Tech Talk for Monday July 7th 2008

 

It’s too late to sell and too early to buy most equity index and sectors ETFs and stocks. Most markets are substantially oversold. Best guess is that the bottom will not happen until after the release of second quarter earnings reports. Now is the time to do your homework by determining what to buy when most equity markets and sectors finally show technical signs of bottoming. The bottoming process has not started yet. 

 

Pre-opening Comments for Monday July 7th

 

9:15 AM EDT: U.S. equity index futures are mixed this morning. Dow Jones Industrial Average futures are up 2 points. Futures are being helped by lower crude oil prices and hampered by  reports predicting more credit write offs related to sub-prime lending. Crude oil is down $2.25 to $143.03 per barrel.

 

Consolidation in the base metal sectors continues. This morning, Inmet offered to purchase Petaquilla for $2.00 per share cash. The stock closed on Friday at $0.96. Inmet is expected to open lower on the news. Inmet is struggling on the charts. It currently is testing support at $58.26.

Chart courtresy of StockCharts.com                          www.stockcharts.com

 

More short term pain for long term gain! General Motors is trading higher this morning on a Wall Street Journal article that the company will lay off more white collar workers and is considering the possibility of reducing its number of models.

 

Negative investment sentiment continues to weigh on U.S. equity markets. Bullish Advisors fell to 31.9% last week and isclose to its low set in March. History shows that a depressed Bullish Advisor Percent near this level usually is followed by a significant intermediate recovery.

 

Entertainment stocks are expected to open lower this morning. Lehman downgraded the sector and lowered its recommendation on Disney to under-weight. 

 

Merck is expected to open lower this morning. UBS downgraded the stock due to concerns about Gardisil. On the charts, Merck has a negative technical profile. Intermediate trend is down. The stock likely will test support at $34.49 at the opening.

Chart courtesy of StockCharts.com                             www.stockcharts.com

 

CIBC strategist, Jeff Rubin has reduced his targets for the TSX Composite Index. His target for the end of 2008 fall from 15,200 to 14,300 and his 2009 target drops from 16,200 to 15,250. He also reduced the equity portion of his model portfolio by 4%. According to Jeff, the Canadian economy is slowing faster than expected.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outlook this week

 

Economic news this week is sparse. The U.S. May Trade Deficit and July consumer sentiment indicator are released on Friday.

 

Second quarter earnings start to trickle in this week.

 

Company                    Quarter           Consensus      Previous

 

Tuesday July 8th

Alcoa                           2                      $0.68               $0.81

 

Friday July 11th

General Electric            2                        0.54                 0.54

                                    Source: www.cnbc.com

 

Trends

 

The Up/Down ratio for S&P 500 stocks fell sharply again last week. The ratio fell from 0.76 to (140/267=) 0.56. Seven S&P 500 stocks broke resistance last week and 68 stocks broke support. S&P 500 stocks remain in the Mark Down phase. Significant technical signs of the Bottoming phase have yet to appear.

 

Bullish Percent Index for S&P 500 stocks fell again last week. It dropped from 33.20% to 28.60%. Intermediate trend remains down. The Index remains below its 15 day moving average. The Index already has reached an intermediate oversold level, but has yet to show technical signs of bottoming.

 

Chart courtesy of StockCharts.com                         www.stockcharts.com

 

The Up/Down ratio for TSX stocks also fell again last week. It fell from 1.04 to ((74/86=) 0.86. Seven TSX stocks broke resistance last week (including BCE and Ivanhoe on Friday) and 24 stocks broke support (including FNX Mining and Nova Chemicals on Friday). TSX Composite stocks are firmly into the Mark Down phase. Significant technical signs of the Bottoming phase have yet to appear.

 

Bullish Percent Index for TSX Composite stocks fell again last week from 39.44% to 36.65% and remains below its 15 day moving average. The Index already has reached an intermediate oversold level, but has yet to show technical signs of bottoming.

Chart courtesy of StockCharts.com                                   www.stockcharts.com

 

 

 

 

 

The S&P 500 Index lost another 1.21% last week. The Index briefly fell below support at 1256.98 on Thursday. The Index remains below its 50 and 200 day moving average. Short term momentum indicators, (RSI, MACD and Stochastics) are substantially oversold, but have yet to show technical signs of bottoming.

