Do or Die Time on S&P

Posted on May 8, 2012 by John S. Hopkins, Jr.

The S&P is right on the verge of making a big statement here. The only question is will it be a positive or negative outcome?

Let’s look at a one year chart of the S&P here. What stands out? The 20 day moving average is now below the 50 day. Notice this happened in early June and then early August, 2011. It then happened again for a very brief moment in December, 2011. In the June and August periods – especially August – the market fell sharply while in December it was brief and not as pronounced.

Now we are at the crossroads once again and we’re seeing the market isn’t in a happy mood. The question then becomes, can the bulls hold here or will the bears take full advantage of this technical break to drive the market lower?

In the June 2011 time period, the S&P went from a high of 1345 to a low of 1258 in just over two weeks, a 6.5% correction. In the August 2011 time period, the S&P went from 1250 down to 1101, a correction of nearly 12% in less than a week.

Once the 20 day crossed back over the 50 day in early October 2011, it was pretty much off to the races, as the S&P put in a series of higher lows and when the bears failed to move the 20 back below the 50 in mid-December for any sustained period of time, the bulls took charge for 4 months. So, we are once again at a critical juncture here, and one that could be a game changer.

So, what should we expect here? The bears have already challenged and gone below the most recent low on the S&P of 1357, so the next key level of support will be at 1340, the March 6 low. Since the market is nearing oversold territory, 1340 should hold. if it does, then we could see a turn to the upside, with limited damage. However, should 1340 go, then we could be in for a more sustained and painful pullback.

I have to say that I don’t like what I see. However, it becomes easier to handle since I know 1340 is key, so as long as it holds, no problem. Should 1340 go, then 1300 could come into play, making the correction more significant.

The bulls have stood hard and fast where they needed to the past 5 months. Will this time be any different? We should know fairly soon, and the good thing is we know exactly what to watch for.

A Better Market Picture?

Posted on January 26, 2012 by John S. Hopkins, Jr.

After months of going nowhere fast, the market is looking like it wants to go higher. The S&P is now within striking range of summer 2011 highs after hitting a low of 1074 back in October.

Why the sudden change in direction?

First, corporate earnings have been well received. Apple itself had a blowout quarter, getting a very positive market response, and now has the distinction of being the highest market cap stock in the world, neck and neck with Exxon Mobil.

Next, the market senses an improving (albeit slow) economy, with weekly jobless claims remaining under 400,000 for a number of consecutive weeks now. We’re also seeing an improved manufacturing picture and consumer sentiment has been improving as well.

Also, there has been considerable technical improvement in the market. Specifically, important indicators that technicians watch have gotten markedly better. For example, in early October of last year, the 20 day moving average on the S&P – that is, the average closing price for the preceding 20 day period – crossed above the 50 day moving average for the first time in a number of months, which was a very bullish development. Since that time the S&P has climbed 8%. Additionally, the 20 day crossed above the 200 day in early January, another bullish signal and resulting in a move higher.

We’ve also seen the yield on the 10 year treasury bond move up from a December low of 1.8% to as high as 2.09 on January 23. This move in yields indicates investors are willing to take on more risk, benefiting equities.

Another key development has been the decline in the Volatility Index, or the “VIX” – commonly referred to as the “fear meter.” The VIX has gone from a reading of over 47 in early October to just over 18 in late January. That is a significant shift in thinking, and indicating more willingness to invest in and trade stocks.

Everything I’ve laid out has resulted in a better market picture, but can it last? Where might the market be headed?

My partner and Chief Market Strategist at Invested Central, Tom Bowley, just conducted a session titled, “The January Effect.” During his presentation Tom laid out historical data showing where the market ended up for the year based upon January’s performance. It’s clear after sitting in on the presentation that a strong January indicates a high probability of a strong year.

Of course, some will say we are in an election year, and that will influence market behavior. That might be true, but there are always events, some out of the blue, that can impact market performance. So, we pay more attention to what the charts and historical data tell us, with the belief that the market is always looking forward, and charts never lie.

