Saturday, August 21, 2004
Weekend Update
Technical Analysis: BULLISH
The US markets have begun a technical rebound that may be more that just an oversold rally.
An oversold rally is what we had in late July --- it lasts for just a few days and merely relieves the downside pressure before the decline resumes.
Now, we have a bunch of intermediate term technical indicators that suggest that a rally is underway that will last as long as 3 weeks.
Firstly, the 10-day and 30-day moving averages of the advance-decline line on the NYSE are both oversold and are both moving upwards in tandem. Sentiment is also sufficiently bearish, so that in a contrarian sense, we interpret it as being bullish for the market. The 10-day moving average of the put/call ratio, for instance, is now in bullish territory. Plus, the Investor's Intelligence survey's percentage of bearish investors has reached a high that was attained only in March 2003, the precise bear market bottom of the S&P (note however that the percentage of bulls is only as low as the May 2004 interim lows).
The S&P looks like it has a clear shot at the 1108-1111 level, where the 50-day and 200-day moving averages currently reside. If 1111 is re-taken, and bullish behaviour continues after the monthly chart turns up (on trade above 1108) and continues after the quarterly chart turns up on trade above 1150), then it will be clear skies ahead for the S&P to reach 1170-1190.
On the other hand, a failure at the 1108-1111 level that causes the S&P to rapidly decline in terms of both price and time will be MAXIMALLY BEARISH, and will be a clear-cut signal to short-sell.
The bulls have their work cut out for them, just like the bears. Good luck, and happy trading!
Friday, August 20, 2004
Late August Rally in the Offing
According to many technical indicators, it would appear that the US markets are oversold and due for a bounce which should take place in late August. Currently as I'm typing this, the S&P is facing initial resistance at 1087-1089; if this level is cleared then it paves the way for a test of 1108-1111, in the region of the 200-day moving average.
The bulls have their work cut out for them. They need to generate both momentum and volume, and decisively capture the 200-day MA if they are going to have any hope of achieving a positive close for the June-September quarter. On the other hand, a rally to 1108-1111 which subsequently falls apart will be very bearish. Any rapid disintegration of the current oversold rally after the S&P has moved above 1100 would be deemed to be the best sell / short signal in a long time.
While the short term trend is up, the intermediate trend is still down --- the bulls need to prove themselves going into late August and September. As late September to early October is traditionally a bad time for the markets, the task ahead will be very difficult, even though the longer term uptrend initiated in October 2002 has not yet been violated. A failure of the current rally to take the market indices past their 200-day moving averages will most likely turn the long-term trend down and confirm the resumption of the secular bear market. It ain't gonna be pretty.
The US dollar to coming under pressure again, and somewhere down the line, it will be bullish for gold and silver. Currently the enormous trade deficit is being ignored --- witness the 10-year note's yield rallying to 4.22% in the face of obvious dollar pressure and a rising interest rate environment. The US government is also trying to tell us that $46 oil translates into a DECLINE of 0.1% in the CPI. Either the 10-year note is signalling that the economy is about to fall apart rapidly, or it is being seriously mispriced by the market. If the latter is true, the 10-year note may represent the most beautiful short-selling opportunity out there. I will update you as we go along.
The best equity investment opportunities are to the found in Asia, particularly smaller economies like Malaysia and Thailand. For fixed income, investors should overweight bonds with higher grades and shorter durations, and focus on economies with the least inflationary bias such as the Eurozone and Singapore.
