More Weak Volume Rallies, But the Bear’s Jugular is Temporarily Exposed!

I’ve been getting the hang of customizing and adding to chrisrowesblog.com and haven’t publicized a damn thing yet, partially because I want to be 100% sure I do no wrong by my paying members of Tycoon Services (can’t post what other people pay good money for – like recommendations), and partially because I’m just not sure exactly what I want it to be based on yet.  Today I’ll discuss ways Obama can create an Obama stock market rally RIGHT NOW.

In the short term, we’re seeing weak volume rallies.  Of course this last week was expected to have light volume due to Jewish holidays and since it was the first week after labor day.  It looks more like traders covering shorts with no real conviction on the decision to move higher. It seems like with every real move higher in 2010, we’ve seen decreasing volume. We see heavy volume on the sells. But most recently we have seen lighter volume on both sides as the market just stalls. So the bias is to the downside but with the intermediate-term indecision, I’m reminded of whichever “Rocky” movie (was it part I or part II?), when both Rocky Balboa and Apollo Creed are so weak that they eventually both go down at the same time.

That’s the kind of action we generally see in a stock market index; in an individual stock; in just about any kind of security; right before we see volume pour back into the market either sending it much higher or lower with strong momentum. You can look at any long term stock chart of any real company and you’ll see what I mean. Both the bull and the bear have hit the proverbial canvas and it’s just a matter of which fighter can get up before the 10-count!

This action isn’t surprising in a mid-term year, typically the weakest year out of the 4-year presidential election cycle.  Investors and traders hate uncertainty so it doesn’t want to do anything until investors get a better sense of how policies are likely to change (or not). If there is any direction in the market, it’s usually going to be to the downside.  And for the same reason, the following year tends to be the strongest out of the 4-year cycle.  Investors then have a better feel for what to expect for the next couple of years, at least, and the president spends nearly the next two years shining the positive light on all the good he’s done.

For the Obama administration, the market is WIDE OPEN to be manipulated in any direction they want! Of course they want it higher in order to increase positive sentiment which helps stimulate the economy.

Believe me, I am all for market manipulation by a president. We will know very soon if his administration understands technical analysis and how the market place works in terms of timing his announcements/decisions.

Money has been pouring out of equities and into bonds drying up the level of activity. But if Obama comes out and puts his “huevos” on the table and does something huge in terms of tax cuts, for example, and “surprises” everyone, money will likely come pouring back into the stock market pushing it back into bull mode. That may just be his plan! What’s the alternative? Whatever his next couple of moves are will tell how savvy he is in terms of market manipulation. If that is, in fact, his master plan then he had better make his play soon because markets won’t wait much longer.

I don’t understand why people tend to omit, from their arguments on tax cuts, what it just generally does to sentiment and momentum. Tax cuts may “cost” the country money, and whether you believe that the money directly gets plugged back into the retail stores, housing, construction, business investment, or not, you can’t argue with the fact that when people feel good, they spend. Period. If Joe Shmoe’s 401k is moving higher he’s more likely to spend. If dividend taxes don’t increase, my grandparents, who are living off of dividends, will be more willing to buy my son and daughter Christmas gifts. Getting on the same page as his new partners (the right) and improving bullish sentiment has intangible benefits that I’m hearing little discussion about and to me that’s going to be the whole ball game.

Obama knows he’ll have to work with what will soon be a Republican controlled House and maybe even Senate. He’s already moving more towards the center as his policies have so far been viewed by business owners as “antibusiness”. As Republicans gain some control of congress, the risk is that nothing will get done for the next two years. Right now he has the choice of striking while the iron is hot in the equity market (light volume, spring coiled, sitting duck waiting for something big to happen) by making more “business friendly” decisions, at the same time warming up to Republicans, giving the markets the sense that they will be able to play, at least somewhat, nicely together.

Again, the tax cuts are the example I’m using but if Obama has some other idea then he’d better go ahead and fire his bullet before the market fires it for him.

The long-term momentum is certainly down, based on the light volume rallies and heavy volume distribution days, so inaction is the same as consciously letting the equity market drop (which will further hurt consumer sentiment spiraling the economy lower with more disinflation and maybe even the other “d-word” that nobody likes talking about). The bear’s jugular is exposed right now Obama. What are you gonna do?

Related Articles

• Investors, Prepare For Volatility (nytimes.com)
• Stocks on the rise: A sucker’s rally? (money.cnn.com)
• Back to School for Investors (thestreet.com)
• Is the Bull Down for the Count, or Just Taking a Break? (dailyfinance.com)

2010 – A Sideways Year – Consolidation = Indecision

It’s amazing how confusing the financial market can be while, at the same time, being so obvious.  But I guess it shouldn’t seem that amazing since the latest market action shows that everyone is in the same boat.  I say that because of the consolidation that has been happening over the last 4-5 months (or all year depending on how you look at it).

The only reason for consolidation (on a long-term basis, in this case) is it’s a period of indecision.  The key rule to remember in this case is: the longer a consolidation period exists, the bigger the following move (up or down) will likely be.

I try to ignore the bullish arguments of why this is the best time to buy and the bearish arguments which state the opposite, because markets wouldn’t exist if the two arguments didn’t exist.  And when considering today’s state, I know if either side was that sold on either argument then the market wouldn’t be sideways for the last few months.

