Market Timing: Should You Attempt It?
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» BoltonCT - The squeeze has begun.
The squeeze has begun.Just so you know I liquidated had long positions in Jan 2004, bought back in during July and August. Started liquidating in December 2004 and was shorting in the Santa Clause rally, moved to a hedged 50-50 position by the end of January and am moving to a net short position again with the exception of Japanese stocks. I run my portfolio like a hedge fund and timing is very important to me. At the present moment all the major American averages are down for the year and the N225 is up more than 6%. Most of the stocks mentioned above as overpriced in December are already down substantially.
Long term interest rates have begun to rise. They lagged the Fed’s increases in the short term rates but now inflation is apparent and long term rates have begun to move more rapidly than the Fed’s increases. Bond prices will take the shock first and then the stock market. Housing will follow. Each 1% higher interest rate will make mortgages 20% more expensive and prices decline accordingly. The same for long term bonds.
The Qs and NASDAC have begun to break down again. The S&P and NYSE appear to have enjoyed the benefits of churning where few shares are exchange at ever higher prices with very little cash flow. That leaves them fragile with the likelihood of gapping down as the selling resumes in earnest.
The market leaders are energy and financial related... the classic end of a cyclical bull market.
Financial health is predicated on trust in the financial institutions and credible economic policy. Both are eroding rapidly in the world as America’s trade and fiscal deficits run out of control. Korear and recently Japan have mentioned moving into other currencies besides dollars for reserves.
The decline of the dollar could very well accelerate now as trust and credibility evaporate. The dollar decline is being transformed into price inflation instead of bolstering our balance of trade. Europe and others could relieve that pressure by expanding their money supply as America continues to raise interest rates. But while that would relieve pressure on the dollar it would hurt the balance of trade until the shock of higher interest rates reduces American consumption.
Rising short term rates have recently triggered rising long term rates as the housing industry and others grab the opportunity to lock in lower rates. Bonds prices will drop to reflect the higher rates and stock prices often follow in the contraction. Given the fragile nature of the stock market the shock should be greater that the 1996 response but probably not as bad as it was in 1987.
The Japanese market appears to be pulling out of 15 years of stagnation.
-- posted by BoltonCT
» BoltonCT - Two timing examples as another test
I would not be fool enough to hold a short after the father of Vanguard made it a #1 recommendation... but the test case in that previous example was DOX and it still is drifting lower. I am happy just to get 6% a month and have sometimes let investments run for years. It depends on the time horizon of the market. During long term growth stages you can buy and hold. But in turbulent periods you need a shorter time horizon and you can be bullish on one sector and bearish in another at the same time.I am sure Kirk will enjoy these two examples because he indicates he knows that risk and reward differ markedly between the top and bottom of a trading chanel. Timing might be considered the exploitation of valuation opportunities resulting from market inefficiencies. One clear characteristic of market inefficiency is the occurrence of contradictory fundamental and technical factors. It indicates that a group of investors are not playing with a full deck.
Example 1 is CREE which for the first two quarters of the current fiscal year averaged double the earnings of the previous year and estimates that the final two quarters will do slightly better than last year. So according to S&P this year they are estimating more than 30% growth. And to boot CREE is has a PE of 17 and PEG of .66. Then if you look at the trading channel you see it is at the bottom of the two sigma band where the risk is lower and the reward is maximized. That is clear value but the story is better yet. CREE is 18% shorted and anything over 5% is considered a trigger for a short squeeze and a turn around.
AUDC is a similar situation and is 10% shorted today. It has a PE of 17.7 and a PEG of .87. But what makes the timing so much better is that both will soon announce what is expected to be good quarters, CREE on April 14 and AUDC on April 21 so a short trap is immanent.
Now you may argue that this is not timing but valuation. But how do you estimate the value of the short selling or the earnings announcement. A potential 20% price gain in a few weeks seems a lot better than 20% over two years?
I offer these two examples as a test of principles of timing which can only work when there is evidence of a disparity between the market's technical valuation, and the fundamentals, suggesting that a group of investors haven't a full deck or have let emotion trump reason. Lets see where these stocks are one month from now. We are in a turbulent market right now where money is rotating in and out rapidly. There are good long selections and good short selections.
-- posted by BoltonCT
» Normxxx - Slothower: Up/Sideways/Down?
