John Murphy, King of Technical Analysis

» Kirk - Thu, 26 Jan 2006 5:0 PM ET

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Read Kirk's Recommended Books by John Murphy

• Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications
  
• The Visual Investor : How to Spot Market Trends
  
• Intermarket Analysis : Profiting from Global Market Relationships
  

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  MARKET HAS STRONG DAY ON GOOD VOLUME -- LED BY CHIPS AND FINANCIALS -- JAPAN STABILIZES ABOVE 5O-DAY AVERAGE AS XAU HITS NEW HIGH
  
  
  S&P HOLDS 50-DAY LINE ... As you know, I've been expecting the S&P 500 to fall below its 50-day average. It dipped beneath it yesterday intra-day before closing just above it. Today it bounced off it pretty impressively. While that doesn't completely rule out the possibility for further short-term losses, it makes them a lot less likely. Other market averages experienced strong days on rising volume. Global markets are bouncing as well. Two of the stronger groups today were chip stocks and financials. The financials were led higher by banks which may be benefiting from a steeper yield curve.

  
  Chart 1

  BANK REGIONAL HOLDERS GAP HIGHER ... Chart 2 shows the Bank Regional Holders (RKH) gapping above their 50-day line today on rising volume. I suspect part of today's renewed interest in banks is due to this week's jump in bond yields. Chart 3 shows the 10-year T-note yield surging over the last two days. Why that's good for banks is that the yield curve is steepening again. A flat or negative yield curve is bad for banks because they borrow short and lend long. They can't make much money when the spread between the two is absent. The jump in bond yields is widening the spread between long and short rates which is good for banks. The fact that it also diminishes the threat of a negative yield curve may be boosting the entire market.

  
  Chart 2

  
  Chart 3

  SOX NEARS OLD HIGH ... Today's jump in the Semiconductor (SOX) makes the last two week's action look more like a consolidation pattern than anything else. That increases the odds for a new recovery high. That should also help the market. Meanwhile, the Semiconductor Holders (Chart 5), which have been weighed down by Intel, are back over their 50-day line.

  
  Chart 4

  
  Chart 5

  JAPAN IS STABILIZING ... A little more than a week ago the Japanese market took a big hit. I suggested at the time that the price fall might provide a buying opportunity if and when the price stabilized. That now looks to be the case. Here again, it comes down the 50-day moving average. The Japan iShares (EWJ) have bounced right off that support line (as has the Nikkei Index). That suggests that the worse may be over in the land of the rising sun. All of the major global markets are trading over their 50-day lines as well. I recently expressed concern about the possibility of a downside correction in gold. So far, the yellow metal has held up pretty well. Chart 7 shows the Gold Trust Shares (GLD) trading well above their 20-day average. Chart 8 shows the XAU Index hitting a new high today. Since gold and Japan have been closely linked, that's probably a good sign for both.

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  For 2005, "Kirk's Newsletter Portfolio" was Up 13.2% vs. QQQQ up 1.2% vs. DJIA down 0.6% vs. S&P500 Up 4.8%
  
  As of 12/31/05 the Total Return for "Kirk's Newsletter Portfolio" since 12/31/98 is Up 197% while the S&P500 only up 12%!!! & NASDAQ only up 1%!!! (my portfolio beta is roughly equal to that of QQQQ.)
  
  What should be quite clear is a “buy and forget” market strategy using the DOW, S&P500 or NASDAQ would have under performed holding money funds over the past seven years while my newsletter portfolio nearly tripled every dollar invested
  

-- posted by Kirk

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