy of its long-term moving average. A strong showing Friday will help clarify whether we're seeing an actual change in trend or just a rally within a Bear Market.

A striking factor in this week's action has been the decline in "hard assets" versus "financial assets" such as stocks.

It's always worth waiting to see if a Head and Shoulders pattern works out -- as it did this week for the gold bullion exchange-traded fund GLD. I first pointed out the formation last Thursday and then noted on Monday how the price had bounced off the "neckline" at about 87.50. Then came the breakdown, and GLD closed today at 83.99, down more than 15% from the high-price "head" of the formation.

Look for a reversal, if there is to be one, in the range between 76 to 81.

Gold is supposed to be a protection against inflation and, despite what is happening to consumer prices, inflation expectations seem to have fallen over the past few weeks. Or is it simply the exhaustion of speculators?

For example, the exhange-traded fund TIP, Treasury Inflation Protected Securities, broke through an important area of support in April. TIP shares had run up rougly 13% from the beginning of September to mid-March. Since then they've fallen roughly 5%.

Another inflation-indicator is the exchange-traded fund DBA, a multi-sector agricultural futures fund. It is possibly tracing out a head and shoulders pattern, but in any event is down significantly from it's peak in mid-February.

All of these declines may not indicate anything fundamental. Rather, they may simply show how overbought these funds were by speculators betting on ever-higher commodity prices. Even oil prices are down this week, though only by roughly 3%, hardly a trend-changer. Copper also seems poised for a break in the coming days, and the odds would seem to indicate a break downward in price rather than up.

What to do now? I'm not giving investment advice. If you bought gold long ago you still have a hefty profit and waiting for a serious break at 76, that might indicate a true change in trend, would be a reasonable course of action. If you bought gold recently and have a loss, a good rule of thumb is to sell in order to avoid any loss greater than 8%; but this rule is critical only if you are close to using that asset for income.

If your income stream is secure and you believe gold is a good long-term holding, then waiting to see if it recovers in the range of 76 - 81 is also a reasonable course of action. But you must maintain that belief against the discomfort of looking at greater losses before the reversal finally occurs.

To me, patience in the face of pain is the single most important attribute for winning at the investment game. Charts simply give you an idea of where changes may take place -- but nobody's charts are certainties; they help you with the odds, with hanging in there despite the pain, but there is, of course, no such thing as a sure thing. Charts are all here. Charts are courtesy of StockCharts.com.

Just a Bear Market Rally? | Stock Market Investing

Mon, 28 Apr 2008 02:43:46 PST

Daily market action has shifted into neutral, with the Federal Reserve Open Market Committee meeting tomorrow, and its official announcement due on Wednesday. At this point, odds seem to favor an end to the current Bear Market rally that began after the market low on March 17 and another leg down in the current Bear Market.

In recent posts, I've noted that the Volatility, or fear, Index (ticker VIX) has broken an uptrend on a weekly basis. That's bullish for stock prices. Unfortunately, we haven't seen a lower low in the VIX, as this chart shows. It looks like the recent drop in the VIX level may be getting ready for a rebound, a negative for stock prices.

Another indicator I've talked about lately is market breadth, as measured by the percentage of stocks with a bullish point-and-figure pattern and the percentage of stocks above their 200-day moving average. Looking at these readings for the S&P 500 Index, we can see improvement but no positive breakout, as measured by the daily closing price breaking above its moving average. The picture is here. Another factor facing the S&P 500 is strong resistance at the 1400 level. The market closed today at 1396. It could be a stall or simply uncertainty about what the Federal Reserve will announce on Wednesday.

So the issue is less what the recent indicators are showing and more about where we stand on a long-term perspective. One way to view this is to look at the put/call ratio. When puts outnumber calls, investors are negative about future prices. The picture for total put/calls and equity puts/calls is quite different, as shown below.

What is striking about the total put/call ratio is that it has been in an uptrend since the end of the last Bear Market, while the ratio for equity-only puts and calls has experienced two dramatic spikes, once in 2004 and again since the 2007 market high. One conclusion you could draw from these charts is that we entered into a secular Bear Market in 2000 and that the 2003-2007 Bull Market was just a cyclical Bull Market inside a much longer-term Bear Market.