Up...Sideways...Down
By Dennis Slothower | 7 April 2005
Dennis Slothower, editor of the Stealth Stocks newsletter, details three different situations that could take place in the market going forward. Discover how he sees a bullish trend playing out, what he would do in a sideways market and read about his concerns. Also, learn about his view on geopolitical risks and find out what kind of moves he is planning for the future. Afterward, read about a sampling of stocks from this expert’s Watch List.
Raging bull… Sideways stall… Growling bear… Terror threat… Dennis Slothower’s next move from April 4th
Dennis Slothower thinks it is a given that we live in very uncertain times. The market environment we face right now is overflowing with risk. The way Slothower sees it, there are three scenarios that could take place.
First let Slothower tell you how he sees the good scenario playing out. It would begin with the market close to an important intermediate bottom. We have been declining for most of the year, are deeply oversold and are due for some type of rally. There is a good argument that can be made for this scenario and Slothower will explain this argument in a few moments.
The way he sees the bad scenario taking place is if he sees more of the same sort of trendless market that we have had over the past few months. You know what he is talking about - the kind of market that goes a little up and then a little down, stays within a very narrow trading range and can’t sustain a trend in either direction for very long. If this sounds familiar, you might have figured out that Slothower has just described the stock market since the end of 2003. If the market continues to go nowhere fast, it will frustrate both the bulls and the bears, and money will be lost on both sides.
Now for the ugly. The ugly scenario develops if Slothower begins to see an economic breakdown or contraction develop. This can happen due to the combination of high energy costs, higher interest rates and the tightening of the money supply. If investors perceive that the economy is contracting, a bear market could develop.
There you have it. Slothower gave you the three different scenarios and now it is his job to tell you how he plans to make money in anything the market throws his way.
Raging bull
The Nasdaq Composite Index bottomed out in October of 2002 and since then has been tracing out a pattern of higher highs and higher lows. Since October 2002, the index has trended at or above its monthly middle Bollinger Band, which confirms the bullish trend. As long as the monthly middle Bollinger Band line is ascending and price holds above it, the bulls are in control. Once price falls below the middle band, the ball then goes to the bears. From what his charts tell him, the bulls are in the driver’s seat.
When he looks at interest rates, he could easily make the case that the Federal Reserve is largely being accommodative with low interest rates. Sure, rates are climbing, but with the Fed Funds rate at 2.75%, corporate America is certainly benefiting. With the gross domestic product (GDP) growing at 3.8% and corporate profits still rising, no harm has occurred because of the recent rates hikes.
While the stock market is bottoming out, the weekly intermediate cycle for crude oil prices is peaking. The weekly stochastics for crude oil are now negative with %K at 79 and %D at 87. This suggests that over the next few weeks crude oil prices may drop into the $45-48 range. If oil supplies build in early spring, Slothower forecasts oil prices dropping to the $40 range. If the oil market falls, it would sure give a big boost to the stock market.
If his good scenario pans out, he will be buying very cautiously in the beginning. He still wants to make sure that the economic fundamentals are strong. If that is the case, he will be loading up on large capitalization stocks since they provide more liquidity than smaller cap stocks. Market leadership will be the key if this scenario takes place. He would then want to see small cap stocks lead the large caps in the next advance.
When the advance does come, he will be focusing on ETFs (exchange traded funds - indexes that trade like stocks) for his recommendations. These stocks tend to be less volatile and provide plenty of liquidity. He would build a core position around ETFs in his portfolios. He also will be looking at several utility indexes such as iShares DJ Utilities Sector Index (IDU), Utilities Sector SPDR Fund (XLU) and ML Utilities HOLDRs (UTH) as a more defensive play, with less volatility risk.
Sideways stall
Over the next several weeks, Slothower sees oil prices declining, but not for long. When oil corrects and becomes oversold and begins to rally from those conditions, he would seriously consider shorting growth stocks, especially if crude oil prices hold support. He doesn’t want you going out and shorting stocks just yet, he wants all the conditions he mentioned above to be in place. At this point he is neither a bull nor a bear, and he very well may take some short positions in addition to some long positions, a real hedge strategy. Shorting the weak sectors and buying the strong sectors will make the most sense.
Growling bear
While interest rates are low and supportive for the market, further advances in energy will ultimately slow down the economy. Slothower can’t accurately predict how high oil prices will have to go to cause the economy to buckle. But the stock market is looking more and more vulnerable with oil prices in the $50 range. He sees global economies getting hurt more than the United States economy, and that is putting them on edge.
