Market over-view heading into Q3'10 end

Hi there, and welcome back to CRI's S&P 500 blog.

As CRI prepares for the quarter and year end, this week's S&P 500 Blog will include a quarterly review of SPY, (and for all you Canadian's out there) the TSX Composite and TSX-Venture exchanges.

SPY

As has been the case for many weeks now, the SPY is pointing higher. Regular readers of this blog will recall CRI's bullish enthusiasm coming out of the US mid-term Congressional elections and the announcement of the US Fed's QE2 program. Fundamentally we experienced a dramatic political shift in Washington coupled with a guarantee of an additional $600 billion in Fed. bond purchases before the end of Q1'11. Technically, the market registered a very well defined double bottom breakout from 112.58 (our 'trader buy signal') coupled with a nice cross of the 13 EMA back above the 30 SMA (our 'investor buy signal').

As a special treat this week we added what CRI would consider to be the significant up-trend lines on the above chart. Notice the 2009 bull run was dominated by line 1. So far the year 2010 bull run has been dominated by line 2. CRI is expecting this trend line to hold up for the time being but if it should fail, next significant support is line 3. Notice that a 50% retracement of this entire bull run brings prices right back to line 3. at around the 95 area so keep on eye on this line should things start to get ugly again.

TSX Composite

The primary stock index for Canadian investor, the S&P TSX Composite Index is a basket of stocks very much like the S&P 500 index in the US. The Canadian stock market is dominated by commodity related assets as Canada is a very rich commodity nation. From wood to oil to gold, Canada has it all and its products are very much in demand. Very much like its southern counterpart too, the Canadian stock market registered a significant buy signal in the middle of September when prices crossed back above 12,321. Canadian interest rates are very stock friendly, a large portion of the $600 billion Fed QE2 program is going directly into commodity related assests and Canadian corporate earnings are in far better shape than their US counterparts. Given this fundamental backdrop, one should not be too surprised to see rising stock prices. Applying the same technical logic as SPY, one can clearly see a massive Bull flag formation that has been carved out over the past 2 years. The conservative upside target here is 13851 (with an aggressive target near 16,000!) and considering the violently bullish nature of many commodity markets of late, a move to this conservative point would not be too big of a surprise.

TSX-Venture Exchange

Probably the most surprising to the investment community has been the dramatic comeback in the Venture Capital market of late. Above is the Canadian equivalent of the Russell 2000 stock index in the US. This index represents the smallest companies in the Canadian universe and as you can see from the chart above, the move higher over the past two years has been dramatic. But more dramatic was its initial fall. Consider that the market has just now gotten back to the 200 week EMA. In essence, when the rest of the market came back in 2009 the venture market was still in panic mode. If one considers that corporate borrowing rates in North America have fallen from about 2% this time last year to about .5% now, it makes sense that the speculative market is finally starting to see investment capital again. Unlike their larger brethren, venture stocks took off like a rocket heading out of the summer and into the fall. The election and subsequent QE2 announcement was further validation for this index. What is interesting here is that if one looks at the Point & figure charts (link) we still have some way to go till we get to our target (2640 area). Like the major index's, the venture exchange has a bull flag working too. The formation here suggests that prices want to move up into the 2355 area. 

Summary

North American stocks are in a massive bull wave which is pushing prices higher across the board. Canadian stocks look to benefit from the move higher in a greater degree than US stocks because of the better structure of the Canadian banking system, a friendly macro trend towards commodity related assets and a strong currency. The first two weeks of Q3 suggested money was going to be flowing primarily into Basic Materials, Energy and Tech. Two of which are a hallmark of the Canadian investment landscape, need we say more...

The markets never move in a straight line so CRI will be looking for ebb and flow to this move higher but make no mistake, equities are moving higher and if you are not participating you will be left behind.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Irrational Exuberance Once Again?

Hi there, and welcome back to CRI's S&P 500 blog.

The brief consolidation that followed the post mid-term US Congressional election rally (try saying that 10 times fast!) has resolved itself bullishly. So much so that one has to realistically expect to see much higher prices in the weeks to come. Indeed, if the bullish flagpole formation (that has been registered with a move above 122.95) is to be believed, then our target must be in the 137 area or more than 11% higher than current prices.

Regular readers will of course be well aware of CRI's bullish stance on SPY (specifically when the SPY crossed back above 112.58 confirming a double bottom breakout AND an 'Investor' buy signal was registered when the 13 EMA crossed back above the 30 SMA) as of the middle of September. The most significant development of the three week consolidation is it has allowed those that bought the breakout at 112.58 to finally have a new support zone to move their collective stops to (actually just under the support zone....like 117.64 for instance). 


