Market Commentary

What do you think is the most bullish indicator of our markets?  It's not a trick question; the answer is "price".

The markets have held-up nicely, throughout this rally, despite lots of bad news about the economy. And that, in-and-of-itself, is bullish.

It doesn't matter what technical analysis indicator you use (increasing negative divergences and selling on down days … or less positive momentum and market breadth), the markets have given us a clear message recently. Price is the primary indicator, and it has stayed above support. 

For example, here is a daily chart of the Russell 2000 Small-Cap Index.  It is holding its gains; yet, sitting at a decision point. 

Last week I posted a chart showing the Elliott Wave count of this index.  Nothing in this chart changes that analysis.

We can't abandon the discipline of looking to technical analysis, just
because early indicators haven't tipped us off to the end of rally, yet.  All that means is that the rally hasn't ended, yet.

The trading action during rallies is often characterized as "climbing a wall of worry".  So, how long can this rally last?  The next section suggests that a rally can last a lot longer than this one has, so far.

How Does This Rally Compare With Historical Rallies?

The Dow made another rally high this week, as it moved further above the 10,000 level.

To provide some perspective to the current Dow rally that began back in March, all major market rallies of the last 109 years are plotted on the following chart from Chart of the Day.

• Each dot represents a major stock market rally as measured by the Dow.
• The Dow has begun a major rally 27 times over the past 109 years,
  which equates to an average of one rally every four years.
• Also, most major rallies (73%) resulted in a gain of between 30% and 150% (29.8% to 150.5% to be exact) and lasted between 200 and 800 trading days (9.5 months to 3.2 years).
• These "typical rallies" are highlighted in the blue-shaded box.

As it stands right now, the current Dow rally (noted with the yellow highlight) would be classified as both short in duration and below average in magnitude.

On a different, but related, topic … I think it's time to pay some attention to what's happening to the U.S. Dollar.

What Happened to the U.S. Dollar – Or … Why Is Everything Else Going Up?

Here is a Performance Chart showing how the major world currencies have performed since last March.  This chart made me think of the Sesame Street song "One of These Things is Not Like the Others". Notice that all the currencies, except the U.S. Dollar, are up since then.

To me, this implies that the government made a decision near the March lows. Here is a link to an insightful post on why you should care about the strength of the dollar.  In general, there is a strong inverse relationship between the strength of the U.S. Dollar and the strength of the U.S. Stock prices.  Here is a chart showing what that looks like.

At some point, the economy will be more important than the market.  To that end, U.S. Treasury Secretary Timothy Geithner said a strong dollar is in the nation’s
interest; and that the government recognizes the importance it plays to the
economic health of the United States and the global
financial system.  We'll see.

Business Posts Moving the Markets that I Found Interesting This Week:

• Cisco's Profit Falls 19% – Shares Rise Anyway. (WSJ)
• Roubini: Bernanke Can Avoid A Crisis by … Actually He Can't. (BusinessInsider)
• Congressman Ron Paul Says Be Prepared for the Worst. (Forbes)
• Fed Sees No Need to Raise Rates Soon. (NYTimes)
• Buffett's Unusual Train of Thought on Burlington Northern. (WSJ)
• A VC Win: Greylock Partners Raised a $575MM new fund in six weeks. (WSJ)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Moon Crash – While Public Yawns, Scientists Celebrate. (PhysOrg)
• Manhattan Providing Incubator Office Space for Businesses to Grow. (NYTimes)
• Learning in the Womb: Newborn Babies Cry in Native Tongue. (LiveScience)
• Hands-Free Parallel Parking in Your Next Car. (WSJ)
• Does Being Sad, or Complaining, Make You Smarter? (MarginalRevolution)
• Brain Scanners Can Tell What You're Thinking About. (NewScientist)
• More Posts with Lighter Ideas and Fun Links.

The best thing I can say about the market is that the current lack of sellers is giving investors a good long chance to take their bullish bets off the table.

Unemployment is above 10%, and at its highest level since 1983.  Here are a few economic signs.

What about the Market?

The chart below shows an upwards sloping trend channel on a chart of the S&P 500 Index.

