Category Archives: Technical Analysis

toe in the water?–one day later

August 10, 2011 By in Constructing a Portfolio, Current Market Thoughts, Portfolio management, Recent Market Action, Strategy, Technical Analysis, Trading Tags: , , , , , , , , , , Leave a comment

yesterday’s trading

I was traveling to San Francisco today, so I wasn’t able to monitor much of the market action as it was happening.  I’m sure I would have been (even) more frightened, for the first time during this downturn, if I had experienced it first-hand.

Looking at the charts, the tumultuous day consisted of:

1.  a rally off the lows in Asia, aftermarkets there absorbed the shock of a very sharp decline seen in New York trade on Monday

2.  early weakness in Europe, followed by a sharp rally and a close in positive territory

3.  strength from the open into the afternoon in the US, a brief swoon on the Fed statement shortly after 2PM, then a rebound to a close that more or less doubled the earlier-day highs.

As I’m writing this at close to midnight Pacific time, Asian stocks are showing substantial follow-on gains.

my thoughts

The issue at hand is whether this action contains any evidence that markets will stabilize/are stabilizing at around these levels.

I think there’s a good chance that market are stabilizing, for several reasons.  None of them are strong enough to bet the farm on, however.   I also don’t see any need for me to act right away on my conviction, other than not to adopt a more defensive stance in my own portfolio.

My reasoning:

–My experience is that serious downward market movements don’t end until everyone becomes frightened by the damage done to their portfolios.  Since I’m usually optimistic, and because I’ve been around for a long time, it takes a lot to disturb me.  (Alternatively, maybe I’m just slow to catch on.)  In any event, when I finally think I should be hiding under my desk rather than looking at prices, a down movement tends to be pretty long in the tooth.  I reached the point of real fear yesterday and today.  My nonchalance had been the major reason I thought the markets had more to fall.  So, in the perverse way that equity investors think, I regard my own  fear as a good sign.

–turning points in the markets are often marked by considerable volatility, as bullish and bearish ideas struggle with one another.  Yesterday is the first day that attempts to rally weren’t overwhelmed by new waves of selling.  That’s another good thing.

–a minor note.  My experience is that when the Fed speaks, the first half-hour or so of market reaction is invariably in the wrong direction and is quickly reversed.  So it really doesn’t disturb me that the initial market move after the Fed said it would keep rates low into 2013 was down. In fact, the opposite.

–I don’t think recession is in the cards.  Or if it is, it won’t result in the dramatic falloff in earnings that happens when an economy that is expanding at an unsustainably high rate goes into reverse.  Developed nations may go from being slightly in the plus column for growth to slightly in the minus, but going from +1% to -1% won’t have the same negative effect on corporate profits as if growth went from +6% to -2%.

Let’s say S&P 500 earnings are $50 for 1H11 and $40 for 2H11, meaning $90 for the year.  Assume that 1H12 comes in at $40 and 2H12 at $50.  If so, at yesterday’s close, the S&P was trading at 13x 2011 eps and 13x 2012 eps.   That seems very cheap to me in a world where the competing liquid investment, government bonds, are yielding well under 4%, even for the longest maturities.  I also feel that a 15% or so drop in the index already discounts a lot of bad earnings news.

–I also don’t think that the EU’s financial troubles will trigger another Lehman-like event. I don’t have great reasons for this belief, but here they are:

In my experience, the worst possible political outcomes rarely occur.  The surprise factor of Lehman wouldn’t be present the second time around.  And the EU isn’t that important.  Also, my take is that EU politicians know what needs to be done with Greece.  They’re just trying to figure out how to do it without getting themselves all fired.  Sharp market falls may have given them the political “cover” they need.

support and resistance imply there’s no rush to buy

Under most conditions, when an index (or an individual security) is trading above a price where a lot of buying and selling has happened in the past, that level acts as a kind of floor, or support, for the index.  It’s hard for the price to go penetrate below it.