So what might be going on fundamentally to prompt such a move? CRI's opinion has been that the triple effect of QE2 ($600 billion of 2-5 year US government bonds by the US Federal Reserve through Q1'11) , relatively strong corporate earnings and the balancing of power within the US Federal Government has laid the ground work for a 'perfect storm' for stock appreciation.


So where is this $600 billion going? CRI publishes a report every quarter that helps in determining where new money is flowing: 1st 2 weeks of Q4'10 Report. The last report suggested money was moving primarily into the Basic materials, Energy and Tech. sectors. Indeed, these areas have done well and CRI shall be concentrating efforts for the remainder of the month to trade these sectors accordingly. For an idea of what CRI is buying right now, subscribe to CRI's OnlyDoublesNewTrades to get the low down on what CRI likes right now.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Four weeks of consolidation leads to new stops

Hi there, and welcome back to CRI's S&P 500 blog.

The ten week breakout that preceded the US mid-term congressional elections is now in its fourth week of consolidation. Some simple technical targets suggested the market had three significant support zones (the 117 area, the 114 area and finally the 112 area). Considering a natural 50% retracement of the ten week rally would have brought prices back into the 113 area [(103.73+122.95)/2=113.34] that was CRI's objective on this latest wave of selling. The move into the low teen's didn't materialize as both international tensions (Korea, Ireland) and domestic tensions (repeal of George Bush's tax cuts) seems to have melted away. and while everything seems cordial in Washington these days, I might be inclined to chalk the current market up to a combination of lame-duck old Congress and an early Sanata Claus rally. Regardless, enjoy the higher prices while they last.


Our most recent lament about the market concerned the fact that while the most recent buy signal was indeed correct, it left us long the SPY from 112.58 with stops remaining at (or just below) 103.73. The four week consolidation (which registered a significant low at 117.59) has now given us a new level to move our collective stops to just under. Going forward then, those that did buy SPY at 112.58 ought to now have their stops sitting just below the lows of three weeks ago at or near 117.58. Should we get a reversal in the next couple of weeks (highly unlikely) then this would actually turn into a shorting opportunity....but we will cross that bridge when we come to it.


Ideally we would live the market to consolidate for another week, then break higher. If that does happen then we would have completed a natural 5 week consolidation after a 10 week rally. Additionally, this price pattern would represent a very short term bull flag pole formation and would suggest prices want to get up into the 136.81 area [(122.95-103.73)+117.59].


but lets not put the cart before the horse...

Summary


The market registered a significant 'trader' (double bottom breakout) and 'investor' (13 EMA crossed back above 30 SMA) buy signal when prices crossed the 112.58 level back in September. 


If one were to be long SPY, one should be long from 112.58 with stops just under weekly support at or near 117.59. Tech., Basic Mat., Energy were 'Q310 1st 2 weeks best performing sectors and that shall be where I will concentrate my trading efforts over the coming few weeks into the end of the quarter. OnlyDoubles trades have been tearing the market appart (3 doubles in October alone!) and is well positioned to take advantage of any move higher should it ocure.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

The slow consolidation continues

Hi there, and welcome back to CRI's S&P 500 blog.

As has been the case for the past three weeks. We are slowly consolidating the 10 week bull rally that preceded the US mid-term congressional elections and the official launch of 'QE2. 

Both traders and investors were given a clear signal to 'get-in' when prices broke above 112.58 back in mid September. The market indeed rallied to take out the spring highs (which in itself is a monthly double bottom buy signal) a move of more than 7 percent from the breakout. Unfortunately, the move higher was almost straight up, suggesting there needed to be a few weeks of consolidation before we can expect another move higher in earnest. That consolidation is happening now. 

Technically

we are a bit over-extended but not badly. We have several moving averages just below us to provide support so I wouldn't be surprised if the above mentioned support areas (refer to chart) are indeed strong enough to hold prices up.

Fundamentally

we are OK here too. Both a friendly yield curve and solid corporate profits shall help things going forward. 

The problem

1. Corporate scandal, As long as we keep reading about one scandal after another both fines and lack of focus shall hinder corporate profits in specific sectors. Specifically the financial sector this go round.

2. No-one likes war. So if the bullets are flying for real in Korea one ought to expect both a substantial rally in the US Dollar and a soft stock market. This is known as a systemic risk and no matter how hard one tries, one cannot control it. If it happens we just have to deal with it. Interestingly though, this may be the reason the market corrects (as we have been expecting) and once the event has passed the market may go through a dramatic period of catch-up as the fundamentals (earnings & interest rates) have remained relatively friendly through this whole time period.

