Secular Bulls and Bears and Potential Trades

I seem to always be working. Whenever I am out in a social setting (many parties this time of year), people always ask me the same question – “If things are so bad and everybody knows it, then how does the Stock Market keep going up?” This is normally followed by – “How high does the Stock Market go before it cracks again?”

These are questions that people never would have dreamed of asking in 2000. Back then they were programmed to “buy every dip”, because the Markets never seemed to go down. But things have changed, and people who haven’t played defense are frustrated about having been through two brutal Bear Markets in the last decade and they are terrified about it happening to them yet again.

I want to review the reality that is the Markets today. You can either look at reality and deal with it or pretend it doesn’t exist and suffer the consequences.

Here are two charts. One is a Secular Bull Market and one is a Secular Bear Market. I removed the symbols, because who the stocks are is unimportant. What is important is to recognize that Assets Classes move in long term patterns. These patterns normally play out over 18 to 20 year periods.

It is pretty clear where your money needed to be over that 20-year period. I think you can guess what these two charts are. The Secular Bull sequentially made higher highs, meaning that even if the timing of your purchases was wrong, you got bailed out and still made money over time. The Secular Bear Market was in a brutal trading range, where if you bought wrong you got crushed and even you bought right, if you did not sell, then you probably ended up breaking even after 20 years.


Since 1998, you can see that the roles have reversed and you now have one in a new Secular Bull Market and the other in a new Secular Bear Market. Interestingly enough, they are both now at approximately 1,100. I am pretty confident that the top chart will be a lot higher over the next 8 – 10 years than the bottom chart.

The top chart is Gold. The bottom chart is The S&P 500 Index (Stocks). Look at the 20-year charts above and ask yourself if the long-term fundamentals justify an extension of the Secular Bull market in Gold and the Secular Bear Market in Stocks. I believe that they do and will manage money accordingly.


People have convinced themselves that all stocks will ever do is go up in a Secular Bull and never correct or underperform for an extended period – remember the misinformation that Real Estate never goes down…

Stocks can have horrible performance over extended periods. Especially the Markets of economies where the Governments decide that nothing will fail. This is what has happened in Japan since 1990. Take a look at how the Nikki has performed since 1990 –


If you don’t think the same thing can happen here, then take a look at the NASDAQ ($COMPQ), with a very similar Post-Bubble chart. You can easily see Real Estate Prices and Financial Stocks tracking out similar charts over the next twenty years.


Someday, the chart of Gold will look like the Nikki and the NASDAQ, but I don’t think we have arrived at the point where the Gold Market has hit a multi-Generational high. The fact is that THE enemy right now is falling Real Estate Prices. The best way to pump them up is to keep Interest Rates near zero, so that the cost to borrow is cheap, thus propping up Real Estate Prices.

The Fed has chosen to do this by buying Mortgage Backed Securities and US Treasuries. Other countries have chosen to do the same in their countries. Each time there is a crisis, you will see more money printed to buy whatever asset class is being delevered. That is bullish for Gold.

What This Means to You
Stocks are in an extended trading range. They are by definition TRADES, unless you want to hold them for 20 years and potentially have no real appreciation in your holdings. So there will be a time when you must sell. We probably are not there yet, but you should be preparing your holdings for the future need to play defense.

Fewer Stocks Are Working
You can see that the price of the S&P 500 Index ($SPX) is at new highs, but the Bullish Percent ($BPNYA) and the Summation Index (NYSI) are well off of their highs. Bullish Percent measures the percent of stocks in uptrends and Summation is a cumulative total of the number of advancing stocks versus the number of declining stocks.

As trends mature, fewer and fewer names participate in the rally and ultimately the final leaders top and the market rolls over. We aren’t at that stage yet, but leadership is narrowing.


Here is a comparison of Large Cap ($SPX) versus Small Cap ($SML). You can see that $SPX is at new highs, while $SML is several percent below its highs.


Here is a comparison of US Large Cap ($SPX) versus Developed International Large Cap (EFA). SPX is outperforming EFA.


Here is a comparison of SPX versus Large Cap Technology (QQQQ). You can see that they are basically the same chart. So, Large US is performing in line with Large Technology.


THE US Dollar
Near Term, the US Dollar has a very big decision to make. If resistance holds here, then we could see a retest of recent lows and that would be good for Carry Trade items like Gold and potentially Stocks. I am open to anything happening and will have in stops to participate if the Dollar rolls over for a few days or weeks.


This is important because shorting the Dollar has been the engine for the massive US Dollar Carry Trade, which has propped up all kinds of risky asset classes.

