Pullback Over?

Time to show some charts. First, my favorite market leader, the SPXA50, the number of SPY stocks trading above their 50 day moving average:



As you can see, we’ve had a dip in the numbers, and haven’t reversed the trend yet. The dip wasn’t as low as they usually go, which means it was a weak pullback. But it was a pullback. Since we haven’t seen the trend change, I suspect there’s more down to go. So here’s the SPY chart, and my humble analysis



As you can see, the uptrend since November was broken (as we would expect from looking at the 3LB chart at the top). The downchannel which broke out of November’s upchannel is about ½ as wide, so the standard deviation on the downchannel is smaller. This means it’s easier to break out of the downchannel. I believe the algos are trendfollowers, so when the breakout happens, look out for significant pops to the upside. You can see a large down day, and we’re trading within that day’s range, so until we get out of the inside bar, we won’t know the direction of the market. Today looks like up to me, so today we may break out of that inside day trading. If we get out of the downchannel today, I suspect we will continue the November’s upchannel. If we don’t then look for a down day Friday.

A couple of things to note on this chart: the downchannel begins on the day of the highest high of the upchannel. Of course, you don’t know it’s a downchannel until the breakout happens and is confirmed by a second day. This downchannel is really short, only one day of real confirmation, with high volume as well, but the next day the volume was average, so no continued confirmation. Second, the Stochastics are oversold, and turning up. To me, I read this to mean the pullback’s over, and we will close above 138.40 today. If that happens, look for a move higher into the weekend, and a pop for Monday.

The last chart I want to present is AAPL.




Note it’s strong resemblance to the SPY. Could be that a) AAPL watchers play other stocks based on AAPL’s performance and b) AAPL is a very significant component of the marketplace. I use AAPL’s trend as a leading indicator of the SPY. Combined with a few others, like XOM and IBM, you watch those, and they will tell you the tells.

So after I posted this, I though you might like to see what the bots are doing. They are clearly trying to support the market by moving AAPL upward. There is a lot of non-bot pressure on AAPL downward, but look at what's happening:



For reference, look at the green line I drew on the volume, and you'll see what the trend was before the bots. Then suddenly at 13:09, the bots took over and started to control the tape. The first one at 13:11 or so tried to eat out all the sell orders, and was effective for 3 minutes. The next one at 13:33 tried the same thing and was successful until 13:39. Then another buy at 13:45 was unsuccessful. Again at 13:51, we see another attempt, which turned out to be successful and stop the fall at 621.

At 14:03, the bots tried another buy to push above the support line at 623 (in red) but was unsuccessful. I suspect another down leg as a result.

You'd think the bots would run out of money, right? Not so. They can borrow at 0% interest.

Longer Timeframes

If you read the articles posted on the previous thread, then you will begin to understand traditional charting technologies are becoming worthless. As the market manipulators continue their intereference (HFTs) the market will over the short term do what they want. However, over the long term, they can't, because over the longer term, the pushing the market around won't work: fundamentals will cause the prices to move where investors feel they should be. Like today, the P/E for AAPL is much smaller than what many analysts believe it should be, so in the longer term, AAPL is likely to correct to the upside (buy on any pullback). Now, longer term trend following will make you money, not short-term daily trading.

So I thought I'd post a few charts in which we have some mutual interest. First, the SPY on the weekly timeframe:



As you can see, we're in an upchannel. This is the basis of Mutt's call that we will have a 2000 point run in the DOW. Now, in the shorter term, the SPY on the daily timeframe with the overlay of the weekly channel markers:



If the trend continues on the downchannel, we could expect a reversal where the daily downchannel intersects the weekly upchannel. However, being trend followers, we'll follow the downchannel daily trend until it breaks out. We may have to redraw the weekly upchannel, depending on when it decides to break out.

So here's the weekly SLV:



Looking at the weekly, I think we don't need to redraw the daily chart, it seems to be headed down to it's lower weekly downchannel, around 23 and change. However, if it breaks out of it's current channel, a new weekly upchannel would be drawn starting around Dec/E and upwards, incorporating our current downchannel trend. I previously commented that I might nibble on Silver, but looking at these charts, I think it's too soon to take it seriously. (I typically don't short anymore because of the costs to borrow the shares). The other question to seriously ask is why, when the overall market trend is up, is the SLV on a dwwntrend? SLV gets used up in manufacturing processes and catalytic converters, and unlike GLD, goes away unless the miners dig up more. You'd expect a long-term upchannel.