Instead, in this blog post anyway, I’ll focus on two powerful economically agnostic forces that apply to the long-term picture and likelihood of either direction.  I’ll warn you right now that there will be no bullish or bearish conclusion so if  you need that right away you can skip reading this and, instead,  spend the time watching an interesting YouTube clip or two.

One Bullish Long-Term Argument:  Seasonality & Presidential Cycle

One Bearish Long-Term Argument:  4-Stages of the Stock Market Cycle

BULL: Anyone who follows the stock traders almanac (or studied technical analysis 101) knows mid-term years are typically the weakest of the 4, and bear markets have a tendency to end in those years.  There’s so much mud slinging going on back n forth between two parties that it dampens economic expectations, and this year (these next few months) might be extra gloomy since it looks like Republicans are going to take control of the house and possibly the senate.  Don’t get me wrong, I realize republicans are considered market friendly, but the fear is that we have two years of nothing getting done.  So if Republicans take over congress…. well, we’ll see.

Why do I mention this after “BULL:”?  Because a weak market (somewhere near the low) is when one wants to be long-term bullish.

Pre-election years are typically the best performing years.  Presidents try to gain momentum and talk themselves up (and through the mouths of their friends) which tends to put a positive spin on the economy.  If there is one thing Obama is good for in this economic disaster, it’s that he’s a great speaker.  I think he will be able to do a great job talking up the economy and encouraging average consumers to spend.  And if he’s smart about it he will wait until the second half of 2011 – and this is a man who runs smart campaigns.  (C’mon right wingers, you’ve got to give him that).

The largest gains tend to happen from the mid-term low to the pre-election year high.  In fact, without looking it up I think it’s something like an average of 50% gain for the Dow-30 and about 75% gain for the Nasdaq.  That’s pretty huge for one year.  And it sounds enormous but remember it’s from LOW to HIGH which means one has to buy at the low n sell at the high to achieve that return (buying the indices).

Finally, let’s remember that the 3 months from October/November tend to be the strongest.  Add to that the fact that you’ll soon start to hear the media talking about seasonality and the mid-term year to pre-elect. year surge, and as much as the financial media gets made fun of, they truly have a strong influence on sentiment, even when it comes to the savviest seasoned investing professionals.  (Or the majority of them).

BEAR: There are a large number of signs we see now that identify each of the 4-stages of the very long-term stock market cycle.  I won’t get into all of them here.  But one of the most important things to focus on is the relationship between the general market’s price action and the major moving averages.  You also want to focus on the size of pulses, or surges, higher.

There’s certainly no “holy grail” to investing long-term, but one useful guideline we use is the relationship between the 20-week EMA (exponential moving average) and 40-week EMA (see below).  We use the relationship of these two moving averages for important clues on which stage, in the general market cycle, we are currently in.

We are mostly seeing characteristics of a market that is going from the “topping stage/distribution stage” to the “declining stage/mark-down stage”.

I’ll take this opportunity to remind you that I’m not focusing on any particular bearish or bullish story since they both always exist.  I’m just stating what the technical picture is currently favoring.

You can see below (red arrows) that the 20-week EMA’s move from above to below the 40-week EMA had confirmed the beginning of the long-term down trend in the S&P 500 in the year 2000 and within the first few days of 2008.  You can see (blue arrow) that it looks like that is just about to happen again.  I’ll paste a number of different time frames since the 1960s with the 20-week and 40-week moving averages because by focusing only on the last two times we were in this situation you can easily get a jaded picture.

Click Images to Enlarge

S&P 500 Weekly Chart 1999 - 2010 (Sept)

Take a moment and look at each of the charts below because you’ll find many occasions where the 20&40 week crossover either came close to happening only to be followed by a market resuming its prior directional trend, or the corssover occurred well after the market made it’s move (in the direction of the signal) and had already started moving back in the other direction.

Keep in mind, however, that there is a time and a place for every indicator.  For example, the momentum indicators like the MACD or RSI are “more reliable” for ENTRY signals than exit signals.  Some indicators are inappropriate for certain markets.

A great example of this is the 1987 crash.  There were many warning signals but the point is the 20 & 40-week crossover did you no good (since the crash was so fast) and “technically” generated a sell signal after the market had already started moving back up.  Instead of being robotic we realize when the indicator is not useful.  Don’t make the mistake of dismissing this tool because of “late signals” like these, especially since they are used for perspective as opposed to trading signals.

We generally use moving averages, not for signals on when to execute a trade, but for guidance on where we most likely are in a cycle.

This may be a good time to scroll back up and see what the situation looks like today.  We look very much like we are exiting the topping stage and entering into the long-term declining stage.

Too Big To Fail — Check out the The Preliminary Staff Report: “GOVERNMENTAL RESCUES OF “TOO-BIG-TO-FAIL” FINANCIAL INSTITUTIONS”.

http://www.fcic.gov/reports/

Click above and the report is on the top right dated Sept 1-2.

This is a pretty well written preliminary report that will help you understand a more complete picture of what caused the credit crisis of 2008. It’s important to gain a complete (or close to it) understanding of what happened (instead of just the typical soundbites that make for “good conversation” at a cocktail party) because that knowledge will help you successfully navigate the future economy and markets.