I am watching Gold closely for a trade and the ability to sell more of my holdings into any bounce (I wish I had sold it all on Dec 3). If there is no bounce from here, then things could get real nasty very quickly.

Let’s see how well Gold (GLD) manages to bounce if the US Dollar weakens next week. It didn’t take long for Gold to tag the 50-day, did it?


Gold Stocks (GDX) are now at the bottom of their trading channel.


Here is the hourly chart of the Dow Jones ETF (DIA). You can see how it has held support on 3 other occassions at about $102.10 After each successful hold, it has gapped up about 100 points an ventured back to the top of the trading range. I would not be surprised to walk in tomorrow with the Dow up or down 100 points before the open of trading. You can also see where your stop should be if you own DIA.


The NASDAQ 100 (QQQQ) has been leading the markets. See how it is challenging the top of its trading range, while DIA is near the lows of its range? I don’t own much QQQQ, but have stops in to buy a breakout.

Jingle Mail, Jingle Mail...

Jingle all the way to Wall Street!

Morgan Stanley has decided to turn in the key on 5 San Francisco high rises, because these five buildings are about 50% in The Red.

http://www.zerohedge.com/article/morgan-stanley-abandons-5-san-francisco-office-towers

Jingle Mail is where a homeowner is so upside down on a loan that they simple walk away from the home and mail the keys in to the bank.

I don't know who Morgan Stanley stuck with these keys, but there will no doubt be a serious hit to somebody's CRE MBS (Commercial Real Estate Mortgage Backed Security). Ouch...

How freakin' stupid is Morgan Stanley? If they are mailing in their keys, then what is to stop all of those Millions of homeowners currently with Negative Equity?

According to the Wall Street Journal today, here are the current percentages of homeowners with Negative Equity (WSJ) (keep ion mind that these are 2008 numbers and 2009 are far worse)-

California 31%
Nevada 27%
Arizona 24%
Florida 22%

http://online.wsj.com/article/SB126100260600594531.html#project%3DSTRATEGIC_DEFAULTS_0912%26articleTabs%3Dinteractive

Do you wonder why people are angry with Wall Street when they pulling stunts like this? Check out he Huffington Post today -

If Morgan Stanley Walks Away, Why Shouldn't You?

"To the extent that Morgan Stanley is leading by example, the securities colossus is sending an unlikely message to underwater homeowners: Walk away."

"In Thursday's Wall Street Journal, John Courson, the head of the Mortgage Bankers Association, played up the moral argument against walking away, telling the paper: 'What about the message they will send to their family and their kids and their friends?'

'It highlights the double standard we have in this country,' White says. 'Businesses strategically default all the time and, in fact, they should -- they're obligated to maximize profits and minimize losses. But so should homeowners.'"

The collective greed of Wall Street is staggering. This makes them so deaf to their public image and is such an albatross around Obama's neck.

Now you have Citigroup, Wells Fargo and BofA repaying TARP, not because it helps their shareholders (See Citi down -14% in 3 days on a massively dilutive sales of stock) but because it allows then to get out from under the Pay Czar. The bankers are doing whatever they can to make as much money as they can and the public is getting pretty upset about it - check Obama's Poll numbers.

2010 will be a referendum on Washington's conduct towards Wall Street. So expect the anti-Wall Street rhetoric to pick up in Washington after the Health Care socialist-wealth-transfer-scam is passed or shelved.

Illinois Downgraded _ Can California Be Far Behind?

Substitute “California” or “The United States” for “Illinois” and you get an idea of where this is all going…

“Standard & Poor's Ratings Services lowered its rating on Illinois's general obligation bonds, reflecting the state's budget gap.

The legislature's difficulties in passing a fix before the end of the fiscal year on June 30 are heightened by a constitutional rule requiring a supermajority of 60% to pass any law taking effect before June 1 of the following calendar year, Moody's said.

S&P said Thursday the state has made limited progress in addressing this year's budget gap and next year's budget balancing depend on uncertain savings from spending reductions and debt restructuring. “

"The downgrade reflects what we view as the state's deteriorating liquidity and financial position," said analyst Robin Prunty. "Illinois failed to address its fiscal 2009 deficit, which was carried into fiscal 2010. Similar to many other states, revenues are performing below originally forecast levels."

“The firm has a negative outlook on the debt, now rated at A+, largely because the credit rater has doubts about the government's willingness to implement politically unpopular measures to close the gap. The new grade is four steps below AAA.”

http://www.zerohedge.com/article/big-trouble-little-chi-town-illinois-downgraded-aa-sp-liquidity-issues

Illinois did what California did in 2009 and blinked. They decided to borrow from 2010 to pay for 2009 and not make any real cuts. They will have to make difficult decisions in 2010, or they will have to pay more to borrow in 2011.