Anyway, because of the HFT's, I'll miss the daily and sometimes hourly moves. The reason my trades were losing money is that I would wait for a trend to be clearly established, and by the time I made my trade, the trend was over and the algos reversed the move. So I've been making longer-term trades, and even though the overall market is going lower, I've made 2.77% in 3 days. With much fewer trades.

Warning, Warning Will Robinson!

Double top in the down channel on the spy.




You can see where the downchannel created by the gap was broken, and an upchannel to try to fill the gap was started. The big gap down isn't likely to fill today. Turnaround Tuesday is almost over, so I'm looking for a pop overnight. Strength in AAPL, TIF, LGF, SOHU SPRD, SCO POT CLNE CHS WMB, NTAP.

Scary? not for me. my iPad 1 is still in my drawer.....

The chart was edited to include the fib retracement information. Should have included it because we know we have an 83% chance of hitting the first retracement line....

Getting old, it seems.

Anyway, check out PCLN, AAPL,QCOM, and VTR. The revenue stocks continue to do well. No pullback for them.

So I will expect a pop in the AM to fill the gap. Keep us in the horizontal trend trading range.

AAPL Pullback

We saw AAPL hit 600 today.

It's just about it's own country, in size.

Here's the flag that's forming. Is this a bear flag or a bull flag? Was 600 a Bulltrap? Or after hitting 600, should we expect the country of AAPL to be more successful than ever?

I got out this morning, but am back in at 589.05. Will see.

Range bound or Breakout

Here's the chart. See the falling volume and the weakness in the MFI and Stochastic RSI. I'm looking for a Turn-around Tuesday (I think today's close will be higher than open, but I still lost money).



Falling volume like this can mean that the price isn't supportable. Meaning price should go lower.

It was pointed out to me that we could play the SPY as though it were in an upchannel like this:



If this is the play, it shows great weakness having broken the channel on the downside on extremely light and decreasing volume. In which case, it seems we should go lower and perhaps look for support points.

I don't think the second scenario will play out. There's too little volume and too many plungers. IMHO it's likely we will stay range bound until, as Mutt says, the market vomits and we go one way or another.

Watchlist for Upward Bias

For my weekly work, I use a prescreener which eliminates a lot of possibilities for me because I don't trust them. I screen for stocks >$12 and <$120. I screen for a minimum of 500000 shares traded yesterday, and a minimum of 2M shares traded last week. This gives me confidence that the results of these screeners are less likely to be moved by HFT's or somebody with deep pockets. (this is not always true, but seems mostly true).

Within this set of constraints, here are the stocks that have pulled back the most the last several days:


CAVM DECK GT IOC

OPEN AKRX NAV SKX DMND BCO

VNO MOH BX

AFL ALKS AMLN BBG CEG CNX CTRP CY DFT ESI EW EXPE FCN FSLR GFI GMCR GT ICON IRM MAKO NRGY OPEN TZOO UNG VALE VALE.P VVUS WLP WSM

ACI ANR ATI AYR BAK BAS CAH CCJ CMC CROX DE DELL DWA ERF FCX GG GILD GNTX GTI HPQ ILMN IOC JCP LIFE POT PPO QCOR RIMM RRD SIMO SLW STLD TDS TIE VCI WLP


Here's the strongest stocks,
(from Friday, the list of the best revenue growth: AAPL AMZN QCOM PCLN JOY VTR)

ACC BIG CINF COST CPN DISH FDO JAH ORLY OVTI RGC VRSK

and somewhat less strength:

ITB ARUN ANN TSO SPR ATHN KRO RYL DISH CPN ARO GTLS OC ZUMZ MTH AEO CRR SCSS VLO JAH LEN CLNE DHI INSP OVTI ITMN VHC JOE


Now, do we believe the strongest stocks will continue their run, or do we believe the weakest stocks will turn around and pop the most?

Here's the trend: The market is advancing, but my favorite leading indicator is down.



In all the other times in the near-term past when the SPXA50 was headed down, the market was also falling. Not this time. This time it looks like time is doing the consolidation, and we've been in the 134-138 range since Feb 10.

I think we have a market that's wound tighter than a $3 watch. I will be playing the long side, staying in overnight with partial positions. Initially, I will be playing strength, and watching the weakness for signs of a confirmed turn-around, then move into those.

I don't anticipate any structural changes, but one never knows.

Silver and dollar

Mutt started me looking at silver. Here's a couple of charts that are interesting.



Both charts are the same time scale. You can pretty much see that UUP trend is the inverse of AGQ, a silver ETF. Right now, the Bernank wants to keep the dollar moving weaker, but additional liquidity in the Eurozone is trying to thwart these plans. If China adds liquidity as well, the Bucky is likely to grow stronger, hence pushing silver lower.