1. Notice that the early part of the up-trend stayed above the channel's mid-line (indicated by the blue solid line); and
2. Notice the second half of the up-move stayed above the bottom portion of the channel (indicated by the green solid line) until recently;
3. Also notice that the market is recently rebounded to test the underside of this line. I highlighted that portion with an orange circle. This chart pattern is often called "kiss and say goodbye" because a failure to jump back above the lower trendline, back into the upward sloping channel, is often a sign seen at market tops.

Bob Prechter Calls a Major Top Using the Elliott Wave Pattern.

If you are looking for Top-Calls, then Bob Prechter is not shy.  He says: "Stocks are topping out, commodities are topping out and the dollar is making a bottom". 

Prechter is a high profile market commentator who uses Elliott Wave as a framework for understanding the market.  So, I thought this might be an interesting time to re-visit this technique.

The premise is that the market doesn't affect sentiment.  Rather, it is the other way around;  collective sentiment affects the market.  And that while markets change, human nature doesn't … consequently, predictable patterns play out over and over again. Prechter calls this "Socionomics".

While I now look at Elliott Wave more as a way of understanding what the market has done (rather than a great predictor of what it will do next), I do believe it is helpful in getting a sense of the next likely swing. 

Here is a chart that shows the basic sequence and an example of the sentiment causing the move.

The next chart shows that a similar sequence often happens in both directions.

All this reminded me that I have a piece of software called the Advanced GET, which uses a pretty clever algorithm for identifying some of the simpler Gann and Elliott Wave trading patterns. So I dusted-it-off, fired-it-up, and started playing around.

Looking at a weekly chart of the Russell 2000 Index, it's very easy to envision
a five wave sequence as follows.

Note that the wave five target
is beneath the recent bear market lows. And that the wave four pullback takes us back to the top of the downwards sloping trendline … and seems to have pretty clean Elliott Wave size,
slope, and timing.

Again, I don't trade
the Elliott Wave. Yet it fascinates me, and is something
that I do pay attention to as a framework.  Add to all this that the daily chart of many US equity indices are stalled at their 50-day moving averages and kissing the bottom of their recently broken up-trendlines, and I'm certainly going to be wary of a pull-back here.

Business Posts Moving the Markets that I Found Interesting This Week:

• Does Economics Violate the Laws of Physics? (ScientificAmerican)
• Fed Tests Tool For Reeling-In Money From Economy. (Yahoo Finance)
• Time for Companies to Justify Big Gains. (WSJ)
• How We Got Here: Bush Advisor Analyzes the Financial Sector Meltdown. (WP Carey)
• Smaller, Faster, Cheaper – The Enterprise Is Changing. (Forbes)
• Is the Dollar Losing Its Status as the World's Reserve Currency? (WSJ)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Apple is the Outlier in this Recession. (Forbes)
• The Mortal Sins Of Chart Design, and How to Fix Them. (BusinessInsider)
• Will Airports Screen for Body Signals Instead of Bombs? (CNN)
• Can Men Breastfeed? Apparently, They Can. (MentalFloss)
• Why Some Sleep Better Than Others (Forbes)
• Are You Asleep? Exploring The Mind's Twilight Zone. (NewScientist)
• More Posts with Lighter Ideas and Fun Links.

The best thing I can say about the market is that the current lack of sellers is giving investors a good long chance to take their bullish bets off the table.

Unemployment is above 10%, and at its highest level since 1983.  Here are a few economic signs.

What about the Market?

The chart below shows an upwards sloping trend channel on a chart of the S&P 500 Index.

1. Notice that the early part of the up-trend stayed above the channel's mid-line (indicated by the blue solid line); and
2. Notice the second half of the up-move stayed above the bottom portion of the channel (indicated by the green solid line) until recently;
3. Also notice that the market is recently rebounded to test the underside of this line. I highlighted that portion with an orange circle. This chart pattern is often called "kiss and say goodbye" because a failure to jump back above the lower trendline, back into the upward sloping channel, is often a sign seen at market tops.

Bob Prechter Calls a Major Top Using the Elliott Wave Pattern.

