Friday, January 30, 2009

Technical Update 3.09

I have recently come to the conclusion that blogging and modesty are incompatible. A prerequisite of writing your thoughts for others to see is the belief that others actually give a damn. However true that may be, I will continue in my attempt to avoid coming across as some arrogant jerk, screaming for attention.

Sometimes I'm right, sometimes I'm wrong. I've made a decent living the last few years being more of the former. But from what I understand, that is no feat in itself. Many, if not most, can claim a similar record. Others will simply convince themselves of righteousness. In fact, I'd be willing to bet that nobody believes they are wrong more often than they are right. Just like 90% of people grade themselves as above average drivers.

So what does this preamble have to do with technical analysis? Everything. Wall Street, Bay Street, High Street and many others to be sure, are littered with the corpses of those who thought they were god. If nothing else, this current crisis is testament to that. Only this time they weren't playing with their own accounts and livelihoods. They were playing with everyone's.

One of the toughest paradoxes I've had to confront in doing what I do, is to reconcile differences with time horizons. Most of my analysis is done on a very broad, macro scale. Yet most of my profits come from short term speculations. And depending on your definition of "short term," that is what everyone else is doing also. If anyone tells you they are a long-term investor right now, they are probably lying to themselves. We're all "renting" stocks to a certain extent. The days of investing for the prospect of dividends is essentially gone. Even today, when confronted with an opportunity to buy a company with a robust dividend, we are more or less speculating on that company's ability to survive. Very few robust businesses are paying robust dividends.

So please try to view these technical updates through the appropriate lens. My sentiments here may contradict sentiments expressed elsewhere due to the time horizon I am dealing with.

The S&P 500 is my primary benchmark for market direction. But I like to see confirmation in other indices like the Dow and Nasdaq before I draw my conclusions. The Dow has been a laggard over the last week as earnings disappointments hammered some of its components. The S&P had to drag the Dow along with it when it broke above resistance at the 840-850 level. As of Thursday's close, the major indices are at a very vital juncture. Any sort of follow through of Thursdays action would portend very poorly on weekly and monthly charts. I will be watching Friday carefully.

As can be seen from the chart above, the S&P is looking vulnerable after a potential "price too high" rejection of the breakout. Fast moves follow failed patterns.

Here is a weekly of the Dow. The considerable underperformance could even see the average post a weekly drop for the fourth consecutive week in January.

Above is a chart of the 10 day moving average of the NYSE market breadth. That large spike above the red line early in the year was one of the signals I used to start getting short. We have now rebounded back to the historical area of "overbought" and are falling again. An oscillation down to the -1000 mark would undoubtably see the major averages surpass their November lows. I expect this to happen.

Another one of my trusty indicators for market sentiment is the put/call ratio. It also gave an extreme reading early this month and has nearly revisited those readings on this shallow rally. This should be a very concerning divergence for bulls. See below:

Suffice to say, I expect lower prices in the immediate future.

As regular readers know, I have been wrong on the recent rally in gold. And I mentioned last week, that if any rally could hold above the $900 level, I would have to re-evaluate my stance. On Monday morning, gold opened higher and continued to rally. I'd like to share the following psychological process I went though, because it is one that often leads to losses. As gold opened higher, one of my requirements for higher prices had been met. For fear of it running away, I thought about buying it. Regardless of the fact that there was no reasonable levels of support to make such an entry with defined risk. I didn't want to miss "it." "It" being the run-away prices of $2000 or higher that many gold bugs have talked about, and that I have warned against. "What if it happens and I miss it!"

Luckily I caught myself. Fear of missing profits was not on my list of legitimate reasons to enter a trade. I had the feeling that others were going through a similar process, so instead of buying gold, I shorted it. I covered near the open on Thursday for a decent profit. Today, I see gold up sharply in European trading, near it's highs from Monday. However, it has been trading down every day this week, only to open flat or higher in New York. (side note: don't expect gold bugs to decry price manipulation if gold is being bought every day before the open - they only see it when it happens the other way).

I don't know what gold is going to do here. If it is indeed in a "long-term" bull market, it "should" correct further and for longer prior to any further upside. I'll take a wait and see approach before drawing any further conclusions.