What's the probability that will happen?

Here's another chart. It's the daily AGQ. I think you can see a H&S forming, with the peak volume at the head.



The last H&S I followed didn't complete, and resolved to the upside. My thinking is the dollar will continue it's downward trend, and this chart will also not complete, resolving to the upside. That's based on my previous observation that the Bernank knows how to push the dollar down.

Overnight Market Pops and Snappers

The SEC keeps a list of authorized exchanges. See
http://www.sec.gov/divisions/marketreg/mrexchanges.shtml

This is not a complete list, it is simply a list of exchanges administered by and under the set of rules provided by the SEC.

I looked into the NSX. I can not find how or when they move their data into what Investopedia calls the "consolidated tape". For NYSE and NASDAQ, it's easy because nobody lists their stock on both. But NSX lists stocks concurrently listed on NYSE and NASDAQ.

Looking at NSX volume, their volume yesterday was about 14M shares NYSE, and 9M shares NASDAQ.

It seems that there's a lot of trading activity at the end of the day. That's when the ETF's make their trades, and when the broker-to-broker trades are settled. I suspect that's when the other exchanges' trades get rolled up, but I haven't confirmed that suspicion. The rollup function is provided by clearing and settlement companies, and after they are all done, they report the price for the next trading activity. For a deeper understanding, see

http://www.tradersmagazine.com/news/102263-1.html

This article talks about the settlement activity, and that NASDAQ would be setting up their own settlement operation.

So at settlement time, the price may change. Dramatically.

Suppose broker A has a buy order of stock that it doesn't have. Broker A goes to the settlement house to get the stock. The settlement house may have to go to broker B who has the stock. Broker B may decide that the stock is worth more than the closing price, and transfers it to the settlement house, who sends it off to broker A at the new, higher price. The consolidated tape then reflects the higher price. There is no volume registered for this trade, because the trade volume was already reported during the day. This is just a settlement of that volume.

Now, how does that affect your broker, TDAmeritrade, for example? You bought the stock at a low price during the day, and overnight it pops up. The brokerage house (TDAmeritrade) has to come up with the money to settle the stock, so it's out the delta from when you bought it to the settlement price.

So now you can see how "snappers" happen. A stock who's relative strength compared to the index may be negative, but somebody thinks it's a deal and buys a lot of shares. Overnight, it pops up because of the settlement. In the morning, we all see the pop, and know this one is really weak, so we may short the stock because overnight nothing changed, it's still weak. Maybe it will become strong this quarter or maybe not. But the stock then trades lower, usually back to it's yesterday's trading point. If it's relative strength is negative, it will usually end up being lower than the delta of the index move.

If there's enough "snappers", then the market index "pops".

Don't worry about TDAmeritrade. There will be a Broker C going back to TDA to buy a stock, and TDA will raise the price so it covers it's original loss on your stock. I think it's a zero-sum game, because brokers continue to be in business.

An interesting study would be to screen for stocks that traded over 10X their average daily volume, and see what happens to price overnight.

Just so you guys don't get chart-starved, here's my chart I'm watching:



As you can see, my favorite leading indicator is looking down. Sometimes being oversold is resolved by time, and sometimes it's price. Which one will this be?

Market Forces

Remember the chart I put up that showed we were heading for a 2000 point gain in the DOW (DIA)? And remember the direction change caused by the structural movement of the unified central banks?

That shows the importance of structurals. Anybody trying to time the cycles or count inflection points will be unable to rely on the periodicity of the structural inputs from governments (eg “thou shalt take a bond haircut”) and central banks (eg LTRO’s, TARPs, simultaneous announcements), and the market direction caused by them. That’s why DeMark blew his prediction.

Remember, it’s hard to short a market where the structurals keep popping it higher. That may also be why we see substantially lower volumes, with no one shorting and covering because the overwhelming structural pressure is up.

I decided to look at the SPY from this viewpoint. Here it is:


It’s hard to see, but there’s a black line centered in the ranges, and vertical on a pop to the new range.

As you can see, we operate in a range for a number of days, then Pop to a new range. For the last month or so, we’ve operated in 3 ranges, of 11 days, 9 days and (so far) 6 days. So it appears as though we’re nearing the end of this day-cycle. Looks like a couple more days in this range before we get a pop. Let’s see, what’s happening in a couple of days in the Structurals? Why, the next LTRO, of course.