If you are looking for Top-Calls, then Bob Prechter is not shy.  He says: "Stocks are topping out, commodities are topping out and the dollar is making a bottom". 

Prechter is a high profile market commentator who uses Elliott Wave as a framework for understanding the market.  So, I thought this might be an interesting time to re-visit this technique.

The premise is that the market doesn't affect sentiment.  Rather, it is the other way around;  collective sentiment affects the market.  And that while markets change, human nature doesn't … consequently, predictable patterns play out over and over again. Prechter calls this "Socionomics".

While I now look at Elliott Wave more as a way of understanding what the market has done (rather than a great predictor of what it will do next), I do believe it is helpful in getting a sense of the next likely swing. 

Here is a chart that shows the basic sequence and an example of the sentiment causing the move.

The next chart shows that a similar sequence often happens in both directions.

All this reminded me that I have a piece of software called the Advanced GET, which uses a pretty clever algorithm for identifying some of the simpler Gann and Elliott Wave trading patterns. So I dusted-it-off, fired-it-up, and started playing around.

Looking at a weekly chart of the Russell 2000 Index, it's very easy to envision
a five wave sequence as follows.

Note that the wave five target
is beneath the recent bear market lows. And that the wave four pullback takes us back to the top of the downwards sloping trendline … and seems to have pretty clean Elliott Wave size,
slope, and timing.

Again, I don't trade
the Elliott Wave. Yet it fascinates me, and is something
that I do pay attention to as a framework.  Add to all this that the daily chart of many US equity indices are stalled at their 50-day moving averages and kissing the bottom of their recently broken up-trendlines, and I'm certainly going to be wary of a pull-back here.

Business Posts Moving the Markets that I Found Interesting This Week:

• Does Economics Violate the Laws of Physics? (ScientificAmerican)
• Fed Tests Tool For Reeling-In Money From Economy. (Yahoo Finance)
• Time for Companies to Justify Big Gains. (WSJ)
• How We Got Here: Bush Advisor Analyzes the Financial Sector Meltdown. (WP Carey)
• Smaller, Faster, Cheaper – The Enterprise Is Changing. (Forbes)
• Is the Dollar Losing Its Status as the World's Reserve Currency? (WSJ)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Apple is the Outlier in this Recession. (Forbes)
• The Mortal Sins Of Chart Design, and How to Fix Them. (BusinessInsider)
• Will Airports Screen for Body Signals Instead of Bombs? (CNN)
• Can Men Breastfeed? Apparently, They Can. (MentalFloss)
• Why Some Sleep Better Than Others (Forbes)
• Are You Asleep? Exploring The Mind's Twilight Zone. (NewScientist)
• More Posts with Lighter Ideas and Fun Links.

Last week it started to feel like the markets were breaking-down.   Most of the major US equity indices broke down through their 50-day moving averages and also below their up-trend lines. Likewise, the Dow is back under 10,000 again.

The chart, below, shows that we are that an important support and resistance level that goes back to November of last year. In addition, we're back to price levels from late July. That means that we've had three months of rally, good news, and talks of "green shoots", with no real price advancement and a decrease of momentum.

From a technical analysis standpoint, this would be a good place to
reverse and rally. However, longer-term charts and the sheer size of
the recent rally suggests that we might have a little more market
correction to go before the decline reverses.

A Rising VIX Often Means Falling Prices.

The CBOE Volatility Index  (better known as the "VIX") is a measure of the implied volatility of
S&P 500 Index options, with very low numbers indicating extreme bullishness
and very high numbers severe bearishness. It is also referred to as the “fear
gauge” of US stock markets and is used as a contrary indicator as it moves
inversely to equity prices. So a rising VIX often means falling prices.  As shown below, the VIX spiked to its highest level
since early July.

I'm watching the VIX for clues about the direction of the next big move. If fear subsides quickly, then the rally will likely continue.  On the other hand, volatility will increase if the markets remain jumpy.

What's GDP Got to Do with It?

Going back to last week, Bears started jumping in on estimates that GPD would fall from 3.0% to 2.7%. Then GDP came in at 3.5%, and suddenly there were a bunch of headlines and news reports that the Recession was over.  As a result, the market blasts 2% higher in one day. My guess, that was more a result of massive short-covering, rather than actual bullish buying behavior.

