Thursday, January 26, 2012

When to Start Buying Stocks Again

Political, economic and foreign crosscurrents resulted in a lower opening yesterday. But much like Monday, buyers arrived in enough strength to take back a significant portion of the early losses. Greece’s debt-reduction talks with its creditors were the main reason for the early weakness, but buyers snapped up some bargains in the technology sector.

At the close, the Dow Jones Industrial Average was off 33 points to 12,675, the S&P 500 fell just over 1 point to 1,315, and the Nasdaq rose 2 points to 2,787. The NYSE traded 741 million shares and the Nasdaq crossed 443 million. Breadth was slightly positive on both exchanges with advancers ahead of decliners by 1.2-to-1 on the Big Board and 1.5-to-1 on the Nasdaq.

After the closing bell, Apple (NASDAQ:AAPL) blew the cover off the ball by announcing that they had sold 37 million iPhones in the December quarter while analysts had predicted that 30 million would be sold. The enormous sales gains resulted in their “best quarter ever,” according to Apple’s CEO.

Nasdaq Chart
Click to EnlargeTrade of the Day Chart Key

Rumors of a big quarter for Apple have been circulating for weeks, and with the announcement, the Nasdaq could open higher and then retreat since the good news is now public, or the index could fade on the opening. Either way the Nasdaq has had a spectacular 11% run from its December low, and like the broad market, is due for a rest at the bearish resistance line at about 2,800.

Monday’s high touched the line and then quickly reversed, which created a sell signal on the stochastic. The first support on a pullback would be at the October high of 2,753, shown in green on the chart.

Russell 2000 Chart
Click to Enlarge

Even the small-cap Russell 2000 index is showing exhaustion. Following the breakout above its 200-day moving average most small caps would make a run to new highs. Instead the index has paused and yesterday traded in a broad range but failed to break Monday’s high as sellers arrived just before the close. Its stochastic is very overbought and close to a sell signal. However, the index could punch into the heart of the broad resistance zone between 760 and 845 before reversing.

Conclusion: The broad market has reached significant resistance, and every internal measure encourages us to expect a pullback. Nevertheless, the longer-term momentum has shifted to the bulls, and so the chances of a broad breakout following a period of consolidation have improved. Thus pullbacks should be used as buying opportunities. The first area of support for the S&P 500 is 1,285 to 1,292, for the Nasdaq, it is 2,753, and for the Dow, the support is at 12,300.

Jim Sinclair: Mainstream Entities Will Now Enter Gold Market

from King World News:

With gold and silver exploding to the upside on the Fed announcement, today King World News interviewed legendary Jim Sinclair, to get his take on where things are headed. Sinclair told KWN he now expects mainstream entities to enter the gold market. Here is what Sinclair had to say: “Today is an important day. There are many days we talk but this is a mile-marker. What the Fed did today is they turned on the light of what will be QE to infinity. Today the light went on with regards to the intentions of the Fed. They did that for very specific reasons, we have troubles people can’t see and this is one of the ways out.”

Jim Sinclair continues: Read More @

The Demise of the Petrodollar

The official line from the United States and the European Union is that Tehran must be punished for continuing its efforts to develop a nuclear weapon. The punishment: sanctions on Iran's oil exports, which are meant to isolate Iran and depress the value of its currency to such a point that the country crumbles.

But that line doesn't make sense, and the sanctions will not achieve their goals. Iran is far from isolated and its friends – like India – will stand by the oil-producing nation until the US either backs down or acknowledges the real matter at hand. That matter is the American dollar and its role as the global reserve currency.

The short version of the story is that a 1970s deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on the all-important oil trade the US dollar slowly but surely became the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar's value up, up, and away. In addition, countries stored their excess US dollars savings in US Treasuries, giving the US government a vast pool of credit from which to draw.

We know where that situation led – to a US government suffocating in debt while its citizens face stubbornly high unemployment (due in part to the high value of the dollar); a failed real estate market; record personal-debt burdens; a bloated banking system; and a teetering economy. That is not the picture of a world superpower worthy of the privileges gained from having its currency back global trade. Other countries are starting to see that and are slowly but surely moving away from US dollars in their transactions, starting with oil.

If the US dollar loses its position as the global reserve currency, the consequences for America are dire. A major portion of the dollar's valuation stems from its lock on the oil industry – if that monopoly fades, so too will the value of the dollar. Such a major transition in global fiat currency relationships will bode well for some currencies and not so well for others, and the outcomes will be challenging to predict. But there is one outcome that we foresee with certainty: Gold will rise. Uncertainty around paper money always bodes well for gold, and these are uncertain days indeed. (more)

Oil Service Stocks Perking Up: APC, NOV, XLE, XTEX

Many oil service stocks have been appearing on my stock screens the past few nights and it comes as no surprise with the U.S. dollar showing weakness over the past two weeks. Oil is typically inversely correlated to the “greenback” and if oil is seen as strengthening, then its service stocks usually aren't too far behind.