Finally, I mentioned last Friday that the exchange-traded gold bullion fund GLD was right at the "neckline" of a head and shoulders pattern and that if it broke down through that "neckline," it would signal much lower prices ahead. What happened today? The price bounced off the neckline and rose modestly. However, as the chart shows, the 50-day moving average for GLD has rolled over and the longer-term moving average appears to be flattening out. Both of these could indicate lower prices in the intermediate future.

Inflation is good for gold prices, so what are some other inflation indicators doing? Well, the Reuters-CRB Commodity Index has lost its upward momentum on a short-term (daily) basis and the yield on the 10-year Treasury Bond has hit strong resistance at 3.9%. A rising yield would indicate higher inflation expectations in the future but so far, the yield on the 10-year has not established an upward trend. So there would still seem to be a question as to whether the Federal Reserve is more concerned about possible deflation -- set off by the terrible condition of household balance sheets in the US -- than inflation. We'll see which way the wind is blowing on Wednesday. Charts courtesy of StockCharts.com

Gold Is on the Edge | Gold Investing

Thu, 24 Apr 2008 01:58:54 PST

The gold bullion exchange traded fund GLD has twice broken the support line formed by the apex of the triangle pattern from which it broke out decisively in February. Since then GLD has been tracing out a head and shoulders pattern. Today brought the price right to the neckline (red circle). A decisive close below the neckline confirms the pattern and gives us a price target of $72.92.

And it may be more than just the precious metals. The Goldman Sachs Industrial Metals Prices index is treading water just at the 480 level. Positive momentum appears to have flattened out as well. And the Dow Jones-AIG Agriculture sub-index is also showing signs of exhaustion. It makes sense. When you see a lot of main stream media stories about a particular investment, it's dependably past its prime, and well past the time you should be investing in it. Is oil next? It continued on its upward course today, with light crude closing at 118. We'll have to wait and see.

Junk Bond Rally | Stock Market Investing

Tue, 22 Apr 2008 03:17:03 PST

April has been a pretty good month for junk bonds given the fact that we're in the midst of a financial-system-shaking credit crisis and a recession to boot.

One of the junk bond mutual funds that has correlated very nicely with stocks over the years is the Smith Barney High Income fund (SHIAX), which is up 2.5% since the first of the month and up 4% since March 17.

Two exchange traded funds have done much better -- the DLJ High Yield Bond Fund (DHY) up 14% and the Blackrock Corporate High Yield Fund (COY) up 13.6%. The price of each has moved above their respective 50-week moving averages. The last time such a cross-over happened was in mid-2006. You may recall the stock market rocket that took off in August. If these cross-overs holds, they may be one more confirming piece of data that this bear market has bottomed.

(The S&P 500 Index exchange traded fund SPY is up 4.5% so far this month.)

Federal Reserve Bank data shows Moody's seasoned Baa corporate bond yields hovering around 7%, up from 6% in 2005 but still a full percentage point lower than in the 2000 recession. What's it all mean? Well, unless it truly is different this time, and history is no longer a guide, it's bullish for stocks, crazy as that seems, on a fundamental, economic basis. Here's history:

The correlation is pretty clear. Charts courtesy of StockCharts.com.

A Bear Rally or a New Trend? | Stock Market Investing

Sat, 19 Apr 2008 04:40:34 PST

Last week was the first really bullish week we've had since the end of January when the NYSE composite closed the week at 9277.58. Friday's closed bested that mark with a close at 9310.24.

The percentage of stocks above their 200-day moving average has risen 80% in the last four weeks while the percentage of stocks showing a bullish point-and-figure pattern has rise 63.5% and closed Friday right at the 50-week moving average. The chart is posted in Newsletters. Check the chart in the March 14 post for comparison.

Another bullish indication is the clear break in the Volatility, or "fear," Index. When the VIX falls, stock prices rise. In October and again in December, the VIX fell to its support line and then bounced higher. This time rather than bouncing up it crashed through the support line which now becomes resistance.

However, with a close at 20.13, the VIX has not reached bull market territory yet. During the last bear market, the VIX fell below 20 on two occasions and subsequently rose to over 40, sending stock prices lower each time. We're not out of the woods yet, but we seem to be headed in the right direction.