Chart courtesy of StockCharts.com                         www.stockcharts.com

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of S&P 500 stocks trading above their 50 day moving average fell last week from 26.65% to 13.43%. Intermediate trend remains down. The Index is substantially oversold, but has yet to show technical signs of bottoming.

Chart courtesy of StockCharts.com                              www.stockcharts.com

 

Percent of S&P 500 stocks trading above their 200 day moving average fell last week from 26.65% to 24.25%. Intermediate trend remains down. Percent already has reached an intermediate oversold level, but has yet to show technical signs of bottoming.

Chart courtesy of StockCharts.com                              www.stockcharts.com

 

 

 

 

 

 

 

 

 

The Dow Jones Industrial Average gave up another 0.51% last week. Intermediate trend remains down. Resistance remains at 13,169.69. Next support exists at its July 2006 low at 10,634.82. The Average remains below its 50 and 200 day moving averages. Short term momentum indicators (RSI, MACD and Stochastics) are substantially oversold, but have yet to show technical signs of bottoming. Strength relative to the S&P 500 Index remains negative.

Chart courtesy of StockCharts.com                      www.stockcharts.com

 

 

 

 

Bullish Percent Index for Dow Jones Industrial Average stocks was unchanged last week at 23.33%. The Index remains below its 15 day moving average. Intermediate trend remains down. The Index is oversold, but has yet to show technicals signs of recovery.

Chart courtesy of StockCharts.com                        www.stockcharts.com

 

Bullish Percent Index for NASDAQ Composite Index stocks fell last week from 33.24% to 28.43% and remains below its 15 day moving average. Intermediate trend remains down. The Index already is oversold, but has yet to show technical signs of bottoming.

Chart courtesy of StockCharts.com                       www.stockcharts.com

 

 

 

 

 

The NASDAQ Composite Index fell 3.03% last week. Resistance remains at 2551.47. Support at 2155.42 is being tested. The Index remains below its 50 and 200 day moving average. Short term momentum indicators (RSI, MACD and Stochastics) continue to trend lower. All are short term oversold, but have yet to show technical signs of bottoming. Strength relative to the S&P 500 Index has been trending upward, but is showing early signs of changing.

Chart courtesy of StockCharts.com                              www.stockcharts.com

 

 

 

The Russell 2000 Index lost 4.64% last week. Resistance remains at 763.27. Support at 643.28 is being tested. The Index remains below its 50 and 200 day moving average. Short term momentum indicators (RSI, MACD and Stochastics) are substantially oversold, but have yet to show technical signs of bottoming. Strength relative to the S&P 500 Index remains positive.

Chart courtesy of StockCharts.com                    www.stockcharts.com

 

 

 

 

 

The Dow Jones Transportation Average fell 4.69% last week. Resistance exists at 5536.57. The Average is below its 50 day moving average and broke below its 200 day moving average. Short term momentum indicators (RSI, MACD and Stochastics) continue to move lower. They are short term oversold, but have yet to show technical signs of bottoming. Strength relative to the S&P 500 Index has been positive, but appears to be changing.

Chart courtesy of StockCharts.com                         www.stockcharts.com

 

 

 

The TSX Composite Index fell 2.40% last week. Resistance remains at 15,154.77. Weakness last week below a short term double top pattern quickly achieved its first downside technical target at 13,800. Short term momentum indicators (RSI, MACD and Stochastics) continue to trend lower. They are oversold, but have yet to show technical signs of bottoming. Strength relative to the S&P 500 Index remains positive.

Chart courtesy of StockCharts.com                  www.stockcharts.com

 

 

 

 

Percent of TSX stocks trading above their 50 day moving average fell again last week from 37.34% to 28.09%. Intermediate trend remains down. Percent already is oversold, but has yet to show technical signs of bottoming.

Chart courtesy of StockCharts.com                           www.stockcharts.com

 

Percent of TSX stocks trading above their 200 day moving average fell again last week. It slipped from 44.21% to 39.57%. Percent is trending down and approaching an intermediate oversold level. Technical signs of a bottoming have yet to surface.

Chart courtesy of StockCharts.com                          www.stockcharts.com

 

 

 

 

 

 

 

The Australia All Ordinaries Index lost 3.35% last week. Resistance at 6059.50 remains. Support at 5130.10 was broken. The Index trades below its 50 and 200 day moving average. Short term momentum indicators (RSI, MACD and Stochastics) are oversold, but have yet to show technical signs of bottoming. Strength relative to the S&P 500 Index remains positive.