He is working on a bearish plan should the Fed incorrectly become too restrictive with the money supply and oil prices continue to climb. The Fed has already made it known that it is very concerned about inflation. If that were the case, it would attack inflation by raising rates and bring this economy to a screeching halt. The stock market is hinting at this possibility by its sideways action. The next surprise could be an economic slowdown rather than an economic expansion.
He will be looking at a breach of the monthly middle Bollinger Band lines by the indexes to signal the beginning of his bearish shorting attack. He has been reluctant to consider shorting the market as long as the primary trend is above the monthly middle Bollinger Band lines for the majority of indexes. A breakdown through primary support will force his hand to the short side.
Terror threat
Slothower can’t say that the geopolitical risks are any better than they have been when he looks at the big picture. We are still at war with al Qaeda and are still susceptible to a surprise attack. Furthermore, both Syria and Iran are very real risks and another war could erupt very soon if Iran refuses to stop its pursuit of nuclear weapons.
On the bright side, all is not gloomy. He is seeing some rays of sunshine in the hot spots of the world. He sees Iraq’s government making inroads in its fight for democracy. In fact, some sort of profit-sharing arrangement of oil profits between the Shiites, Kurds and Sunnis appears to be developing, which may calm down the Sunnis. In the meantime, Iraq’s military is getting stronger daily, while the insurgents are weakening. Slothower has faith that the Iraqi government will be successful and democracy will take root in the Arab world.
Slothower’s next move
If he didn’t scare you so far and you are still reading, Slothower will end on an upbeat note. We are very close to an intermediate bottom, based on a number of technical oversold readings that he follows. If an intermediate bottom holds here at or above the monthly middle Bollinger Band, He will start to nibble at stocks. The way it stands right now, the stock market is in a neutral position; testing both the upside and the downside but staying in a very narrow range. The real wild card is still crude oil. It appears to Slothower that the path crude oil takes will force the stock market either up or down. To sum up what he plans on doing
_ He will be looking at the short side if the technical picture erodes.
_ He will be a buyer, albeit a very cautious one (mostly large caps and utilities), should crude oil turn down and the market rally.
_ He will also be a very cautious buyer and short seller of selected stocks (a hedged position) if the stock market moves more or less sideways (like the market over the last year or so) and crude oil backs off a bit.
A Sampling of Stealth Stocks’ Watch List
Valero Energy (NYSE: VLO) owns and operates refineries in the United States and Canada with a combined throughput capacity of approximately two million BPD, making it one of the nation's top refiners of petroleum products. Valero is also one of the nation's leading retail operators with retail outlets in the United States and Canada under various brand names including Diamond Shamrock, Ultramar, Valero, Beacon and Total.
Forward Industries, Inc. (NASDAQ: FORD) is engaged in the business of designing, manufacturing and selling of custom soft-sided carrying cases and advertising specialties.
Premcor, Inc., (NYSE: PCO) through its principal operating subsidiaries, The Premcor Refining Group Inc. and the Port Arthur Coker Company L.P., is one of the largest independent petroleum refiners and marketers of unbranded transportation fuels, heating oil, petrochemical feedstocks, petroleum coke and other petroleum products in the United States.
[Very High Risk] Stocks That Could Double in a Year
MEMC Electronic Materials, Inc. (NYSE: WFR) is engaged in the production of wafers for the semiconductor industry. The company provides wafers in sizes ranging from 100 millimeters to 300 millimeters and in three categories: prime polished, and highly refined pure wafers with an ultraflat or ultraclean surface. For the fiscal year ended 12/31/04, revenues rose 32% to $1.03 billion. Net income rose 94% to $226.2 million. Revenues reflect higher sales volume and price increases. Earnings also benefited from improved gross and operating margins.
Zygo Corporation (NASDAQ: ZIGO) manufactures, designs and markets yield enhancement solutions that utilize optical metrology and automation for high-performance manufacturers. For the six months ended 12/31/04, revenues rose 23% to $63.6 million. Net income from continuing operations totaled $3.9 million, up from $265 thousand. Results reflect increased flat panel sales, increased sales to lithography customers, higher gross margins, reduced selling costs and lower general expenses.
