July 30, 2010

Markets went nowhere within narrow pivots on average volume.

Short-term: 4 yellow
Intermediate-term: 2 green, 2 yellow – tending yellow/green
Stock targets: 36% swimming, 34% neutral, 29% sinking

The index-driven stocks are all continuing to cross over technical thresholds simultaneously. Not really great for “leading” stocks since portfolio money now gets distributed more widely. This sort of technical convergence doesn’t happen very often — the last five times were Oct 2004, Nov 2005, Aug 2006, Dec 2007, Jun 09.

The first signified the end of the first correction period off the 2002 lows, second two signified the end of correction/stagnation periods in a longer cyclical, the third the last gasp of that bull and the beginning of the 2008 bear, the fourth the confirmation of the move off the Mar 2009 lows. In each case, whatever has led the move beforehand has handed the reins over to something else. The main difference being how big that “substitute horse” has been — in two cases being rather smaller than a Shetland pony and hence not being able to take the weight of a bull.

So the question you have to ask yourself is this time more like Aug 2000/ Dec 2007 — or more like October 2004? If you know the answer please tell me.

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July 29, 2010

Market ranged within wide pivots on low volume.

Short-term: 4 yellow
Intermediate-term: 3 green, 1 yellow – tending green
Stock targets: 32% swimming, 34% neutral, 34% sinking

If this ain’t evidence of a tug-of-war, hard to imagine what would be. The bottom-up technical moves are now at nearly maximum strength. If bulls can’t get bottom-up fundamental buying and both bottom-up and top-down technical buying in now to plow through resistance; then they will soon run out of time. Everything is aligned for bulls – including a declining dollar and a good earnings season — except for a garbage economy.

This morning’s market action was interesting. Market opened up by almost exactly the same % that the dollar was down overnight. And until 11 am EST (when the European markets closed), the US and European markets traded in complete synch. I wonder if this is some coordinated attempt to goose the markets above resistance before August vacations.

If we do break resistance, I like stocks that are already buys (at least trading buys if not investments) that are higher beta and levered to growth — techs (UTEK, QCOM, ADTN), transport (ALEX, CNI, TAM), oil services (HAL, BHI, CRR), and momo (CRUS, VMW, LORL, BUCY, NTAP). But I really hope we go down and actually base. This phony trading market sucks.

Market Observation

Have been non-formally tracking US stock market opens for awhile now. The gaps between previous day’s close and today’s open have seemed to me to be far more important in daily market moves than the intraday trading moves. And they frequently send conflicting signals – eg a gap up open today followed by what so far is a big fade/selloff.

Finally though I got an idea of why that stuff may be happening. Today the US market opened up 0.86% because the euro rose by 0.80% against the dollar compared to yesterdays close. Always knew that markets were arbitraged between index spot and index futures (the “futures fair value”) but that is always a very minor difference (barring some obvious explainable external news shock). But this coincidence today made me realize that this arbitrage happens everywhere — by all big global investment houses — in their own currency. Once the market opened, US investors (thinking in dollar terms) are now selling off an overbought market that the technicals indicate needs a selloff.

So despite the news headline fakeouts that purport to “explain” these changes in terms of what seem to be pre-open nonsense; one big underlying reason for short-term stock market volatility seems to be currency volatility – not projections of economics/earnings.

As long as currencies remain volatile against each other — and that is one trend I don’t expect to change as long as growth remains slow/negative and financial systems are still in crisis/recovery mode – then timing out currency investment will actually provide a large portion of the total return on investment for anything denominated in or dependent on that currency. Without the need to take on liquidity/credit risk (bond market) or growth/credit risk (equities).

In today’s case, my FXE and FXF captured the gains from the dollar sinking overnight — but haven’t faltered with the selloff in the US stock market today. My short equities position (which I would have been tempted to sell early on because it appeared that my technical analysis for the stock market was wrong and that the predicted selloff was over) has captured the gains from the intraday post-open sell off.

It is days like today — where you think you’re OK if you’re in US$ cash because you are avoiding an equities selloff — that actually put you behind. Because US$ cash holdings have dropped in value. Not relative to gold — which isn’t moving much today — but relative to foreign currencies.

I’m gonna have to tweak my technical analysis a bit. Pay more attention to possible divergences between on-balance volume and accumulation/distribution. Not so much at the overall “market” level — but for individual stock ideas to see how much those stocks are just “following an index” and how much they are moving on their own.

July 28, 2010

Market dropped within wide pivot on low volume.

