Friday, February 13, 2009

Technical Update 5.09

The market continues to hold support like a champion.

A number of key averages were testing their last line in the sand going into the final hour of trading Thursday, when the Obama Administration "pushed the button" with some sort of mortgage gimmick. We know that the impact of these interventions are only very short term in nature. Ultimately, markets will go where they want to go.

In the long term, mid-market policy announcements will only serve to increase uncertainty. With increased uncertainty comes decreased liquidity. And with decreased liquidity comes increased volatility.

But for now, we have another rally to deal with. I don't know why, but I can't shake the idea that the "path of greatest frustration" would be for this rally to continue a little bit higher than the last few before turning around again. But maybe I'm overthinking matters.

Thursday marked a "peek-a-boo" break of the lower boundary of the triangle. As the market saw goes, "the second bird gets the worm." In order for a test of the upper boundary of the triangle to transpire, there is the minor issue of resistance all along the way at numerous levels before it gets there. For the record, I'm doing more watching than trading while this unfolds.

Some other indices were revisiting their November lows yesterday. Among them were the "strongest in the world" Canadian Financial Services sector:

The Dow Transports are also playing with fire. I consider the trannies a leading indicator.

And even though consumer staples are supposed to be "recession resistant," we can see them struggling as well. There are no safe havens in a depression. The staples sector is currently trading at a 1 year trailing multiple of 13.7 and dividend yields of 3%. At the bottom of a bear market we should see this sector trade for less than half that and for dividends yielding more than double.

This is not the underpinnings of a strong and robust market. That's not to say there are no bright spots. Select tech sectors appear to be very healthy. Some of the stronger companies (like Cisco) have been raising money without problems and intend to use that to grow their businesses. But as of now, the total market capitalization of the Nasdaq is 1/4 the size of the NYSE. I expect that to change in the future (a subject I intend to explore further), but it will be a slow process. Until then, the dog wags the tail.

Gold continues to push higher. The advance "makes sense" in that it is a store of value in uncertain times, but I still think holders of the metal (mostly via the ETF GLD, rather than taking possession of physical coins or bars) are more speculating on skyrocketing prices than attempting to simply preserve their wealth. I'm waiting for a washout of these speculators before the next leg of the bull market takes hold. I don't dislike gold, but I do think it is still widely misunderstood.

That's all for now.

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