The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» Normxxx - Headley: MidWeek Update
BigTrends.com MidWeek Update
http://www.bigtrends.com/document.jsp?do...
By Price Headley | 8 April 2005
When we first plotted the S&P 500's support line at 1163, it was intended to be the starting line for the confirmed beginning of a significant drop in the large-cap index. The momentum was bearish, the volume was bearish....all we had to do was make a new low for the year to trigger the selling spree. Incredibly, the support line at 1163 actually held up as support, rather than being broken last week. It's an excellent illustration of why it's far better to trade based on chart realities rather than on hope and expectations. The reality is that the SPX bounced off that support line, despite the market wide expectation that it wouldn't (after the NASDAQ made new lows for the year).
Since then, like the NASDAQ, the S&P has managed to work its way back up and above the 10 and 20 day lines (at 1181 and 1185, respectively). Normally that would be the first half of a short-term buy signal. The second half would be another close above those key moving average lines. Yet as you read in the NASDAQ analysis, those signals have meant very little this year. And in the case of the SPX, the recent bullishness is on the verge of being threatened by an even more important line - the 50 day moving average line. It's just above 1193, and with the S&P 500 currently at 1188, we'll be testing the mettle of the buyers real soon (although probably not today).
In the meantime, the stochastic buy signal from last week and today's bullish MACD crossover are likely to keep the bears away for a while. However, we're only willing to take on a neutral stance here for the S&P 500 until we see what happens at the 50 day line. The market may not be as bullish as it appears to be, as the volume over the last three days still hasn't been as strong as the selling volume was over the previous two weeks.
The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» BoltonCT - Monday will tell
My indices for all the American Markets I follow were up this week. The total up ticks exceeded the downticks. Japan continues to decline.Ticks
up down last
NYSE +68 -40 -7
NASDAQ +25 -15 +5
S&P +35 -19 -3
QQQQ +54 -49 -16
Also the market was steady on Friday. Wild swings will put people on the sidelines fast. I checked today and I am 55% long and 45% cash. I am having a very difficult time finding low risk shorts right now and will have to screen more stocks to find some. If Monday is up even moderately I will start buying more. If it is down I will have to hedge my long position.
Good luck
This is by no means the end though. My indices have been saying sell since the first trading day in January and if we bounce now I expect at least one more market drop before consolidation is complete. I go according to the individual stock opportunities but like to lean heavily in the directin the market is taking.
-- posted by BoltonCT
» BoltonCT - Strategy next week
While I am expecting another decline before the market turns up strongly again I think this is an intermediate cyclic bounce not a dead cat bounce.I took all 401 money out of the stock market a month ago although Eagle funds and the others had been doing well enough.
I covered all shorts two weeks ago and went to 85% cash just before last week.
I went long 55% and cash 45% last week. Next week I plan to go long in our 401 accounts and further long in my investment accounts. I hope there is a sell off while I am buying like there was last week.
So far this year I am still net up a little more than 20%.
I was one of the few who anticipated a declining first half and a second half recovery. I did so based on my MCFI analysis but it also made economic sense. Everyone knew the profits were rising and they were saying the profits would stagnate before the end of 2005. So if you think things will get worse you should get out six months before it happens. Likewise if you see things are getting worse right now and you anticipate a soft landing you should be buying not selling. Did everyone forget that the stock market is a 6-month leading indicator of the economy?
I am sure I am out on the limb again when Norm and Kirk are becoming more bearish and I am becoming bullish again.
The one thing that really scares me is when Bob Brinker becomes bearish. He almost never is a bear. But even that has not happened. That is what made me skittish last July when the market was bottoming. I was concerned he would say sell at that time.
I am anticipating a bounce, a decline, and then a major rally like we had in the latter half of last year. I think this year looks, feels, waddles, and quacks a lot like last year. I see many loe risk buying opportunities and many potential high risk short squeezes.
-- posted by BoltonCT
» Kirk - Re: Strategy next week
.In response to Strategy next week posted by BoltonCT:
I sure wish you would not put words in my mouth!
I am sure I am out on the limb again when Norm and Kirk are becoming more bearish and I am becoming bullish again.
As I wrote here
I don't know what makes you think I am bearish. I'm not and I expect a rather large rally from here... and I've been buying but I try to present both sides in articles I find here. I wrote a bit about it here http://6URL.com/G8S . One reason people subscribe to my newsletter I think is they don't have to search around the net for what I post so you are not confused about my asset allocation.