It doesn’t really make sense to try to predict where the market will be by the end of 2012; we’re more focused on the here and now. But, if the bulls are able to clear the high of last year of 1370 on the S&P, it should pave the way for the market to go even higher.

Complacency at Extreme Level

Posted on January 20, 2012 by Tom Bowley

One of my favorite sentiment readings is the relationship between a short term moving average and a longer term moving average of the Equity Only Put/Call Ratio (EOPCR).

Currently this relative ratio is at the highest level we’ve seen in more than a year. As you can see on the chart below the last 2 elevated readings indicated that we were quickly approaching a short term top in the S&P 500. We’re now beyond both of those levels!

New Year Resolutions

Posted on January 10, 2012 by Eva Zaleski

There is that special meaning to the start of a new year: new chapter, closure of previous one, fresh ideas…

People try to make all kinds of New Year resolutions. Many traders, especially if the previous year wasn’t great for them, feel new strength and optimism. What really changed? – Just a date!

That especially happens to traders who compare their results to the overall market or other traders.

They start every year with a fresh chapter and reset the comparison to 0%. Then with every week or month they compare again and either outperform or underperform their benchmark. They focus their energy on the wrong target and they let push their emotions by those comparisons. There are plenty emotions in trading as it is. You don’t need this additional one.

I stopped comparing my trading performance to any benchmarks. Important for me are my absolute results. I review my work at the year end to see if the method I used worked better than the previous year and how should I improve it going forward.

I also look at a bigger picture for the New Year ahead: sociopolitical climate, possible changes in an economic cycle and more, to just get a sense of the moment. I don’t set any bets for the market based on that however nor do I build any convictions on how market should perform.

Where are we on a long term chart of S&P 500?

S&P 500 has been in a wide range consolidation pattern since 1997 with low at 800 and high at 1600.

I am pretty sure we will stay within that range in 2012. S&P 500 would have to gain about 30% this year to break out from that range – a very low probability scenario.

There are many opinions that the election year has a specific pattern. I just don’t see it that way. Presidential election impacts the markets. But this is only one of the factors that push and pull the market all the time.

Below is a 15 year annual chart of SPY. Every candle represents a year of trading….

Eva

Another year begins

Posted on January 4, 2012 by John S. Hopkins, Jr.

Here’s what we know about the market in 2011. The S&P ended at 1257 as of December 31, 2010, and ended at 1257 as of December 31, 2011. So, over a period of 365 days, the S&P was totally flat for the year.

It’s hard to fathom that after 365 calendar days and hundreds of trading days that the S&P would not gain or lose one point, but that’s exactly what happened. It’s hard to imagine that with everything going on during 2011, including a stalemate on balancing the budget, the near implosion of Europe, millions of people losing their homes and unemployment remaining high that the S&P didn’t move. If you had decided to bury your head in the sand for a full year, put your money into the S&P Spiders with hope that your portfolio might jump, you discovered a year later that you hadn’t made a dime; nada. In fact, inflation adjusted, you would have been in the hole.

Of course, the market did move throughout the year, with the S&P getting as high as 1370 on May 2 when it peaked and then falling as low as 1074 on October 4. Thus, the S&P was up as much as 9% at its peak for the year and then fell over 20% from that May 2 high to the October 4 low.

Still, 2011 required a unique set of trading skills and discipline to keep the average trader from losing his/her shirt. Yes, that sounds a bit odd; if the S&P broke even, at least one should be able to preserve 100% of capital. Sorry, doesn’t work that way.

Instead, those individuals who like to call themselves “trend traders” were pretty much forced to approach the market more like “day traders”, or risk losing heavily, when, for example, news from Europe overnight left them vulnerable to heavy losses. You would think this would be a big boon to companies like Charles Schwab who rely on heavy trading to make their money, but this was not the case. In fact, despite the churning throughout the year, Schwab lost 33% of its value over the course of the year, so even the brokers suffered.