The Yen downtrend is also bullish for US stocks. The Euro is overbought and could see a pullback shortly.

Having made the bullish case for US stocks, I admit to expecting a pullback on Monday, statistically the worst day of the week for the market. One test of our trend will be the depth of the pullback.

And then there's this to think about: going long as we approach May is counter to one of the market's long-standing maxims: "Sell in May and go away." On the other hand, the market's long-standing belief that the best period to own stocks is November through April has been badly battered. The S&P 500 Index was down -9.9% in the first 3 months of this year. Last week's rally left the index down -3.9% for the year. Six of the last seven times this happened the market was even lower at the close of the subsequent six months. Charts are courtesy of StockCharts.com.

Inflation-Deflation | Economy

Thu, 17 Apr 2008 02:19:51 PST

This week has seen a number of positive signs in the stock market. Friday's action may be decisive. We'll report those results over the weekend.

As for Inflation-Deflation, the debate rages on and contraryinvestor points out that you can take either side and still win the argument. There is a great deal of inflation, notably what we are importing:

The impact of most of these rising prices -- energy and food -- is actually deflationary. US consumers, faced with rising prices for staples will have fewer discretionary dollars to spend. People are not going to stop eating or driving -- although they may make wiser choices as prices continue to rise -- so the energy-agricultural commodity juggernaut seems likely to continue.

But while this inflation may be deflationary for these retail categories -- motor vehicle and parts dealers, general merchandise and clothing, building materials, furniture, electronics & appliances -- inflation will keep things moving for other retailers: food and beverage stores, gas stations, bars and some restaurants, health and personal care products.

What about housing? A big question mark. Though the stocks of home builders have rallied since the beginning of the year, long interest rates have suddenly taken a turn to the upside. Higher rates will cause problems for both homebuilders and consumers faced with mortgage resets. And that will add to deflationary pressures. While the Federal Reserve can "control" short interest rates, long rates are up to the market. Commodity inflation may drive inflation higher and long interest rates along with it. Charts on homebuilders, and interest rates are posted at Charts.

Which Way Is the Wind Blowing | Stock Market Investing

Sun, 13 Apr 2008 08:39:26 PST

Has the Bear Market wind shifted to neutral? While Friday's drop in the market was a disappointing conclusion to last week, there are signs that, within six months, this market may be turned around.

Consider the percentage of stocks in the S&P 500 above their 200-day moving average. Back at the end of the last Bear Market, the momentum indicator MACD gave a positive signal in October, but the market thrashed around until April -- six months from the first positive momentum signal.

This week, we have the first sign, after a long decline in the MACD, that momentum has turned positive. That's the good news. The bad news is it may take six months for that momentum to translate into dependably higher market index prices. Check out the picture here.

Another possible positive sign is the tracing out of an inverse head and shoulders pattern in the S&P 500. The last such pattern, on a weekly basis, was back in the summer of 2006 -- and the market skyrocketed from that point. The pattern, however, is not complete, so this is something to keep watching.

Finally, the VIX, the fear index, showed a curious hesitation last week. As this picture shows, the VIX has been on a steadily rising trend line since the October 2007 high in the market. But last week, the expected reaction high did not develop. Maybe it will this week, in which case, the Bear rules. But if this trend begins to moderate, it would definitely be bullish. Charts for April 11 courtesy of StockCharts.com.

Just A Bear Market Rally? | Stock Market Investing

Sun, 06 Apr 2008 10:00:23 PST

Last week we looked at the New York Stock Exchange Composite -- which includes many non-operating companies, such as exchange traded and closed-end funds -- and the use of breadth indicators to judge the direction of the market. The peak in breadth occurred early in 2007 while the peak in price occurred in October. It is typical for breadth to peak six to nine months before price.

The chart clearly showed how dangerous the market was at the peak in price: our two breadth indicators were both below their long-term moving averages.

Where do we stand today? One of the those indicators, the percentage of stocks showing a bullish pattern on point-and-figure charts, is within 5% of its moving average. The other is 25 percent lower.

It seems unlikely that this rally will continue without another major pullback. In other words, it seems appropriate to continue to sell into rallies.