Here is a chart I've passed around and published here and there...
<img src=http://home.netcom.com/~kirklindstrom/Ne... >
As you can see from the 10 DMA spike crossing my threshold line, that is not a bearish signal.... 
Nor is the 60 DMA at a bearish level.... I think that chart shows people are more bearish now than they were at the 2002/03 bottoms which says many missed the bottom in 2002 and probably jumped back int the market in late '03 or early '04 just in time to get crushed in the NASDAQ correction since then...
I actually look at what has happened to the markets as a correction in the NASDAQ that had grown to be a large percentage of the major indexes people use. If you look at mid cap indexes, we are well into a new bull market... well past 2000 highs...
I think the nasdaq and "popular names" outside high tech, got way ahead of fundamentals and had to be corrected. The markets are wonderful at this.
FWIW, I have not seen such values in stocks I've been loading up on since the early 1990's when I bought Intel and MSFT and IBM near a multidecade bottom......as I accumulate shares as I buy and sell the mini rallies (yeah, the overall total goes down some but the number of shares are what I am interested in... ) I've got all sorts of great companies now in low teen or lower PEs that pay dividends... and tech stocks that have mid teens PEs and huge growth ahead... and even speculative issues at price/book and/or price/sales at bear market bottom levels. It is simply incredible...
Now if the World economy falls apart, then I'll be a big loser, but I think we will continue to muddle through. There are just far too many bears saying otherwise and not many bulls. BTW, have you checked the Rydex Nova/Ursa ratio?
-- posted by Kirk
» Normxxx - Random Observations
Random Observations
From A Usually Reliable Source. . .
05/10/05
• Many traders REALLY don’t believe in this rally. Since April 20th, the low close in the S&P 500, total assets in the leveraged funds at Rydex have barely budged. The bull funds have gained a measly $18 million in net new assets and the bear funds have also GAINED a net new $17 million. This is extraordinarily unusual. Looking at the last four lows in the S&P, we see how the leveraged assets changed by the time the S&P rallied 3.5% off its low:
1. March 2003: Bull funds +$102m, Bear funds -$139m
2. March 2004: Bull funds +$159m, Bear funds -$93m
3. May 2004: Bull funds +$168m, Bear funds -$224m
4. August 2004: Bull funds +$130m, Bear funds -$172m
• So, by this time at each of the other lows, the leveraged bull funds had gained an average of $140 million in net new assets while the leveraged bear funds had lost an average of $157 million. We can see then just how un-believed this low has been compared to the others, despite nearly identical percentage moves in the S&P.
• I read over and over again that volume has been “too low” during this recent rally attempt. The argument from those who expect prices to decline is that since volume is low, it shows that large, institutional “smart money” is not actively participating in the market. Besides being completely untested for any forecasting validity, these arguments are just plain wrong. Over the past week, block trades (those for 10,000 shares or more at a time, the great majority of which come from institutions) have averaged about 19% of total Nasdaq volume. What’s the average for the past two years? 18%. Not only has institutional participation over the past week been higher than average, it has also been higher than it was during the decline during April. There are reasons why stocks should decline, but this is not one of them.
• A statistic that was flying around trading desks yesterday was that the Nasdaq 100 trading stock, QQQQ, had never enjoyed 8 consecutive higher closes in its history. Monday was day #7 in the current streak, so the assumption is that it is unlikely the NDX would rise on Tuesday to become the longest streak in history. There are several things misleading about this: First, there were four other streaks in QQQQ history of 7 straight days of higher closes, and 20 days later it was higher every time with an average return of 4.6%; after a brief pause, the index did exceptionally well over the next month after these streaks. Second, QQQQ only goes back 6 years. Using the NDX index instead, going back to 1985 there were 17 streaks of at least 8 days of higher closes, one of which was 19 days. Using the Nasdaq Composite index back to 1971, there were 68 of these streaks, which is about two every year. So not only is the current streak not all that unusual, in the past it has actually been quite a bullish signal.
