For the week ending Nov 27 2009

Just your typical jittery, light volume, holiday week.  Let's recap:

(Instead of interpreting the weekly moves for you, I think it would be more informational to give you screenshots of the source I use.  Lots more information, and much easier to digest in a glance.  I'll try to figure out a way to get them on here a little bigger, but for now just click on the ones you're interested in and you'll be brought to the full size version.)

Looks like your basic flight-to-safety trade:

The defensive trade seen across asset classes is confirmed by the individual sectors:

As far as breadth goes, the NYSE and Nasdaq BPIs continue to look week.  Advance-Decline indexes look alright, in line with the recent market action.  New High - New Low indexes are the strongest of the bunch, and continued their uptrend this week.

On Island Sector Signals

All sectors still in buy territory.

With Thanksgiving behind us, look for some real action ahead.  Nothing all that new to comment on from this week, so I'll hold off on observations until next week. 

Although, one tidbit of interest is the huge 20% spike in the VIX on Thursday.  Whether it was a meaningful move or not will be revealed next week (but if I had to put money on it I'd say it was an overreaction).

Adam, Eve, and Natural Gas

Natural gas has been on a one way track for a year and a half now, continuing to hit fresh lows as other commodities catch significant rallies.  Fundamentals aside (they look horrible and justify the recent price action), the technicals suggest natural gas may finally be bottoming.  There are a number of hopeful signs here:

1. Increase in volatility (bulls are finally starting to fight back against the bears)
2. Decrease in volume (peaked in June and continues to drop despite nat gas hitting new lows -- signifies despair / complacency / "I give up!")
3. Large and sharp selloff at the end of August / beginning of September (flush out the remaining weak hands and bottom callers)
4. Gentle retest of the lows of the sharp selloff on light volume (no interest and no panic)

The technical name for this kind of double bottom is an Adam and Eve bottom, where Adam is the sharp selloff and Eve is the gentle bounce.

Although technically the pattern is not confirmed until we see a break above 12.50, adding a teaser position now might not be a bad call since the 8.80 stop is so close. 

Even though the trade setup looks promising, natural gas is still in a very dominant downtrend both technically and fundamentally so there is a high chance this trade will fail.  To us the odds are worth it though when you consider the four hopeful signs listed above along with the potential return.

If you really want to juice this trade up and shoot for the stars, consider using the Jan 2011 15 calls (ZZMAO) currently trading at 0.84.  Consider the total investment in the option your maximum loss, and only invest as much as you're comfortable losing.

To top things off, natural gas has not fallen into the dollar down / everything else up correlation trap, and it's nice to trade something other than the dollar for a change.

For the week ending Nov 20 2009

Ho hum week.  Dollar / stock correlation (or "ABD" -- anything but dollars -- as John Mauldin refers to it) drawing a lot of attention.  Let's recap:

Silver outpaced the rest this week rising 6.2% while gold, the runner up, only rose 2.9%.  The Kiwi was hit the hardest down 2.7% while the US dollar rose 0.5%.

Precious metals and commodities performed well this week rising 3.4% and 1.9% respectively. Emerging markets and small-cap growth stocks were the underdogs down roughly 0.9%.

Russia and Brazil were the only two countries to eke out gains this week, rising 1.6% and 0.2%.  Australia was down the most, falling 3.4%, and followed by Japan down 2.8%.  The S&P was down 0.2% for the week.

As for sectors, healthcare and materials made gains of 2% and 1.3%.  Energy and consumer discretionary were the underperformers, down a little over 1% each.

On Island Sector Signals

All sectors in buy territory.

The calm before the storm continues.  Numerous commentators noted the dollar / stock correlation this week and all were cautious of a sharp short-covering induced rally in the dollar.  I agree it's in the cards, but knowing when it's going to happen is the challenge.  For now, those short the dollar are sitting comfortably and aren't scrambling over each other to cover their positions on corrections.  We will likely see increased volatility in the dollar before that happens and although we've begun to see some sharper moves, I can see us having one more drop in the dollar / pop in risk assets before the ultimate correction. 

As with everything in the markets though, all it takes is a catalyst and things can turn on a dime.  Stay hedged, stay nimble, and trade akamai.

Aloha

An Update on Gold

Gold continues to look great. Over the past two and a half months we've seen half a dozen accumulation days (nice gains on heavy volume) and a very limited amount of selling.

Hopefully by this point you've established some sort of position in gold, but if not don't fret.  If you're lacking gold exposure and you want some, put on half a position now and hope for a pullback to bring the position up to full.  It is a belief of technical analysis that old resistance becomes support, so you would want to add the second half of your position on a pullback to the 104-105 area.

Many times, especially on a breakout this large, conviction will falter ("easy come easy go -- better lock in those quick gains") and prices will retest the last major resistance area prior to the breakout.  In GLD's case, the 100 level acted as resistance on numerous occasions over the course of the past two years.  Technically we retested at the end of October, but a more convincing retest of the 100 level is a high probability.   But you never know -- sometimes prices breakout and never look back, just as they did with gold in 2007.