Newsletter_042009

Conversation on Mr. Market

I told you so! Actually I didn't but I would have, for sure. As I type this, the stock market is down about 3% from the recent highs. What's interesting is that it is the US markets following the European markets into losses. Is there something they know that investors in the US don't? All this recent talk of green shoots belies the fact that they are growing in a massive pool of toxic waste! So much for the nascent recovery.

For the short term (couple of weeks timeframe) the markets seem to be sorely in need of a breather after the massive 30% run up from early March lows. Moreover, many indicators I have been following tell me that we are severely overbought (CBOE put/call ratio, % stocks above 50 DMA's), and this buying has been done not by longer term investors but by speculators/traders who will dump their positions and even go short if that is what will make them money. As for whether this is the time to short the market, here is my view: please don't! I know it's an adrenalin rush to time the market perfectly and make those couple of hundreds but guess what comes next...hubris, which leads to further losses along the way! I say this from years of trading experience (yes, it has been that long). Rather, exercise patience. This is a race for the long run so at most I'd say sell some longs and hedge others if that is what you want to do.

Critical levels (I will quote these on the S&P 500 since I consider that to be an appropriate index to monitor the broader market)
Below 803 -> Don't just walk, run!
Below 839 -> trouble
Above 856 -> strength
Above 873 -> Man this market has legs

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Chart of the week: $SPXA50R

As mentioned earlier, I see the market as heavily overbought. One trustworthy indicator is the number of S&P500 stocks trading above their own 50 day moving average ($SPXA50R). When this indicator goes above 80, alarm bells start ringing in my head (similarly, below 20 sets off a different set of alarm bells). As of Friday, this indicator was at 89.6!

For those with a keener eye (hopefully all of you), note the chart below, of $SPXA200R, the number of stocks trading above their 200DMA. This is still at a measly 25.8 meaning that on the shorter term (50 days), although we are very overbought, there is still no "intermediate term" conviction in this advance.

Data showing we are way way overbought

Wow. That was quite an impressive rally. However, at this juncture, although many people think we are headed to 875 on S&P, I would like to submit my thought that we are due for a good correction. A poor jobs report will certainly counter the good after hours RIMM news. And IBM may finally make their Sun takeover public in the AM tomorrow. However, here are some charts that should make you very concerned. Almost every time things have aligned up this way, the markets have fallen.

The above graph is the number of stocks above their 50 and 200 day moving averages respectively. The 50 day moving average number shows a more short term reading. As you can see, almost 80% of stocks are above their 59 DMA. The last few times that happened, we have seen selloffs and this number has dropped way down to under 30.

The above is a graph of the CBOE options put/call ratio. For those who know what that means, very good. Someone in need of an explanation, please comment. The graph is showing that we are as overbought as we were in May 2008. Everyone knows what came soon after. The blue and red lines are the 50 day and 20 day moving average respectively, both of which are similar to that time in May 08.

Tomorrow is the jobs report which will essentially give us direction, but if it is a bad one, better watch out coz the markets want to tank.

The mini-rally; the important events tomorrow

It's been over a month since I last posted. Not sure how many missed reading me but I hope it was atleast a few :)

My prior post seems to have been very clairvoyant. We are now past the snapback rally from S&P 666 to S&P 830, an almost 25% rise in a few weeks! If only I had followed my own post for my personal investing decisions :(

Things happening tomorrow:

• FASB is about to relax mark to market accounting rules. This is very significant for the banks since they can reduce their "reported" losses and improve their capital ratios
• The G20 meeting in which success will be measured by agreement on how to deal with toxic bank assets, new banking regulation and elimination ofd tax havens

Now, as has been oft repeated, it's the reaction to the news that matters. I wonder if the mark to market event is already priced into banking stocks that have rallied 45% since the lows. If not, we will see a surge tomorrow.

As for the G20 summit, the expectations are low and I think there is not going to be much success with the agenda. Reaching a consensus amongst politicians is ridiculously difficult.

So market wise, we stand close to S&P 810 Wednesday evening. If mark to market brings in buyers, I think they could push the market up to 840. However, there are big negative news events to consider as well, the big one being the Friday jobs report. I am looking for a consolidation to S&P 765 where the big decision of the big break will happen. Fasten your seatbelts for some volatile trading to come.