Saturday, September 25, 2004
Technical Update
Don't Panic!
The stop loss of S&P 1115 was filled on Wednesday trading.
Now as I type this the carnage continues. I know how the bulls feel. To tag the all-important S&P 1130 level on Tuesday only to gap down on the open on Wednesday and slice through all the key technical levels in a trend day that gave no spike up, no gracious exit for the bulls. That felt bad. Very bad.
I stated two weeks ago that the market was stretched and could use some consolidation to work off the overbought condition. Yes, a little range-bound trading took place between S&P 1120-1130 but it failed to work off the overbought condition successfully in preparation for another leg up. The market stubbonly held on to its overbought condition all the way into this time frame, when the intermediate-term indicators are now ready to peak and roll over.
In failing to work off its overbought condition and delaying the inevitable correction, the market lost the chance to capitalize on the momentum of the swing off S&P 1060 commencing mid August. The momentum of that intermediate-term swing is now all but gone, lost forever in this stubbon, stubbon market.
By persisting to the downside after turning its weekly chart down on Wednesday trade below S&P 1119.75, the market demonstrated bearish behaviour and the first sign that things were no longer as rosy as before. In addition, the stab below the key 200-day moving average like a knife through hot butter --- without looking back at all --- is another negative.
The knee-jerk reaction now would be to panic and sell. But often, the first decline is offset somewhat by an initial move up as the all-too-eager shorts are squeezed --- it is only the second downward reaction that often proves to be the genuine bias. As they say, the early bird catches the worm, but the second mouse gets the cheese. To panic and sell now, would in my opinion, be amateurish and ultimately futile.
It is do-or-die for the market. The S&P must re-capture 1120/1123 in order for there to be any hope of achieving new swing highs. A failure to penetrate S&P 1120 intraday by next Wednesday would nail the coffin for the bulls, and I will not hesistate to call the top.
Don't Panic!
The stop loss of S&P 1115 was filled on Wednesday trading.
Now as I type this the carnage continues. I know how the bulls feel. To tag the all-important S&P 1130 level on Tuesday only to gap down on the open on Wednesday and slice through all the key technical levels in a trend day that gave no spike up, no gracious exit for the bulls. That felt bad. Very bad.
I stated two weeks ago that the market was stretched and could use some consolidation to work off the overbought condition. Yes, a little range-bound trading took place between S&P 1120-1130 but it failed to work off the overbought condition successfully in preparation for another leg up. The market stubbonly held on to its overbought condition all the way into this time frame, when the intermediate-term indicators are now ready to peak and roll over.
In failing to work off its overbought condition and delaying the inevitable correction, the market lost the chance to capitalize on the momentum of the swing off S&P 1060 commencing mid August. The momentum of that intermediate-term swing is now all but gone, lost forever in this stubbon, stubbon market.
By persisting to the downside after turning its weekly chart down on Wednesday trade below S&P 1119.75, the market demonstrated bearish behaviour and the first sign that things were no longer as rosy as before. In addition, the stab below the key 200-day moving average like a knife through hot butter --- without looking back at all --- is another negative.
The knee-jerk reaction now would be to panic and sell. But often, the first decline is offset somewhat by an initial move up as the all-too-eager shorts are squeezed --- it is only the second downward reaction that often proves to be the genuine bias. As they say, the early bird catches the worm, but the second mouse gets the cheese. To panic and sell now, would in my opinion, be amateurish and ultimately futile.
It is do-or-die for the market. The S&P must re-capture 1120/1123 in order for there to be any hope of achieving new swing highs. A failure to penetrate S&P 1120 intraday by next Wednesday would nail the coffin for the bulls, and I will not hesistate to call the top.
Tuesday, September 21, 2004
Market Update
The Rally Is Losing Momentum
There are few certainties in the world other than death and government taxes. One certainty however is that the US Federal Reserve will raise the Federal Funds Rate by 25 basis points on Tuesday to 1.75%, which by any measure can still be considered a near-historic low. Yet for all the massive policy accomodation that has been put in place for two years running, all that has been achieved is a year-long cyclical recovery that is rapidly losing momentum in the face of multiple earnings disappointments especially in the semiconductor sector, a "soft patch" in July and August that is almost threatening to become a larger patch, and muted job and wage growth.
The old refrain on Wall Street is "three steps and stumble", supposedly meaning that if the Fed raises interest rates three times in a row, it will lead to a decline in the stock market. Many market participants therefore are anticipating a decline in stock prices heading into and after the Fed interest rate decision on Tuesday. But as I have mentioned many times before, what everyone already knows is very seldom worth knowing. Sure, we might have our garden-variety knee-jerk reaction to the downside, but I would not put my money on that.
