Going Shopping

If we hold the 1120 line, that will give me confidence that there are buyers here. If there are buyers here, then that means we’ll likely retrace the latest pullback, albeit slowly and painfully. Here’s the SPY.



You can see the two boundaries I’ve drawn for the upper and lower edges of the range. If we fall below that range, well, in my opinion, it’s “look out below”. But I don’t think that will happen. On the right, you’ll see the Fibonacci breakdown of the move from 121 to 113. The 38% retracement is at 116, and I’m looking for a quick rebound to that point. After that I think it will be a 5-10 day painful move up. On the technical side, I see the stochastics haven’t returned to the 20% level, but the large move due to the words of the Fed has basically reset that number as thought it were at 20%. Of course, the darkside of me looks at the large selloff and increasing volume over the last couple of days, and I’m thinking those words were leaked to a few friends.

Markets are reacting as though there were a monumental change overnight. That’s just not so. There is nothing new that should have caused such a large overnight move. So I’m anticipating bargain hunters will come in, probably overnight again, and do some buying.

Time for us to go shopping, I think.

Because of the volatility in individual names, I’m thinking of focusing on ETF’s but there are a few names that deserve an honorable mention. Two of them are

1. IBM. The relative strength of IBM is unbelievable. Here’s the chart:



You can see the 5-day relative strength is over 5% better than the S&P, and even the 20 day is almost 5% better. They don’t get much better than that. So IBM’s had a pullback and it’s time to buy.


2. AAPL. Again, a monument to relative strength



You can see the 5 day relative strength is again over 5%, but look at the 20 day, it’s over 9%! This stock is a deal on a pullback. Which we just had. BTW, look at the slope of the relative strength curve, both the 5 day and the 20 day.

Now you may ask why we would buy stocks that don’t pull back with the market, instead of stocks that fell off a cliff, hoping for a rebound. Remember this: RIMM. If you bought RIMM after it fell off a cliff, hoping for a rebound, it would have taken you to the cleaners.

Buy strength. Short weakness. Never short AAPL or IBM.

Now let’s think about the general economy, and it’s strengths and weaknesses. In 2008 when we had the big fall, we all knew the banks were weak. If we’d bought SKF at 25, it went over 200. We shoulda known. I did know, but I had no courage for my conviction. So what’s weak this time, and what’s going strong?

My opinion is that we’re still in recession and never left it. As a result, we see deflation in assets happening, at least until the asset is no longer offered. (once an asset reaches a certain low price, then it’s value may go infinite due to the inherent shortage at that price). I see nothing on the horizon to pull the world out of this negative spiral, and it could be that we will continue this sawtooth price action down to the old 666. It may take awhile, though, so in the meantime, where do we trade?

I don’t have a clear gut feel this time, except I’d love to figure out how to short the European banks. So let’s see what the market says:

The worst ETFs are:
KOL DIG TAN XES SLX XOP XME and OIH. Their relative strength is between 3% to 13% lower than the S&P. What this tells me is that the most basic resources are in the worst shape: coal’s not necessary because we don’t need as much energy. Oil and gas are terrible again because we don’t need as much energy. Most energy is used to create and transport things, and we don’t need that now. TAN’s down a lot because we don’t need more energy, and the cost premium for alternative energy solutions is still prohibitive. And of course steel. We don’t need the things.

The best ETFs are:
IRET XLU GDX $DRG.X $DJULTC IHE GLD BBH RTH IBB. Look at all the biotechs in there. Also, we’ve got the golds and gold creators. Also, we’ve got real estate (rental, not builders), utilities, and retail. The basic stuff we need to survive or take a long term hedge on our debt.

So this tells us that we don’t need more stuff and aren’t buying it, but we are buying pharmas and the necessities, with a hedge on the golds.

So, if you believe we’re at the bottom of the price swing with yesterday’s action, then buy long from the best ETFs. If you believe we’re at the precipice about to fall of the edge of the financial cliff, then short the worst ETFs.

Or use these categories to trade individual stocks and concentrate your risk.

As an aside, it is interesting to note that the slope of the relative strength curve is negative for the worst ETFs, and positive for the best ETFs (except for one single deviation). This says that compared to the overall S&P, the worst ETFs are getting worser, and the best ETFs are betting better.

And yes I know worser isn’t a word.