Oh wait, that’s not true. Because they US Government will bail the states out by giving Municipal Bonds implicit guarantees of the US Government, moving the obligations for state spending from the states to the US Taxpayer…

I don’t know if this stuff all hits the fan after the Mid-Term Elections of 2010 or the Presidential Election of 2012, but at some point, investors will start to sell their US Treasury holdings and the US will have to devalue the US Dollar. It is simply a matter of when.

Watch the likes of Greece, Ireland, Spain and the UK to get an idea of how things will be done when the US devalues the Dollar.

US Treasury Yields Up, Commodities Down

The Demand for US Treasuries is slowing, causing Bond prices to fall…

http://market-ticker.denninger.net/archives/1720-Oh,-You-Think-Youre-Gonna-Crank-Out-Bonds.html

And Interest Rates ($TYX) on US Treasuries to rise…


Which causes the US Dollar ($USD) to rise (because you want to own currencies that pay higher yields)…


Which kills the Dollar Carry Trade, and forces sales of Crude Oil ($WTIC) and Gold ($GOLD) …


The lower cost of Energy helps Airlines ($XAL) and Retail (XRT)


Here are the charts above on one chart, for easy viewing. Since approximately December 1st, you have had $TYX, $USD and $XAL up and $GOLD and $WTIC down.

And Stocks remain in a trading range, with The Bullish Percent ($BPNYA) and the Summation Index ($NYSI) well below their highs of September. So you have fewer names in uptrends, holding the markets up.

This can’t last. We either need to see a selloff, to clear the decks for another rally attempt, or we need to see new buyers show up and break the markets out of this trading range on big volume.


You have to ask yourself, if asset price appreciation and the Global Recovery is predicated on a falling US Dollar, and the Dollar is weak because of low Interest Rates on US Treasuries, then how far can a Dollar rally and a Commodity selloff really go?

A second theory is that everybody is short the US Dollar and when you get crises like Dubai and the Credit downgrade in Greece and the downgrade watch on the Credit of Spain, then people need to cover their shorts and you get a vicious rally in the US Dollar. Moreover, you get fear that countries in the Euro (Greece, Ireland, Spain) are going to leave, so that they can start printing their own money to deflate away their debt – putting pressure on the Euro and benefiting the US Dollar.

In my mind, that makes the Dollar rally Cyclical (Trade) and the Commodity rally Secular (Buy and Hold).

Is the Dollar Carry Trade Dead?

I wrote the following about the ETF for Gold on Tuesday -

“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.”

“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).”

Gold was hammered on Friday. GLD was down -4.17%! That is what happens when prices gets extended. It is normal. GLD is now at its first level of support. I mentioned two potential entry points if price pulled back. If the big boys don’t show up to defend the price of GLD at these two levels (Blue and Pink Arrows), then I will get concerned. But as of right now, in my opinion, Gold is in a once-in-a-generation Bull Market with strong fundamentals.

I think GLD is in its first real correction of this move. That would put it into a correction similar to the one in late 2007 (Black Circle). It could be that this advance is more mature that I think and GLD will have a shorter correction (Black Arrow). I do not think the move is over, but if it is, then GLD will fail to rally and a correction like the one in March 2008 should be expected (Green Circle).

The bottom line is that people have just started to believe that Gold is now an asset class that they need to own. GLD currently represents 0.4% of the Market Cap of the S&P 500, so it has a long way to go before it is a significant portion of most investors’ portfolios.


Here is how several Gold Stocks did this week. Yikes…




Is the Dollar Carry Trade Dead?
The Dollar had a strong day on Friday and is again touching the 50-day (Black Line). You can see that every time the Dollar has touched this line since April, it has failed and made lower lows. There has been an obvious correlation between the falling Dollar and rising Risky Asset prices.


The speculation this week has been that the Yen Carry Trade is back on and that it will now become the engine for driving Asset Prices higher. The Yen is also now at an obvious level of support. I was short the Yen for most of this week, but sold my positions in YCS on Friday.


The Euro is sitting at the bottom of a 1-month trading range. The Euro has been the anti-Dollar.


The S&P 500 is still in a trading range (now 16 trading days). It is either going to break out and we have a nice Christmas present, or it breaks and gives us a shot to buy it at lower prices in January.


This should be an interesting week. I am also noting a number of potential setups in Asian Country-specific ETFs.

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

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?

http://www.zerohedge.com/article/188-million-vacant-homes-q3-seasonally-adjusted-homeownership-rate-decade-low

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.

http://lansner.freedomblogging.com/2009/11/25/how-banks-may-lose-430-billion-more/45087/

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.