The group, as represented by the SPDR Select Sector Fund - Energy (NYSE:XLE) ETF, has been consolidating near its 200-day moving average for several months following a similar pattern to crude oil. What is interesting is that XLE didn't weaken much despite the U.S. dollar trading strongly towards the end of 2011. XLE has been setting progressively higher lows since last October and recently cleared its 200-day moving average. It has since been trading in a tight range near the $72.50 level which has been acting as resistance for several months. If it can successfully clear this area, it could set the stage for a test of last year's highs near $81. (For related reading, see The 7 Pitfalls Of Moving Averages.)

National Oilwell Varco, Inc. (NYSE:NOV) is an individual stock in this sector following a similar pattern. NOV has been consolidating since a false breakdown in October, as it trades between the mid $60s and $75. It was struggling with its 200-day moving average as well, until clearing the average in late December. It has started to trade in a very tight range near $75 has just started to clear this level. If it can sustain above this area, it could set the stage for a test of the mid $80s. (For related reading, see Simple Moving Averages Make Trends Stand Out.)

Crosstex Energy, L.P. (Nasdaq:XTEX) is another oil stock testing a key resistance level. XTEX has been struggling with $17.50 since August 2011. The stock has been finding strong support near $14.50 as it builds a wide base. Recently, XTEX has been experiencing a decline in volatility as the base matures. XTEX is trading in a very tight range over the past month, and any strength that carries it above $17.50 may lead to a breakout. (For related reading, see 3 Reasons Not To Trade Range Breakouts.)

Anadarko Petroleum Corporation (NYSE:APC) is an oil stock that is not quite as close to a breakout, but still revealing a healthy consolidation. APC has been consolidating between $72.50 and $85 after a violent shakeout in October. It has found strong support near $72.50 and is starting to form a well developed trading range. It is resting above its 50-day moving average and could be close to testing a trendline marking recent highs. If it can clear this trendline and the $82.50 level, it could lead to new highs. (For related reading, see The Utility Of Trendlines.)

The Bottom Line
It is always worth investigating when an entire group moves in unison. The oil service stocks have been consolidating now for several months and many are starting to press up against resistance. While it is possible that they fail to emerge from their consolidation patterns, there are enough clues suggesting a possible breakout. Traders should keep an eye on the index ETFs for the group such as XLE to see if the strength is confirmed. If so, it could lead to several individual names breaking out.

Chart of the Day - Simon Property Group (SPG)

The "Chart of the Day" is Simon Property Group (SPG), which showed up on Tuesday's Barchart "All Time High" list. SPG on Tuesday posted a new all-time high of $133.64 and closed up 1.60%. TrendSpotter has been Long since Dec 22 at $129.06. In recent news on the stock, Simon Property Group on Jan 17 was downgraded to Hold from Buy by Sifel Nicolaus due to valuation concerns. WSJ on Jan 9 reported that malls and shopping centers in Q4 showed a slight improvement in occupancy rates but that the outlook for 2012 is mixed. Simon Property Group, with a market cap of $38 billion, is a real estate investment trust that is engaged in the ownership, development, management, leasing, acquisition and expansion of income-producing properties, primarily regional malls and community shopping centers.


Complacency Risk Is High

By Lance Roberts of Streettalk Live

As I was writing this past weekend's newsletter "A Technical Review Of The Markets", it really dawned on me just how complacent investors have become on the economy, the markets, and risk in general. The mainstream media, and most analysts, are looking at recent improvements in the economic data as a sign that the economy has begun to make a turn for the better. This view is further supported by the rise of the stock market.

With a couple of breadcrumbs, a sprinkle of "hope" and a cup of optimism, analysts, economists and investors have whipped up the perfect concoction by extrapolating recent upticks into long-term future advances. However, this is a game that we have seen play out repeatedly before.

Take a look at the chart of the volatility index versus the S&P 500. The media and analyst community were convinced early on in 2007, even though we did protest heavily, that the economy would experience a "Goldilocks scenario" and the economy would "muddle through." As the market declined, and one indication after another showed that the coming crisis would be far worse than people imagined, investors remained complacent until the "Oh $#@!" moment occurred. Unfortunately, by that time it was far too late. The same thing occurred in 2009 as the Fed intervened with quantitative easing and then again in 2010 with QE2. Each time, as the volatility index retraced back to levels of complacency, the seeds were sown for the next "Oh $#@!" moment.

Reminiscent of the "Perfect Storm", when the Captain of the Andrea Gail gets a brief reprieve from danger as the eye of the storm passed by, investors today are currently basking in the warmth of a rally not realizing that much more danger lies ahead. Bullish sentiment, as measured by the composite of AAII and Investors Intelligence indexes, is currently at very high levels. While this does not mean that a market correction of some magnitude is imminent, it does mean that further gains are likely to be small and the next correction is likely not too far away.