Short-term: 3 yellow, 1 red – tending yellow
Intermediate-term: 3 green, 1 yellow – tending yellow/green
Stock target: 27% swimming, 35% neutral, 37% sinking

Huge change in the stock targets in the last few days as the highly-correlated index-driven stocks all cross technical thresholds at the same time. Still may be another down day or few to clear the overbought conditions – but setting up for a top-down index-driven ramp up through resistance and squeeze shorts on the other side. If it fails, they’ll run out of earnings season – and there is no more ammo left to deal with the steady drip-drip-drip of a leaking economy.

I don’t have any confidence in my ability to play this volatility after a few days — but I dread being the long-dollar bagholder of cash that allows others to play their games. What to do what to do.

July 27, 2010

Market went nowhere within narrow pivots on low volume.

Short-term: 2 yellow, 2 red – tending yellow
Intermediate-term: 2 green, 2 yellow – tending yellow/green
Stock targets: 24% swimming, 34% neutral, 42% sinking

Wow. What a difference a day makes. Short-term, the market is overbought and deteriorating underneath. Intermediate and longer term, stocks really are highly correlated and you can see it. The number of individual stocks all crossing 50/200 and other technical factors (like the length of the May/June correction affecting a lot of different technical factors for a lot of different stocks) simultaneously is really surprising to me. I knew most stocks just move along with the market (with different betas and such) but it is interesting to see this all happen. The indexes are still chewing through resistance and didn’t make any progress today.

Gotta admit I am just confused. If I were to bet, I’d bet that the indexes pull back and then make one more attempt to charge thru resistance. But frankly, it’s probably better just to leave for the summer. No push through resistance or failure to do so is gonna be meaningful/predictive with this anemic volume. No humans here – just high-frequency computers trading with each other.

Gold is now oversold as valued in pounds – and is close as valued in euro, A$, and francs. Not oversold valued against dollars, C$, or yen. I may be early but since I much prefer gold over any currency long-term, I am going to scale into gold (first bit bought at $1162) before it bottoms and turns. A bit of a test of my “currency” strategy. Silver is still a bit too expensive here.

July 26, 2010

Markets rose up to wide pivot on low volume. Now seriously overbought and chewing on resistance. Individual stocks broadening and improving pretty quickly – and also overbought.

Short-term: 1 green, 3 yellow – tending yellow/green
Intermediate-term: 3 green, 1 red – no tendency
Stock targets: 23% swimming, 31% neutral, 46% sinking.

Breakdown of the “swimming” stocks:
Roughly 25% are ADR’s of foreign companies. Sectors overweighted are pharmaceuticals, pipelines, semiconductors, consumer staples/packaging, specialized machinery, and utilities. And that’s pretty much it. It surprises me that this is still so narrow since I waited awhile to look at this. I wanted to see a reasonably large new influx of “swimmers”. This does tell me that there is no “new bull market leadership” here. Defensive — with some unique growth stories.

That said, I’m glad I finally did this. The green/yellow/red indicators can often just follow the indexes even though I’ve designed them to be more bottom-up and more reliable.

Bullish on Fraud

Fraud has a bright future in the US. Today the US stock markets went up on the headline:

Builders lifted by June new-home sales
Home-builder stocks rallied Monday after the Commerce Department said new-home sales rose in June. “Headline new-home sales rose a dramatic 24% in June to 330,000, but again the main story in the data is the massive revisions that have been ongoing to prior month numbers,” Deutsche Bank said in a research note Monday.

New Home Sales Surge in June, Inventory at 42-Year Low

The headline of the story was similar in every media outlet because it came verbatim from the Commerce Department’s press release and journalists are, almost without exception, too lazy and dishonest to do anything but parrot whatever appears in a press release. The “analysis” of each headline is a bit of mumblety-mumblety by Deutsche Bank or some other Wall St house of flimflam. Barely honest (maybe) without being either enlightening, comprehensible, or incisive.

So like lemmings, people bought stocks. Very very widely — ie mainly via indexes — but on low volume. But overall, the market added a few hundred billion dollars in market cap.

So what’s the problem?

Well, the FACT is that the June new-home sales were the absolute lowest ever for June. Lower than last June and lower than in any June since the government first started tracking this data in 1963 and the population of the US was about 100 million less than it is today. 30,000 new homes were sold. Nationwide. Some bloggers analyzed the data correctly – Calculated Risk. Me? I’m a real fan of graphs.