Chart courtesy of StockCharts.com                         www.stockcharts.com

 

 

 

 

 

The Nikkei Average gave up 2.26% last week. The Average fell a record 12 consecutive trading days. Resistance has formed at 14601.27. Support exists at 11,691.00. Short term momentum indicators (RSI, MACD and Stochastics) are oversold, but have yet to show technical signs of bottoming. Strength relative to the S&P 500 Index remains positive.

Chart courtesy of StockCharts.com                    www.stockcharts.com

 

 

 

 

 

The Shanghai Index eased 2.86% last week. Resistance remains at 3,656.85.

Short term momentum indicators (RSI, MACD and Stochastics) are showing early signs of bottoming from an oversold level. Strength relative to the S&P 500 Index remains negative.

Chart courtesy of StockCharts.com                           www.stockcharts.com

 

European equity indices also weakened last week. The London FT Index gave out 2.12%, the Frankfurt DAX Index lost 2.33% and the Paris CAC Index fell 2.99%. The Paris CAC Index broke support at 4416.71 set in March.

Charts courtesy of StockCharts.com

The U.S. Dollar improved 0.43 last week. It remains in a four month trading range between 70.70 and 74.31. Short term momentum indicators are overbought and rolling over. The Dollar remains below its 50 and 200 day moving averages.

Chart courtesy of StockCharts.com                           www.stockcharts.com

Conversely, the Euro eased 0.97 last week. Four month trading range remains between 153.14 and 160.20. Short term momentum indicators are recovering from oversold levels.

Chart courtesy of StockCharts.com                      www.stockcharts.com

 

Ditto for the Canadian Dollar! The Canuck Buck eased 0.85 last week. Seven month trading range is between 96.69 and 102.99. Short term momentum indictors are recovering from an oversold level.

Chart courtesy of StockCharts.com                         www.stockcharts.com

 

The CRB Index continued to move to all time highs last week. Short term momentum indicators are overbought but continue to trend higher.

Chart courtesy of StockCharts.com                      www.stockcharts.com

Record high crude oil prices were the main reason for strength in the CRB Index. Short term momentum indicators are overbought, but continue to trend higher.

Chart courtesy of StockCharts.com                 www.stockcharts.com

 

Ditto for Natural Gas!

Chart courtesy of StockCharts.com                            www.stockcharts.com

 

Energy stocks on both sides of the border are skeptical. Notable on the list of stocks breaking support last week were U.S. oil & gas, U.S. oil service and Canadian energy stocks. The TSX Energy Index peaked over six weeks ago and already has dropped 10%.

Chart courtesy of StockCharts.com                      www.stockcharts.com

 

Gold’s technical profile continues to improve. Gold broke briefly resistance at $935.40 last week. Previously, it broke above a bullish triangle pattern. Short term momentum indicators (RSI, MACD and Stochastics) are trending higher and already have reached an overbought level. Purchases on short term weakness are preferred (i.e., closer to its 200 day moving average currently at $869.08 U.S. per ounce).

Chart courtesy of StockCharts.com                          www.stockcharts.com

 

Ditto for Silver! Two hundred day moving average is at $16.32.

 

Chart courtesy of StockCharts.com                       www.stockcharts.com

 

Several gold equity indices broke resistance levels last week before retreating on Thursday.

Chart courtesy of StockCharts.com                  www.stockcharts.com

 

Chart courtesy of StockCharts.com

 

Gold stocks have better value that gold at current prices. The Gold Bug Index to Gold Index at 0.47 is near a three year low.

Chart courtesy of StockCharts.com                      www.stockcharts.com

 

Copper broke to an all time high last week on news that labour strife in South American is continuing and world copper inventories once are approaching a critically low level.

Chart courtesy of StockCharts.com                        www.stockcharts.com

 

Aluminum prices also broke to an all time high last week.

Chart courtesy of StockCharts.com                        www.stockcharts.com

 

Metals and Mining stocks are not responded to higher gold, copper, silver and uranium prices (at least not yet). Short term momentum indicators for the TSX Global Mining Index continue to trend lower. The sector is worth watching for a possible recovery this summer.

Chart courtesy of StockCharts.com                      www.stockcharts.com

 

The yield on U.S. 10 year treasuries slipped 0.17% last week. Resistance exists at 4.32%. Short term momentum indicators have rolled over and are trending lower.