Summary

If one missed the original buy signal (112.58) then one may have an opportunity to enter at or near that level again as prices have been (and are expected to continue to be) consolidating for a few weeks. For those that did the trade, stops still remain just below the double bottom (103 area). The low of this consolidation shall represent our new stop if and when it comes.  In the short term, it shall be hard for the market to breakdown in earnest as there currently exists significant support from 111 to 117. So I wouldn't be surprised it our stop is moved into this area but we will just have to wait and see if and where it comes. Having said that, if war does breakout on the Korean peninsula one would be best advised to cover any long positions and ride the uncertainty out in cash. While it isn't a specific recommendation, it is common sense in the trading world...

When someone asked me what would cause the market to correct after the recent 10 week bull run I had to reply, 'one can't write better fiction than reality'

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Moving Higher But A Little Over-Extended

Hi there, and welcome back to CRI's S&P 500 blog.

It has been a  few weeks since the US mid-term congressional election and the FOMC's QE2 program launch. The market ran up into both events in a classic 'buy-on-the-rumor' and unfortunately it looks like we have begun the process of 'selling-on-the-news'. While there hasn't been any longer term technical damage done, it wouldn't surprise me if this 'correction' continues for at least a few more weeks. Irish debt, rising Asian inflation and a lot of supply of stock (GM IPO etc) are just a few issues the market is dealing with at the moment. And until we see some sort of capitulation, I won't be in a big hurry to be back on the long side from a trading perspective.

So lets go take a look at the chart to see where we might be heading [please refer to chart above]. This has got to be one of the more busy charts I have looked at in a while!

Lets start off with the longer term perspective - The move through 120.89 is significant from a longer term perspective as it represents a monthly double bottom breakout in the market. Stops on that monthly trade should be at or just below 100. While I am not taking this trade on (way too much risk for my liking) it is important for us to both recognize and appreciate what the market is trying to tell us. Specifically, the economic backdrop for stock growth going forward is OK (ie. yield curve is friendly, interest rates are low, and earnings are high). Additionally, there is still a lot of pessimism out there which unfortunately for the public is actually bullish.

Now the shorter term time from - Even from a weekly perspective, we are getting over-extended. The last major buy signal on the SPY was at 112.58. One should have stops working for that trade just below support at 103.73. This is all well in good if you did the trade (you are up almost 8 points or about 7%). The move up was ten weeks in duration and almost straight up. This straight line move up unfortunately has not given traders an opportunity to move stops. The current correction is the way for the market to find a new support line and once that is established then those that did the trade at 112.58 will be given a signal to move stops accordingly. 

So where am I thinking this new support line will come in? To me it looks like we ought to be shooting for a move back towards the 111 to 113 area. As well as there being a gap at 111.09 that needs to be filled in, a 50% retracement of the most recent move higher would bring prices back to 113.34. Lastly, all three moving averages are bunched up tightly between 111 and 116.

In summary then, investors and traders were given a huge buy signal in the broader stock market in the middle of September when prices crossed back above 112.58 and the 13 EMA crossed back above the 30 SMA. For those that did the trade, look for a nice pullback in price and then a subsequent move higher to move stops. For those that missed it, look for the anticipated pullback to try and enter the trade at the original buy point (112.58) or after the market has consolidated for another few weeks and then breaks out higher.

Either way, if you are a regular reader of CRI's offerings then you will definitely here it from here...

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

The Bulls are firmly in control - for the time being

Hi there, and welcome back to CRI's S&P 500 blog.

The important US mid-term congressional elections have come and gone and now we must get used to the new reality coming out of Washington (with regard to major US Federal legislation changes). Interestingly, it looks like the market has gotten exactly what it wants. The Republican win in the House was enough to dislodge the Democrat stranglehold while at the same time, wasn't significant enough to be considered any type of mandate. In essence, little to no change in US Federal Government fiscal policy ought to be expected for the next two years. 

This bullish enthusiasm can be clearly seen in the price action. The chart above (as always) is the ETF for the S&P 500 stock index. It represents a basket of the 500 biggest stocks in the US. Since many US companies derive their revenue from international sources, this one index is an excellent proxy for world equities in general. This past week saw the index break to new 52 weeks highs and more importantly, crossed through the spring '10 peak at 120.85. Ideally, we would like to see the market finish two consecutive weeks above that level but make no mistake, the break higher was/is bullish for equities over the longer term going forward.

[The big picture.....If one can look at the market from a little longer time perspective, one can justifiably make an argument for a long term buy signal to be registered on a weekly close above 120.85 (with corresponding stops just below the most recent correction lows of 100.59). This price pattern (known as a bull flag formation) suggests prices want to ultimately move up into the 155 area [(120.85 - 65.65) + 100.59 = 155.79]. I know it sounds crazy, but given the additional $600 billion in bond purchases announced by the Fed and the propensity for Washington to be un-able to get in Wall Street's way.....leads this investor to believe this all may happen.]