Seasonality is also a negative indicator. The best six months for the market is the period between November and May. The Dow Jones Industrial Average is on pace to post its worst 'best six months' performance since the bear market of 1973-74, according to Stock Trader's Almanac. And the helpful folks at the almanac point out the advice of stock trading legend Edson Gould: "If the market does not rally, as it should during bullish seasonal periods, it is a sign that other forces are stronger and that when the seasonal period ends those forces will really have their say."

Of course, Gould spent his first tend years on Wall Street during the 1920's and a lot has changed since then, for example, the impact of hedge funds. But fear and greed do remain the same, so we should mind what Gould has to say.

Arguing for at least a short-term pullback is the position of the Volatility Index, or VIX. It closed just below a support line that has been a 'bounce-point' since October. So the probability is that we will see another bounce in the fear index and a concomitant drop in the index prices. If we don't see a bounce, that may indicate a major change is in progress.

Other charts this week a close-up of the NYSE bullish percent index, last posted March 14, the downside targets for the S&P 500, last posted March 7, but this time I've added a histogram for stocks on the NYSE making a new high. Another chart posted March 7 was Industrial and Precious Metals Indexes. Finally, we haven't looked at foreign stocks lately and price charts for the iShares EAFE Index (EFA) and MSCI Emerging Markets Index (EEM) are posted. Charts courtesy of StockCharts.com.

Ben & the Transports | Economy

Wed, 02 Apr 2008 09:17:03 PST

Times are strange. With fuel prices spiraling out of control the transportation sector launched itself from a very pretty flag pattern, snapping out of a downtrend that began last July. So as Federal Reserve Chairman Ben Bernanke testified that a recession was "possible," a sector that typically leads the economy says otherwise. This break-out in the Dow Transportation Average will be a definite positive if it can cross above 5000 -- just 28 points away -- and maintain 5000 as a support level.

Another positive sign, as yet unconfirmed, is the bullish wedge pattern that has developed in the cumulative NYSE Advance-Decline Line. A break-out to the upside here would be a most positive sign for the overall market. The A-D line on a weekly basis remains in negative territory. We have a long way to go. Expect a pullback from the gains made during the last two days. Chart are courtesy of StockCharts.com.

Commodities & Deflation | Economy

Mon, 31 Mar 2008 08:22:36 PST

The Reuters-CRB Index of commodities dropped drastically the week before last, recovered above its 50-day moving average, and then closed today just below that support line. Gold's behavior has been the same.

The last time commodity index closed broke the 50-day moving average it also broke the long-term 200-day moving average. That was the prelude to the enormous run-up in prices that peaked roughly two weeks ago. Is the pull-back now setting the stage for another massive up-leg?

It would appear to depend on how successful the more speculative investors in the crow believe the Federal Reserve will be in pumping the economy back up into a growth mode. The current fear is that we face a much worse deflation than the Japanese did earlier because we're carrying much more debt. (The Nikkei fell 80% from its 1989 peak to its 2003 trough while real estate prices fell 50% from their 1992 high.)

So if commodity and gold prices take off again it's a sign that the Fed will keep deflation at bay -- and consumers will be paying higher prices (which encourages them to spend now as opposed to waiting).

For the Exchange Traded Fund GLD, gold bullion, there is an important support level at 89. Visit Charts for the pictures.

Control Your Optimism | Stock Market Investing

Sun, 30 Mar 2008 03:29:50 PST

Over the short run, the market is unpredictable. Over the long run, it is predictable. Why? Because the market is made up of people and people are predictable. Not over the short run - in the next few minutes, a person is unpredictable – he or she may do any number of things, sit down, stand up, walk around, make a phone call, check email, laugh, cry, smile, scowl, eat something, go to the bathroom. For the most part, you can’t tell by just looking at a person what they’ll do next. Just like the market. Short term market charts can't predict what will happen next with any certainty.

But over the long run people are predictable. We all share the same human emotions. People are born, get educated however they may, work, grow old, die; over the long run a course of a life is predictable. The market is much the same. Over the long run it's predictable because it is governed by economic realities, government policies, and people's reactions to the economy and to government policies. Long term market charts reflect those realities.

