Jack’s Financial News & Opinion

I Told You So

I said last week that risk was high. I had no idea that Monday would bring such a big sell-off, but I do know that there are several portfolio managers (that’s anecdotal by the way) who use the same Point&Figure charts that I use for determining when to take on risk and when to protect from risk. Two of those big picture indicators, the NYSE Bullish Percent Index (NYSEBP) and the 10-day moving average of the New High Percent Index (HILO), are still in a column of Os on their respective charts. Risk is still high according to these very reliable measures.

Moving Averages

There was some interesting commentary on the television this week. Not that I watch much television, but what little of it I saw the participants who were trying to guess the market’s direction were mostly focused on two moving averages for the S&P500, the 50-day and 200-day simple moving averages (sma). Let’s have a look at what they were seeing. The 50-sma is shown on the chart in blue and the 200-sma is in red. The focus of their conversations was the fact that the 50-sma crossed above the 200-sma, which is commonly referred to as the “golden cross.”

The 200-sma did not start to decline until January 2008, a full three months after what is now commonly known as the end of the last bull market. The index captured its 200-sma in May 2008 but that condition only lasted the early part of one day, May 19th, and then fell below the 200-sma by the end of the day. Now that the S&P500 has recaptured the 200, should we be excited about this golden crossing of the 50 and the 200? After all, does this signify a great buying opportunity or not? My guess: Not.

Two Reasons

Technical: While I would love to jump on the bandwagon with other market technicians and fall in for the idea that one moving average crossing another one means that stocks are a buy now, I think that that bandwagon is a little crowded. One thing is for certain, when the majority opinion is that the market will do one thing it is bound to do something else, and just as equally likely the opposite of what they expected.

Fundamental: The S&P500 closed at 921 last week and 918 this week, losing a whopping 3 points once the roller coaster came to a stop for the week. It’s still trading at 16x normalized earnings. The last four big bear markets (you have to admit we’re in a big bear now) have ended when the P/E ratio of the S&P500 index was below 10x. We made it to 13x on that sell-off in March, which was a pretty good bargain for a very strong short-term bear market rally, but we are still in a bear market.

The new bull market has not, I repeat with emphasis HAS NOT started yet.

A weekly update shown exclusively with Point&Figure charts.

The Bullish Percent Index is in a column of Os and at an elevated level (high risk):

The 10-day moving average of High-low Index, the HILO, is in a column of Os at an elevated level (high risk):

Percent of S&P500 stocks above their ten-week average, is in a column of Os at an elevated level (high risk):

And last but not least, the S&P500 index:

The index is still above its bullish support line, but the three big picture indicators that I use are all telling me that risk very high right now for another move south. That doesn’t mean that a move south is imminent, just that the risk for a move south is higher, much higher than the potential reward from stocks advancing north. As I have repeatedly said since May 8th, when the S&P500 was at a record level above its 50-day moving average, chasing this bear market rally has more inherent risk than reward.

And by the way, when I made reference to the S&P500 being so high above its 50-day moving average on that particular weekend, the index closed that Friday at 929. Yesterday it closed at 921. Six weeks, nowhere.

Briefly this week

Along with telling you the way it is, what you can also expect from my efforts here is that I will not try to assign cause-and-affect relationships to the market like you normally see and hear from financial entertainment news media. I’m sure you’ve heard them all, for instance, “Stocks ease as crude drops” was the one explaining yesterday’s market action. So what really happened in the stock market this week? I’d say not much. But before I show you, let’s have a little walk-through of candlestick chart patterns.

A Candlestick Primer

The following picture is a typical six-day look at the price action of the market presented in what is known as a candlestick chart. I snapped this picture from the middle of the chart somewhere in the last two months.

The red bars represent down days and the green bars represent up days. When a green bar has what appears to be a hallow rectangle in it, that box represents the range from the opening to the close (bottom to top), with the entire “stick” represents the day’s total price range. When the day starts out at one price and closes much lower, then that day is represented with the candle having a solid red body (top to bottom), and the sticks at either end represent the day’s entire range.

The next picture is a look at a candlestick chart of the futures contract of the S&P500 over the last six days. I chose this particular index because the futures market for the financial indexes is open practically around the clock, save for about an hour and a half at the end of each trading day and of course it is closed all weekend. With a view of the trading range of this contract you can really get a good idea of what the entire world thought about the value of our stock market over the course of an entire day.

Six Days in June

Here’s the picture of the last six days.

When the closing price of the day is very close to the opening price, you have what appears to be a solid horizontal line in the middle of a stick, almost like a spinning top. People familiar with candlestick charts call this a “doji.” To candlestick chartists the world over this pattern represents indecision.

Now, ignore or remove from your mind all the headlines that clouded your computer screen this week. Blame or credit was assigned to the movements of the stock market for a variety of reasons and a myriad of news events. Aside from all of those headlines that attempted to assign cause and affect to the movement of the stock market, what do you think really happened and why? I’ll tell you, not much of anything and I don’t know why.

The entire world appears to be waiting for some catalyst to nudge prices in one direction or the other, but for now what we have is a full six day’s worth of indecision.

In the words of Forrest Gump, from the movie Forrest Gump, “that’s all I have to say about that.”

Have a stellar week.

I saved this picture and have been anxiously waiting for three years now to bring it out.

This was the front side of a postcard we received back in the Autumn of 2006. I destroyed the card after scanning it so I do not remember which company this ad campaign belonged to, perhaps it was the National Association of Realtors®. In any event it was just another obvious sign, to me, the real estate craze was way, way over.

Every now and again I see someone who makes me stop what I’m doing and listen very carefully. One of those people is Prof. Joseph Stiglitz of Columbia University. His picture and his words are referenced in a Bloomberg article from Thursday:

The revival may be short-lived. Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are.

The government probably wants to win time for the banks, keeping them alive as they struggle to earn their way out of the mess, says economist Joseph Stiglitz of Columbia University in New York. The danger is that weak banks will remain reluctant to lend, hobbling President Barack Obama’s efforts to pull the economy out of recession.

It’s at about this point in the article that I shake my head and say, “I agree completely.” Then later on in the article I find this little bit:

Fed’s Optimism

“These changes will help the banks hide their losses or push them off to the future,” says Sherman, a former Securities and Exchange Commission researcher.

The Federal Reserve, which designed the stress tests, used a 21 percent to 28 percent loss rate for subprime mortgages as a worst-case assumption. Already, almost 40 percent of such loans are 30 days or more overdue, according to Tavakoli, who is the author of three primers on structured debt. Defaults might reach 55 percent, she predicts.

At the same time, the assumptions on how much banks can earn to offset their losses are inflated, partly because of the same accounting gimmicks employed in first-quarter profit reports, Weiss says.

“There’s a chance that it might work,” Columbia’s Stiglitz says of the government’s attempt to boost confidence. “If it does, then they’ll look like the brilliant general. But all these efforts also bank on the economy recovering and housing prices not falling too much further. Those are not safe assumptions.”

Stiglitz says that the Fed’s assumptions are not safe. I am not surprised. In fact, I agree completely.

Source, Bloomberg:
Bank Profits From Accounting Rules Masking Looming Loan Losses