A month ago we posted about precious metals where we said it wasn’t quite time to buy gold stocks. Fast forward to today and we’re still watching and waiting. The chart below shows that nothing dramatic has changed. GLD and GDX are still moving slowly sideways to up and closing in on their down trend lines. The next several days will create a break or a failure at the trend line. Belief that the Federal Reserve will initiate another round of quantitative easing is currently pushing gold and gold stocks higher. We don’t rely on the news to make our decisions so we’re more interested in how price reacts at critical support or resistance. We believe that a good break of the trend line will provide a low risk opportunity to buy GLD and GDX. A break of the trend line for GDX will also correspond with a break above the recent highs. We hold a small core position in GLD and GDX as a hedge against the
One thing that concerns us about the recent rally is the lack of new highs and the increasing amount of new lows. If you look at the chart of the Nasdaq Composite below with its new highs in green and new lows in red you can see that all is not well with the index. We’re seeing negative divergences when we want to see confirmation of the rally. An example of a positive divergence happened at the low made in early June. As the market was breaking to new lows the number of stocks also hitting new lows was decreasing. At the same time the number of stocks hitting new highs was increasing. This was a positive divergence that gave hints that a good rally could follow. Once the rally started the number of new highs and new lows on Nasdaq performed properly for a lasting rally. Then we got a bad jobs report on 7/6/2012. You can see in the chart the serious damage the jobs report
Exxon Mobile is fairly characteristic of how people feel about energy and oil stocks recently. Our Twitter Sentiment Indicator for XOM has been reaching extreme levels. The last time we saw readings near or above .80 it turned out to be an initiation thrust that helped push the stock to new highs. In fact, the move not only broke several months of recent consolidation, but was strong enough to also clear the early 2011 highs. Sentiment on Twitter for oil stocks like XOM have shown high readings as the stocks are seeing new highs. It looks like the extreme sentiment may indicate the stocks are oversold. Our smoothed indicator is rolling over which may be signaling XOM is ready to consolidate the move through the 86 level. A correction back to the 84-86 level would be healthy as it will allow sentiment to clear its overbought condition. It will also provide money managers and traders alike an opportunity to buy at a low risk entry point and a small discount.
Our Twitter sentiment indicator for the S&P 500 Index is finally showing some strength as the market is attempting to break out to new 52 week highs. The consolidation at 1400 on SPX induced extremely negative sentiment levels. The longer the market stalled just above 1400 the more negative people got with their tweets driving both daily and smoothed sentiment to the lowest levels since the June low. It appears that this build up in sentiment got enough people committed to the short side of the market to allow a break out above 1410. The move to 1415 was enough to get people excited about this rally’s potential pushing our daily sentiment indicator to our highest recorded levels. The consolidation on 8/17/2012 just above 1415 did not dampen sentiment and is helping to move our smoothed sentiment indicator quickly higher. We’ll be watching to see if a break through 1422 brings higher sentiment readings or a contraction back below the zero line (as has been the case for every higher
Our Long / Short hedging strategy is now 80% long and 20% short. As the market consolidated above 1400 we saw improvement in most of our core indicators tracking market trend, risk, and strength. We’re still not seeing the strength we’d like in enough of our measures of the economy and market quality. Conditions such as we’re experiencing today are most likely associated with a continuation of an up trend after a correction. However, during a bear market these conditions occur near bear market rally highs. Our current Hedge Ratio is .25. The long portion of our portfolio continues to be stocks we want to own for the long run that we believe will out perform in an up trend. Our 20% offsetting short is simply a short of the S&P 500 Index. The green lines are adding exposure (removing shorts and increasing longs). Yellow lines represent increasing our hedging (reducing longs and increasing shorts). The red line signals aggressive hedging with instruments like puts, volatility, or actively managed bear
We saw continuing improvement in our core market indicators this week allowing us to add exposure to the market in our Long / Cash hedge strategy. We are now 60% long and 40% cash. Most of our measures of market strength, trend, and risk are positive, while most of our measures of the economy and quality are lagging. This is the point during strong bear market rallies where we often see whip saws. During the 2000 to 2002 bear market this level of exposure was often associated with a market peak within a few weeks. However, during normal up trends this level of exposure generally signals a continuation of the up trend. In the chart above green lines are adding exposure and yellow lines are raising cash.
I keep seeing talk about a double and triple top forming in the S&P 500. These market prognosticators are foretelling doom for the stock market because it is approaching a double top. They often cite all the problems in Europe, a slowing economy, and even the US debt problems as to why the market is going to fail right here. Although I agree that all of the fore mentioned items are problems, I don’t agree that reaching a previous price point will bring those problems to a crisis point. Double tops (and double bottoms) are simply places of short term support or resistance. I’m always amazed to hear technicians pointing to a double top as a great place to get short over the intermediate term. If you’re not eating cat then a cursory glance at a medium to long term chart will tell you that double tops and bottoms should only be used for a trade with the trend or for a very short term trade against the trend. Take
It’s interesting to see the difference in sentiment for Apple and the S&P 500 index. Both the index and AAPL had significant corrections from March to late May or early June. The corrections were followed by a retracement that has brought them both back to within a percent of the previous highs. However, that’s where the similarities end. Take a look at the chart of AAPL and you’ll see that Twitter sentiment continues to improve as it moves higher. Even the few sharp sell offs have barely taken the sentiment indicator negative. Meanwhile Twitter sentiment for SPX has exhibited the exact opposite behavior. It has had a hard time getting above the zero line even though it has several peaks above peak and valleys above valley. Right now sentiment for SPX is breaking down hard even though the market is merely consolidating above 1400. It appears that market participants think AAPL will break out to the upside while SPX is a good short at these
Our smoothed Twitter Sentiment Indicator broke down from a triangle pattern today. Levels this low on the smoothed average haven’t been seen since the June lows. We’ll be watching the market over the next few days to see if it indicates selling pressure or too much bearish sentiment.
One of the less frequent and lesser known patterns in Dow Theory is a “line”. Robert Rhea defines a line as, “A price movement extending two to three weeks or longer, during which period the price variation of both averages move within a range of approximately five percent. “ He goes on to state that the narrow price movement indicates either accumulation or distribution. When a line is broken to the upside the pattern is most likely accumulation. When a line is broken to the down side the pattern indicates distribution. At the first of the year the Dow Jones Transports entered a 5% trading range that lasted over 4 months. The Dow Jones Industrials traded in a narrow range for 3 months. On May 15th, 2012 the industrial average broke down from the line and was confirmed by the transport average on 5/17. William Peter Hamilton believed that the breaking of a line indicated a change in the general market direction. This change in trend could be of either