To make investing in the stock market a joyful experience, you have to accept the fact that the market is both predictable and unpredictable. The long term predictability of the market is the Primary Trend, The other key is your time horizon. Over the short run the market is unpredictable and we're all buffeted by emotions -- fear of losing, fear of missing out, regret over past mistakes. Over the long run it's quite predictable. And using long term charts can counterbalance the emotional impact of watching the value of your account go up and down over the short-term.

If you have a clear view of the market's long-term trend and understand how it may affect your ability to begin spending your investment assets at a given point in time, and if you can control your emotional reactions to market unpredictability, investing is a joy.

That's why I wrote The Joy of Stock Market Investing and post charts on this web site.

Where do we stand today? In danger of over-optimism about the market having found a bottom.

When we’re optimistic, we feel good. And feeling good makes us happy. Feeling happy is experiencing joy as well. When we’re confident, we feel in control, not just of our own lives but the whole world around us. We’re in gear together. Another joyful experience. That’s the problem with investing.

Optimism, over-confidence, illusion of control – these are feelings that create investment mistakes because they make us underestimate risk as they relate to our time horizon and the market's trend.

The New York Stock Exchange composite rose in price 0.51% last week. The percentage of stocks above their 200-day moving average rose 8.65%. The stocks in a bullish pattern rose 28.19%. Other short-term indicators may also give rise to over-optimism. One chart tells it all.

Shanghai down 50% | Stock Market Investing

Thu, 27 Mar 2008 03:49:08 PST

China had the hot stock market and now it's on the rocks. The Shanghai Stock Exchange Composite Index has given up 50% of its gain since the mid-2006 low at 1000. The S&P 500 Index is still holding out above the 38% give-back level.

While both moving averages for the Shanghai exchange have rolled over, the 20-day has not yet cross below the 50-day, as it has for the S&P 500. Which may only mean that the S&P is farther along toward recovery.

What happens this evening in China may have an impact on US markets tomorrow.

Pros & Cons for a Rally | Stock Market Investing

Wed, 26 Mar 2008 12:59:13 PST

Investors appear to be on the cusp. Momentum has shifted to the positive side but volume remains tentative. Where exactly does the S&P 500 Index stand? Read on.

Momentum, the top chart, began falling at the market peak in October and fell steadily into this month, when a reversal occurred for both the 45-day rate of change and its 20-day moving average. That's a positive. A on the chart.

The 50-day moving average is well below the 200-day moving average, a sign that we're in bearish territory; however, the spread between the two is quite wide and that may indicate a reversal is in the cards. It doesn't mean an end to the down market, necessarily, just a rally to close the gap. B on the chart.

As the year opened a symmetrical triangle pattern developed and prices broke down from that pattern at the end of February. The apex of the pattern is at 1354. For a rally to take place, the index will have to close decisively above 1354. C on the chart.

The index closed today at 1341. The 50-day moving average was at 1341. That won't happen again tomorrow. A close above the 50-day moving average will be bullish. D on the chart.

Volume has not yet responded to these early indications of an end to the correction. E on the chart.

The MACD, another momentum indicator, is tracing out a triangle pattern as well. Note the December peak occurred when the index was at 1515. It's been downhill since then. The market was at 1380 for the late February peak in the MACD. If the MACD's black signal line can decisively break through the upper boundary of the triangle pattern now taking shape, that would be bullish. A pullback seems more likely. F and G on the chart.

All of which indicates just how difficult it is to buy low and sell high. For conservative investors, it's still too early to jump back in. For aggressive ones, keep your eye on the indicators.

A Bear Rally | Stock Market Investing

Mon, 24 Mar 2008 08:04:24 PST

1350 was the magic number for the S&P 500 Index to quit its bearish ways according to some market commentators -- it closed today at 1349.88. Is that good enough to shift the market from down to neutral?

If you believe price follows volume, today's action was not enough. Volume was less than half that of the down days of March 14 & 17, when the market hit a new low. In fact, all the high-volume days have been down days. Not exactly bullish. Charts for this article are posted here.

Looking at the percentage of S&P 500 stocks trading above their 200-day moving average we see a nice double bottom formed by the 10-week moving average and the day closed with 27% above the long-term MA. That's higher than both the 10-day and 50-day moving average. Not conclusive, but positive.