• Recent regulatory changes might have compromised the extraordinarily low Specialist Short Ratio readings we’ve seen over the past couple of weeks. But, according to specialist firm Van der Moolen Holdings: “If anything the short sale rules are being liberalized. We suspect that the decline in short sales is simply the result of market circumstances. However, the "threshold" rules may have forced them to cover some long-term shorts. Specialists concentrate pretty exclusively on short term strategies, but if there is buying interest in an illiquid share that is difficult to borrow (for instance, a preferred issue), in the past they might have shorted it "naked." This is no longer possible for periods longer than twice the normal settlement cycle. However, we doubt that covering such positions would be sufficient to cause any noticeable changes.” So, while recent historically high public short sales may be due to the General Motors debacle, it does not appear to be due in any large measure to the regulatory changes regarding short sales.
05/09/05
• For those following the impact of General Motors options on the equity put/call ratio (a worthy exercise in my opinion), Friday’s trading saw a dramatic lessening of that particular stock’s influence. The reported ratio was 0.80, which was the 7th-highest reading so far this year. Taking out GM options, the ratio only fell to 0.75, the smallest impact in the past few days. Insomuch as we can make the assumption that this translates into traders betting against (or at least not fully buying into) the rally, this can be a moderately bullish sign.
• The Specialist Short Ratio for the week ending April 22nd (the latest available) was the 2nd-lowest in history. The lowest in history occurred only the week prior. One week of this data reporting that the “smart money” had all but abandoned their shorting activity can be explained away – two consecutive weeks of the lowest readings in history start to become suspicious. With a couple of new SEC regulations taking effect recently, one can’t help but wonder if this measure is being more misleading than usual. If it is, indeed, an accurate reflection of excessive public shorting, then we are seeing the most bullish data in 60+ years of history.
• For the first time since February 6, 2003, the smallest of options traders (those who trade 10 contracts or fewer at a time) concentrated 20% or more of their total volume on buying put options for two weeks in a row. This is a direct indication of increased uncertainty from this mostly wrong-way crowd. I wouldn’t say that this data is necessarily showing much actual fear, however, since their call buying has not dropped off to a significant degree. This has happened only twice before in the 5 years of history available – early February 2002 (which lead to a 70-point S&P gain over the next few weeks) and early June 2002 (which lead to a 250-point plunge). Not much to draw from those instances.
• The S&P 500 (cash index) has now posted 5 consecutive days of higher lows than the day before, the first time in two months. Of course, that last instance was a good sell signal as the S&P ended up nearly 6% lower 30 days later. Going back to 2003, however, the index was higher 80% of the time after the other 40 days which showed this type of behavior with an average return of just under 2%. Looking back to 1962, the returns were closer to random, with 65% being positive and an average return of 1.2%.
05/06/05
• The equity-only put/call ratio from the Chicago Board Options Exchange was high again Thursday with a reading of 0.74. Similar to Wednesday’s high put/call ratio, though, options on General Motors were a big influence. Subtracting GM options from the ratio, it went from 0.74 down to 0.59 – a much more neutral reading. On the ISE options exchange, there were only 111 calls bought for every 100 puts, which is the 2nd-lowest reading in the last six months. Typically that would be a positive for the market, but again GM options are likely having an outsized affect on those figures as well.
• Volume in the S&P 500 tracking fund, SPY, increased by 18% from Wednesday. But total volume in the 500 individual components of the index DECLINED by 15%. This is highly unusual behavior – such a thing has happened only 10 other times in the past five years. 3 days after the other occurrences, the S&P was higher 7 of the 10 times, with an average return of +0.5%. After 30 days only 3 of the occurrences were positive, as 7 of these happened from 2000 – 2002.
• Traders are thirsty for any sector that seems to have the ability to hold up in the face of the volatility we’ve been seeing over the past couple of weeks. Those sectors are some of the most defensive available – healthcare and utilities. Assets in the Rydex mutual funds which track those two sectors have recently tripled as investors scramble to get into some of the few long funds which have been showing steady gains. Assets in the Utilities funds have now reached nearly $56 million. Just a drop in the bucket in the bigger scheme of things, but it’s worth noting that over the past four years, whenever assets reached $50 million or more, the Utilities fund was higher after 30 days 0% of the time (0 out of 23 days) with an average return of -6.6%.
• At the Healthcare fund at Rydex, traders have put in nearly $120 million – triple the amount from early April. Over the past four years whenever assets in the fund hit $100 million or more, 30 days later the fund was positive only 36% of the time with an average return of -1.5%. After 60 days, it was higher only 3% of the time (2 out of 64 days) and the average return was -3.2%. It may be more challenging now to bet against this fund, however, since it is hitting its highest levels in 7 years.