If, however, the index/security does penetrate below the support level, it tends to start to act as a ceiling, or resistance, to advance.

Looking at the S&P, 1200, or about 3% above yesterday’s close, is one of those levels.  So, too, is 1250.  They used to be barriers to decline; now they’re barriers to advance.

what I’m doing

…watching.  I’m satisfied for now with the overall shape of my holdings.  I can, however, monitor what I own for names that have fallen less than the market and are rebounding more (that’s good), as well as names that are doing the opposite (they’re strong candidates for elimination).

making sense–if there is any–out of the stock market selloff

August 5, 2011 By in Constructing a Portfolio, Current Market Thoughts, economics, emerging markets, Portfolio management, Recent Market Action, Strategy, Technical Analysis Tags: , , , , , , , , Leave a comment

the situation

On Wednesday, and to a greater degree on Thursday, world stock markets declined sharply, across the board, in a selloff that has more than a whiff of panic about it. 

The trigger for the downward move is worry about EU banks.  As the Greek crisis drags on without resolution, interbank liquidity in the EU has been gradually drying up.  Everyone figures that banks will eventually have to write down part the value of the Greek government bonds they hold.  No financial institution wants to be caught, when the writedowns occur, having lent even short-term money to any bank whose credit rating becomes impaired in the process.

On this side of the Atlantic, Washington’s fear-mongering about the possibility of government default has caused companies to stop hiring, and consumers to stop spending for the moment.  It has also created enough anxiety that money market funds here, worried about possible redemptions, have withdrawn their financing from EU banks in recent weeks as well.  That has made an awkward EU situation worse.

All this has conjured up fears in Europe of a mini-Lehman event there.  As every investor recalls very vividly, the Lehman bankruptcy in September 2008 brought global trade finance to a screeching halt, paralyzing economic activity for a number of months and producing massive corporate layoffs in response. 

Hence the selloff.

is this rational?  is this likely?

My answer is “no” to both.  Is it thinkable?  Yes.  And that’s enough for a market that’s feeding on negative emotion to use as a rationale for decline.  It also doesn’t help either that this is August, when most senior European portfolio managers are on vacation–and, strangely, to my mind, apparently incommunicado.

there are problems

The US and EU are facing a serious economic problem.  Growth is barely above zero and will likely not be much better in the near future (in other words, things will eventually improve, but I have no idea when).  That’s mostly necessary healing in the wake of the housing/financial crisis.  But a coterie of politicians bred to run for office but with no clue about what to do once elected is not helping, either.

It’s also worrying that governments in developed countries have already used up most of the growth-inducing weapons in their arsenals, leaving them vulnerable to new external shocks.On the other hand, this is not new news.

what to do

To my mind, there is a strong positive case for stocks.  It doesn’t depend on accelerating economic growth, although it does assume we don’t go into a serious tailspin.

My argument is that:

–emerging market will remain strong, and

–we can separate overall lackluster growth into two parts:  say, 85% of the workforce that is doing increasingly well, and 15% (up from 5% in a “full employment” economy, that isn’t.

Since publicly traded equities, especially in the US, are overwhelmingly focused on more affluent consumers and on emerging markets, we should be able to find strong money-making stocks, even if economic growth is lackluster and the overall market drifts.

I think the negative emotion expressed in the current selling is so large that it won’t disappear in a day.  So I think it’s better to wait to see the market stabilize than to “catch a falling knife,” as they say in the UK, and add to equity exposure on the way down.

At the same time, since the selling seems to me to have been indiscriminate, don’t be afraid to upgrade your portfolio by getting rid of stocks that have mostly exposure to broad economic activity in the domestic market, and replacing them with stocks that have emerging markets profit exposure and an up-market consumer (not industrial) clientele at home.