Looking at the fear index, the VIX, we see a rising channel since the October all-time high in the market's price -- that's rising fear -- and while the index closed well below its extreme highs today, it is still well above the point friendly to highs in stock prices. VIX closed today at 25.73. A close of 14 to 16 would be conducive to rising stock prices.

Two inter-market indicators that are friendly to rising stock prices are the decline of the Japanese Yen and a fall in commodity prices. Commodities and precious metals have pulled back dramatically. Since US indexes have been negatively correlated to the Yen for some time, it would be bullish to see the Yen continue to fall in price. But the long-term trend for the Yen is still up, indicating that this may be just a short-term correction. That may be the case for commodities and precious metals as well.

Two Big Bounces | Stock Market Investing

Tue, 18 Mar 2008 07:28:44 PST

We can't say the worst is over, but the past week has seen support for the S&P 500 Index hold at 1276 -- the point at which 38% of the total gain from 2003 to last October's peak is lost.

The S&P 500 hit 1273.37 last Monday and 1276.60 yesterday before powering back up to 1330.74 today. The projection from the (weekly) head and shoulders pattern was 1276.23. The 38% give-back level was 1276.95. Really, uncanny.

For those who have faith in Fibonacci numbers, it's a confidence builder. The rest of us just want to see that 38% support level hold -- because the next stop is a 50% give-back of all the gains earned from the spring of 2003, the start of the last bull market. No one wants to see that.

Another 1998? | Stock Market Investing

Sat, 15 Mar 2008 01:56:37 PST

Today's paper reported that the chief market strategist at A. G. Edwards & Sons Inc. , Alfred Goldman, has "seen a bottom" in the market, to which he quickly added, "It's probably not 'the' bottom . . . it would be presumptuous to call 'the' bottom."

So what was the headline to this declaration of 'a' bottom if not 'the' bottom? "Some see recovery coming." Bound to be right, sooner or later. Right now, we can only look at the preponderance of evidence, which is all negative -- and that's the kind of news that goes into making a bottom in prices.

Back at the end of February, the Dow Jones Industrial Average and the S&P 500 Index both formed triangle patterns, which indicate investor uncertainty. At the end of the month both rallied up -- but the rally lasted only four days, and since then both indexes are well below the apex of the triangle, which is at about 1350 for the S&P 500.

Seasonality is negative with Easter coming this month; the days before and after Easter are traditionally bad days for the market.

A quick check of the AAII sentiment survey shows an increase of Bearish sentiment -- to 59.15% for last week -- but Bullish sentiment remains stubbornly high at 20.42% -- with "neutrals" coming in at the same level. Still not gloomy enough to be a bottom in my book.

Up volume (the volume associated with stocks moving up in price) on Friday was wretchedly low. While the 5-day moving average has turned down, it is still above the 10- and 20-day moving averages.

On the other hand, a long-term view of the VIX, the volatility or fear index, bears an interesting resemblance to what happened in 1998 when the S&P 500 fell roughly 18%. While circumstances are different, what the Federal Reserve is doing may in fact succeed, and the market may recover, as it did in 1998, to go on to reach new highs. Of course, that may mean we have another 2000 waiting for us as well -- a crash of epic proportions. All the charts for this commentary and the following can be found in the Newsletter update for this week.

On the NYSE Bullish Percent Index we're still looking for a higher low to indicate a reversal; ditto for the S&P 500 Bullish Percent Index.

As far as the percentage of stocks trading above their 200-day moving average, there is a glimmer of hope for the NYSE, as the MACD oscillator has turned up, but still from a very low level; perhaps indicative of a short-term rally with a long way to go for it to become a true reversal up. No sign of bullish life using the same indicator for the S&P 500 and Nasdaq 100.

One bit of potentially good news, if for short-term purposes only, is the short-term chart for the Volatility Index, which hit closed up sharply on Friday. Peaks in fear are typically a contrary indicator -- the market rallies in response.

But the kind of rally we need to see for a reversal in the market is one that decisively surpasses a previous high price. We're still waiting for that.

