Like Officer John McClane, they continue to expend all of their nine lives. Is this life number 9?
Without a doubt, my assessment of the state of the markets has got to be called into question. Two relevant issues to address are: (1) Has the Hindeburg Omen, become, as Dee Dee Myers used to say, non-operational?; and, (2) Is the Precious Metals arena about to explode? For more on the Hindenburg Omen, click here http://markostake.blogspot.com/2010/08/hindenburg-omen-all-over-financial.html.
If we do not begin to see a forceful decline commence by the end of this week, it is unlikely to build the kind of downside momentum that would be required to precipitate a crash. That said, as of this writing, I have not budged from the crash prediction one bit. The technical reasons were recently outlined in this piece http://markostake.blogspot.com/2010/09/lets-get-technical-part-2.html.
As far as the Gold and mining stocks sector go, I have some further technical thoughts. For the record, my position is that Gold is forming an intermediate top, before returning to the proximity of its 200 Day Moving Average (DMA), which currently stands at $1175. That makes downside exposure in the vicinity of 10%.
One thing that troubles me about Gold is that it has underperformed the weakness of the U.S. Dollar over the past several months. Since June, the Dollar Index is down 11%, while Gold has risen about 9%. Ideally, we'd like to see the reverse.
More troubling is just how extremely overbought Gold has become. It now has a Relative Strength Index of 83.46. The piece referred to above explains the use of the RSI and how it's derived.
An examination of the relative strength of precious metals mining companies, as represented by the Gold Bugs Index (HUI) to Gold itself is quite revealing. Ideally, we would desire the stocks to substantially outperform the metal. Since May, the companies have underperformed, although not substantially. The HUI continues to be unable to materially break out above the 500-525 zone despite daily new highs in Gold. Should the HUI return to its 200 DMA at 446, it would get smacked for 11%. Downside risk is very limited.
Ideally, the HUI ought to also do better than the broad stock market. We can measure this by comparing the performance of the HUI to the Standard & Poors 500 (SPX). The HUI has gained no ground since November, 2009. This isn't cause to worry long term, but it does tend to suggest that a modest correction is imminent.
Investors should remain cautious but ready to jump in!
Marko's Take
Showing posts with label Standard and Poors 500. Show all posts
Showing posts with label Standard and Poors 500. Show all posts
Monday, October 4, 2010
Tuesday, September 21, 2010
Let's Get Technical (Part 2)
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
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
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
Thursday, August 26, 2010
How We'll Know If Hindenburg Omen Is Wrong
Yesterday, a 4th dirigible was seen flying the not-so-friendly skies. According to Robert McHugh, who seems to be THE expert in the now famous Hindenburg Omen, we need 5 to get a "cluster". But, let's take a deep breath, reduce our hyperventilation, and examine what signs we might look for that would suggest that this entire exercise is nothing but a blip on the radar screen.
One key factor is time. The "crash window" is open, but won't stay open for very long. If the financial markets don't implode pretty soon, then this entire exercise will become, as Dee Dee Myers used to say, "non-operational". Ms Myers, who had the tremendous misfortune of explaining away Mr. Clinton's ongoing non-truths, had to constantly change stories as new facts came to light. But, we can discuss that at another time.
If the Dow Jones Industrial Average (INDU) remains near or above 10,000 through the end of September, at the LATEST, I'd say that it would be time to go back to the lab.
Key downside levels to watch would be roughly 9,500 on the INDU, 1,025 on the Standard & Poor's 500 (SPX) and 2,100 on the Nasdaq Composite (IXIC). A break above 10,500 on the INDU, 1,100 on the SPX or 2,300 on the IXIC would suggest that the markets are probably poised to rally more.
As far as Gold goes, a break above $1,250 would suggest that an upside explosion could be at hand. Contrarily, a penetration below $1,200 would be bearish, short-term, and probably be followed by a sharp, albeit temporary, correction.
Other signs that this whole scenario is incorrect would include rising long-term interest rates or a falling Dollar. In the instance of a deflationary scare, we should see a strong dollar and strong bond market. The key industry group to watch is the financial stocks. They are currently poised to be leaders on the downside. The markets CANNOT rally without at least a some upside strength in this group.
Do we care about earnings or economic statistics? NO! They are backwards looking and have ZERO predictive value. In fact, any decline is likely to take place against a backdrop of at least decent news. Like a sleight-of-hand magician, markets are very expert at having investors look up when investors should be looking down. Look at my pretty assistant!