More on this in the next few days.


the June 2011 Employment Situation report

July 10, 2011 By in economics, employment, Employment Situation report, Portfolio management, Recent Market Action, Strategy, Technical Analysis, Trading Tags: , , , , , , , , , , Leave a comment

The Bureau of Labor Statistics released its June 2011 Employment Situation report just before the start of New York trading on Friday.  In essence, the data confirm the message from the May report that job creation in the US has slowed dramatically from the 200,000+ per month clip of February-April.

the data

The June report indicates that the domestic economy created 18,000 new jobs during the month.  The private sector chipped in 57,000 positions, 53,000 of them in services and the remaining 4,000 in goods production.  Governments laid off a net 39,000 workers.

Also, April and May figures were revised down.    For May, reported private sector hiring dropped from the original +83,000 to +73,000; government layoffs increased from 29,000 to 48,000.  April private sector gains fell by 10,000 to +241,000; government layoffs increased by 5,000 to 24,000.

The May and June Employmnet Situation reports are similar in three respects:

–hiring in goods-producing industries has dropped from a 40,000 monthly pace earlier in the year to just above zero;

–service industries, which had been adding over 200,000 new workers a month, have dropped to under a third of that, and

–government layoffs have accelerated by 10,000-15,000 jobs a month.

why the slowdown?

No one really knows.  It’s possible that part of the jobs falloff is due to supply-chain disruptions caused by the devastation in Fukushima in March.  But that would account for at the very most for a third of the decline.  It’s also possible that employers are worried about the parlous state of politics at home or in the EU.  Or the current state of affairs may simply be the standard pattern of recovery after a devastating financial crisis.

As I observed a month ago, the Employment Situation numbers conflict with more positive employment data from private sources.  Since then, we’ve seen June retail sales figures, which were surprisingly strong. And in its admittedly highly volatile employment report, payroll company ADP said a few days ago that it thinks the US economy added 157,000 jobs in June–most of the gain due to a surge in service sector hiring.

the stock market meaning?

There was a lot of hand wringing by TV commentators on Friday morning about the BLS announcement.  The lack of job growth in the US also made the Saturday front page of all the newspapers I read.  This is partly because bad news sells, partly because the bullish EDP report fooled many economic “experts” into substantially raising their BLS estimates at the last minute, leaving them with egg on their faces.  True to their usual form, although the BLS report was a disappointment, pundits made it seem that the whole problem was the economy and not their estimates.

To my mind, Wall Street trading tells a somewhat different story than the media.  Specifically,

–on Thursday, the S&P reacted to the positive ADP report by gaining 1%.  On Friday, the market rallied from session lows just after 11:00 am to close down .7% on the day.  In other words, for the two days the New York market was up.  That wasn’t the very negative result one might have expected, based either on the poor BLS report or the palpable anguish of talking heads.

–I hold ten US stocks in the actively-managed portion of my taxable stock portfolio.  Four of them were up on Friday, and by enough to put the collection of ten in the positive column for the day.  Admittedly, one of my main objectives over the past couple of years has been to find US-listed companies with substantial exposure outside the US.  Still, it seems to me that the selloff on Friday was much less across-the-board than the one that greeted the May BLS report.

–add to this the fact that the rally came on a Friday afternoon, when (very) short-term traders are deciding whether to hold positions over the weekend.  A late afternoon selloff–not a rally–would have been the more natural outcome if traders were feeling bearish.

We’ll see more when trading resumes on Monday.  But so far it seems to me Wall Street has shrugged off the BLS news to a greater extent than I would have expected.  It may be that Wall Street is beginning to make two distinctions I think are important to understanding the profit potential of US-listed stocks.  They are:

–the difference between the structural social/political/ethical problem of having an extra 5% of the workforce unemployed for an extended period of time, and the stock market issue of the spending behavior of the 90%+ of a (growing) workforce that is beginning to get compensation increases for the first time in a few years; and

–the difference between a domestic bond market whose performance is dependent on the strength or weakness of the US economy, and a stock market, half of whose earnings come from outside the US and whose domestic half has virtually no exposure to housing, real estate, construction or autos.  (By the way, this stock market structure is the norm for every other major equity market in the world.)