It is not an exercise in predicting where the Market will be – I am never going to say that the Market will be at (blank) at the end of the year. What I try to do is look at how money is being deployed by Institutions large enough to move Market prices up or down. You can see when they are selling and you can see when they are buying.
From there it is an exercise in looking at current circumstances and comparing stock performance from times in the past that had similar fundamentals. I do this by reviewing the markets literally every night.
Selling in Spring 2008 was the result of experiencing the Crash of 2000 – 2003 and understanding how markets top. They top sector by sector, until there are no longer enough names to hold the markets up. My homework saved clients millions of dollars.
Markets bottom in a similar fashion. You get more and more sectors hold their lows and begin to rally on strong volume. You get more and more stocks with expanding earnings go up on increasing volume. Eventually you get enough names going up to drag the indexes higher.
From a tactical standpoint, when markets go too far too fast, they need to revert back to the norm. They do this either by selling off back to the norm or sitting around, while the norm reverts up to prices. The number I use is for the norm is the 50-day moving average, because that is what the majority of Wall Street uses. The S&P 500 opened today 13.5% above its 50-day. That is the farthest above it has been since the peak in October 2007.
The Forest
Even with the rally of the last 8 weeks, the S&P 500 is still over 8% below the 1-year average. The markets need time to work through all of the damage caused in 2008.
Comparing 2009 to 2002 – 2003
Each rally in the NASDAQ 100 (NDX) failed at the 200-day (Blue Line and Arrows). Buying at the 200-day has proven to be very costly the last two Bear Markets.
After hugging the 200-day for 5 months, NDX was finally able to break above it in March 2003. It took that long for stocks to repair the damage of the 2000 - 2002 Crash. However, eventually Big Money showed up and the new Bull Market began.
The signal that it was okay to buy was a combination of price breaking out, accompanied by the percent of companies breaking above their 200-day breaking out (Red Arrow) and the New 52-week High List exploding from 100 to 418 in about 6 weeks.
Each rally of the 2007 – 2009 Bear Market failed around the 200-day (Blue Line and Arrows). You would expect this rally to pause of fail at this level. Remember, NDX is up 8 weeks in a row and that has only occurred 3% of the time since 1985. So a pullback seems to be eminent.
Stocks above their 200-day is now at 44%, about where it failed in January 2003. New Highs is at 10. 10! 10!! This market may still need more time.
Today
Several leading sectors got hit today. They had moved too far too fast and gotten to levels at which you would expect to see prices pause or pull back.
Here is the 30-minute chart of NDX
Today is the first daily close below the trendline off of March 16th. NDX could easily implode to 1,282 or you could see the futures gang come in tomorrow and gap prices up above 1,400 the open, suck in a bunch of shorts who stop out and then hit a few buttons to pop prices above 1,425 before you can drink your first cup of coffee tomorrow morning. We’ll see, but topping will probably not be a one-day affair with a 100 point crash.
I use a business consultant to help me identify the needs of my clients. What he told me most people are looking for in 2009 is somebody with a strategy to help them recover from all of the damage they sustained the last 18 months. I don’t have to deal with repairing fortunes, because I did my homework and protected them. That allows me to be patient.
We are now either in a Bull Market, or in the transition from Bear to Bull. I preferred to have confirmation and the ability to buy with defined risk, before really loading up. That means a pullback or a lateral consolidation is required.
Many key sectors and stocks (that I want to own) are now stalling at their 200-day (a logical place to rest) – QQQQ (the NDX tracking stock) OIH, XLE, XME, SMH. Technology, Commodities and Commodity-Based Economies will no doubt lead.
I think the move off of the March 2009 low is similar to the first rally off the 2002 low. So a pullback will need to be bought. We should get a secondary buy point soon (next few weeks?). It will occur as people who hold these stocks get tired and want out (get shaken out as over-owned names are sold with abandon). Even the 1982 and 1984 moonshots (V-shaped bottoms) had 2-day -7.5% selloffs and sat around for a week or two before launching higher. Losing 7.5% in two days would give some of my clients (and me) heart attacks, so I am patient…
NASDAQ
The NASDAQ has been a leader and it is stalling. NDX sits 12.5% above its 50-day. Either price will pullback to the 50-day or the 50-day will catch up to price. Either way, I will get much better risk-reward entry points.
The recent rally sure looks a lot like the March – early June rally of 2008 (Green Lines). I will have that in the back of my mind as I watch how the pullback unfolds. If volume is light and price holds up well, then I will be much more bullish than if prices plunge on huge volume.
