Sat Jan 7, 2011
But Captain that would be irrational..
Mr Spock to Captain Kirk
Investors continue to exhibit an irrational Mr. Spock fear of being in stocks. Yet the internal indcators we we have shown this past week continue to improve. So our basic outlook is for higher stocks, which will really get going as TLT and the US Dollar finally begin a retreat. I wish I knew when that would happen but you should be prepared by now.
Now that he Santa Claus Rally has more or less ended we could have a seasonal weakness here. The summation index for both the NYSE and the NASD both continue to the upside. Bullish oercent charts are also in uptrends but have not topped out.
We continue our hourglass analogy today. The analogy is that money available for invesment flows from risk on to risk off. Once the money finally all moves to one end of the hourglass, the momentum that powered the move is over. There is no more money to move. Hence the sand or financial funds, must move back to other side of the hourglass.
Markets are emotional which is why we discuss socionomics. Investors vividly remember Fall 2008. Not wanting to be caught in a downward spiral againl they have moved move money into low yielding government bonds than they did when the stock market was thousands of points lower! This, Mr. Spock would say, is irrational. But real.
TLT in red black versus the New York Stock Exchange Index in green
If one looks back one learns that I sold TLT between 105 and 110. Looking at this chart it is clear why-TLT had reached its previous high recorded in 2008 It did not seem logical that it would continue higher as stocks were much higher now than then. There was not sufficient reason to be so frightened as then.
But clearly investors were frightened, and irrational, very much so in fact.And so TLT has climbed higher even as the NYSE index fell and then recovered. Even the recovery has not budged money out of TLT.
At bottom the correlation coefficient shows what one woudl epxect, usually an inverse relation.
Note that in 2008, money only flowed into TLT after stocks crashed. No one was prepared. Now everyone is prepared, they are all in TLT. And therefore it is nearly impossible for the market to crash, there cannot be enough sellers of stock. Let me show you.
NYSE
In December money flow in lower panel scurried out of stocks, again, even more so than in October. It seems to me that exhausted the selling. Sure the market could dip yet again. how many pullbacks since the August low, I can't count them all. Yet the economy improves, car sales are up hiring has picked up a bit, REITs are acquiring properties, even the home buildings stocks are recounding. And so the money will flow back into stocks and out of low yielding bonds.
PTEN Patterson Energy Service
E\Here is a good example of how commodity related companies are lagging the commodityr price Crude oil is the solid black line. Notice that the red and black bars of PTEN have been dancing above and below the 50 day MA. Once TLT (whoops I did not put the MAs on TLT in the first graph) starts to break down commodity plays like this will come to life. Note that decrease in volume.
Gold
The physical price of gold is the red black bars. The green line is Market Vectors Junior Miners.
Gold has tested 1550 twice and rebounded. GDXJ howver continued to be out of favor dropping more than a full one thrid of its previous high price of 38 to 24. It is still cheap relative to the gold price. Gold likes round numbers, note the high at 1900 and the recent rebound and trade at 1600. The better bet is GDXJ here but I have purchased both GDXJ and Central Fund CEF. Central Fund has not fallen as much as GDXJ percent wise but has fallne more percent wise than gold itself.
Currencies
The US Dollar in red black has returned to its level of 81, Same as this time last year!
Note at top that hte Euro has nicked a bit lower no doubt causing lots of traders to add additional short positions. This is a mistake. I expect this market to reverse; the widely touted 118 level for the Euro is not likley to be reached if for not other reason, so many are focusing on it. Note the USD is in near parabiolic vertical position.
The jobs reports clams unemployment at 8.5%, expect the govt numbers to fall beloqw 8% before th election whether that reflects reality or not. The economy continiues to improve despite not becuase of government actions and this will also eventually power the stock market higher.
Dennislelam@gmail.com
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