And we all know why this is happening, right? It’s simply a move by the financial community to take a more firm hold over the actions and direction of governments. Look at Greece: they are ceding their sovereignty in return for money to keep their government jobs. This is an interesting trend. Future governmental financial policy will be contractionary. How will the financial community best make money in that environment? Answer this question correctly, and you will make a lot of money.

So how will I trade this market? Well, as I said, the financial community wants the Bucky to devalue, so I moved a lot of money into the RMB. It’s made me quite a lot since I started this activity. But what about risk assets? As I said above, the market pressure is up. So I will buy dips and sell blips.

But also, I want to look at the depressed sectors. Here are a few charts (weekly) of my herds list that are depressed: Now, I’m not saying these are good investments, and will likely rise. I think we have to answer the above question: how will the financial sector make money in a governmental contractionary environment?

I removed the charts. If anybody wants them back, let me know.

But here's a chart. It's the one I referred to in the top paragraph. It's amazing, we're absolutely on-track.

15 Minute H&S

I'll be interested to see where this goes.

Good volume at the head. Would like to see increasing volume on the right shoulder, but don't see it yet.

Triparty Repo Market is Failing

While I've been resting, I am doing some research on our financial system, and how MF Global failed. So I thought I’d put together a post about that for your perusal, as we see what the market brings us today.

MF Global’s failure is basically due to risk-taking by lenders (typically banks) on the permitted re-lending of borrowed assets. And the market in which this is done is failing, according to the Fed. In a lead article by Michael S Derby, Dow Jones Newswires, you will find some of the quoted excerpts below. Some are my thoughts.

First, read an eye-opening article about the Repo construct.

http://soberlook.com/2012/02/increase-in-triparty-repo-usage-and.html

Now we understand why the FED buys RMBS's. A bank-owned RMBS can be relent to other banks (less the prescribed haircut) and therefore it's worth becomes greater, due to the relending leverage. If the mortgage backing the RMBS fails, this leverage comes crashing down.

Remember, the Fed has bought RMBSs and will hold them to maturity (or until the troubled asset packed into the security is repurchased by leveraged buyout (Private Equity) or by foreclosure). If the income from the security is not adequate to pay the interest, the Fed can simply issue liquidity (print money) to pay the interest, keeping the system afloat.

In the long run, the Fed can be the winner, because the RMBS will mature, all the properties under the RMBS will mature, the interest will be paid. And there’s the reason for inflation, it’s hoped that with enough inflation, (2% minimum per year) there will be enough appreciation so the RMBS is not retired at 0 worth, but at full value worth. (That's (simply) why Bernank said deflation is our greatest enemy.

If you’ve got deep enough pockets, and a long enough time, and the ability to create inflation, you will be the winner. The Fed has all these. Albeit some trouble on inflation….

Today, the NY Fed said the triparty repo market is failing.

Because fixing RMBSs doesn’t fix the problem. The problem is that originally, only Treasuries were “Repo-able”. But that didn’t fit bank’s requirements for profits, so regulators (not the law) changed the rules so that basically any AAA rated security (or other not so high rated securities) can be repo-ed. As long as you can find a buyer, you can repo it. A repo is simply a financial product created to make money. In other words, it makes money out of money. It does not create wealth, it creates liquidity. Liquidity (like debt) can create the appearance of wealth. But true wealth only comes from productivity funded by capital. There’s no productivity in a repo.

So here’s the problem: the Banksters have created liquidity, funded by the 0% interest rate they can get from the Fed, and profits of money which they dole out as bonuses to their salesmen selling these created repos on their trading desks. These Wall Street guys are simply used car salesmen, with an Earl Scheib repainted rustbucket they put lipstick on and sell.

Today, Mr. Derby’s article said that “At issue is the state of the triparty repo market….And because the market is dominated by short-term activity, a loss of confidence in a particular firm can kill its access to credit and potentially kill the institution, which can, in turn, create problems for the broader functioning of financial markets…...The effort to repair the market came to a head Wednesday with the release of a report by the Tri-Party Repo Infrastructure Reform Task Force, a private industry group operating with the support of the New York Fed. The report was to offer the group's final recommendations,” but the NY Fed said “ … the amount of intraday credit provided by clearing banks has not yet been meaningfully reduced, and therefore, the systemic risk associated with this market remains unchanged,"

Simply put, there are too many Earl Scheib rustbuckets, too few Used car salesmen, and even fewer tire-kickers.

Mr. Derby continues “As a result, the bank (The NY Fed) said it "will intensify its direct oversight" of the triparty repo market.”.

Are you frightened? You oughta be. Because direct oversight will not eliminate rustbuckets, hire qualified salesmen, and drum up customers, It will only get in the way, and make things worse.