Sick Sectors | Stock Market Investing

Fri, 14 Mar 2008 03:45:10 PST

The health care sector, (the SPDR ETF, ticker XLV) normally thought of as a defensive holding in down markets, was dragged into the emergency room today, down more than 3% for the week.

And the other supposed stalwart sector, consumer staples (SPDR ETF, ticker XLP), is looking sick as well. It's price at the close of the week was 26.96, below both the 20-week moving average, which has a distinct downward slope, and the 50-week MA, which is flattening out; neither a good sign.

In fact, as far as sectors go, Energy (SPDR ETF, ticker XLE) is the only one that is holding up, as defined by the price being above its 20-week moving average and the 20-week being above the 50-week moving average. It's easier to see on a chart.

Things aren't looking good for another supposedly defensive sector, utilities. The price for the SPDR Utilities Sector ETF (ticker XLU) closed the week at 37.90, well below both its moving averages.

The only other sector with price and short moving average above long moving average was Basic Materials (SPDR ETF, XLB), but it's a close call. Price at the end of the week was 40.77, the 20-week MA was at 40.41 and the 50-week MA at 39.45. Not a lot of wiggle room.

Financials (needless to say) (SPDR ETF XLF), Industrials (SPDR ETF XLI), Technology (SPDR ETF XLK), Consumer Discretionary (SPDR ETF XLY) and Health all have a current price below the 20-week moving average which in turn is below the 50-week MA. The market has not fallen 20% from its October high, so officially this isn't a Bear Market, but it's hard to find a sector that's looking bullish right now.

Breadth Still Stinks | Stock Market Investing

Wed, 12 Mar 2008 07:57:00 PST

A bounce was exTuespected on Tuesday, given the deeply oversold condition of the market, but the Federal Reserve added some unexpected punch with its promised $200 billion injection of liquidity.

Still, despite the big rally that got the bullish emotions pumping, we have a long way to go to turn this market around.

In fact, Tuesday's rally looked anemic on the S&P 500 Index compared to the rally following the low on January 22. On January 25 the index jumped up to 1395. The S&P closed Wednesday at 1308. The picture is here.

And market breadth continues to look bad. The Advance-Decline line for the NYSE has developed a downward channel. All Tuesday's rally accomplished was a blip bounce off the lower channel line. And the long term moving average has developed a decided downward slope. It will take time to turn this boat around.

Another breadth measure is the percentage of stocks trading above their long-term moving average (200-day MA). For the S&P 500, that was 20% and for the Nasdaq 100 it was 17% at Wednesday's close. These charts paint the picture -- it's not pretty.

Another measure, the "bullish percents" indicator (those stocks in a bullish point-and-figure pattern) shows all the major indexes in Bear Market territory, below 30%.

Of course,when things look the worst is when they turn around. The question is ... is it that bad now or is worse yet to come? Charts are courtesy of StockCharts.com

Yipee! Another Bottom | Stock Market Investing

Sat, 08 Mar 2008 03:45:52 PST

A "double bottom" is now in place. The question: Will it hold?

Friday's close established new lows for all the major indexes:

11893 for the Dow Jones Industrial Average (old low was 11971)
1293 for the S&P 500 (1310)
1707 for the Nasdaq 100 (1795)
2212 for the Nasdaq Composite (2292)

It's uncanny that the Nasdaq 100 closed at 1707. As I noted in my March 4 post, "Smart Money Is Buying," late-day buying kept the index from falling below 1707, the low for that day. Perhaps 1707 really is a bottom. Time will tell.

Now that the news media is in full cry about recession and falling stock prices we should expect things to get better -- gradually. One possible impetus is a sudden pullback in commodity prices which have experienced a very steep ascent of late. Those kind of parabolic moves typically invite a pullback of some sort. A picture of the Goldman Sachs industrial metals and precious metals indexes is here.

Other indications that things may be lumbering toward improvement:

February's help wanted ads were up over December and January.
The "2-10 spread" surpassed 200 basis points. In the past, when the yield on the 10-year Treasury widened to 200 basis above the 2-year Treasury, and the Fed Funds Rate fell below the 2-year yield, good things have happened in the stock market. However, we still have a Fed Funds rate above the 2-year rate. We'll see what the Fed does at its next meeting.
Charts look ugly. And that can be bullish -- or not! See them in the Newsletter.