Chart courtesy of StockCharts.com                             www.stockcharts.com

Other Factors

 

Short term technical indicators for U.S. and Canadian equity indices and most sectors are substantially oversold. (Exceptions are indicators for the precious metal and uranium sectors). However, technical signs of a recovery have yet to appear.

 

Intermediate technical indicators for U.S. and Canadian equity indices and most sectors (e.g. Up/Down ratio, Bullish Percent indices) also are oversold. However, technical signs of a recovery have yet to appear.

 

Equity market start to focus on second quarter reports this week. Equity markets are moving lower as analysts reduce estimates (particularly in the financial service sector). Reports by Alcoa and General Electric this week will be “nothing to write home about”. Consensus is for flat to lower earnings relative to the same quarter last year. The key will be responses to these reports. The danger is that many companies will include negative guidance when they release results. Net result: strength in equity markets during the earnings report period between now and the first week in August will be muted at best.

 

The VIX Indicator (also known as the Fear Index) is rising, implying that bearish sentiment is increasing. However, VIX has not reached a level (say over 35%) where capitulation is apparent and an important reversal is set up.

 

Chart courtesy of StockCharts.com                     www.stockcharts.com

 

Geopolitical events continue to influence markets. The focus this week is on the G8 leaders meeting in Japan starting today. Geopolitical “hot spots” such as Nigeria, Iran, Israel and Pakistan were quieter last week. Slightly offsetting was news late last week that the first major tropical storm of the season has appeared in the Atlantic, reminding everyone that hurricane season has started. 

 

Political interference by the U.S. Congress has become a real threat to U.S. capital markets The Democratic controlled Congress appears intent on “reining in speculators” by introducing legislation that limits the ability of institutional investors to invest directly or indirectly in commodity markets. In Tech Talk’s opinion, investing in commodity markets is a zero sum game. Profits realized by some are equal to losses by others. Actions by Congress will encourage institutional investors to seek markets outside of the U.S. where U.S. regulation does not apply.

 

Funds available for potential equity investment continue to grow on the sidelines. Funds will return when investor confidence returns. However, signs of returning confidence have yet to appear.

 

The Bottom Line

 

It’s too late to sell and too early to buy most equity index and sectors ETFs and stocks. Most markets are substantially oversold, implying that the start of the next intermediate upturn likely will happen sooner than previously thought. Tech Talk previously was expecting equity markets to bottom by September. However, best guess given current technical circumstances is that the bottom will happen before then (say after the second quarter earnings season is over). Special situations such as gold and uranium stocks already are showing technical signs on bottoming. Now is the time to do your homework by determining what to buy when most equity markets and sectors finally show signs of bottoming. The bottoming process has not started yet. 

 

Tech Talk’s Weekly Column in the Financial Post

(Published on Saturday July 5th in the National Post. The original report is available by paid subscription at www.nationalpost.com )

 

Looking for a Golden Summer

 

Gold and gold equities have good reasons to move higher this summer. Seasonal, fundamental and technical analysis currently are projecting gains until at least the end of September

 

Seasonal influences

 

Gold and gold equity indices have a history of moving higher from the end of July to the end of September. During the past ten periods, gold has advanced in eight periods for an average gain per period of 6.8%. Gold equity indices have a similar period of seasonal strength, but with better performance. The Philadelphia Gold and Silver Index also gained in eight of the past 10 periods, but with an average gain per period of 9.0%. The AMEX Gold Bug Index also has gained in eight of the past 10 periods, but with an average gain per period of 12.5%.

 

The enclosed chart shows optimal seasonal entry and exit points during the past seven years for the TSX Gold Index:

Chart courtesy of StockCharts.com                                           www.stockcharts.com

 

A major reason for seasonal strength during the July to September period is incremental purchases of gold by fabricators who purchase gold to make into jewelry for the Christmas season and Diwali, the festival of lights in India at the end of October. Gold jewelry accounts for 70% of the demand for gold produced each year. The largest consumer of gold is India. Diwali occurs after the monsoon and harvest season and is a popular time for marriages where gold jewelry is exchanged as part of the marriage tradition. Strong economic growth in India this year could enhance gold jewelry purchases.