I don't consider myself as one of those screaming about a bubble in treasuries. I think if inflation was calculated properly (as an aggregate of total money and credit) we would see that real interest rates were high at anything above 0. Clearly, prices got ahead of themselves in December. But I wouldn't be surprised to see even higher prices if the stock market goes in the tank again and people flee for something "safe." I like the 122 area with defined risk on the 10 year.

That's all for now.


Joe said...

Hi Matt,

Love your blog. I found it because one day it popped up as the top headline on google finance. I now check your blog daily.

I'm not a gold bug, but I think we could see gold go much higher. With all the central banks printing money it seems none of the paper money will have much value. Here's a quote from Dennis Gartman:

"Gold has become the second reserve currency, if you can’t go any place else, people are going to move into gold."


Matt Stiles said...

Hi Joe. Thanks for stopping by.

It is my opinion that the "printing money" claim is a function of most people's misunderstanding of what money is and how it is created. Without going into too many details of the banking system (and to be perfectly honest, I suspect some of my readers have a better understanding of it than I do), it is imperative to know that in order for the supply of money and credit to expand, enough credit needs to not only be offered, but taken as well. In my opinion, we are in a secular period of debt aversion. That is, "you can lead a horse to water, but you can't make him drink."

I think the global central banking cartel's attempt to reflate the supply of money and credit will ultimately fail. I don't think they're as omnipotent as most believe.

Therefore, my view on gold is that its primary value is derived from its inability to "goose-egg." It will hold its value as everything else is declining. And in addition, you can't be taxed on it like you can be on land or other stores of value.



Anonymous said...

Regarding some of your first comments on why people blog or leave comments on blogs. Speaking for myself, it's to try to understand the positions of others who disagree and their level/scope of thinking. Are they repeating platitudes, have they done in-depth analysis in a specialized area that I may have missed, have they considered something outside the area of economics that I failed to consider, or what is it that causes them to come to a different conclusion? Another related reason would be to see if bringing additional facts into the mix causes that person to consider another viewpoint or whether they automatically regurgitate the echo inside their head.

mannfm11 said...

I find good stuff and keep going to it. I am confused as well about this printing money, as I don't believe people that use the term know what it means. The Fed was to put one dollar of unsecured currency out there and it would collapse. The best they can do is buy assets so the banks can pay each other. If the Fed monetized a billion dollars worth of bonds, the funds would end up in the banking system as liabilities of the banks, which would require they buy a corresponding asset, most likely the treasury the Fed used to create the cash. Few people understand that all the money created by the banking system comes with interst attached that is never created, so when the system is creating a socalled money supply, it is creating an even greater pile of debt that can't be paid by the money created. I don't know what the recent increase in money supply is about, but it sure isn't about buying cars and new homes, gasoline and paying retail. Best guess is it is for business liquidity and for some derivative asset settlement. Few of these guys are going to run off to walmart any time soon.

My real intention here was to praise your technical work Matt. You are using some indicators I am not schooled in, but I will say the 10 day MA of A-D is something close to something I used a few years back. I was trying to trade stocks a few weeks back when the market turned and had too much other stuff going on. I am a long term studier of big bear markets and under 3000 looks like the destination before we are done. The fundementals in the market are collapsing and even if they weren't, under all the long term valuation models I have looked at (I did a financial study of Shillers 130 years of data some years back), the market is far from cheap. I have begun to realize that they don't put anyone on CNBC to tell the truth about anything and won't buy into the idea stocks are cheap until they really are, which is a 6% or higher market dividend. I have written on the internet, mainly the Prudent Bear chat page for 8 years now and you will find a lot of stuff reposted around the net under my moniker mannfm11 in a search. I have a blog that a few of my long term readers go to that I write on from time to time, mainly to keep my thoughts in order. I am going to attempt to write something on how I perceive the banking business to work and attempt to diagram why I don't believe they are going to create any hyperinflation any time soon. Prudent Bear has a guy named Doug Noland who has been writing a weekly called the Credit Bubble Bulletin since 2000 and he seems to disagree with me. But, then again, I believe he is more concerned with the government going broke, which is more possible than I have thought in the past. When I get my post together, which might take a couple of weeks, I will drop you guys a note. Love your stuff. Barry

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