This is the 47 year graph of new home sales. Showing the 30 year increase in new homes sales as boomers became home buyers and second home buyers — until 2005 and then — whoosh. Straight down. To the point that last month is the second worst month ever.

How do you explain that home sales rose 24% in June then smartypants?

Because May 2010 was the WORST absolute month ever. AND they revised the preliminary May numbers that they released last month down so that they could compare June’s preliminary numbers with May revised-downward numbers. So in the course of two months, they have trumpeted that “May’s home sales didn’t drop as much as expected” (using preliminary numbers for May and downwardly revised numbers for April) and then that “June’s home sales rose more than expected” (using downwardly revised numbers for May)

Still – the numbers were up for June even if they weren’t up by 24%. That’s good news

And it will remain good news. Because next month, they’ll revise June downward and compare the preliminary July numbers to the revised June numbers. And it will work until summer home selling season ends and the adults return from vacation and find that their stocks are valued on hype and manure. Today alone, US stocks added roughly $6.7 million in equity market cap for each new home sold in America in June. Turns out that fraud is a much more effective economic multiplier than either new Fed money or fiscal stimulus.

It is always a good sign when a market goes up on bad news. It is emphatically NOT a good sign when markets go up on deceivingly bullish headlines built upon hidden bad news, obfuscation, and fraudulent manipulation of the statistical truth.

I am no longer interested in overweighting North America or the dollar. It is rather stupid and risky to overweight a country that is so transparently fraudulent and dishonest and apparently content with cronyism. I am reducing my “normal” portfolio weight permanently from 35-40% to 25%-30%. Allocating that 10% equally to Asia and to emerging markets.

That said, it is at least intellectually interesting to observe a Minsky melt-up (aka the attempt to reinflate a bubble and/or blow a new bubble) as it occurs.

And, in unheralded news, the BIS (the Swiss bank owned by the world’s central banks which sets out all regulations for all banks worldwide) announced its bank accounting and liquidity reform package today. Parliaments/congresses will, over the next year, enshrine these into law via grandiose sounding legislation. Expect this to have the same deleterious impact on you as the last round of “international financial reform” which resulted in the repeal of Glass-Steagall; the “deregulation” of derivatives, and the enshrinement of mortgage ratings — and thus a global housing bubble — in Tier 1 capital.

Stock Valuation and Currencies

One of the toughest mental habits to break is the notion that you “buy” something or “sell” something. In truth, all one ever does in the market is exchange one thing for another thing. For example, you may buy an SP500 ETF (SPY) but you only do so by simultaneously selling US$ cash. One of the two people surrounding you in the exchange is selling the SPY ETF to you and buying US$ cash (and likely selling that US$ cash to buy something else – or maybe not). The other person in the exchange is buying your US$ cash and selling something else. “The market” is, in truth then, all of those transactions – aggregated across all asset classes – worldwide.

This is an inevitable part of globalization and it obviously gives a monopolistic advantage to those who a)have the biggest fastest computers running the most accurate trading algorithms and who b)have the most proprietary information about the individual transactions that occur and who c)have the cheapest access to the one external input into these markets — which is the central bank’s ability to create money out of thin air so that “cash” can acquired without selling anything else. IOW – the advantage goes to the sharks — not you or I.

Failing to understand this and keep this constantly in your mind when you assess investments means that you are, potentially, chum. Let me illustrate this using the SPY ETF as expressed in different currencies.

First, the SPY chart expressed in US$. Momentum peaks in mid-April, price peaks in late April, followed by two waves down with lower lows and lower highs. Recent 3 days has moved SPY above the 50 day avg and now above the 200 day average.

Second, the SPY chart expressed in pro-fiat anti-dollars (the dollar index). Momentum and price peak in mid-April, followed by one wave down, a rebound, a higher low, and now a higher high. Recent days have punched thru the 50 day but are below the 200 day.

Third, the SPY chart expressed in euros. Momentum peaks in late March, price peaks in mid-May (AFTER the flash crash). Followed by two waves down with lower highs and lower lows – and a third wave with a higher low and, so far, lower high. But SPY has never dropped below the 200 day and is currently tracing up towards the 50 day.

Fourth, the SPY expressed in yen. Momentum peaked in early April, price peaked in late April – followed by two waves down with lower lows and lower highs. The current rally has not even broken through the late May lows and is now just at the 50 day avg and below the 200 day.

