Saturday, February 21, 2009

Technical Update 6.09

The "imminent move lower" I have been expecting for a few weeks has begun, although unevenly. I favour an extension of this selloff, but a bounce may be required to work off some measures that are displaying excessive pessimism.

Increasing talk of "nationalization" has been hammering the financials, as common and preferred share holders fear getting a goose-egg on their speculations. Readers of this blog know that a goose-egg on many of these stocks is inevitable. The only questions are when and how.

In the middle of the carnage on Friday we were told that more details were forthcoming on Timmy Geithner's "plan." I'm not so sure that's a good thing, but we'll find out Monday.

As you can see, the SPX has managed to stay above it's November lows. The same can be said about the Nasdaq and the Russell. The Dow Industrials and all of the indices I mentioned last week (Transports, Canadian Financials, and Staples) have not been so lucky. All made new lows this week. The Industrials are looking the ugliest. You have to go back to early 1997 when the index closed the week at such a level. So much for buy and hold. What else happened in early 1997? OJ Simpson was aquitted, Dolly the sheep was cloned, Packers beat the Patriots in the Superbowl. I got my braces removed and was battling acne.

Another problem area on my radar is the utilities sector. Think this is a relatively stable sector with secure dividend payments? Think again. Many of them are saddled with enormous debt/equity ratios and much of that debt is coming due over the next two years. Their situation is similar to that of the REIT complex (with different problems obviously). Fear of not being able to refinance is hammering their share prices. Lower share prices increase the debt/equity ratio and increase fears of not being able to refi. Previously, when a utility would get over its head, another one would simply take it over. They'd do a public offering or go to the debt markets at more favourable terms and consolidate the debt. That is not economic now. Even the strongest are trying to reduce debt levels. Yet one more manifestation of peak-credit. I don't think the socialists in government around the world would think twice about nationalizing this sector, as they are about the banks. I can just see President Obama giving a heartwarming speech about having to keep the lights on so a student can study at night and become a doctor. "It is government's res-pon-si-bility to maintain essential services for everyday Americans."

Preferred shares. Getting hammered as a function of nationalization talks. (note: Financial preferreds make up 81% of this index)

But as I mentioned earlier. A continued swift move lower is guaranteed to no one. I covered some of my GE and Canadian Financial short exposure into the morning abyss on Friday. Some of my indicators, and a few being followed via others are already at extremes. Take for example the 10 day MA of the Advance/Decline ratio. I'm not sure if the increased volatility is responsible for the recent swings out of the 2 year range, but I suspect so. In that case, there's still plenty of room on the downside.

A weekly look at the same indicator supports that view, as the extremes on both sides have been expanding for at least 20 years. Try to ignore the red lines on this chart. Does it mean anything? Maybe not. To me, it is supportive of the gambler's mentality that was prevalent over this period.

My put/call indicator is suggestive of further downside.

Although a look at the same indicator on the weekly chart is unconvincing.

For practical purposes, these are both likely better used on shorter timeframes. But I was fooling around with the inputs and thought I'd share them.

That's all for now.

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.


mannfm11 said...

Matt, believe it or not, the Dow is really about 900 points lower than it shows due to careful manipulation of the index around the 2001 top and the stock changes since. It is hard to quantify the stocks in the Dow as some of them have been reconstituted as in T and some have been combined, as in CHV and Texaco (i forget its symbol, but it was in the Dow in 1997). In any case, I reconstruted the Dow in 2005 to reflect the stocks that were in it at the time, back priced to the 2001 high and found the index to need an extra 900 points to break the dollar value of the group of stocks priced to January 14, 2001. Being the price differential is a constant that 900 points would still hold true, not to mention the other stuff that has gone on since then. One reason I did that exercise was I knew the Dow had been manipulated to the upside by timely splits, but I had no idea the new issues had done so poorly since 2001. I also knew the Dow couldn't be at a record while the SPX was down about 200 points from its 2001 highs and the Nasdaq was under 50% of its 2001 price. In any case, I back priced the SPX and it also matches its value for that April 1997 dip. The SPX interday low in October 1997 was 855, so you can see how much lower we are in that index. Stock market losses for those that have stayed in or held the 1997 index have been devastating. If you go to the S&P website, it will have a link to an excel page that shows the top 10 cap value stocks of prior years. The losses in these stocks by themselves are about 50% of the losses in housing so far. Someone held GE from where it was about $60 a share to where it is now $10. They held MSFT from $60 to its now under $18. They held INTC from its $72 to its now $13 or so. They held LUC from its top 10 reading to its almost zero. They held PFE from $50 to its now under $14. They held CSCO from its over $600 billion cap value to its now $100 billion or so (this is a guess). I am guessing the only winner in the group was XOM and it was only XON at the time and when you combine the 2, it might not have made much either. IBM hasn't done bad.