 

 

Fundamental influences

 

Gold prices are responding to anticipation of higher inflation rates and continuing weakness in the U.S. Dollar. The U.S. Dollar remains in a long term downtrend and once again is testing an important multi-year low at 70.70. The Dollar is sensitive to interest rate differentials. Differentials widened this week when the European Central Bank raised its overnight rate from 4.00% to 4.25%. In addition, unwillingness by the Federal Reserve to reduce interest rate differentials this year by increasing the Fed Fund above 2.00% has become more apparent. Net result is continuing pressure on the U.S. Dollar with only a limited attempt by the Fed to contain inflationary.

 

Meanwhile, higher gold prices during the past year are buoying earnings and cash flows by gold producers. The price of gold rose from $680 U.S. to $900 U.S. per ounce from the second quarter last year to the second quarter of 2008. Second quarter earnings reports by major gold producers to be released in August will be pleasant reading.

 

Technical influences

 

Gold and gold equity indices have improving technical profiles. Gold recently bounced from near its 200 day moving average. Previous bounces from its 200 day moving average on multiple occasions during the past seven years have led to new highs. A bounce from its current 200 day moving average at $867 U.S. implies a test of gold’s all time high at $1033.90 U.S. per ounce. Last week, gold broke above a bullish triangle pattern implying that the period of seasonal strength has started earlier than usual this year. Strength in short term momentum indicators such as Relative Strength Index, Moving Average Convergence and Stochastics confirmed significance of the breakout.

 

Gold equities currently are more attractive than gold. The ratio between gold equity indices and gold remains near the bottom of a six year trading range.

 

Gold equity indices have improving technical profiles. The TSX Gold Index, AMEX Gold Bug Index and Philadelphia Gold and Silver Index broke above key resistance levels last week.

 

How to invest

 

Preferred investment vehicles are Exchange Traded Funds (ETFs) that track either gold or gold equity indices. In Canada, gold equity choices include iShares on the TSX Gold Index (Symbol: XGD) and Horizon BetaPro Gold Bull+ units (Symbol: HGU). Gold choices include iShares on Canadian COMEX Gold (Symbol: IGT) and Horizon BetaPro Gold Bullion Bull+ units (Symbol: HBU). Numerous choices are available on U.S. and international exchanges. Best known are the World Gold Council Gold ETF (Symbol: GLD) and Market Vector Gold Miners ETF (Symbol: GDX).

 

Interesting Comment in Saturday’s Financial Post

 

Peter Hodson wrote an interesting article in Saturday’s Financial Post entitled, “Even experts can’t time the market”. Tech Talk is a big fan of Peter Hodson’s work (even though Peter beat Tech Talk in a portfolio contest  with six other investment professionals sponsored by the Financial Post three years ago. Tech Talk’s portfolio realized a 44% return that year, but Peter’s portfolio realized about a 50% return to win the contest. Tech Talk’s wife has been affectionately calling him “Number 2 Man” ever since). Peter notes in his column on Saturday that some of the biggest and best investment managers and hedge fund investors in the U.S. and Canada have been “bagged” in recent months by purchasing large positions in financial service stocks. Examples included in the column were:

  • Commerce Bank sold at $67.50. Now $56.74
  • Citigroup shares sold at $25.27. Now at $16.82
  • Lehman Brothers sold at $28. Now at $22.85
  • Countrywide sold to Bank of America at more than double the current price
  • Washington Mutual sold at $8.75. Now at $5.38

 

The flaw with each purchase was the use of fundamental analysis to determine the value of investment at the time of purchase. Those who try to “Time the market” based solely on its value are vulnerable to disappointment. Those who “time the market” using a combination of fundamental analysis, technical analysis and seasonal analysis greatly enhance chances of realizing a profit or protecting against downside risk.

 

Tech Talk site conversion

 

Tech Talk will convert to a new server and will offer a higher quality service as fall approaches. A sneak preview of the new site is available at www.timingthemarket.ca/techtalk

 

Matt’s Blogs

 

Matt Black offers two reports this week. The first report notes that, “Stocks decline for fourth consecutive week as leaders fall hard”. The second report offers a mid-year round up. The chart showing the S&P 500 Index relative to polls showing odd of Obama winning the presidency is rather interesting. Following are links to the reports:

http://tradesystemguru.com:80/content/blogcategory/34/68/ 

http://tradesystemguru.com/content/blogcategory/47/81/

 

Disclosure: Mr. Vialoux does not own securities mentioned in this report.

Disclaimer: Comments and opinions offered in this report are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.