Bank’s were hit particularly hard during 2011, with Bank of America itself losing nearly 60% of its value over the course of the year; Goldman Sachs lost 45% of its value; Morgan Stanley lost over 40%. This is compared to a flat S&P, so it gives us some perspective on how poorly the banking sector did perform for the year.

There were also some big names, what I like to refer to as “cult” stocks, ones that traders love to get involved in. Research in Motion (RIMM) was one that got hammered for the year, down over 70%; Netflix (NFLX) was down roughly 60%, and over 75% from its peak to year end.

The combination of a dismal financial sector and such uncertainty abroad made it nearly impossible for the market to advance. 2011 was the year that Europe took center stage, with investors in US stocks being held hostage day in and day out, never knowing what the morning might bring. This was a dramatic shift from the norm, where most investors around the globe had become accustomed to letting the patterns in US stocks dictate the move in world markets.

Yields in US treasuries fell off the cliff, with the yield on the 10 year Treasury Note falling over 40% from the end of 2010 to the end of 2011. In that respect, one could argue that US equities did well to break even, as investors around the world fled to safety.

What will it take for US equities to shine during 2012? For starters, banks need to perk up. When you have banks like Bank of America, Goldman Sachs and Morgan Stanley faltering, it’s a sign of uncertainty – i.e., what might be lurking on the collective balance sheets of the banks? Next, the consumer needs to perk up, and that’s going to be tough as long as unemployment remains high. It has been encouraging lately to see weekly jobless claims fall, down under 400,000 for more than just one week at a time, and the unemployment rate is back below 9%. But, rest assured that corporations will do everything they can to increase their respective bottom lines without adding bodies, leading to the continuation of skeptical consumers.

One other thing. When the US implemented its TARP program back in 2008, it took almost 6 months for the market to bottom, when the S&P reached 666 in March, 2009. So though it may appear that Europe has made progress with its banks, we may yet see a delayed affect that will affect markets around the world.

Bottom line for 2012? Honestly, it’s just too hard to tell. It’s a presidential election year, so that could affect the market, depending on the outcome. Banks could continue to struggle as more loans go sour and as the realities of dealing with so much bank owned real estate. And, without the banks participating, it is hard to imagine the market able to make much headway. Expect corporations to squeeze as much as possible out of the work force; no one is going to hire unless absolutely necessary. It’s also quite possible that the effects of recent actions in Europe will continue to be felt in the US, keeping a significant number of investors on the sidelines.

On the other side of the spectrum, if the banks can make headway on their bad loans while minimizing real estate related losses while open up lending in an even bigger way to small businesses, that would be a net positive. It’s also possible that the affect of all of the Fed‘s efforts the past many months will kick in big time, stimulating the economy and the market as well.

A potential huge impediment? Rising oil prices, particularly if it translates to higher prices at the pump. That could be a deal killer. It certainly had a near devastating impact when oil neared $150 a barrel back in 2008; we all saw what happened to the market and the economy in general. The US economy is not yet strong enough to withstand a repeat of 2008.

Which gets me to my 2012 forecast…see me in about 12 months and I’ll give you my number then!

Banks Score Again

Posted on December 21, 2011 by John S. Hopkins, Jr.

Banks Gorge on ECB Loans

So went the headlines this morning as European banks took advantage of a program meant to increase liquidity in Europe’s fragile banking system.

According to Reuters, banks borrowed almost 500 billion euros in 3 year loans carrying an interest rate in the range of 1%.

The market’s initial reaction was positive but then it started dawning on traders that the need for such a huge amount of cash could signal more trouble. And, there’s some question as to how the funds will actually be used; i.e., will the funds be used to loan to third parties or will the banks just sit on the cash, or invest in treasuries while enjoying the spread, much like US banks did when they received TARP assistance back in 2008.

