Tuesday, December 1, 2009

Many Potential Setups for Year End

The S&P 500 has been stuck in a narrow trading range for 14 trading days. The last few consolidations like this have led to rapid advances in short bursts. You also have Crude Oil and several other Commodities in multi-week consolidations and Gold in a vertical rise of panic buying.

Needless to say, a lot can happen between now and the end of the year, so this is a very comprehensive and long post. I cover a lot, but I think these charts indicate how I will be positioning money over the next 4 to 6 weeks, if the big boys show up to push prices higher into year end.

Here is the trading of the S&P 500 over the last 3+ months (Hourly Chart). There have been three rallies and three consolidations. Breakouts from the consolidation have been accompanied by breakouts in the RSI(14). This has been the flattest of the three consolidations, which tells me that the big boys just weren’t interested in selling. There is a pretty obvious entry point on this chart.

Do you see why I consider this to be a trader’s market? In October, price on SPX went from 1,020 to 1,100 (+7.8%) and then back to 1,030 (-6.4%). That’s nasty. A 6.3% drawdown in 7 trading days is brutal.

Here is the daily chart of SPX. I have highlighted the three consolidations. I want in if SPX breaks out.

Gold (GLD)
I started to sell some of my Gold stocks. They have had some impressive runs and I have moved out of some extended names and into some new names breaking out of bases. I’ll get to them in a minute. First, I wanted to look at a longer term chart of the Gold ETF (symbol GLD).

In late 2007, GLD broke out of an 18-month base and went vertical. In November 2007, GLD hit the +20% band above its 200-day (Red Line and Red Arrow). At this time, RSI(14) got up to about 80 (Green Vertical Line). This is normally a zone of being so overbought and stretched above a key moving average that a pullback or consolidation is to be expected. RSI (14) measures Momentum and often peaks before the final peak in price.

GLD sat around for 6 weeks and then started another leg higher. On this second rally, RSI (14) put in a lower high. Price then sat around for only 3 weeks (Secondary Bases are normally shorter than the first) and then GLD had its final rally of the move. On this rally (Black Vertical Line), ADX shot up to and peaked at over 50. ADX measures the strength of the trend and ADX at over 50 is where trends go to die.

Look where GLD is now. ADX is only at 27! But RSI (14) is at 82 and price is +20% above the 200-day. It has been a heck of a run, but I am looking for a near term pullback in Gold. I will be selling some here. I think the easy money has been made and will look to reload on a breakout of the next base or pullbacks into the 50-day or the +15% Band (Blue Line).

RGLD has rallied 25% in a month and ABX is up 35% in about a month.

While SSRI and GFI are just starting to break out of bases. It is easier for me to play defense on SSRI and GFI if things turn unexpectedly sour. I am also looking closely at Anglogold Ashanti (AU).

Crude Oil ($WTIC)
Crude Oil has been sitting in a narrow trading range for 7 weeks. It has stalled out right below the 38.2% retracement of the Bear Market (who says that the computers and their Algorithms aren’t driving trading in 2009…). It tagged the uptrend line on Friday’s Dubai panic (Red Arrow).

RSI(14) has stalled out for the last 6 months at 60. RSI doesn’t stall out at 60 – it either breaks to 80 or 90, or collapses back to 30 or 20. A big move is coming! Hopefully soon…

ADX is now at 16 (Black Arrow). I keep telling you how I run screens to find stocks that are basing. I like a reading of 15 or less for ADX, but will take a reading of 16 on the weekly chart…

I sold my USO (Crude Oil ETF) yesterday. I’m not worried about missing out on a dollar or two. I will be heavily invested in Crude when it does break out. I may also be heavily invested in the short of Crude if it breaks down. I expect a very dynamic move in the not too distant future and I want in! That 50% level sure looks like a magnet on the upside (Green Arrow), as does the 200-day (Blue Line) at $66 on the downside.

During the time Crude Oil has been in a trading range, Energy stocks have also been consolidating. Large Cap Energy (XLE) has been consolidating right on top of its 50-day and has a fairly obvious entry point, while the Energy Explorers ETF (XOP) has been consolidating below the 50-day.

Normally, the smaller Exploration companies have more volatility on the way down and up, than the large Energy companies. I expect the Energy stocks to move out of their bases (either up or down) at about the same time as Crude Oil. The higher octane way of participating in the moves of Energy Stocks is DIG/DUG, but the SEC frowns upon owning leveraged ETF’s for anything more than a “Day Trade”. Buyer beware!

The Agricultural Commodity ETF (DBA) broke out of its recent trading range today. However, the action was weak and DBA actually closed below its opening trade of the day. That said, it still definitely has my attention.

The Total Commodity Index ETF (DBC) is the textbook example of why I wait to buy breakouts. Remember what I have been telling you since I started this blog – stocks tend to make big moves over short periods and then sit around for a long time, before either reversing or reinitiating their trend in another violent move.

The big moves on DBC have only taken a few weeks (Parallel Green Lines) and the consolidations have taken a few months (Blue Lines). I expect the next move on DBC to be pretty violent and if the big boys show up and buy it hard tomorrow, then I will be interested. Today’s action was pretty lame.

Take a look at how Gold has traded over the same period versus DBC and DBA. Which one would you rather own? GLD has been a core position for a reason!

Chemicals and Fertilizers
Mosaic (MOS) has broken out of a nice base

Celanese (CE) broke out of a secondary base today

Leaders in Bases

Large Companies in Bases

Sectors in Bases

Sunday, November 29, 2009

Vacancy Nation

Last week, I went to lunch with some friends and they asked me how many vacant houses there were in the USA. Here is the data from the US Census Department –

130,302,000 Total Housing Units
18,843,000 Vacant

Or a 14.5% Vacancy Rate!

