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Sunday, December 13, 2009

Newsletter -- Week Ending Dec. 18. 2009

This Week: Sideways Market? Got “Pair Trade?”

Stock market trend: Bullish Trend Turning Sideways

Market Pulse

Last week, market action was decidedly mixed. The Dow Jones industrial average and the S&P 500 were barely up while both the NASDAQ and the Russell 2000 were down. Most troubling is the lack of volume -- the persistent trend over the last month in what may be an aging bull market.In fact, there is an emergent sideways pattern to major US stock market indices that is well worth noting as we stumble towards the end of the year. This pattern is evident in the two-month chart of the S&P 500. Since November 13, this broad market index has basically gone nowhere.

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The chart of the Russell 2000 is even more interesting. It suggests that a market top may have been reached as early as the middle of October. At best, this chart evinces a sideways pattern as well.These observations are consistent with the ongoing technical weakness that I have been noting now for almost a month in this newsletter. While sentiment is neutral, both momentum and strength measures suggest a bearish trend reversal.

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Both the emergent sideways pattern and the ongoing technical deterioration in the market are a reflection of mixed macro fundamentals. While there is continuing evidence of recovery in the business investment component of the GDP equation, the consumer remains a question mark. More broadly, all forecasts point to a meek recovery in 2010 it that is unlikely to significantly reduce the unemployment rate -- or generate robust corporate earnings.

From a trading perspective, the safest strategy, particularly as we move into the holidays and the end of the year, is simply to move into cash, count your blessings, and conduct research that will position you for some more active trading in the new year when the trend hopefully declares itself more fully -- either bullish or bearish.  If, however, you want to continue to trade this market, you may want to consider a long-short approach such as the one I discussed several weeks ago in highlighting a strategy to trade the IBD 100. (Click here to review)


The least risky type of a long-short strategy is to find two stocks in the same sector or space -- one that is weak that you can short sell and one that is stronger to go long with. This is called a "pair trade." An excellent case in point is offered up in this week's edition of Barron's magazine.

In an interview with Douglas A. Kass, the President and founder of Seabreeze Partners Management, Kass recommends the following pair trade: Short Franklin Resources (BEN) while going long State Street (STT).  In general, I like this trade but only with a properly timed entry using technical analysis.In fact, right now, technical analysis would suggest that Douglas A. Kass is dead wrong. In particular, Market Edge rates Franklin Resources a "buy" while rating State Street a short sell. This is exactly the opposite recommendation of Douglas Kass. Thus, if you were to execute this particular pair trade right now you would be very early to the game, at least on the basis of technical analysis.

That said, I do like this trade possibly over the long term. Looking at the one-year chart of Franklin Resources, you can see a double top pattern that suggests a possible trend reversal. Based on this chart pattern, being early into this trade on the short side may not be that risky.

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On the other hand, the one-year chart of State Street clearly indicates the beginning of a strong downward trend in the stock in mid-October. Thus, going long State Street right now would be much more of a leap of faith.

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My bottom line here is that this is a good pair trade to put on your watch list. If Kass is right, the technical indicators will begin to point in the right direction and greenlight this trade. It could be big.
To end this missive, I'd like to leave you with a quote from the Kass interview that is consistent with my broad view of the market and my concern that a bearish trend reversal may be on the horizon:

"Frankly, it's hard to totally understand what has been propelling the recent market rise, both in scope and persistence. An obvious reason is the Fed's zero-interest-rate policy and its cheap-dollar initiative, which is creating a shortage of available credit domestically and a glut overseas. And while gold and equities rise, this is undercutting domestic economic growth. In a vicious cycle, capital is being deployed away from the US, small businesses and the consumer, and it's pushing our dollars abroad and wasting precious growth capital and assets in commodity bubbles. And renewed optimism in longer-duration assets such as stocks has, in part, resulted in a massive reallocation at large domestic pension plans and endowments. They have moved from fixed income to equities after allowing the ratio of bonds to stocks to rise dramatically by the time the US stock market hit the bottom in March of this year.

1:18 pm est 

Saturday, December 5, 2009

Newsletter for Week Ending Dec 11, 2009
Always a Winner Strategies

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  America’s appetite for cheap Chinese goods is as strong as its political will is weak.” 
Week Ending December 11, 2009                 Volume15, Number 22               

 

This Week: Grudge Trend

Stock market trend: Bullish Trend Remains Intact

Market Pulse

Grudgingly, I must admit that the market's upward trend remains in place. However, this remains a very difficult market to make money in while the risk/reward still looks more like a gamble on the long side rather than a solid speculation.

The upward trend is consistent with the philosophy of this newsletter. At least in my world, the stock market is a leading indicator of the economy. At least last week, market participants seem to have interpreted the economic news as relatively bullish. The most important data point last week was a sharp reduction in layoffs, indicating a strengthen him ing economy.  This expansionary signal simultaneously boosted the dollar and steepened the yield curve.

Still, all was not rosy. The ISM Manufacturing Index declined by 2.1 points, and this was the second decline in three months.  The significance of the decline in the ISM Manufacturing Index should not be underestimated. Much of the US recovery is being driven by business investment and inventory restocking. If consumers fail to follow through on this investment led recovery, the recovery will stall. That holiday sales have not been particularly robust should be a warning sign.

That said, one should never argue with the tape. What the tape continues to tell us, contrary to my prediction some weeks ago, is that the bullish trend remains in place.

The reason, however, that I am so reluctant to trade on the long side at this point in time is the disquieting jumble of technical indicators, many of which are clearly bearish. For example, of the 91 industry sectors tracked by Market Edge, only a third or rated strong or improving while the remainder are weak or deteriorating.

At this point, I think it is worth pointing out that if you made a bundle off the March lows, taking some of those profits before the calendar year ends and using this time for research and reflection may not be a bad strategy. In my experience, the best and biggest returns are earned in the middle of a bullish trend while most of the money is lost trying to pick tops or bottoms.

As a final comment, I believe that the ability to make money in the US stock market over the next several years will hinge on how market participants interpret a rate of economic growth that will likely be positive but still below potential output. To put this point another way, a recession is clearly bearish for the market and full employment output in a robust expansion is clearly bullish. However, that netherworld between of slow growth is very difficult to handicap. In this regard, we are entering a new phase in our economic history and in modern times, it has been extremely rare for forecasters to project extended periods of slow growth and high unemployment. Stay tuned.

 
11:58 am est 


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DISCLAIMER: This newsletter is written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.







DISCLAIMER: The newsletters and blogging on this page are written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.

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