In any case, my point is the chart has moved. Your analysis is really on the ball. I pointed your site out to a guy my age that used to read my trade advice when I was more onto the charts and he pointed out your age, education and the fact you were a tennis player. I noted to him that you had the direction of the market right while what he was following missed it. The decline to 8000, which I was on the wrong side of the trade there was too smooth for it not to go on. I have owned the EWP text book by Frost and Prechter since 1997 and I know an impulsive move when I see one and that move to 8000 looked pretty impulsive to me. I think we are really early in the third wave of a SC or GSC degree crash, maybe the middle wave of wave 3. This is a 6 bottom in the Dow when you take 1998, 2002 (twice), 2003 and 2008 into account. Gann said that many bottoms was a poor bet to hold. I believe the trading of the SPX to a much lower level of support, the April 1997 level, breaking the 2002 bottom in November was a clear sign of things to come. I was actively involved in that 2002 and 2003 market as an observer and I nailed the 2003 bottom to the day, though I suspected early that we were going to go lower. The 2000-2003 bear never had any real impulsive form in anything other than the Nasdaq, as the Dow was nothing more than a series of sewing machine moves. But, then again, they put the 900 points I mentioned and they saved another 800 to 1000 points by the splits they made in 2000 in GE, AXP, INTC and HWP (now HPQ), so the chart is really a tough one to analyze. So much for my rambling. I don't see an end to this soon and we aren't about to rally if this is an Elliott impulse, save a B wave of a flat that began in November.

olives said...

According to Robert Prechter, we are currently in wave (5) of wave 1.

Matt Stiles said...


Never rambling. Your comments and anecdotes are always welcome.

I've always thought that the purpose of an index (or any statistic) was to measure one static set of variables against different periods in time. If you start fooling around with the inputs, the results are not only useless, but misleading. As you mentioned in your other post; the business of stocks is selling them, not buying them. I suppose that is all just a coincidence.

And regarding the EWP. There are always a number of interpretations going at once. I believe that the Nov-Jan rally was too short to be considered a primary wave 2. My subscription service agrees with olives and says we're in Intermediate (5) of Primary 1. Wave 5's can be short and just below the wave (3), or can be equidistant of wave (1) or (3). This would mean we bottom somewhere between 600-730 before rallying about 6 months in primary wave 2.


dacian said...

olives, yep, in terms of EW we are in wave 5.

Matt, do you have a target for the small correction to the upside we might experience in the coming days? Do you see the SPX heading towards its MA20 (which is ~820)? I don't see it going up that much but a move towards 790/800 is possible followed by more downside; what do you think?

Matt Stiles said...


A tag of the 20 day EMA or midpoint of the bollinger band would be a little over 820 and falling. That "fits" as 820 was support on the way down. Support, when broken, becomes resistance. Above 780, I don't see much stopping it from "filling the gap" of last Tuesday - which again resolves to 820.

Then again, we could just continue downward.

I'm trying not to think too much. :)

mannfm11 said...

Prechter told his people to cover yesterday. I have read a lot of Prechter in the past and have been wanting to buy his stuff lately because of reasons other than his market projections. I notice you link his socionomics site, which I may have mentioned before and he has a lot of interesting stuff along those lines. I have been wondering what his count was, as I was kind of shocked he would cover here knowing what he thought in the past. I have been trying to count using Elliott myself and the mess at the top was tough to read. I do know that this wave we are in now should have another wave and most likely another higher degree wave to follow it.

In any case, if this is Prechters count, wave 5 of 1, I understand what he is doing. I also can see the market in light of Japan, which was a decline to the 50% point, a rally of about 1/2 way then a plunge to the 1/3 then lower. I get the idea that he is off base here, but then again no one has ever seen a GSC wave. I have been trying to figure out what one would look like for 10 years now, as I believe they have to show up on the charts as 5's regardless of A wave or C wave due to the fact that the degree is so high. Degree is the direcion of the wave of the next highest degree. Wave IV is down so wave A would break down into 5 wavers even if it is styled in a 3 waver. The whole thing is too damn confusing to count and I believe no one really has a clue. I think we are going much lower, as this is a worse situation than the depression because they could change the system in the past. They can't do much with the money system this time.

As far as the indexes go. You can go to the SPX site and you have to search around to find it, but they have a spread sheet showing the value of an SPX point over time. Companies on the way down are generally replaced with companies on the way up and the point value has to do with how much more or less the new company is worth when you divide its cap value by the index number added to the divisor, subtracting the same generated number for the company excluded. The Dow is figured the same way, in that the new divisor has to give the same Dow figure as the old one when you take out the old stock and put in the new stock. One of the factors was the new stocks in the Dow were much higher in price on 1/14/00 than they were when the index made a new high. In fact, 21 of the 30 stocks were lower in price, most significantly lower, but AIG, PFE, VZN and whatever other stock they put in were much higher then than when the index made its all time high in January 2000. It is almost impossible to back construct the Dow now because there are so many symbols that have changed and finding prices for them is really tough. I spent a lot of time working on this index to find the reality and have several indexes priced at the same time in an old computer.

I have taken Prechters ideas and projected a low in the Dow of 1000 or less. If you can consider this as a break of a H&S pattern, the target is clearly sub 1000. Also, the SPX made a double top and I believe the target there is the height of the pattern on a break. Maybe I am wrong in this case, as I can't recall and would have to read. I do know a wave 2 rally is supposed to be 50% to 5/8 the decline and with all the goods thrown at this mess at this time, we cold get a rebound for awhile. I, for one don't believe the economy has the cash to push the indexes this high, but the market makers can move them without real money as long as the shorts can be managed. My guess is the market makers don't have to recognize reality if they want to ignore it and if it is them against the bears for a period of time, I think they can force the bears to cover. But, this would mean the stock that is being traded vanishes, as a closed short merely wipes out a liability and nothing else. The sale of real stock by the public is another matter.

View My Stats