Logical support for QQQQ is the breakout point near $32 (1,280 for the NDX, or about 38% of the recent rally).
QQQQ will likely, because its key components are stretched far above their 50-day averages –
AAPL is 17% above its 50-day
RIMM is 30% above
BIDU is 25% above
NTES is 18% above
GMCR is 33% above
Yikes. If the key components are extended and likely to pull back, then you figure that the Index has a high probability of doing the same thing.
Are you starting to see how this isn’t guessing or predicting? It is homework. It is massive preparation and study. It is a process of reviewing the components of the Market and determining if the components (Stocks and Sectors) of the Market are likely to rally or pull back in the near term. It is a process of reviewing where the Market stands in relation to past moves and determining if there is a high probability of a reversal or an extension of a move. It is a discipline of knowing when to commit money, while risking as little as possible. Yet it is imperfect and that is why God made Stop Losses…
Failing Leader
Netflix (a former leader) is failing on bad volume patterns. It held the 50-day the entire rally and has now broken it on big volume.
Bull Markets are by definition when price pulls back into moving averages and then launches to higher highs. NFLX pulled back toward the 50-day three times during its rally (Green Arrows). On this most recent time, it failed and broke the 50-day on heavy volume. If you are inclined to short, then you would be looking for the 50-day to roll over and you would look to short rallies into the now declining 50-day (a Bear Market by definition).
I am not advocating buying or selling/shorting NFLX. I’m just telling you how Bull and Bear Markets appear on charts.
In commodities, a similar bellwether would be FCX – if it breaks the 50-day on volume, then my perception of the health of commodities changes too. But I will worry about that if it occurs (I don’t think it will). See how FCX tried to rally during mid-2008, but the rallies failed near the 50-day (Red Arrows)?
Semiconductors
They lead moves, but up and down. The sector is -5% today on what will be massive volume. That is a lot of people all heading for the doors at once. They will most likely sell off what they want to sell off, very violently over a few day or one/two week period.
What scares me is that the recent rally looks exactly like the early 2008 rally (Green Arrows). Both rallies had near-vertical moves into the 200-day (Red Lines and Blue Arrows).
All I can tell you is that the $16 area had better hold for SMH, or we are hosed!
Commodities
Oil Service (OIH) is at its 200-day. It should be a leader for the first part of the Bull Market (if not the entire thing). I figured that it would pause here and debated selling it yesterday. I chose to hold it, just in case they ramp it higher, without looking back. My goal is to continue to add to it (not a recommendation, just my mind wondering).
Energy (XLE) hit its 200-day this morning and failed. OIH is outperforming XLE, so I will focus more money into OIH than XLE.
Metals (XME) are stalling right above the 200-day. XME is at the top of my buy list, and I am hoping for a pullback towards $30. XME is down -4.5% today.
Gold
Gold is in a 14-month base. The last base was 16 months and led to a 40% rally. I will be looking to commit large sums of money to Gold and leveraged Gold producers (but remember, Gold is highly manipulated by Central Banks, so the base could take longer and be more violent than you would expect it to be).
I have draw in what may end up being a massive Inverse Head and Shoulders pattern. A break above the $100 area for GLD ($1,000 an ounce for Gold) would be very Bullish.
China
China (FXI) has been a leader since late 2008 (sort of reminds me of Semiconductors). But I wanted to show you the size of the rally in relation to the magnitude of the Bear Market. FXI has only been able to recapture about one third of the crash.
I would like to buy a pullback into the old base, starting around $31.
US Treasury Bonds
They got slaughtered today on big volume. There is simply too many Bonds being created by the US Treasury for markets to be able to buy. The last $171 billion of auctioned Treasuries are now under water (sounds like the Real Estate market…). Investors are not willing to buy at these horribly low yields, so prices are falling hard (down -2.25% today!).
I circled the Quantitative Easing announcement (Green Circle) to show you how the Fed’s $300 billion commitment was quickly overwhelmed by the new supply coming on line each month as Obama spends an extra $2 trillion this year of money we don’t have to buy assets nobody wants, at prices nobody else is willing to pay and gives the rest to his political cronies and contributors.
The Fed may have to act soon. They dropped the ball when they did not expand the QE commitment at the last FOMC meeting. Gold and the Euro seem to be pricing that in. A surprise expansion of QE would also be great for Commodities and risky stocks. So it may take a few more days of selling before the Fed acts, because all they do seems to be designed to prop up stock prices…
So the setup is there for a pullback of undetermined time and price. The violence and volume of the pullback will help me determine how bullish to be about the rest of 2009. I’ll keep you posted.
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