It's important to note, that as of this writing, not ONE of these possible contra-indicators is in place. In fact, there is only one piece of evidence that the scenario is not imminent. The yield curve is steep and positively sloped, meaning that the difference between long-term rates and short-term rates is high. The reason this is important is that a steep yield curve creates a very profitable lending environment for banks and other financial institutions which borrow short or cheap and lend long or dear. Since banks aren't lending, this may not be all that signficant.
The slope of the yield curve determines how profitable the financial sector will be prospectively. And, as noted above, the health of this sector is important to the direction of markets and the entire global financial system. It also has very high predictive value in assessing the prospects for economic growth.
Another sign of strength would be felt in the commodities markets outside of the precious metals, which are acting as currency right now. Keep an eye on oil, food and key industrial metals such as Copper. Dr. Copper, as it's known, is a better economist than most Nobel Laureates. Doc Copper has "Marko's Take" in his waiting room. As of today, all the commodities are either weak and weakening or looking very toppy.
So, keep on an eye on the checklist that might suggest that the dark clouds are nothing more than a short thunderstorm. The forecast is for torrential rains, but predicting the market is not much more of a precise science than the weather. Even if it doesn't rain, don't forget your umbrella.
Therefore, unless the conditions for a re-assessment are met, as described above, investors should continue to hold lots of cash, use inverse ETFs for hedging and profits, and wait out the storm.
Marko's Take
One key factor is time. The "crash window" is open, but won't stay open for very long. If the financial markets don't implode pretty soon, then this entire exercise will become, as Dee Dee Myers used to say, "non-operational". Ms Myers, who had the tremendous misfortune of explaining away Mr. Clinton's ongoing non-truths, had to constantly change stories as new facts came to light. But, we can discuss that at another time.
If the Dow Jones Industrial Average (INDU) remains near or above 10,000 through the end of September, at the LATEST, I'd say that it would be time to go back to the lab.
Key downside levels to watch would be roughly 9,500 on the INDU, 1,025 on the Standard & Poor's 500 (SPX) and 2,100 on the Nasdaq Composite (IXIC). A break above 10,500 on the INDU, 1,100 on the SPX or 2,300 on the IXIC would suggest that the markets are probably poised to rally more.
As far as Gold goes, a break above $1,250 would suggest that an upside explosion could be at hand. Contrarily, a penetration below $1,200 would be bearish, short-term, and probably be followed by a sharp, albeit temporary, correction.
Other signs that this whole scenario is incorrect would include rising long-term interest rates or a falling Dollar. In the instance of a deflationary scare, we should see a strong dollar and strong bond market. The key industry group to watch is the financial stocks. They are currently poised to be leaders on the downside. The markets CANNOT rally without at least a some upside strength in this group.
Do we care about earnings or economic statistics? NO! They are backwards looking and have ZERO predictive value. In fact, any decline is likely to take place against a backdrop of at least decent news. Like a sleight-of-hand magician, markets are very expert at having investors look up when investors should be looking down. Look at my pretty assistant!
It's important to note, that as of this writing, not ONE of these possible contra-indicators is in place. In fact, there is only one piece of evidence that the scenario is not imminent. The yield curve is steep and positively sloped, meaning that the difference between long-term rates and short-term rates is high. The reason this is important is that a steep yield curve creates a very profitable lending environment for banks and other financial institutions which borrow short or cheap and lend long or dear. Since banks aren't lending, this may not be all that signficant.
The slope of the yield curve determines how profitable the financial sector will be prospectively. And, as noted above, the health of this sector is important to the direction of markets and the entire global financial system. It also has very high predictive value in assessing the prospects for economic growth.
Another sign of strength would be felt in the commodities markets outside of the precious metals, which are acting as currency right now. Keep an eye on oil, food and key industrial metals such as Copper. Dr. Copper, as it's known, is a better economist than most Nobel Laureates. Doc Copper has "Marko's Take" in his waiting room. As of today, all the commodities are either weak and weakening or looking very toppy.
So, keep on an eye on the checklist that might suggest that the dark clouds are nothing more than a short thunderstorm. The forecast is for torrential rains, but predicting the market is not much more of a precise science than the weather. Even if it doesn't rain, don't forget your umbrella.