The systemic risk with this market remains unchanged. What is the market? Sovereign debt. Treasuries. Bonds. Corporate stocks. Anything the worthless rating agencies rate AAA. The liquidity of the system depends on this market, and it can be brought down by any participant. That’s exactly what happened to MFGlobal.

If somebody looks cross-eyed at the wrong CEO, the system is toast. We’re toast. We will take the haircuts as the banks fail, as did the customers of MFGlobal.

Somebody didn’t like Corzine. That’s the cause of the MFGlobal failure. That’s the cause of the investors losing their retirements.

The other thing that can bring down the system, as I explained about the RMBS above, is the reduced value of any of the repo'ed securities. Like sovereign debt. I mean, that could never lose value, right?

You oughta be scared.

Lowered Earnings

I would like to refer to an article that was pointed out by TBP. I think this article points toward a pretty bleak future, as I understand it. See

http://www.chron.com/business/article/Corporate-profits-aren-t-what-they-seem-3079696.php

They allude to some numbers from another company, without quoting directly the numbers or the method used to derive them, so like anything else, this may be inaccurate when taken out of context. So this may be another example of yellow journalism, but it agrees with what I’ve been looking at and fearing.

Earnings are coming down. It’s hard to explain why job numbers are going up, but earnings are coming down. To paraphrase the article, if AAPL and AIG were removed, the S&P earnings would be about 1.1% higher for the 4th quarter of last year (2011). A rate that is substantially below the first 3 quarters.

I don’t look at earnings, because the books can be easily cooked, making earnings look better (or worse) than they are. Like DMND didn’t pay for their nuts on time. But it is scary to think that without the two big guns, the total increase in the S&P is 1.1% in the quarter. Cooked books or not.

This quarter, around 66% of the reporting companies met or exceeded analysts’ expectations for earnings. But as the article points out, and as we pointed out last December, those estimates were being reduced. Even Bloomie had a vignette on that in January.. But until this article came out, I had no idea it was that drastic.

My indicator is to look at operating cash flow and levered cash flow for a determination of the health of the company. A company like GOOG has a huge 25% of revenue reported as levered free cash flow. (Levered free cash is kind of what’s left over, that you can invest back in your company or put in the bank). If I have time, I would like to see the ratios for the last several quarters, but I can’t find that information compiled and published anywhere, except in the balance sheets of the corporations on Edgar. That’s painful to extract..

The other thing I’d like to point out is that the article said “In cutting profit forecasts for 2012, Procter & Gamble and Pfizer both cited the stronger dollar.” I looked at the dollar curve, did a simple piecewise linear integration of 2010 and 2011, got it that the dollar went down by 12% in 2011, but PFE’s earnings only went up 4% (from the TDAmeritrade “earnings” graph). Doesn’t make sense to me. (But of course, earnings are simply cooked books, but you’d think they’d have to live with their untruths, wouldn’t you?) In any case, it looks like the companies want to say that lowered earnings “ain’t our fault”.

We know fundamentals don’t matter in our market today. But if one day they do, the article’s author’s conclusion might be right.

On Track

Remember Mutt asked if there could be a 2000 point rally in the DIA? My reply was yep, and here’s why.



We’re on track. Extend the green line to where the black line meets the red line. Poof. 2000 points. (Chart courtesy of TDAmeritrade's StrategyDesk)

So where from there? Everyone will be looking for a pullback, so I suspect we will get one going into the election. Who knows what the reasoning will be. It may be unsuspected, like China (remember they just increased liquidity a lot there, could be a sign of the times, and their GDP growth is slowing. Maybe it would slow a lot without that liquidity. Or maybe it’s a war with Syria. We often (without QE(n)) have pullbacks in the slow summer season, so maybe it’s that.

If this is the case, Mr. Obama will lose. The next relatively equidistant timing cycle will extend into the first of next year.

What do I like during the next few months? The herds report tells me to get out of precious metals, but into the metals and mining stocks like CENX X (yes, that will beta along, I guess) and the KOLs. I like many of the retailers like TIF that had a big pullback, and COH that didn’t . Maybe ANF.

I think the future revenue guidences are important in choosing. So I’m looking for white-collar retail stocks (TIF, COH, ANF etc), and B2B corporations like Oracle, IBM, Cisco etc to do well.

Notice the pink vertical line on the DIA chart. It appears as though there was a pullback cycle starting that if allowed to complete, would mean the DOW would fall below the 10000 point. Unthinkable! You remember what happened to turn that around? All the central banks got together and promised TBP (no, this time it means The Big Put), that is, liquidity forever. So with 0% interest rates promised forever, of course, everybody bought, and will continue to buy. Soon you’ll see the funds start getting in big time, then it’s time to ride, boys. Or as Mannwich likes to say, “Rally on, Wayne!”.