David Rosenberg agreed with this veiw point in today's missive:

  • "Most measures of market sentiment are back to where they were last May just when the S&P 500 was peaking.
  • Short interest has dried up to three year lows.
  • The VIX closed the week below 20 for the first time since last July.
  • As Mike Santoli points out in Barron's, volume in leveraged ETF's versus bearish ones has risen to levels that in the past touched off interim market pullbacks.
  • Credit market indicators have lagged well behind the improvement in equity performance.
  • The S&P 500 is three standard deviation points above its 20-day moving average.
  • Again, as Barron's points out, the ratio of the 15-day volume puts on the S&P 100 Index to bullish call volume hit 2-to-1 last week - this happened in the February 2007, February 2011 and April 2011."

As I said in this past weekend's newsletter, if you look at the markets, commodities, bonds and the dollar, there is really not much that is screaming "BUY ME" at the current time. The markets are very overbought on a short-term basis, and further gains are likely to be limited.

This is not a prediction of the next bear-market cycle or the next recession. Those are coming, either sooner or later, as they are a function of the economic and business cycle. The current trend of the market is bullish and the majority of our "buy signals" are aligned. However, the level of complacency that has surrounded this recent rally is getting to dangerous levels, and it is only a function of time before the next "Oh $#@!" moment arrives.

SILVER & GOLD CURRENCY AND MINERS David Morgan Interviewed by Cambridge House Live

Failed treasury auction portends Egyptian disaster

Investors bought less an a third of the 3.5 billion Egyptian pounds (US$580 million) worth of Treasury bills offered to the market on January 22, a red flag warning that Egypt's foreign exchange position is close to the brink.

Yields on Egyptian government debt maturing in nine months jumped to nearly 16%, but the government could not place its local-currency debt to Egyptian investors, even at that exorbitant rate.

This is a new and ominous decline in the financial position of the most populous Arab country. I have been warning since last May that "Egypt is running out of food, and, more gradually, running

out of the money with which to buy it." How fast this may occur is hard to specify, but the government's inability to borrow on money markets suggests that the crunch is not far off. (See The hunger to come in Egypt Asia Times Online, May 10, 2011.)

Interest rate on Egyptian 9-month treasury bills

Source: Bloomberg

Egypt faces a disaster of biblical proportions, and the world will do nothing about it. Officially, Egypt's foreign exchange reserves fell by half during 2011, including a $2.4 billion decline during December - from $36 billion to $18 billion, or about four months of imports. (more)

Another Chance to Sell Common Stocks and Buy Precious Metals

It has been a tough last year for precious metals investors but not so much for common stocks. Sure, the Euro crisis benefited Gold initially but as the panic has abated, stocks are rallying back to their highs while Gold has sold off and the gold stocks are trying to hold their lows. What is going on? Are we in the twilight zone?Bull and bear markets are long lasting, providing ample time for trends and counter trends to continually reappear and redevelop. The long-term activity of precious metals and common stocks is not a mystery. Gold has continued to hit all-time highs while the gold stocks eclipsed and maintain 2008 highs as support. Yes, common stocks are rallying but are nowhere close to seriously testing 2008 highs. Recently, we noted a potential major bottom in both the metals and the mining stocks. With common stocks nearing major resistance, it is no surprise that we are nearing a point where the secular bull trend is ripe for reemergence.

The chart below shows Gold against the S&P 500. Note the similarity between 2003-2006 action and 2009-2012 action. After surging higher, the ratio retreats quickly but then forms a bottom and builds a base. The ratio has found strong support and won’t be going lower anytime soon. Stocks have had a nice relief rally against Gold but it looks to be all but over.

Turning to Gold Stocks against Stocks, we find this ratio at a confluence of support. Yes, the mining equities had a difficult 2011 but it was nowhere close to their severe under-performance in 2008. Technically, the ratio looks likely to bottom soon and reverse course.

Moving along, we see the S&P 500 closing in on an area of strong resistance. Common stocks remain in a secular bear market and as a result, the market is nearing another sell signal. Conversely, the gold stocks which are in a secular bull market, are digging out a bottom

Investors and traders have to monitor charts and also sentiment which tells us more about fund flows and risk versus reward. Below is a screenshot of a new indicator developed by They are combining put-call ratios, short interest and analyst ratings to develop another indicator for the various sectors. As you can see, every sector is either at or very close to a sell signal while the gold stocks are the only sector on a buy signal.

It may take a few months but common stocks are nearing an important peak. They won’t crash but they will act typical of what we see in the last third of a secular bear market. Doom and gloomers and extreme deflationists ignore the obvious reasons why stocks will begin a mild cyclical bear market and nothing of the sort of the previous two bear markets. At the same time, the precious metals sector is set to emerge from a major bottom and spend 2012 working its way towards the next major breakout that will serve as a catalyst for the beginnings of a bubble.

Good Luck!

Jordan Roy-Byrne, CMT