Therefore, unless the conditions for a re-assessment are met, as described above, investors should continue to hold lots of cash, use inverse ETFs for hedging and profits, and wait out the storm.
Marko's Take
Tuesday, August 24, 2010
I See The Bad Moon Arisin'
Last night was a full moon. A BAD moon. With the recent solar eclipse window still open, coupled with the full moon, the anticipated crash, should it happen, ought to take place imminently. A review of the significance of astro-harmonics can be reviewed by clicking here: http://markostake.blogspot.com/2010/07/hindenburg-omen-confirmed-or-was-it.html.
Now that earnings season has encouraged investors, it's time for the economic reality to splash cold water in the financial markets' faces. The news is exceptionally poor.
The Richmond branch of the Federal Reserve’s measure of manufacturing activity for the mid-Atlantic region plunged by about 30% . The fall was less than economists were predicting, but the decline strongly suggests tha one of the US’s only area of strength has an empty gas tank.
The economy’s weakest sector, housing, got yet more bad news. Sales of existing homes fell 27.2% in July, the steepest monthly drop in 15 years and past consensus expectations of a 12% decline.
The Richmond Fed’s index came in at 11, versus 16 the previous month. Last week, the Philadelphia branch registered a disappointing index of factory activity that sent markets reeling, as it suggests a potential dip in the August reading of the broader Institute of Supply Management’s index. The Chicago Fed’s index is due next week.
And this is just the beginning. In today's trading, it appears that we will have yet another Hindenburg Omen. This makes at least 3, depending on whose definition of it one ascribes to. What's a few New Highs and New Lows among friends, anyway?
The equally ominous head and shoulders pattern gives us at least an idea of what might be reasonable to expect here in terms of the next intermediate low. A good rule of thumb is that once the neckline is broken, the downside target is equal to the decline that immediately preceeded it.
Thus, one could look to these levels for the market to take its next breather: 525 on the Russell 2000, 925 on the Standard & Poors 500, 1900 on the Nasdaq Composite and 8500 on the Dow Jones Industrial Average. And, these levels, or some approximation thereof, should be reached BEFORE the actual crash occurs, if there is one.
The only safe places to hide capital are Utilities, Oil Companies with a high dividend, Gold (physical), the Dollar and ultra-safe Bonds. For the aggressive, inverse ETFs such as FAZ and TWM ought to provide at least a good hedge, but also a very risky, but potentially very profitable trade.
I see the Bad Moon Arisin', I see trouble on the way....
Marko's Take
Now that earnings season has encouraged investors, it's time for the economic reality to splash cold water in the financial markets' faces. The news is exceptionally poor.
The Richmond branch of the Federal Reserve’s measure of manufacturing activity for the mid-Atlantic region plunged by about 30% . The fall was less than economists were predicting, but the decline strongly suggests tha one of the US’s only area of strength has an empty gas tank.
The economy’s weakest sector, housing, got yet more bad news. Sales of existing homes fell 27.2% in July, the steepest monthly drop in 15 years and past consensus expectations of a 12% decline.
The Richmond Fed’s index came in at 11, versus 16 the previous month. Last week, the Philadelphia branch registered a disappointing index of factory activity that sent markets reeling, as it suggests a potential dip in the August reading of the broader Institute of Supply Management’s index. The Chicago Fed’s index is due next week.
And this is just the beginning. In today's trading, it appears that we will have yet another Hindenburg Omen. This makes at least 3, depending on whose definition of it one ascribes to. What's a few New Highs and New Lows among friends, anyway?
The equally ominous head and shoulders pattern gives us at least an idea of what might be reasonable to expect here in terms of the next intermediate low. A good rule of thumb is that once the neckline is broken, the downside target is equal to the decline that immediately preceeded it.
Thus, one could look to these levels for the market to take its next breather: 525 on the Russell 2000, 925 on the Standard & Poors 500, 1900 on the Nasdaq Composite and 8500 on the Dow Jones Industrial Average. And, these levels, or some approximation thereof, should be reached BEFORE the actual crash occurs, if there is one.
The only safe places to hide capital are Utilities, Oil Companies with a high dividend, Gold (physical), the Dollar and ultra-safe Bonds. For the aggressive, inverse ETFs such as FAZ and TWM ought to provide at least a good hedge, but also a very risky, but potentially very profitable trade.
I see the Bad Moon Arisin', I see trouble on the way....
Marko's Take
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