It's worth noting that the GDP number was annualized. Real GDP growth for the quarter was 0.87%.

So far, the Stimulus spending/ Bailouts have
cost the US more than WWI, WWII, and the New Deal combined… and we get
GDP growth of 0.87% for Q3?    That's not a sign of a
strong economy.

Longer Term: How Does This Compare to Other Bear Market Rallies?

Here is an interesting inflation-adjusted comparison of three
Mega-Bear Markets. It
aligns the current S&P 500 from the top of the Tech Bubble in March 2000,
the Dow in of 1929, and the Nikkei 225 from its 1989 bubble high.

Something to keep in mind … while history doesn't always repeat itself … it often rhymes. If so, the next big move is down.

Business Posts Moving the Markets that I Found Interesting This Week:

• 2010 Economic Forecast: Don't Hold Your Breath for Fast Growth. (WP Carey)
• U.K. GDP Numbers Worse Than Most Thought – Down about 5% this Year. (WSJ)
• Bank Failures Hit 106 Year-to-Date -  Most Since 1992. (MarketWatch)
• Will Retailers Top Last Year's Holiday Sales? (WSJ)
• The Good, Bad & Exaggerated in Michael Moore's New Film 'Capitalism'. (Wharton)
• Venture Firms Making Bets On Forex Start-Ups. (WSJ)
• Ten Odd Economic Indicators: From Hot Waitresses to Men’s Underwear. (Time)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Ten Things Every Good Business Plan Must Have (Forbes)
• Google, Microsoft Intensify Search Rivalry with Music. (WSJ)
• E Pluribus Tunum: How Not to Price Online Music. (Economist)
• Online TV Leader Hulu Won't Remain Free, Official Says. (WSJ)
• Why We Lie to Our Spouses? (WSJ)
• White House's Fox News Boycott Prompts Network Revolt (HuffingtonPost)
• Secrets of the Centenarians – Life Begins at 100. (NewScientist)
• More Posts with Lighter Ideas and Fun Links.

Last week it started to feel like the markets were breaking-down.   Most of the major US equity indices broke down through their 50-day moving averages and also below their up-trend lines. Likewise, the Dow is back under 10,000 again.

The chart, below, shows that we are that an important support and resistance level that goes back to November of last year. In addition, we're back to price levels from late July. That means that we've had three months of rally, good news, and talks of "green shoots", with no real price advancement and a decrease of momentum.

From a technical analysis standpoint, this would be a good place to
reverse and rally. However, longer-term charts and the sheer size of
the recent rally suggests that we might have a little more market
correction to go before the decline reverses.

A Rising VIX Often Means Falling Prices.

The CBOE Volatility Index  (better known as the "VIX") is a measure of the implied volatility of
S&P 500 Index options, with very low numbers indicating extreme bullishness
and very high numbers severe bearishness. It is also referred to as the “fear
gauge” of US stock markets and is used as a contrary indicator as it moves
inversely to equity prices. So a rising VIX often means falling prices.  As shown below, the VIX spiked to its highest level
since early July.

I'm watching the VIX for clues about the direction of the next big move. If fear subsides quickly, then the rally will likely continue.  On the other hand, volatility will increase if the markets remain jumpy.

What's GDP Got to Do with It?

Going back to last week, Bears started jumping in on estimates that GPD would fall from 3.0% to 2.7%. Then GDP came in at 3.5%, and suddenly there were a bunch of headlines and news reports that the Recession was over.  As a result, the market blasts 2% higher in one day. My guess, that was more a result of massive short-covering, rather than actual bullish buying behavior.

It's worth noting that the GDP number was annualized. Real GDP growth for the quarter was 0.87%.

So far, the Stimulus spending/ Bailouts have
cost the US more than WWI, WWII, and the New Deal combined… and we get
GDP growth of 0.87% for Q3?    That's not a sign of a
strong economy.

Longer Term: How Does This Compare to Other Bear Market Rallies?

Here is an interesting inflation-adjusted comparison of three
Mega-Bear Markets. It
aligns the current S&P 500 from the top of the Tech Bubble in March 2000,
the Dow in of 1929, and the Nikkei 225 from its 1989 bubble high.