How many years of inventory is that?
How much of that inventory is not for sale and being held off the Housing Market at places like FHA and Citibank?


The big issue going forward for Real Estate is that there is an enormous pile of debt that will have to be refinanced in the next few years. Because Real Estate prices have fallen so sharply, many of these Commercial Loans and Residential Mortgages will not be able to be refinanced.

Here is a chart of the oncoming wave of Residential Option ARM mortgages that will have to be refinanced in 2010 – 2012. If the house you own is worth less than you paid for it and your bank calls to tell you that you need to refinance your mortgage, will you A) walk away from the house or B) walk away from the house?

The deflation we are seeing in asset prices is simply a function of contracting credit and too much inventory (Supply) for not enough buyers (Demand). I think the big Recast wave for Option ARMs will be a big weight on housing prices in 2010 – 2013.

Commercial Real Estate
There is $1.4 Trillion coming due in Commercial Real Estate (CRE) loans over the next 5 years. These properties have the same issue as Residential Real Estate (RRE) – Negative Equity, limited available credit, too much Inventory for current Demand.


To put $1.4 Trillion in perspective, that equals all of the CRE paper maturing from 1994 – 2009!

All of this tells me that the Fed will continue to print several $100 Billion per year for the next three to five years. Call it Quantitative Easing or call it Government creating artificial demand to prop up asset prices and allow banks to offload newly financed debt to the US Taxpayer.

Any way you slice it, the prospects of the US Economy finally being able to focus its resources on real growth and job creation seem to be bleak, at best.

Kick Me

Health 'Reform' That Burdens Our Young

“We have become a society that invests in its past and disfavors the future.”

I can’t believe that I am quoting a Newsweek article… But this one addresses my concern that the Government is stealing from our kids, instead of actually making sacrifices to current consumption. This article focuses on how the current “Healthcare Reform” legislation will dramatically raise healthcare premiums paid by the young to subsidize the premiums paid bt those over 55.


“In fiscal 2008—the last "normal" year before the economic crisis—Social Security, Medicare and Medicaid (programs wholly or primarily dedicated to the elderly) totaled $1.3 trillion, 43 percent of federal spending and more than twice military spending. Because workers, not retirees, are the primary taxpayers, this spending involves huge transfers to the old.”

$1.3 trillion is about what we will run as a Deficit in 2010. I have no doubt some smart, young politicians are looking at those numbers and saying “I can balance the Budget in one shot”…

“Now comes the House-passed health-care "reform" bill that, amazingly, would extract more subsidies from the young. It mandates that health insurance premiums for older Americans be no more than twice the level of that for younger Americans. That's much less than the actual health spending gap between young and old. Spending for those age 60 to 64 is four to five times greater than those 18 to 24. So, the young would overpay for insurance that—under the House bill—people must buy: Twenty-and thirtysomethings would subsidize premiums for fifty-and sixtysomethings.”

No wonder AARP is in favor of this bill.

“Whatever the added burden, it would darken the young's already poor economic prospects. Unemployment among 16- to 24-year-olds is 19 percent.”

19% unemployment is the stuff of revolutions. That is a staggering figure! At some point, some smart, young politician will let his fellow young people know that he can bring back a heck of a lot of middle class jobs if he lowers the value of the Dollar and increases Tariffs on China.

“Working Americans—the young and middle-aged—already pay a huge part of the health costs of the elderly through Medicare and Medicaid. These will grow with an aging population and surging health spending. Either taxes will rise or other public services will fall. Already, all governments spend 2.4 times as much per capita on the elderly as on children, reports Julia Isaacs of the Brookings Institution. Why increase the imbalance?”

At some point in the not-too-distant future, the young will flex their political muscle and start to cut the entitlements offered to those over 50.

Neil Howe (The Fourth Turning) commented on this article -


“At last count the official unfunded liabilities for Social Security and all parts (A-D) of Medicare is roughly $100 trillion. So who’s even going to count the extra nickels and dimes we borrow to fill the Part D doughnut hole? And the fiscal stimulus keeps the economy moving and the Fed is handing out free (zero-interest) money. For me, this is certainly the most interesting and unanticipated fiscal, economic, and political environment I have ever seen in my life. For much of the country, there is tremendous unease that the vaunted “courage” of our national leaders always seems to result in borrowing from our kids, keeping our benefits up and our taxes low, and kicking most of the painful choices (”health care reform”) down the road. What happens when the music stops?”

The IMF tells us that if there is another bank bailout, then there will be revolutions –


So if the bankers only get one shot at a bailout, then they will print infinite amounts of money and hope that hyper-inflation will bail them out of their past lending mistakes.

Back to Neil Howe…

“Many informed Millennial (born 1982-200?) will want to ask why — after all their struggles to find jobs, the higher tuitions, the extra debt, and the open faucet on federal debt that they will have to pay back—they also need to pay a new hidden tax to benefit Boomer (born 1943-1960) nearing retirement. Millennials like to be regarded as more civic minded. But I don’t think they like to have a “kick me” sign attached to their backs. If this goes through, some national leader is going to discover this issue and push it in ways that could get ugly. One could, for example, see low-income, go-bare Millennials heavily featured in the Tenth Amendment challenges that will inevitably occur on the mandate. I’m not looking forward to any of this.”

All of this tells me that more money will be printed and taxes will continue to rise in order to pay enough entitlements to placate the unemployed masses for as long as possible.