Having said all that.....please don't inturprete this price action as a good entry point for either a trade or a longer term investment - Here's why: 

1. We already were told to get back into equities nine weeks ago (apon the double bottom breakout on SPY at 112.51). The market is up 7% from the breakout....so if you missed it, then you missed it.....

2. The stop on the current trade is STILL just below 103.73. This means that even if you are long from 112.51 you still have to risk the market moving down into the 103.73 area without closing the position. That represents almost 17 points lower than where we are now (or 14%!). No indeed, if you didn't do the trade nine weeks ago then don't chase it!

3. Our time tested 'Investor signal (that being the relationship between the 13 EMA and the 30 SMA) turned bullish (right around the time of the price breakout through 112.51) and is now quite extended in the bulls favor. Again (this time from the slow 'Investor' signal system) if you missed the trade, then you missed it...

So what does this mean going forward?

The US Federal Government (in the form of the US Federal Reserve Board) is spoon feeding the market capital. Additionally, there will be a lot of rhetoric but little substantive change to US Federal Government's fiscal legislation for at least the next two years. Historically, the years following the US mid-term congressional elections are often very good. The market told us to buy a little over two months ago. Other than an expected technical correction (ie. a 50% retracement of the recent move on the SPY would bring prices back into the 112 area [(103.73+122.09)/2]) there is little standing in the way of prices moving higher over the next few months. With this in mind, one ought to seriously consider any correction a buying opportunity.

Strap on your safety belts, we are in for a wild few years ahead of us!

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

US Congressional Mid-term elections are finally here

Hi there, and welcome back to CRI's S&P 500 blog.

The much anticipated US mid-term congressional elections are finally here! Long time readers will of course be familiar with our expectation of both a Republican win (more so for the House than the Senate) and more importantly, that the market had little choice but to rally into that event. Coincidentally, the US Federal Reserve Board is meeting today and tomorrow to both decide the near term direction for US short term interest rates but also to consider the size and scope of the much telegraphed 'QE2' program talked about over the late summer and early fall.

It is interesting to see how the market has slowly worked its way back up to within 1 point of the spring highs. CRI was of course expecting this after a substantial 'buy' signal was registered the week of September 13th (when the market moved back above 112.58). For those that did the trade, congrats! You might even think about taking some profits as we are coming up to a significant resistance point (the April highs at 120.89). For those that did not, I wouldn't be surprised if you get an opportunity to enter at or even below that level in the coming weeks. CRI, of course, has done very well through this market rally. While not in SPY in particular, CRI has been busy 'making hey while the sun's shining'. (Three doubles in junior resource stocks for the month of October alone). For more information of CRI's actual trades please visit (CRI's OnlyDoubles).

Here is my thinking as to what one ought to expect in the coming weeks:
The market appears to be 'buying-the-rumor' (that being both an expected massive quantitative easing program announced by the US Federal Reserve and a more market friendly Republican party in charge of the US Congress).
The problem here, that may be exactly what they get and unfortunatly, that may mean more than what appears on first blush.
1. If the Fed is indeed embarking on another round of QE then does that not mean they see a further deterioration in the US economy in general? Classical economics suggests one likes slightly rising rates, not collapsing rates....So, ok, maybe the economy isn't that bad and they don't need to be as aggressive as last go round....is the market going to be disappointed? Too many ifs for serious money managers in my opinion.
2. If the Republicans come sweeping into power, does that not mean that current congressional programs may loose funding? Is there going to be a transition period? Is there going to be an outright freeze on spending? Again, too many ifs for serious money managers...

Fundamental Summary: There very well could be a 'sell-on-the-news' event. There will be a lot of new fundamental variables to calculate into the equation once all this news is out and it wouldn't surprise me if the market gave back 5 to 10 percent in a period of 'cooling-off'. Having said that, the backdrop for stocks is still very appealing over the medium term (very low short term interest rates and robust international corporate earnings). Additionally, there is a tendency for stocks to do well in the year following a mid-term congressional election. So whatever hangover comes from this big event, it probably won't be too long lasting.

Technical summary: While the market is still very much pointing higher (as both a double bottom in price and a positive 13 EMA vs 30 SMA relationship currently exist) one cant help but get the feeling we are a little toppy. Over the course of the past week we have failed on a few attempts to move higher. Additionally, the move through 112.85 has been uninterrupted which unfortunately means the original stop point (103.73) has not changed. Again, yes the market is pointing higher, but one must be comfortable with the 103.73 level being tested as that is the current key support level. My hunch; we do a 50% retracement of this latest rally [(103.73 + 119.75)/2 = 111.74 or about 6.5% off the high] then put in a base for the X-Mass rally. If one hasn't taken a position or either taken profits along the way, that correction window may be a good time to consider purchases...

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com