Something to keep in mind … while history doesn't always repeat itself … it often rhymes. If so, the next big move is down.

Business Posts Moving the Markets that I Found Interesting This Week:

• 2010 Economic Forecast: Don't Hold Your Breath for Fast Growth. (WP Carey)
• U.K. GDP Numbers Worse Than Most Thought – Down about 5% this Year. (WSJ)
• Bank Failures Hit 106 Year-to-Date -  Most Since 1992. (MarketWatch)
• Will Retailers Top Last Year's Holiday Sales? (WSJ)
• The Good, Bad & Exaggerated in Michael Moore's New Film 'Capitalism'. (Wharton)
• Venture Firms Making Bets On Forex Start-Ups. (WSJ)
• Ten Odd Economic Indicators: From Hot Waitresses to Men’s Underwear. (Time)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Ten Things Every Good Business Plan Must Have (Forbes)
• Google, Microsoft Intensify Search Rivalry with Music. (WSJ)
• E Pluribus Tunum: How Not to Price Online Music. (Economist)
• Online TV Leader Hulu Won't Remain Free, Official Says. (WSJ)
• Why We Lie to Our Spouses? (WSJ)
• White House's Fox News Boycott Prompts Network Revolt (HuffingtonPost)
• Secrets of the Centenarians – Life Begins at 100. (NewScientist)
• More Posts with Lighter Ideas and Fun Links.

Traders are starting to sell into strength.  That is something to watch.

This Heat Map, from FinViz, shows that last Friday was a tough day in the markets.  Most everything was red.  However, Amazon was up almost 27%.  And Microsoft had a pretty good day too.  Realize that the averages would have been even weaker without those outlier performances.

But big up-moves on big down days are another sign of volatility, confusion and disagreement.  These are simply things I've learned to notice. 

Price is still the primary indicator.  So keep an eye on the trend-line of your choice.

Items In the Rear-View Mirror May Only Be Half as Big as They Seemed.

Why isn't the world beating a path to our markets, driving-up prices and volume?  Perhaps because they don't see our market the same way we do. 

This next chart caught my eye because it shows our 20% rally (since May) is less than a 10% rally, when it is measured in Euros instead of Dollars.

A similar phenomena is playing-out with Gold too.

Venture Capital Charts are Eye-Opening … But Not Wallet-Opening.

The third quarter was rough for VCs, with 17 firms raising just $1.6 billion. That's the fewest number of firms to raise money in 15 years; and it's the smallest amount of money raised since Q1 2003, says the National Venture Capital Association.

How tough was it?  Venture Capital funding fell 42% through the third quarter compared with last year, and had an 81% drop quarter-to-quarter from a year ago.

The more I think about this, the less it worries me.  There is a lot of money sitting on the sidelines, and I believe that we just aren't in the stage of the cycle where late-majority money flows to speculative investments.  There is a similar situation going on in the M&A cycle too.

When the longer-term economic recovery gets moving, so will the money.

The Jobs Flu.

The real virus affecting the economy is unemployment. 

For example, Sun says it is about to cut 3,000 jobs.  Frankly, I hear chatter from a number of companies planning to reduce headcount in meaningful and painful ways.  Bottom Line: Without a clear path to more sales, the pressure to make numbers is driving further reductions.

It seems several things are thinning the workforce.

President Obama declared swine flu a national emergency.  Officials described the move as similar to a declaration ahead of a hurricane making landfall; though perhaps it was more a "call to action," like how they hand out Nobel Peace Prizes.

