Friday, September 03, 2004
1. The 10-day MA of advancers-decliners is still in overbought territory.
2. The NASDAQ McClellan Oscillator is maximum overbought. Although this does not mean the market has to go down, it suggests it is late in the rally.
3. The 10-day MA of put/call ratio is heading south, suggesting a growing number of bulls --- which in a contrarian sense, we interpret as being bearish. While I admit this indicator is more of a medium term rather than short term indicator, we can combine this with other indicators to assert our overbought case.
Intermediate term indicators are still rising but should slow down going into the traditionally weak September. Since it is already two weeks into the current intermediate term rally, the low volume we have seen thus far should now draw out some concern.
Indeed, the McClellan Summation Index based on NASDAQ volume (NOT on the advance-decline line) is starting to decelerate and will slow down if the market has adown day or two. This suggests that low volume is having an impact on the sustainability of the intermediate term rally.
The rally that comes after the current overbought decline will tells us of the future market direction heading into 4th quarter. The current mid term rally is sustainable for another few weeks only if the S&P trades above the August high of 1109.70, turning the monthly chart up in the process.And only a Real Accumulation Day (a day in which the percentage gain in price is greater than the 50-day EMA of the Reif AVX) by the S&P crossing its 200-dayMA and continued bullish behavior on a turn-up of its quarterly chart on trade above 1146.35 will confirm a new bull market.
Thursday, September 02, 2004
Market Update
Hold Your Positions But Stay Nimble
The US market rebounded off an interim low in late August on very low volume. Intermediate term technical indicators still offer a rosy picture ahead, but short term overbought signals are flashing. As such, we can expect the market to pull back somewhat before launching into a further advance. At the present moment, investors should remain in the market and not try to time the swings as the low volume tends to cause confusing market action that may be misinterpreted. We still have some upside left in the weeks ahead and patience is the order of the day. Intraday traders should try to short strength and cover when the market is once again oversold. As long as the overbought condition has not been worked off, sudden spikes upwards should not be chased, but should be used as a selling opportunity.
Meanwhile, investors should convince themselves that a passive "buy-and-hold" approach to investing has past its time and should not be employed anymore. To quote "Rev Shark" De Porre (RevShark@aol.com) who writes a column at www.realmoney.com:
Many investors have been brainwashed by traditional Wall Street into thinking that they have to be nearly fully invested in the stock market at all times. That propaganda takes a number of forms and has been disseminated for so long and so widely that few people actually question the assertion.
Mutual funds and traditional financial planning tend to focus on relative performance within an asset class rather than timing. That means investors will stay nearly fully invested at all times. There is a hesitance to change asset allocation ratios too quickly or too dramatically, and that means that a good chunk of capital is in the market all the time.
There are some reasonable arguments for that sort of financial planning but one justification that we hear quite often for staying fully invested is that if we happen to miss a few of the best-performing days, our returns will suffer dramatically.
One such study I came across recently stated that If you stayed invested in the S&P 500 for all 2,529 trading days between March 1991 and March 2001, you would have generated a return of 13% a year. However, if you happened to miss just the five best trading days, your return would drop to 11%, and if you had missed the best 30 days, out of more than 2,500, your return would have been a measly 4%.
At first glance, that seems to be quite a compelling argument against market-timing. If you make just a minor mistake, you risk some very severe consequences. However, if you dig a bit deeper, it is obvious that Wall Street is not giving us the entire story.
What would happen if your timing resulted in you missing some of the worst days in the market as well as the best? Unless you have the absolute worst luck in the world, the likelihood is that even the most inept timing approach would have you out of the market for some days on which the market was down. Cherry-picking certain days is statistical nonsense.
It is interesting to look back at the charts on the days that the markets made some of their biggest moves. Quite often, a big move is followed very closely by a big move in the opposite direction. So the likelihood is that if you are out of the market for a big move up, you may very well be out of it for a big move down as well.
Also, it is interesting that many of the biggest days for the market come within major downtrends. It is typical bear market action to have a big one-day spike that eventually fails. If you caught that one-day spike, it may help your returns. But it's a good example of missing the forest for the trees.
Don't be fooled by that old Wall Street canard. Timing strategies can pay off big even if you are out of the market for some of the best days. One of the best skills that investors can cultivate is the ability to move to cash when the market is not offering good opportunities.
A buy-and-hold approach is what Wall Street wants you to employ but, believe it or not, Wall Street doesn't always act in your favor.
The truth is, a passive "buy-and-hold" approach works well only in a persistent bull market, such as what we witnessed in the late 1990s. The trouble with such an approach is that investors often have limited time frames within which to invest. If your time frame is only several years, you may not be able to cope with the volitality of the market and you may end up with mediocre returns.
Worse still, we are currently in a secular bear market, which means that over the next decade or so, equities will deliver close to 0% inflation-adjusted returns. Take the 1970s, for instance, and do your own calculations. Thus while investors should take full advantage of the current cyclical bull swing, some market timing must be employed to weather the next leg down. I will keep you posted on this.
Meanwhile, the global economy is deteriorating and the major economies like the US, Germany, Japan and Korea are showing signs of slowing down, the spike in April and May notwithstanding. The entire global economy can be deconstructed as having the US on the demand side of the equation and China on the supply side --- all the other countries merely serve as props for these two powers, being themselves overly export-dependent and lacking an autonomous source of domestic demand. So long as the structural imbalances left over from the 1990s bubble and the record twin deficits remain with the US, and the Chinese government is committed to slowing down its own economy, this "double whammy" will impact the global economic environment for the months ahead. At present valuations, US stocks remain a screaming sell.
Longer term, the better investment opportunities are to be found in Asia and in emerging markets, with special focus on smaller economies like Malaysia, Thailand and the Philippines. Investors should also overweight debt instruments of higher grade and shorter duration. Happy investing!
