Saturday January 14, 2012
The market continues to post significant divergences. A divergence is a significant change in one indicator while another seemingly is unchanged. This is what most investors are missing. The classic fall sell off occurred with significant lows Aug 8 and Oct 4 yet the markets are acting as though it was still Aug 5 and Oct 1! Investors are still hunkered downin defensive categories of TLT bonds and UUP the dollar.
Dashboard
Yes I am aware that I have shown this chart many times but the point is...
the more out of whack and divergent the indicators get, ie the rubber bands are stretched, the more we are liable to be a corresponding huge move in the opposite direction. This is all happening despite the 90 point improvement in the SPX the last few weeks.
At top the safe harbor of TLT govt bonds keeps bumping against 120 but nnot really going any higher. If Bill Gross and his minions talking on CNBC were right, TLT would be 130 by now. it isn't.
In the main panel the US Dollar, red and black, is stretched even further against the Euro. Indeed some Euro countries, banks whatever were downgraded by rating agencies to generate headlines like
Euro Plunges on New Fears
At bottom the VIX is acting oppostie stocks, the only indicator doing what it should be doing.
But as I have observed this is simply a case of asset risk allocation, the lousy credit risks pay more for their money, which will surely result in Greece leaving the Euro at some point
Yet commodity stocks continue to make higher highs and successively re test their previous lows every day.
Here is a typical pattern of what has been occurring. This is the Dow on Friday. In the morning stocks sell off.This is surely the small investor listenting to the drumbeat of negative news from Europe on CNBC and in the financial press. Once the selling is done, see how sharp the sell off is, the pros step in and start buying.
Stocks made the stand they had to at 1200 SPX, yet at 1289 inveestors are still frightened. I have detailed how many stocks and indices are fighting their respective 50 or 65 and then 200 day Moving Averages. Most commdity stocks are now over at least one of those. Crude oil has been dallying abve and below $100, gold the same at $1600, CEF at $21, still a great buy in my opinion.
Perhaps the best example of negative investor psychology is my contrarian pick in GM. This is surely the ultimate contrarian socionomic play. Consider
The Government resuces both GM and Chrysler.
The bond holders are shunted aside, forget any rules about bamkrutpcy porceedings.
it is branded Government Motors.
The old CEO Rick Waggnoer is fired, the new CEO Henderson lasts a few months, the next guy Ed from ATT lasts until he mentions Government Motors....
The stock goes pubic at 30 something risese to 40 and then collapses 50% ( an interesting replay of hte entire market in 1973-74 now that I think bout it)
The Volt (Obama's favorite car but selling way under its projected 10,000 units per year, catches fire. literally not figureatively)
At $20 a share it had and still does, $20 a share in cash and the EPS was higher than the P/E.
In the weekend WSJ Dan Neil states that even after 20 years of attending the Detroit Auto Show he is re invigorated in his interest in autos, American produced autos that is. Check out
How Detroit Stole the Auto Show at motortrend, again, if my analysis is correct, we should see multiple experts voting for Detroit. In the latest Winding Road, of the Ten Fun Cars to Drive, Chevy has two, the Cruise and the Sonic, talk about Change you can Believe In!
And of course no one wanted it, today it is slogging along making higher highs at 24.29. A return frankly to the old high of $40 is not out of the question. By the way the warrants exercisable at $11 can be bought cheaper than the stock.
Update on Contrarian Picks
I was right to exclude WYNN, an article this week details problems between Steve Wynn and one of his biggest investors regarding Macau.
RIG is likely to take the longer time what with all the legal issues after the BP explosion. It will take a higher oil price and articles aobut the shortage of rigs (the vast majority of offshore rigs are already spoken for in 2012). This is the appeal of energy service companies, there is eventually a limited supply or resource of assets, everyone wants them, the provider can auction their availablity on prie. RIG traded as 60 as recently as the end of October.
GDXJ
The sixty minute chart of Maket Vectors Jr one of our picks neatly divides with vertical bars into daily graphic reports. After the reversal Dec 29, note that it often re tests the previous price level and by the end of the day recovers. Friday, a down day, was still a perfect example of this. I noted a couple of days ago that the market seemed ahead of itself, and indeed it has moved sideways with Friday being a more significant correction. But after being down over 120 points the Dow closed down about 46. Note how the 50 Bar MA in blue was tested Friday.
This same pattern exists in other stocks I own including RL, SEA, URA, BID, FFGCX. The divergence is that commodity prices are moving up as are commodity producers, in the face of a higher dollar and weaker Euro. The smart money sees the change coming!
SPX
Here is a good example of how the market plays with the 50 day MAs.
In the first half of 2011, now you can see it coming, the averages darted above and below the 50 day MA. Note that the two MAs close in on each other right into August. THen the price drops below both of them. Note at bottom that the money flow was moving out of stocks the first half of the year.
Now the reason for our optimsim is that htings are moving in reverse of the first half of 2011. Price flirted with the 200 day MA now with the 50 day, back and forth. IN fact the price index is now above both MAs.
I ran through the industrials, transports, utilities, NYSE, QQQ and Russell smal cap indices. The only index not above both is the NYSE, a broader group of stocks. The Utilities are coming down from their recent highs. In other words that also reverses the pattern of the last year or two. Money is moving from dividend paying stocks, the preferred safe harbor of talking heads on CNBC, to commodity stocks, see earlier graphs and posts this week.
Crude Oil
If the analysis is valid it should hold across multiple asset classes, let's look at oil on the same graph.
Same thing, crude oil flirted with its MAs in the first half of 2011, and then plunged. Now it is above both of them. Resistance now lies at 102.5. See it going back to May 2011? Note the re test of the 50 day MA on Friday.
A Breakdown of the Dollar and taking out 102.5 in oil and SPX 1290 and other 'resistance' zones will likely take stocks, oil, gold much higher. The 50 day MA for gold is 1680 and therefore the level to watch for gold.
Socionomics
Employment numbers are massaged to be sure in an election year but are better in some places. The Auto Show reflects higher auto sales. Oil prices edge higher, but no one believes it.
Endless Summer is the fashion feature on the runways, already as Alaska is gripped by one of the worst winters in modern history (where is global warming when you need it?).
If that link does not work, consider this comment form the article
Moved by what he called "idealized illustrations of Hawaii from the '50s, postcards and Hawaiian shirts," Parisian Joseph Altuzarra sent digital tropical prints down his spring runway against a backdrop of live palm-frond foliage, while Suno, a house that usually sets its compass to Africa (where many of its batik fabrics are made), was also taken with alohawear. "We loved the quirky relevance of Hawaiian tourists dressed in modernized tropical prints," said Suno co-designer Erin Beatty. "It's the perfect outfit to escape the dreary cold of a New York winter."
The fashion world is ahead of the Wall Street Curve. Escape the dreary world of a cold New York Winter
( a metaphor for Wall Street if you will), go island.
The sarong was popularized by Dorothy Lamour in the Road movies from 1940-1952. The mood peaked, at right, in 1952. We are in a move up in the markets during a period of sideways consolidation and dramatic bull to bear markets. This revisitation of the sarong fits in that 1948-52 was a move from the bear of 1930-48 to the new bull of 1948-66. No dobut the breezy nature of the Road movies faded with the Korean War.
This upbeat expectation will match the forthcoming jubilant mood of the breakout over the resistance levels we outlined today.
Travel
We are away from home this weekend and staying at Hampton Inn, part of the Hilton group. I must say, the room is quite nice with a partner's desk, built in sink, and microwave and frig. Good coffee and a reasonable make it yourself breakfast bar. Recommended.
Dennislelam@gmail.com
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