Charts are courtesy of StockCharts.com.

Oil & Technology | Stock Market Investing

Fri, 07 Mar 2008 01:41:29 PST

There are still too many bulls in the market for a bottom. The intriguing question is this: Will Technology and Oil return to their historical relationship or are we in a brave new world?

Of course like everyone else I believe in Peak Oil. And maybe this time it's truly different. But looking at the behavior of oil (WTIC, Oil, light crude) and Technology (QQQQ, Nasdaq 100) we can see an inverse relationship has been the general rule in the past. When oil rallies, technology falls and vice versa.

This was true in the summer of 2005 when oil rose dramatically (to more than $65 a barrel!) and the Q's fell. Again in the summer of 2006, oil shot up over $75/bbl and techs fell to their lowest point since the 2000-2002 bear market. The reverse happened in early 2007: Technology rallied sharply and oil fell to below $55.

But in the spring of 2007, something different happened. Both technology and oil rallied sharply, all the way to October, when another small inverse relationship appeared. Now, we have an enormous spread between oil and technology. The chart for today makes it pretty clear. What's next may be surprising.

Sentiment Is Not Yet Bearish

In the 1990 recession sentiment in the AAII survey was more than 50% bearish seven weeks in a row, topping out at 67%. During that same period, bullish sentiment hit its low for that bear market -- 13%. Those are extreme readings.

So far, we're not even close to that kind of negative sentiment, which, since it is a contrary indicator, would be bullish.

While bearish sentiment has hit 59% (week of January 24) it fell below the 50% mark for five weeks, until this week, when it came in at 51.6%. While bullish sentiment hit a low of 19.6% (week of January 10), it has remained in the upper 20's-low30's up until this week, when it dropped to 21.9%. But that's not extreme enough for a contrary signal. The picture is in Charts for March 7.

Fear of Missing Out | Commodities

Wed, 05 Mar 2008 09:04:04 PST

In my book, Joy of Stock Market Investing -- yes, readers who followed my advice even now can be feeling joy -- I discuss the fear of missing out. Those who didn't invest in oil or other commodities must surely be feeling high anxiety having missed out on the huge run-up in commodity prices.

Is there still time to jump in? History would make a person cautious. Or is this a brave new world?

On the one hand, commodity prices pushed ever upward today. On the other hand, commodities have reached a level where, under more normal circumstances, we might expect a reversal.

Oil and the Reuters-CRB Index have now reached the same level, in relative terms, that the Nasdaq reached in 2000 and the Home Builders reached in 2005. Here's the picture.

We all know what subsequently befell the Nasdaq and the Home Builders. If commodities continue to press higher, it will be a brave new world that awaits us -- and probably not a particularly comfortable new world for those depending on the dollar as their currency.

One thing that is bound to happen as a result of this highly inflationary increase in commodity prices is an increase in long bond rates. The 10-year Treasury had begun an upward march in yield in 2003 -- conforming to the rise in commodity prices -- but collapsed last year in conjunction with our housing-debt crisis. Now there are signs that the recent bond rally (in prices) may be coming to an end -- except for Treasury Inflation Protected Securities. The chart is here.

None of which bodes well for the stock market.

Smart Money Is Buying | Nasdaq 100 Index

Tue, 04 Mar 2008 08:34:07 PST

Does the "smart money" think that 1707 is the "bottom" for the Nasdaq 100 Index? Sure looked that way today. The Index opened today at 1724.09 and fell by early afternoon to 1707.42. What followed was a rally all the way to 1743.70.

There is a theory on Wall Street that the "smart money" trades late in the day and the "dumb money" trades early in the day. If that's the case, the dumb guys were selling early and the smart guys were buying late. A picture of the day's action is here.

But while today's late-session buying seemed bullish, the long-term picture of the Nasdaq 100 still looks menacing. The percentage of stocks trading above their 200-day moving average hit 21% today. That's lower than any low since October 2002 when it hit 15%.

After escaping 2002, the market rebounded, as it did after subsequent lows in 2004 and 2006. But we're below those lows and there is no sign yet of a rebound, as the chart indicates.