At the time of the pink line, I think the boys at the Fed saw the downturn (resulting from sentiment about Eurozone finances and sovereign debt repayment) and didn't want the Ubers value to drop, so the simultaneous announcement was created. I mean what other reason could there be to orchistrate a simultaneous announcement? So the cycle price direction was interrupted.

Could happen again in June/July timeframe. Maybe the US and China will have a simultaneous announcement of plans to save the Eurozone.

Unemployment and the Market

We saw the unemployment numbers improve pretty dramatically on Friday. We all know the dramatic improvement was due to a lot of people dropping off the edge of unemployment reports: that is, they are no longer counted, and may not be looking.

As we pointed out earlier, during Mr. Obaba’s reign, the use of food stamps has increased by 33%, or more. Mr Newt said that it was the biggest increase ever under one president, but he was wrong. It was the second biggest (Bush’s was bigger), but when the Jan numbers come out, Mr. Newt may be right. In any case, for leaders of our country to let this happen is inexcusable.

I have heard many many talking heads on Bloomberg say that we won’t improve the economy until we let the housing sector recover. Many say just let the bottom fall out and recover naturally, some say support it to keep our spirits up and confidence high to support spending.

You can’t spend what you don’t have. And aren’t making. And we all talk about the discrepancy between the haves, and have-nots, and it’s getting bigger, and worse. Even to the point where billionaires say “I volunteer to pay more taxes” which is of course meaningless in the long term, without spending cuts. “you can’t spend what you don’t have” should apply to the US Government, but as we see, it doesn’t.

So what is all this ramble about? It’s about housing, and the recovery as applied to improvements in the housing market.

Prices have come down, but as the blue collar workers lose ground, they still can’t afford to buy houses. Many white collar workers have houses, maybe underwater, but do possess them. As Mannwich’s article pointed out, many feel caught at higher interest rates since banks won’t let them refinance. We all know banks are mostly all insolvent if the government decided to make them mark their assets to market value. So the banks need this high interest rate revenue. The question is, what do banks do with the foreclosures, which are a drain on their revenues from their securities?

The answer was given to us Thursday. There are some private equity firms negotiating with Fannie and Freddie to take the troubled properties off their hands and fix them up and offer them as rental properties (since rentals are on the rise).

This will be a disaster for the housing market. Here’s why: I have looked at a bunch of repos here in the bay area, They are all dumps, where anyone with 600K-1KK price range would not want to live. And even after dumping 100K in upgrades into the property, you still end up with a hacked-up layout, a fixed-up camp. A dump. How will this hurt the housing market?

Fannie and Freddie will sell the securitized properties to the private equity firms for substantially less than their value. You and I can’t invest in this, because we can’t buy an entire security, we could only buy one or two of the components. So we won’t be allowed to participate. Anyway, we can’t afford to buy the property paying 4.25% mortgage, + property tax, + lost revenue on the down payment even with a 90% rental rate, because even at that rate, we will not have a positive yield, and it may be years and years before we can get our money out. What will happen when the PE firms buy is that the taxpayer will pay for the Fannie and Freddie losses (either directly or through AIG), and the PE firms will own the dumps.

The dumps aren’t necessarily concentrated. If they are, they will be slightly repaired and offered to the Blue Collar workers (who are dropping out of the jobs market, remember), and will ultimately likely become ghettos. If they are not concentrated, they are scattered throughout YOUR neighborhoods. And the blue collar workders will be moving in. Next door to you.

Unintended consequences could be ghettos (as I said earlier), lower property-tax income for towns, poorer schools, higher crime (I mean, even in my white-collar neighborhood, my Christmas lights were stolen), and an even brighter and more focused spotlight on the have-have not disparity.. Most of the new building permits are for multi-family dwellings, and this effort to provide low-cost rental property will stop those permits for sure.

Bottom line, your property values will go down, and your tax rates will go up. And, of course, we’ll all have to pay for the losses taken by Fannie and Freddie, and we will give all that money to the PE firms.

Sounds like a deal.

This, I think, is your future. Luckily, it is not Rock’s future, but I weep for my children, and for you. I am desperately sorry I helped bring this about.

Keeping On

So here’s our head and shoulders.