What I would put my money on, however, is for the current stock market rally to continue into late September and early October before losing momentum. Intermediate term technical indicators are still rising, indicating the possibility of further upside, but they are already losing momentum somewhat. The 30-day moving average of the advance-decline line, for instance, looks ready to peak somewhere end of this week going into next week. The McClellan Summation Index based on NASDAQ volume would roll over if we had just a few moderate down days. The 10-day moving average of the put/call ratio is also heading towards what we may consider bearish levels (remember this is a contrarian indicator, so the lower it goes, the more bearish is the outlook). All these three indicators appear to be converging on the same time frame of late September going into early October, so this is when I think the market will peak.
For now however, the market does have a few positives remaining. The sentiment is not excessively bullish yet --- indeed, many are worried about the economy and the strength of the rally, so there is still money on the sidelines that could chase the market higher if it does break out over key resistance levels. The bullish behaviour of the S&P after turning its monthly chart up on trade above 1108.60 suggests that the quarterly chart, at a minimum, will be challenged --- this places the target at S&P 1140.
If the market has anything to say --- good or bad --- it should do so within the next two to three weeks. Already, the S&P has rallied a full 70 points off the swing low of 1060, into the key resistance zone of 1120-1140, without even so much as a single downturn of its weekly chart or a Real Accumulation Day. A breakout now of the 3-point declining trendline defined by the March, April and June highs would lead immediately to a test of 1140. But such behaviour without the benefit of a Real Accumulation Day would be considered suspect. If a test of S&P 1140 without a Real Accumulation Day coincides with maximum overbought readings on the intermediate term indictators I follow as well as an upsurge in bullish sentiment to excessive levels, this would indeed set the stage of the next swing down.
TRADING STRATEGY: Stay Long the US market with target of S&P 1140 and stop loss at S&P 1115.
INVESTMENT STRATEGY/OUTLOOK: Longer term, the better investment opportunities in equities are to be found in Asia and in emerging markets, with special focus on emerging economies like India, Malaysia, Thailand and the Philippines. Investors should also overweight European (in particular, UK) and Asian (in particular, Singapore) debt instruments of higher grade and shorter duration, and underweight speculative/junk debt.
The Rally Is Losing Momentum
There are few certainties in the world other than death and government taxes. One certainty however is that the US Federal Reserve will raise the Federal Funds Rate by 25 basis points on Tuesday to 1.75%, which by any measure can still be considered a near-historic low. Yet for all the massive policy accomodation that has been put in place for two years running, all that has been achieved is a year-long cyclical recovery that is rapidly losing momentum in the face of multiple earnings disappointments especially in the semiconductor sector, a "soft patch" in July and August that is almost threatening to become a larger patch, and muted job and wage growth.
The old refrain on Wall Street is "three steps and stumble", supposedly meaning that if the Fed raises interest rates three times in a row, it will lead to a decline in the stock market. Many market participants therefore are anticipating a decline in stock prices heading into and after the Fed interest rate decision on Tuesday. But as I have mentioned many times before, what everyone already knows is very seldom worth knowing. Sure, we might have our garden-variety knee-jerk reaction to the downside, but I would not put my money on that.
What I would put my money on, however, is for the current stock market rally to continue into late September and early October before losing momentum. Intermediate term technical indicators are still rising, indicating the possibility of further upside, but they are already losing momentum somewhat. The 30-day moving average of the advance-decline line, for instance, looks ready to peak somewhere end of this week going into next week. The McClellan Summation Index based on NASDAQ volume would roll over if we had just a few moderate down days. The 10-day moving average of the put/call ratio is also heading towards what we may consider bearish levels (remember this is a contrarian indicator, so the lower it goes, the more bearish is the outlook). All these three indicators appear to be converging on the same time frame of late September going into early October, so this is when I think the market will peak.
For now however, the market does have a few positives remaining. The sentiment is not excessively bullish yet --- indeed, many are worried about the economy and the strength of the rally, so there is still money on the sidelines that could chase the market higher if it does break out over key resistance levels. The bullish behaviour of the S&P after turning its monthly chart up on trade above 1108.60 suggests that the quarterly chart, at a minimum, will be challenged --- this places the target at S&P 1140.
If the market has anything to say --- good or bad --- it should do so within the next two to three weeks. Already, the S&P has rallied a full 70 points off the swing low of 1060, into the key resistance zone of 1120-1140, without even so much as a single downturn of its weekly chart or a Real Accumulation Day. A breakout now of the 3-point declining trendline defined by the March, April and June highs would lead immediately to a test of 1140. But such behaviour without the benefit of a Real Accumulation Day would be considered suspect. If a test of S&P 1140 without a Real Accumulation Day coincides with maximum overbought readings on the intermediate term indictators I follow as well as an upsurge in bullish sentiment to excessive levels, this would indeed set the stage of the next swing down.
TRADING STRATEGY: Stay Long the US market with target of S&P 1140 and stop loss at S&P 1115.
INVESTMENT STRATEGY/OUTLOOK: Longer term, the better investment opportunities in equities are to be found in Asia and in emerging markets, with special focus on emerging economies like India, Malaysia, Thailand and the Philippines. Investors should also overweight European (in particular, UK) and Asian (in particular, Singapore) debt instruments of higher grade and shorter duration, and underweight speculative/junk debt.
