Yesterday, we built a case that the markets, despite a surprisingly strong Septemeber, were doing their best to prove Abe Lincoln right by "fooling most of the people, most of the time". There is much more evidence of that.
Technical analysts often use an indicator called the RSI or (Relative Strength Index). According to Investopedia, the RSI is defined as follows:
"A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula: RSI = 100 - 100/(1 + RS). RS = Average of x days' up closes / Average of x days' down closes."
"The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued."
To be sure, the RSI is far from perfect, but it has a pretty decent track record of at least measuring the condition of a market that is conducive to either an upside or downside reversal.
At the conclusion of trading yesterday, the Dow Jones Industrial Average (INDU) had an RSI of 66.60, the Nasdaq 100 (NDX) had one of 72.74, the Standard & Poors 500 registered 66.50, Gold came in at 72.50 and the HUI was 55.99 after hitting 68 several days earlier.
A good charting service from which one can review these numbers and other indicators is Stock Charts (http://www.stockcharts.com/).
If you pull these charts up, you can see that most intermediate term rallies crap out with an RSI in the mid-to upper-60's and bottoms hit 35 or below. Markets rarely rally much after crossing 70 on the upside or decline much if they penetrate 30 on the downside.
What makes the market seem so weak is not only the poor price action despite a long string of up days as highlighted in yesterday's piece http://markostake.blogspot.com/2010/09/lets-get-technical.html, but also in looking at how extended, or lack thereof, the market got.
A real lift-off will typically pull an index or stock well above its 200 Day Moving Average (200DMA). Historically, major Gold rallies have peaked in excess of 30% above is 200DMA. The HUI has historically peaked more than 50% above its 200DMA.
The bullion, despite a near-uninterrupted 10 week rally, has failed to get much in excess of 10% above its 200DMA, while the HUI has only gotten 15% above its DMA. One might argue that this means that they have further to go. True enough. But, in light of the various overbought conditions are measured by the RSIs, it would appear that what we are seeing is a series of markets losing momentum.
We continue, therefore, to urge extreme caution. Today's Federal Reserve meeting is a perfect occasion to provide the market with an excuse to begin its trek to lower, perhaps MUCH lower levels.
Once again, while we believe that caution should rule the day even in the precious metals sector, it is highly unlikely that we will see the type of smash that occured in 2008. And, it may even surprise everyone and rally. However, use the guidelines outlined in yesterday's piece before jumping in with both feet.
Marko's Take
Showing posts with label Nasdaq 100. Show all posts
Showing posts with label Nasdaq 100. Show all posts
Tuesday, September 21, 2010
Monday, September 20, 2010
Let's Get Technical
On the surface thus far, September has seemed to be a very normal month. Below the surface, it has been far from it. Coventional wisdom is aware that, historically, it is the weakest calendar month in terms of average stock market performance and, therefore, there was a decent level of angst about what would happen when traders and portfolio managers returned from their summer vacations in the Hamptons.
The market has been up 9 of the last 11 days. These extreme strings of near-consecutive days up or down are very often signs of exhaustion. Market tops tend to be rolling like an upside down arc or parabola. Significant bottoms, on the other hand, are very often V-shaped, characterized by panic selling.
If we put those two observations together we can form an educated opinion as to the technical health of the stock market. In the last 11 days, the Dow Jones Industrial Average has gone up a mere 6% the Standard & Poors 500 has risen 7%, the Russell 2000 8% and the Nasdaq 100 11%. If the market was firing its thrusters for a huge move up, we ought to have seen gains of about double those just experienced.
A 9 of 11 exhaustive string on the downside could potentially result in drops of 20% or more.
Somewhat disturbing is the behavior of the Gold Bugs Index (HUI), especially in light of the move in Gold itself. The HUI is up only 1% despite a 3% advance in Gold and a 10% gain in Silver. In addition, the Dollar index is down 2%, which should have provided a modest tailwind. This is NOT healthy action. The breakout of Gold above $1,250 was NOT accompanied by a breakout of the HUI above 500. For a true bull market to have begun, the twin conditions of Gold above $1,250 AND 500 on the HUI should have bene met. That a breakout didn't occur was quite surpising. I guess Gold 2K will have to be put on hold.
Therefore, while the likelihood of a MAJOR drop in Gold or the HUI is small, we ought to remain on alert that a correction of some sort has become highly probable. In combination with a waterfall decline in stocks, precious metals are better avoided than ridden-out except with long-term money. More importantly, whatever correction occurs will represent yet another low risk entry point.
The other key reason to argue for extreme caution at this time is the major headwind created by the plunging money supply. The most recent figures and the implications are covered here: (http://markostake.blogspot.com/2010/09/turning-economic-titanic.html).
The deflationary forces are confirmed by the action of the bond market which has made new highs after a nearly 30 year bull market. In addition, longer rates have come down much more than short-term rates flattening the yield curve. The slope of the yield curve is particularly critical to the financial sector as the bulk of borrowing is done on the short end, while lending tends to be longer term. The spread between the two creates the level of profitability.
So, it continues to make sense to stay liquid. There will be a better time to take risk.
Marko's Take
The market has been up 9 of the last 11 days. These extreme strings of near-consecutive days up or down are very often signs of exhaustion. Market tops tend to be rolling like an upside down arc or parabola. Significant bottoms, on the other hand, are very often V-shaped, characterized by panic selling.
If we put those two observations together we can form an educated opinion as to the technical health of the stock market. In the last 11 days, the Dow Jones Industrial Average has gone up a mere 6% the Standard & Poors 500 has risen 7%, the Russell 2000 8% and the Nasdaq 100 11%. If the market was firing its thrusters for a huge move up, we ought to have seen gains of about double those just experienced.
A 9 of 11 exhaustive string on the downside could potentially result in drops of 20% or more.
Somewhat disturbing is the behavior of the Gold Bugs Index (HUI), especially in light of the move in Gold itself. The HUI is up only 1% despite a 3% advance in Gold and a 10% gain in Silver. In addition, the Dollar index is down 2%, which should have provided a modest tailwind. This is NOT healthy action. The breakout of Gold above $1,250 was NOT accompanied by a breakout of the HUI above 500. For a true bull market to have begun, the twin conditions of Gold above $1,250 AND 500 on the HUI should have bene met. That a breakout didn't occur was quite surpising. I guess Gold 2K will have to be put on hold.
Therefore, while the likelihood of a MAJOR drop in Gold or the HUI is small, we ought to remain on alert that a correction of some sort has become highly probable. In combination with a waterfall decline in stocks, precious metals are better avoided than ridden-out except with long-term money. More importantly, whatever correction occurs will represent yet another low risk entry point.
The other key reason to argue for extreme caution at this time is the major headwind created by the plunging money supply. The most recent figures and the implications are covered here: (http://markostake.blogspot.com/2010/09/turning-economic-titanic.html).
The deflationary forces are confirmed by the action of the bond market which has made new highs after a nearly 30 year bull market. In addition, longer rates have come down much more than short-term rates flattening the yield curve. The slope of the yield curve is particularly critical to the financial sector as the bulk of borrowing is done on the short end, while lending tends to be longer term. The spread between the two creates the level of profitability.
So, it continues to make sense to stay liquid. There will be a better time to take risk.
Marko's Take
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