I’m thinking that today’s visit to 1300 was not the pullback from what looks like a H&S pattern, but was rather a bear trap. I saw a report on Bloomie where they talked about their interview with Tom DeMark, who called a top this week, but now he’s delaying the call. I think (not sure, didn’t write it down) was that the top would be around 1340 or so. Anyway, that same call was made for last Christmas: see

http://www.bloomberg.com/news/2011-12-05/demark-s-p-500-at-1-330-by-christmas.html

Which was wrong.

So, in light of that, here’s this week’s sooth:
http://www.bloomberg.com/news/2012-01-20/demark-says-s-p-500-may-reach-1-342-by-next-week-before-falling.html

I know, I know, he gets paid a lot more than I do for his sooth saying.

There used to be a sage XYL that commented here but she’s gone now, who had wise advice about calling tops or bottoms. As I recall, she used to say that you don’t know a top’s in until after the top is made, and sometimes that takes months.

I personally don’t think we’re going to see a top for awhile. I am hoping for a pullback, because we need one to advance with strength. I was hoping the pullback would come when the earnings were down, but was not to be. I was hoping the pullback would come when Greece failed, but news coverage has beat that to death, and everybody is expecting that to happen. I was hoping the pullback would happen when the S&P announced they would downgrade everybody’s sovereign debt, but when that happened, that too went out with a whimper. I was hoping for the pullback when Iran said they were gonna block the canal, but they backed down from that, so once again, a mild breeze.

Maybe we need a black swan for a pullback. There’s so much support from lenders of last resorts and bank’s earnings faking success from the rubble of mark-to-non-market, that without a black swan, well, how can we get a pullback? I don’t want this trading in a range crap. It’s very hard and takes complete concentration to make money. At my age, I shouldn’t have to work so hard.

So for now, I’ll just keep on keeping on. Buy the dips, and sell the blips. It makes me kinda sad that I wasn’t involved in the market before this systemic manipulation came to be. It must have been an exciting place. Mannwich commented about the moving average intersection, but things are so cooked these days I’m in the camp of believing that nothing historical matters. What will be, will be.

I still can’t short SHLD. So what will be will be, as long as it’s what’s permitted.

Failed to Track our Rally

I have run some scans, and have some conclusions.

I think the way is up. Still. The Dollar is destined to go down, as the Euro goes up. Why is the Euro going in the up direction? Because people are starting to face the facts. Face it, ladies and gents, the ubra-riche will not let the economy disintegrate, because their fortunes would disintegrate along with the economy. True, they’d still have their real property, and their gold, but you can’t eat marble pillars.

We’ve had a 20-day up-channel in the SPY. Looking at the daily chart, it seems we see a nice W formation with the right side higher, a very bullish formation. Now to continue on with strength, we need to see a pullback. The problem is I don’t see a reason for the pullback, so I’m guessing it will be done by the traders on a technical basis. The psychologicals are up, people are bullish, Greek debt is under control to fail, and we all see the ECB and the Fed stepping in to save the banks. Again. No surprise.

The fundamentals are up. Meeting or beating expectations, whatever that means. I guess it means fundies are up (they are not but the use of “expectations” gives poetic license for me to say the fundies are up)

Structurals are up. Any doubt about capital liquidity flowing into Eurozone and the LIBOR improving?

Technicals are, well, a function of low volume and trader’s sentiment. I can only see in the short term a sentiment change, when everybody says “Overbought!! Overbought!!” and the charts start to turn south.

I ran several screeners and developed a list of stocks that haven’t tracked our rally (yet). I’ve mentioned a few of my favorites that are in my investment account, but these are the ones that may (or may not) have the least to retreat when there is a pullback, and the most to gain. The one piece missing from this chart, which is most important, is the future revenue guidance. For example, TIF is on the chart, but their future revenue guidance is down like 20% from last year. If you take this information, add to it the revenue guidance, I think you’ll have some possibilities.

You can’t use P/E, because as we all know, the E can be adjusted by the accountants, so P/E is almost worthless, it’s included here because some people believe it’s not.

I had to do this with pictures, because I couldn’t get the colums to line up and look like it was meaningful. Sorry. Blame my ignorance, or blame blogger, one of the two is the culprit for sure.

Looking up, my son

There’s a great class on divergences at one of our links:

http://blog.afraidtotrade.com/


Walking by the Priest, the boy asked “how’re things, Father?” to which the Priest replied “Looking up, my son”.

So here we are, today, looking at the SPY. Remember I drew the pennant, and said the breakout buy/sell points would be 128 and 122? Well, we hit and passed the 128, and are currently trading around 129. So we broke through. However, we see some caveats:

1. Low volume (little new money coming in so no commitment, and remember a significant percentage of the volume comes from the HVTs and HFT’s)
2. We got here way earlier than we were supposed to, in order to complete the pennant

Here’s the SPY now:



I had to go back to July, 2009 to get a similar pattern. And this pattern, we all know, resolved into Up Up and away for months.