Business Posts Moving the Markets that I Found Interesting This Week:

• What Happens When the Fed's Buying Binge Ends? (WSJ)
• McKinsey Says Global Capital Markets Entering a New Era (McKinsey)
• Sharp Drop in Start-Ups Bodes Ill for Jobs & Growth Outlook. (WSJ)
• Bank of America Lost $1 Billion in Q3, & It's Now Testing Support. (NYTimes)
• Great Chart of Google's Long Road Back To $500 (BusinessInsider)
• Nokia Slaps Apple with Lawsuit about Wireless Patents. (Forbes)
• Some Reasons Not to Care about Dow 10K. (CuriousCapitalist)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• A $1 Million Research Bargain for Netflix, & Maybe a Model for Others. (NYTimes)
• Forbes Lists the 50 Most Influential Management Gurus. (Forbes)
• Does Social Media Mark the End of the Email Era? (WSJ)
• 54% of CIOs Forbid Use of Social Networks at Their Companies. (WallSt&Tech)
• Gout: The Missing Chapter from Good Calories, Bad Calories. (Ferriss)
• Study – Touch Money And You Feel Less Pain. (CreditCards)
• Disney Offers Refunds on Baby Einstein. (TDB)
• More Posts with Lighter Ideas and Fun Links.

Traders are starting to sell into strength.  That is something to watch.

This Heat Map, from FinViz, shows that last Friday was a tough day in the markets.  Most everything was red.  However, Amazon was up almost 27%.  And Microsoft had a pretty good day too.  Realize that the averages would have been even weaker without those outlier performances.

But big up-moves on big down days are another sign of volatility, confusion and disagreement.  These are simply things I've learned to notice. 

Price is still the primary indicator.  So keep an eye on the trend-line of your choice.

Items In the Rear-View Mirror May Only Be Half as Big as They Seemed.

Why isn't the world beating a path to our markets, driving-up prices and volume?  Perhaps because they don't see our market the same way we do. 

This next chart caught my eye because it shows our 20% rally (since May) is less than a 10% rally, when it is measured in Euros instead of Dollars.

A similar phenomena is playing-out with Gold too.

Venture Capital Charts are Eye-Opening … But Not Wallet-Opening.

The third quarter was rough for VCs, with 17 firms raising just $1.6 billion. That's the fewest number of firms to raise money in 15 years; and it's the smallest amount of money raised since Q1 2003, says the National Venture Capital Association.

How tough was it?  Venture Capital funding fell 42% through the third quarter compared with last year, and had an 81% drop quarter-to-quarter from a year ago.

The more I think about this, the less it worries me.  There is a lot of money sitting on the sidelines, and I believe that we just aren't in the stage of the cycle where late-majority money flows to speculative investments.  There is a similar situation going on in the M&A cycle too.

When the longer-term economic recovery gets moving, so will the money.

The Jobs Flu.

The real virus affecting the economy is unemployment. 

For example, Sun says it is about to cut 3,000 jobs.  Frankly, I hear chatter from a number of companies planning to reduce headcount in meaningful and painful ways.  Bottom Line: Without a clear path to more sales, the pressure to make numbers is driving further reductions.

It seems several things are thinning the workforce.

President Obama declared swine flu a national emergency.  Officials described the move as similar to a declaration ahead of a hurricane making landfall; though perhaps it was more a "call to action," like how they hand out Nobel Peace Prizes.

Business Posts Moving the Markets that I Found Interesting This Week:

• What Happens When the Fed's Buying Binge Ends? (WSJ)
• McKinsey Says Global Capital Markets Entering a New Era (McKinsey)
• Sharp Drop in Start-Ups Bodes Ill for Jobs & Growth Outlook. (WSJ)
• Bank of America Lost $1 Billion in Q3, & It's Now Testing Support. (NYTimes)
• Great Chart of Google's Long Road Back To $500 (BusinessInsider)
• Nokia Slaps Apple with Lawsuit about Wireless Patents. (Forbes)
• Some Reasons Not to Care about Dow 10K. (CuriousCapitalist)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• A $1 Million Research Bargain for Netflix, & Maybe a Model for Others. (NYTimes)
• Forbes Lists the 50 Most Influential Management Gurus. (Forbes)
• Does Social Media Mark the End of the Email Era? (WSJ)
• 54% of CIOs Forbid Use of Social Networks at Their Companies. (WallSt&Tech)
• Gout: The Missing Chapter from Good Calories, Bad Calories. (Ferriss)
• Study – Touch Money And You Feel Less Pain. (CreditCards)
• Disney Offers Refunds on Baby Einstein. (TDB)
• More Posts with Lighter Ideas and Fun Links.