In many ways, what’s going on in Europe is eerily similar to what happened in the US during that tumultuous period back in 2008. Regulators saw trouble brewing, and instead of letting more banks go under decided to throw lots of cash at them, which some think ultimately worked. Now European regulators are hoping for the same outcome, though it is too early to tell if what they are doing will work.

Let’s remember what happened not long after US banks got their TARP funds. It took a few months, but eventually, the market tanked, with the S&P hitting a low of 666 the week of March 2, 2009. In fact, the S&P was close to 1100 at the beginning of October, 2008, when TARP was initiated, so it fell almost 40% in a five month period.

There’s no telling if Europe is on the same path, but those who went through the volatile times at the end of 2008 and the beginning of 2009 know that the initial reaction to TARP was relief. Then reality set in resulting in that big move down in the equity markets. So, we shouldn’t be surprised to see a similar outcome once the initial relief period wanes.

Whatever the ultimate outcome one thing is clear. Banks have once again managed to hold the universe hostage due to their poor decisions. And, once again, the party line will be that banks are the lifeblood of the economic system, that we can’t live without them, that they must all remain strong. Really? Might we not be better off if the we let things run their course, letting the weakest of the weak go under, while weeding out those banks who have made the worst decisions? No one seems to have the answer, but perhaps its worth a try.

Housing Starts Beat Expectations and other Mid-day News

Status

The November housing starts came out earlier today and appear to have really beat the expected number, up almost 10% month-over-month to a seasonally adjusted annual rate of 685,000 units. (The market was expecting around 627,000.) Is this a sign of recovery, in the housing market and in general? Keep an eye on the Home Sales report tomorrow to see if the good news continues…

Wall Street seems to be reacting well to this report, as well as to some positive developments in Europe. The S&P is back above it’s 20 and 50 day moving averages, up about 2.6% as of 11:20 AM Eastern, and the VIX is down about 10%.

Finally, Bank of America appears to have held the all important $5 line, for now…This isn’t just a psychological barrier, many institutional investors are supposed to remove stocks from their portfolio once it gets below $5.

Anything else you’re watching today?

Chairman praising Moynihan baffles the mind

Posted on December 10, 2011 by John S. Hopkins, Jr.

The Chairman of the Board of Bank of America came out today saying that CEO Brian Moynihan’s job is safe. Whenever I hear that, it makes me think that something’s about to happen.

Moynihan has been in charge of BAC since January, 2010. Since that time, the stock has gone from $15 per share to just under $6 per share, a 60%+ haircut, and disastrous by any measure. This in spite of constant assurances that everything is fine at the bank.

Well, I can tell you this for certain; if everything was fine, the stock wouldn’t be down 60%. In fact, the S&P 500, during the same period of time, was up over 10%, so BAC is lagging the S&P by over 70% in a two year period. Awful.

Yet, the Chairman of the Board, Charles Holliday, gives Moynihan a public vote of confidence, saying, “Brian’s a great guy. It’s been a real pleasure to work with Brian the past two years. He’s put things in place (and has) a great team.”

Really? Let’s rewind the tape here.

Moynihan gets promoted to President and CEO in January, 2010. This is almost a year after the market has bottomed. The stock is trading for $15 a share when he takes over. He has two full years to get things in shape and the result is a drop in share price of over 60%, compared to a rise in the S&P of 10% during the same period of time. And for that, the Chairman of the Board pats him on the back for being a nice guy who has put together a “great” team.

I don’t know about you, but when I hear the term “great team” I think about the Yankees, or Red Sox, or Patriots, or Lakers. I don’t think of teams that are at the bottom of the totem pole, which is exactly where Bank of America is today.

So, it strikes me that Holliday was showing a vote of confidence in his public pronouncement when he gave Moynihan a thumbs up, when in fact he must be thinking, this guy’s got to go! And, who could blame him?

I can tell you one thing; I don’t have much confidence in the Board of Directors of a company when its Chairman is endorsing such poor performance. And, it’s likely that Holliday will be challenged to explain why he has condoned a trashing of the bank.