Which brings me to the importance of the other 3 aspects of the market: the psychologicals, the fundamentals, and the structurals. As you recall, in July, 2009, we were beginning QE2 and the Fed was pumping in liquidity like mad. And, corporate profits on earnings were going up, as the corporations became leaner and meaner. And the psychologicals were down in the dumps, as were the bank balance statements and fundamental insolvency.

Isn’t that exactly where we are today? Billions being loaned/given to the ECB, Eurobanks balance sheets suck, and everybody says “oh woe is the Eurozone and therefore by contagion, oh woe is me”. And in earnings season, doesn’t it look like we’re beating expectations (again).

Looks to me like a repeat of July, 2009. Up Up and away.

Now, we may see a minor correction to bring us back into the pennant, as you can see from the “Oversold” and “Turning Down” comments on the chart above,. And here’s my favorite indicator, the SPXA50 from StockCharts.com





Which indicates we are at or near the top of the cycle range. Indicating a turndown may be in store for us. But after that, should it happen, I think things are Looking Up.

Watchlist

Better late than never.

Rock’s Watch List

Here are a few of my watchlist picks and why they are on the watchlist.
First, we are significantly affected by headlines, so temper your trades accordingly. Second, I’m sorry if any of them offend your political, moral, or religious bents. Third, I look at the indicators I see and they all point up, so these are on my watchlist as the market goes positive. Fourth, I will not trade the banks because of their lying balance sheets, and at any moment, they could become insolvent. If Congress gets any balls, which may be unlikely, but possible.

1. VMW. They have a great product and have expanded into the APPL zone. As we get more and more HTML3 and straming movies, there will be more server farms deployed and VMW is the choice for these installations. Their chart is on the bottom, stochs for the 3, 15, and 60 minute is <20. Their money flow is the same and is tipping up, so I’m thinking this is the time. On the financials, they have been profitable at around 18%, and their levered free cash flow (what they have left over to invest in their business) is a whopping 1/3 of their revenues (3.5B).
2. POT I like the smell. I grew up working summers on a farm, and it smells good. Food and water are going to be important going forward, unless the dictators in Africa are successful in killing off the locusts. It’s forming W’s with the right side higher. Their profit is around 40% (huge) but their free cash flow is is only around 12% of their revenue. Since their operating cash flow is about 40% of revenue, that says they’re reinvesting heavily in their company. Good long term strategy while the prices are low, as we get inflation, and companies that don’t invest now will not grow quickly as the economy cycle progresses. Their charts are a little high, but I like the W’s.
3. MCD. I don’t enjoy the product too much, when I go there I get a McDouble and side salad. However, their management team is the best. The chart action is not a formation I like to see, so the entry point may have to be risky or delayed. Profit is huge, 25% or so. Levered free cash flow is around 12% of the revenue which is great, and is about 50% of the operating cash flow, so they too are investing in their business. A lot.
4. AAPL. What can I say. I’ve made a lot of money on AAPL, and I believe sex sells, and if they get somebody sexy to replace Steve, this is a winner.
5. MON. Profit is good, around 12%. Cash flow is good as well. They’re reinvesting around 10% of revenues back into the business. On the chart, the weekly shows a W formation with the right side higher.
6. TIF (RL and COH too). Yep, as the economy turns, look for TIF to outperform. Profit is around 16%, but their levered free cash flow is negative. I can’t explain that other than they may need new management. Operating cash flow is around 10% of revenue, so they may be positioning to sell the company. “Will see”. I still like that play and look for it to hit 85 again.
7. I like several of the metals. I am playing XME because of the headline risk. I expect XME to hit the 76 and would gladly take the 50%. You can do some investigation on SLX AA ATI CCJ CENX CLF CMC CMP CRS CU FCX GGB IPI MT TML NUE POT PKX RS SCHN STLD TIE TX VALE WORX.
8. I don’t trade drugs because of the headline risk again, but some of the pharma ETF’s are on my list. I have not entered yet, but as my aches and pains get worse, I’m seriously considering it.
9. GLD The pullback in GLD is probably tradable since it’s so heavy on the psychologicals. I would keep my stops tight, because as the dollar strengthens, I expect GLD to decline. However, it looks like it’s downtrend M’s have been broken. One more day of follow-through with significant volume will probably kick me off to start a position.

I have established positions in AAPL, VMW, XME and POT. I have half-positions in MCD