For the week ending Dec 18 2009

It was a weird week with a number of conflicting signals.  I've included the macro view at the bottom of the post for those that would like to draw their own conclusions, but I wouldn't suggest reading too far into them.

Natural gas (UNG) and the US dollar (UUP) were the standouts this week.  Nat gas continues to play out the Adam and Eve bottom formation, though we were stopped out and had to re-pounce after the 8.50 close.  The dollar is kissing resistance after Friday's action and looks eager to breakout.  If we fail at resistance here, we'll likely consolidate near the 22.25 - 22.50 range before making another attempt higher. 

Stocks are still in the same trading range they've been in for the past few weeks, and until they breakout of that range it's wise to sit patiently.  Breadth continues to hold steady, suggesting that the next move for stocks will likely be upwards but there are no clear signals at this point.  Action is likely to be choppy but uneventful over the next few weeks with many investors on holiday.

Merry Christmas!  Enjoy the shortened holiday week.

Today's Selloff Less Bad Than You Think

The stock market sold off fairly hard today, but I wanted to bring attention to the resiliency of the stock market despite the sharp rally in the dollar.  Despite the dollar closing at a multi-month high, stocks are just inches away from cyclical highs themselves.

When contrasted against the recent price action in gold, stocks look even stronger.  Have a look at the beating gold has taken over the past two weeks:

I'm not sure how much further the dollar rally has to go, but the selloff in gold is not finished yet.  A gap lower followed up by further selling and a close at the lows of the day (on decent volume to boot) typically implies that the weak hands have yet to be washed out.  Gold will likely kiss old resistance levels at the 100 mark before we head higher once again.

Markets remain eerily quiet but the dollar might be making moves.  Let's recap:

The Kiwi and the Yen were out front this week, rising over 1.5% each.  Gold and silver took a beating once again, down 3.4% and 7% respectively.  The US dollar was one of the stronger performers, up 0.9%.

Junk bonds and the US dollar performed well this week, rising nearly 1%.  Precious metals performed poorly, down 4.4%, but crude oil was hit even harder and ended the week down 7.5%.

Chile had a great week, up nearly 4%.  China was hit the hardest, down nearly 4%, and followed by Russia down 3.3%.

As for sectors, utilities put in a great week rising nearly 4% on top of sitting on a 4% yield.  Consumer discretionary had a good week as well, rising 2%.  Financials performed the worst, falling 1.6%.

On Island Sector Signals

Materials, energy, and financials in buy-hedged territory.  All others in buy territory.

Another week goes by without much worth commenting on. For whatever reason, trading has been very light and tightly range bound lately.  When we eventually break out of this range, to the upside or down, I expect it to be a major move backed up by heavy volume. 

One thing worth noting however is the recent strength in the dollar.  Action has been choppy lately but progress is finally being made to the upside.  Despite the strengthening dollar, the stock market is holding its ground and finally decoupling itself from the dollar up stocks down pattern we've seen so often over the past few months.  Where the dollar goes from here is a crapshoot, but the relative strength of the stock market is a good sign for the bulls. 

For those interested in the full macro view lists, here they are:

A Reinterpretation of Breadth: Chalk One Up for the Bulls

We've been skeptical of this rally for quite some time now, and the major source of that skepticism was our view on the markets' internals.  Breadth had weakened considerably from its peak in September/October, while the market continued to hold its ground and even throw in the occasional rally.  Normally a negative divergence in breadth is cause for concern, but now we're beginning to believe this time truly is different (and we fully understand the weight those words carry in the investment world).

There are three components of breadth that we watch religiously, on both the NYSE and Nasdaq: BPIs, Advance-Decline indices, and NewHigh-NewLow indices.  Recently our interpretation has been BPIs are bearish, Adv-Dec were neutral, and High-Low were bullish.  It's time for a fresh perspective.

We believe our cautious stance has been due to a classic case of missing the forest for the trees.  When looked at from a wider perspective, breadth looks much more bullish.  In our review we'll focus on the NYSE.

First up we have the BPI.  Although off it's recent highs, on a weekly view we see that this rally is still stronger than any previous rally over the past two years.  From the Point and Figure chart, we can also see that the BPI remains in the upper range of levels seen throughout the 2003-2007 bull market.  Yes breadth has narrowed from it's peak, but what should we expect after a rally as strong and widespread as the one we've seen off the March lows?

Next up we have the Advance-Decline index.  Although it has failed to breakout and reach decisive new highs over the past few months, when looked at on a weekly chart we see that we are all the way back to the levels seen at the peak of the bull market in 2007.  That's a clear case of a positive divergence.

The New Highs - New Lows index was already giving us a bullish signal, but let's review it anyway.  Although we are considerably off the 2007 peak, we are still climbing strong.

This bird's eye view of breadth leaves us much more optimistic on the future of this rally than we have been the past few months.  As always though, draw your own conclusions.  Remember, price action trumps breadth, as price action is the element that can destroy your hard earned dollars.  Breadth is just a sign post.  Unless we see a significant move to the downside on increased volume though, we will likely consolidate here a while longer and then continue our trend upward.

For the week ending Dec 4 2009

Action is getting frothy -- an end to the uptrend?  Dollar firms up as gold tanks.  Let's recap:

The standout this week was the Yen, falling 4% on heavy volume.  The Peso made nice gains this week rising over 2%.  The dollar put on a good show as well, rising 1%.

REITs made huge gains this week, rising over 8.5%.  Emerging markets and small-cap growth stocks also did well, rising just over 4% each.  Treasury bonds got whacked, falling over 3%.

Japan and China were the outperformers, rising 6.6% and 5.2%.  Meanwhile South Africa and the UK held up the back of the pack, falling roughly 0.25%.

As for sectors, it was a good week for everything but energy which fell nearly 2%.  Transportation rallied 4.6% and utilities tacked on 3.8% this week. 

Breadth continues to look weak and narrow, with both the Nasdaq and NYSE BPIs barely off their recent lows.  Adv-Dec indices are slightly more bullish, while NewHigh-NewLow indices are notably bullish.  Basically we're at a standstill here and are awaiting the next move.

On Island Sector Signals

Energy and small-caps are in buy hedged territory, while all remaining sectors are in buy territory.

Still waiting on that explosive action, but we're getting hints of it with the recent gaps and reversals.  As we're still in the consolidation range with no notable changes in breadth, fresh observations will once again have to wait until next week.

Full Macro View