This whole situation reminds me of what happened before General Motors got rid of its CEO, Rick Wagoner. Everyone knew that he had tried his best, but everyone knew he had to go. Same thing with Moynihan. Thus, the only real question is, does he go now, or does he go when its too late to salvage BAC?

Super committee’s Super failure

Posted on November 22, 2011 by John S. Hopkins, Jr.

The gloves are off; there won’t be any deal coming out of the congressional Super Committee, not with an election year looming and reps on both sides of the aisle looking to gain an edge in the court of public opinion.

After months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline.

Apparently, the Republicans weren’t willing to budge on taxes and the Democrats on entitlements. Thus, we have a stalemate.

The outcome, while not surprising, is disappointing nonetheless. There was at least a teeny bit of hope that the 12 individuals selected would come up with something bold and creative, but that was not to be.

How might this affect the market? We saw a negative reaction on Monday during a period which is historically strong. So, initial reaction by market participants was enough to cause some technical damage, with the S&P falling below a key support level.

We might as well get used to more disappointment; the politicians are in election mode, and more concerned with getting reelected rather than doing what might be good for the country. It really didn’t matter which 12 lawmakers were selected to be on the committee, it was done more for show than anything else.

If those who were on the Super Committee worked for a corporation and were given a specific assignment to come up with a plan to salvage the company, and failed to do so, they would probably all be fired. Unfortunately we won’t be able to oust the Super Committee members, at least not now…maybe we’ll have a chance to do just that come election time.

Buy and hold and hold your breath

Posted on November 8, 2011 by John S. Hopkins, Jr.

Proponents of a buy and hold strategy had more convincing evidence years ago, but with the advent of lightning fast information and high speed trading they no longer have a valid argument.

The buy and hold model pretty much became obsolete when the S&P topped at 1,552 and the NASDAQ topped at 5,132 in January, 2000. In fact, if you had put your money to work – which the greatest number of individuals in market history did – back in January, 2000, you would still be down almost 19% on the S&P and 47% down on the NASDAQ. That’s not accounting for inflation; that’s pure losses over more than a decade.

So, if you were long stocks and you (or your broker) decided to tough it out when the market began to collapse in 2000, you’re very much underwater. If you don’t mind being underwater by double digits after 11+ years, then buy and hold is most definitely for you.

Proponents of buy and hold will argue that there’s been equally painful periods throughout history where it would have made sense to tough it out. Perhaps, but we’re living in a different world now, where hedge funds and individual traders have access to sophisticated data and trading systems that weren’t around even ten years ago. So, individuals who try to hold on through thick and thin are now subject to the whipsaw action that’s become more the norm rather than the exception. Throw into the equation the ever pervasive effects of world events – i.e. – increased possibility of economic collapse in other countries – and it only increases the likelihood of rapid market deterioration. In other words, the pros today operate on a shoot first, ask questions later mode, thinking in terms of minutes, hours and possibly days, rather than months down the road.

Naturally, such short term mindedness puts the average individual in a disadvantaged position. So, if you are trying to manage your 401k on your own, you best have a full understanding of what’s really going on out there or your portfolio will be eaten alive.

There are plenty of instruments available to the average investor, particularly Exchange Traded Funds, ETF’s, that mirror the movement in the market. For example, you can easily buy ETF’s that go up or down based upon market action, but simply buying and holding on to those ETF’s for a long period of time can be a recipe for disaster. Yes, if you are lucky enough to jump into the market at its bottom (when in fact, that’s just about the time when the majority of investors bail out), then holding for a longer period of time could be profitable. But, timing the market perfectly – that is, buying at the exact right moment and selling at the exact right moment – is akin to hitting the lottery.

Thus, I will argue that the average investor will be better off to sometimes be out of the market completely – even if they happen to miss a nice run to the upside – while preserving precious capital that can be put to use when the market is more predictable. Holding in a market that has been down for over a decade makes no sense. It might have worked years ago when there was a more level playing field, but not with today’s rapid trading environment that calls for lightning quick decisions.

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