• This type of defensive posturing isn’t exactly encouraging. The venerable market technician Walter Deemer popularized the use of the Fidelity Select series of sector mutual funds as a way to keep tabs on market health. Looking over the past 20 years of history in those funds, we see that when Healthcare had a higher relative strength than the S&P 500 while at the same time Technology had a lower relative strength, then the S&P 500 showed a return over the next 90 days of +1.5% with 53% of the occurrences being positive. But when Technology had been outperforming Healthcare, then the future return in the S&P jumped to +4.5% and 79% of occurrences were positive.
05/05/05
• The equity-only put/call ratio from the CBOE closed at an extremely high level of 0.84 on Wednesday, the 2nd-highest reading since last August. It’s even more unusual given the performance of the broader market. However, with all the excitement over General Motors, its option volume was huge. Taking GM options out of the put/call ratio, the equity-only ratio dropped from .84 all the way down to .60. So it appears as though perhaps we shouldn’t jump to the conclusion that traders were betting heavily against Wednesday’s rally – it looks more like traders trying to scramble over the GM news.
• In the Rydex family of mutual funds, traders added a net $29.5 million to the long-side (bull) S&P and NDX index funds and withdrew a net $43.0 million from the short-side (bear) funds. However, we see that traders were quite timid in their moves – usually movements in the leveraged funds will account for most of the daily asset changes. On Wednesday, though, only 29% of the movement into the bull funds went to the leveraged funds, while 39% of the withdrawal from the bear funds was in the leveraged ones. That’s a good sign that Wednesday’s rally was not entirely “believed”. If it was, we would have seen a larger movement in the leveraged funds.
• Breadth on the NYSE Wednesday was the best since January 31st, as we saw nearly 1750 more stocks close with a gain than a loss. Since 1997, there have been only 21 days where breadth was this good or better. 10 days later, the S&P 500 was higher in 16 of those instances and the average return was 0.8%. The return would have been twice that had it not been for an exceptional loss of 14% after one of the “bad” signals in early July 2002. There were only three 10-day losses of greater than 1%, but there were twelve gains of more than 1%. It should be noted that six of the occurrences were during the bear market, and the 10-day return was still positive after four of them.
• The Investor’s Intelligence survey of newsletter writers showed 43.5% of them as being bullish (down from 44.0% last week) and 30.4% as being bearish (up from 29.7% last week). Again, this is the lowest amount of bullishness in the survey in two years other than the week of August 20th, 2004.
The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» Normxxx - Market Round-Up
Market Round-Up and the NYSE Specialist Short Ratio
http://www.marketthoughts.com/market_com...
By Henry K. To, CFA | 16 May 2005
Below you can see a daily chart of the U.S. Dollar Index vs. the Commodities Research Bureau (CRB) Index over the last eight months. Please note that the CRB Index (blue line) has finally broken below the 300 level – with the U.S. Dollar Index (green line) confirming by rising above the 85.50 resistance level – a level which put a cap on the U.S. Dollar Index in early February and mid April. While the former is now oversold and the latter is overbought, the intermediate term trend for the CRB Index remains down and for the U.S. Dollar Index remains up:
“Studies by GaveKal (which is one of the best investment advisory outfits out there) have shown that, historically, the return of the U.S. Dollar Index has been very much correlated with the growth in the amount of foreign assets (which is pretty much all U.S. dollar-denominated) held in the custody of the Federal Reserve. By my calculations, the correlation between the annual return of the U.S. Dollar Index and the annual growth of the amount of foreign assets held at the Federal Reserve banks (calculated monthly) is an astounding negative 61% during the period January 1981 to February 2005! That is, whenever, the rate of growth of foreign assets (primarily in the form of Treasury Securities) held at the Federal Reserve banks have decreased, the U.S. Dollar has almost always rallied.” Following is the revised chart (up to March) showing the annual change in the dollar index and the annual change in the growth (second derivative) of foreign assets held at the Federal Reserve banks:
Please note that at the end of March, the U.S. Dollar Index was at 81. By the close on Friday, the Dollar Index has already rallied to 86.1. However, judging from the above chart, I believe a rise of the Dollar Index to the 90 to 95 level is now inevitable.