Finally, the SPY expressed in gold. Momentum and price peak in late Mar, followed by a pullback in early April, and a lower high in late April – then a two wave plunge with lower lows and lower highs and in the last two days the rally has moved above the June high and is now above the 50 day average but well below the 200 day average.

All very very different charts with different technical interpretations. The story of blindfolded people touching different parts of an elephant comes to mind. The only difference here however is the currency — not different parts of the elephant. Look at only one of these when making buy/sell decisions and you run a real risk of being blindsided by the rest of the world. That is why the big global financial institutions are running serious hedge funds and quantitative HFT and why the currency markets dwarf all other markets in liquidity/volume/transactions/etc. They take full advantage of their information/quantitative/leverage/access advantages.

The reason I chose to look at a single chart expressed in different currencies is because currencies are at the core of every single investors/traders decisions – worldwide – always – across all markets. They are the grease that makes transactions possible – and the unit of account that we all use to determine whether we are successful or not. Get your cash right – in the form of different currencies and an analytical framework for how/when you want to use these different currencies as a source of funds for investments/trading – and you have a chance against the sharks. And indeed, the currencies themselves may provide a non-interest return expressed in your local currency (which is good in a world where cash pays no interest). Fail to do that — and you will be – and probably deserve to be – chum.

FTI Consulting

FTI Consulting (FCN – $35.80) is a consulting firm that specializes in fraud investigations, forensic accounting, corporate valuation, bankruptcy, etc. It is not actually a stock that is currently “swimming” but a special situation trade (not an investment because it doesn’t pay a dividend). The stock price recently gapped down 24% because of an earnings warning for this quarter. That gap down was bought by insiders so I’m comfortable that it is not symptomatic of longer lasting problems.

FCN is one of the few counter-cyclical stocks. It’s business generally booms when growth is slow or finance/credit is stressed or such. That’s precisely when employees/corporations begin to commit fraud, break contracts, go into bankruptcy, merge under stress, etc. That element of their business was, perversely, harmed when the federal government instead chose to bailout Wall St and socialize risk. Those actions took these issues out of the normal avenues (courts/arbitration/negotiations) and into the realm of lobbyists/Congress/DC and taxpayer subsidy/whitewash.

Whether that counter-cyclical business recovers (due to for example the federal government stopping its perpetual bailout of the rich/connected because it has run out of the ability to issue debt to do so) however is not really the case for FCN being a trade. That may just be gravy that shows up in a few months.

The case for a trade is based on their smaller pro-cyclical business — mostly based on mergers/valuations. They are a minor secondary player in that and that is the reason they warned on this quarter’s earnings/revenues. The recent market swoon has hit the M&A “use” of corporate cash hoard and credit/financing — and it never really extended to small businesses (which is FCN’s main clientele in this area) anyway in the 2009/2010 “recovery”.

So you have a stock that is trading at very low valuations compared to its 10-year averages (even before the 24% swoon) – and whose business has been hit by a double whammy. A “recovery” that is bogus and narrow — and a recession where government has backstopped/socialized/subsidized failures (and in so doing has eliminated the potential fraud/etc lawsuits against them).

The trade is based on one or both of those current situations changing. Either the recovery broadens out (and FCN returns to its longer-term trendline – a potential 30% return over the next year) — or we head into a slowdown that will have less government micro-meddling/subsidy (and FCN returns to its headier counter-cyclical “blips” – see 2002-2003 and 2007 on the stock chart – a lot more than 30% return)

If the status quo continues, FCN will go nowhere. But the recent insider buying at $33-$35 – which has continued up to at least two days ago — provides some comfort that the downside is limited. At least in the case of this company, insiders are anteing up even if the company doesn’t reward shareowners to wait it out with a dividend.

July 23, 2010

Markets stayed within wide pivots on low volume. Euro stress tests and GE raising its dividend are the purported catalysts for the move up. Economic releases were horrible – but ignored.

Short-term: 1 green, 3 yellow – tending yellow/green
Intermediate-term: 3 green, 1 red – no tendency
Stock targets: 21% swimming, 29% neutral, 50% sinking

Unlike the June 18 whipsaw, today marks the second day intermediate-term indicators are positive and the short-term indicators don’t indicate a whipsaw this time. The market still has resistance to get through. The market is definitely getting a broader advance from the bottom up this time and improving pretty significantly by the day. Whether or not the indexes make it through resistance or just chop around, the odds now favor either an advance by most stocks or a divergence where some stocks continue to advance and others flounder. In particular, the lack of volume moving the market indicates that sellers are either done, exhausted, or on vacation until Labor Day.