Now, let me go ahead and update all of you on something that has been bothering me during the time I was bearish on the stock market. Remember the NYSE Specialist Short Ratio?
“The specialist short-sale ratio is published each week and represents the percentage of all shares sold short during that week by the NYSE specialist firms – who are the brokers appointed by the NYSE to maintain orderly markets in individual stocks traded on the NYSE. The NYSE specialist short-sale ratio may not represent the bullishness or bearishness of professional traders, but it is definitely representative of the bullishness or bearishness of the public – as these specialists are generally forced to short-sell when the public is bullish (and thus buy stocks) and to buy when the public is bearish. The historically low readings we are currently experiencing in the specialist short-sale ratio represent huge bearish sentiment of the public – as this indicates that the specialists are not forced to do much short-selling in order to maintain the integrity of the stock market.”
Over the last six weeks, the 8-week moving average of the NYSE Specialist Short Ratio has been declining precipitously. In fact, the 8-week moving average of the NYSE Specialist Short Ratio hit an all-time low last week – surpassing the all-time low reading that was only made in late August of last year. As outlined in our November 7, 2004 commentary, such a reading in the NYSE Specialist Short Ratio has historically had very bullish implications for the stock market:
There have been many arguments stating that this ratio may not be as useful as it once was, given the proliferation of hedge funds and complex hedging strategies, for example. Maybe, I believe this has a huge potential of be a very significant development. If we are to follow historical precedence, then a great many number of bears could get killed on the short side in the coming months.
I will now provide an update on our most popular sentiment indicators. Nothing new here – I will start off with the weekly chart showing the Bulls-Bears% Differential in the AAII survey vs. the Dow Jones Industrials:
The Bulls-Bears% Differential in the AAII survey has been oversold for several months. In fact, the 10-week moving average of this indicator is now at negative 8.3% - the lowest reading since April 2003. Moreover, if this ratio is again in negative territory by the end of this week, then the 10-week moving average would be under negative 10% - a very highly oversold reading. As I have said in the last eight to ten weeks, based on the historical implications of a highly oversold reading in this survey, we are going to either have a very strong rally here or the market is going to crash. Volatility, here we come!
The Bulls-Bears% Differential in the Investors Intelligence rose from 13.1% to 18.2% in the latest week. We never got our sub-10% reading, but the 10-week moving average is now at 21.67% - a reading which we haven't seen since May of 2003:
Finally, the following weekly chart shows the Market Vane's Bullish Consensus vs. the DJIA:
As I said in the above chart, there is nothing new here - the latest weekly reading of 61% is not overly high relative to the readings of the last 18 months. Moreover, the 59% reading from two weeks ago is sufficient to give the bulls some “ammunition” here before the market gets overbought again.
Conclusion: The short-term trend of the major indices is still murky, although I believe the major brand name stocks will do well over the coming weeks. Investors should also pay a lot of attention to the NYSE Specialist Short Ratio going forward – in that we are to follow historical precedence, the market is due for a huge rally in the upcoming months. In the meantime, we should watch the two major support levels of the Dow Industrials and the Dow Transports – they are 10,070.37 on the DJIA and 3,388.58 on the DJTA. As I have mentioned over the previous weeks, commodities and financials are still a sell, although the action of the Philadelphia Bank Index may be suggesting a temporary low in the financials going forward. Commodities (except for oil and natural gas) are currently very oversold on a technical basis, and so may experience a good bounce in the coming days. The U.S. Dollar Index is still a buy until it gets in the 90 to 95 range. For readers who want to participate in a discussion on the U.S. Dollar, please take a look at the following two threads in our discussion forum:
http://www.marketthoughts.com/forum/view...
http://www.marketthoughts.com/forum/view...
[Normxxx Here: I might mention that I too predicted a "flat to rising dollar" and a "flat to falling gold price" for 2005 at the beginning of the year.
Didn't see the January swoon in the market though-- but I should have! The markets have been negatively correlated with the value of the dollar throughout this current cycle-- which is bearish for the markets going forward if the dollar continues up.]
The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» Kirk - Re: Market Round-Up
In response to Market Round-Up posted by Normxxx:Thanks for posting Henry To's work. I like much of what he does, probably because he looks at sentiment much like I do, as a contrarian indicator. Funny how we tend to like the work of those we agree with!
-- posted by Kirk
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