A Technical Review of the Markets

January 24th, 2012
in b2evolution

by Lance Roberts, Streetalk Live

I have been getting a lot of requests over the past couple of weeks for buy and sell points on various issues. The market has been rallying, on dangerously light volume, as the “dash for trash” has sprung back to life at the beginning of the year.

It is always interesting to me that as much as we write and talk about being a “contrarian investor”, not to chase market rallies, buying low and selling high, etc. – individuals still fall victim to their emotions and do just the opposite of what they should.

Take the latest mutual fund from ICI. Individual investors took money out of equity mutual funds for 8 consecutive months in 2011 as they sold into the stock market declines. This was following, of course, some of the biggest inflows into funds seen in past 3 years as the markets rallied to their peak early 2011.

Follow up:

Now, as the markets have rallied over the last couple of weeks - the ICI released data for the week of January 11th showing that: “Equity funds had estimated inflows of $1.43 billion for the week, compared to estimated outflows of $9.37 billion in the previous week.” In other words, individual investors are continuing to do exactly the opposite of what they should do. By “reacting” to the market, rather than analyzing and planning, they continually buy high and then sell low.

Investors have gotten swept up into the hype from the media that the economy is on the verge of a stronger recovery, that stocks are cheaply priced and the markets are leaving you behind – the truth is that all of those reasons are patently false.

The reality is that investing is a “game of inches” and the management of risks is the key to long term investing success. Today, we will take a look at several markets from the U.S. to International, Commodities, Gold, Oil and the U.S. Dollar to see what, if anything, we should be doing now.

Domestic Stocks-Looking For A Reason To Sell

The S&P 500 has been enjoying a continuation of the belated Santa Claus rally that began in late December. This coincided with a turn up in our weekly indicators initiating a confirming ”buy” signal that we published in early January. So far – so good.

We said at that time that “…by the time the markets throw off a buy signal on a weekly basis the markets are temporarily overbought.” We advised then, and now, that investors continue to use pullbacks to support levels to add exposure.

The markets are currently trading at a deviation of more than 5% from its 60-day average price. This overbought condition can either correct itself by a pullback in price (market decline) or by a consolidation period where the market goes nowhere. In either case the deviation will correct eventually. That correction event is sufficient to allow for a better opportunity to add further exposure to portfolios AS LONG AS any correction does not reverse the positive trend.

Currently, as we stated, the S&P 500 is on a buy signal and Is now coming into resistance at the down trend line from the 2007-08 market peaks. While the market has cleared the previous resistance from past April’s breakdown there is still significant work to do before the market can make for a push to all-time highs. That event is unlikely to happen in 2012 – so don’t get all excited just yet.

With bullish sentiment pushing very high levels it is really on a function of time before a market correction of some sort begins. The question, of course, then becomes where will be the next opportunity to add exposure to portfolios.

The next chart shows the likely points of a pullback of various magnitudes that do not reverse the current bullish trend of the market. It is important to remember that there are exorbitant risks in the market from a revival of the Euro Crisis, weak economics and / or weakening earnings. Things can change and they can change quickly.

With the market as overbought as it is currently a pullback could begin as early as next week. The areas of support that I discuss are NOT hard and fast numbers. They will change as the market price changes. These are general areas to be looking to add exposure to portfolios.

Support 1: Look for initial support around 1280.

Support 2: Any violation of the first level of support, which is minor, will likely find strong support at support 2.

Support 3: This is the final line in the sand. If the market fails to find support at this level (currently 1240) then something has changed and we will begin talking about reducing exposure to the market on rallies.

[Note: There is a better than average chance that we could violate Support 3 in the coming months ahead. Particularly as we get closer to summer. Don’t be complacent with your investments.]

Technically speaking there are currently quite a few reasons to be bullish on the domestic markets. The market is now trading above its 50-Week moving average which is indicative of a more constructive trend in the market. The markets are on a buy signal and we are seasonally in the strong time of the year. However, this doesn’t mean the markets are ready to launch the next great secular bull market – the economic and earnings environment do not validate that.

The potential limits of this rally will be the highs of the market from 2011 with a bottom of 1100 during any correction in the 2012.

International Trauma

I will review the international markets here for traders only. With the issues of Greece and the Eurozone in general, their economies in recession now and the emerging markets not too far behind. We currently recommend remaining domestically invested only until there is clarity overseas.

However, starting with the MSCI index of industrialized international countries, ex-U.S., we can see that there is really nothing of any real consequence going on here at the moment.

The coinciding rally in January is really nothing more than oversold bounce to resistance in an otherwise pretty dismal bear market. Key resistance is currently the 1550 level where this will likely provide the best opportunity to reduce international exposure until the issues surrounding the Eurozone are resolved.

There have recently been a few articles penned about how “cheap” international companies have gotten. The current price of stock does not make a company “cheap” – it just makes it lower priced. If the Euro-zone comes apart at the seams, as will ultimately happen, then international stocks, along with domestic issues with large international exposure, are going to be priced even lower.

“Cheap” is when a company’s stock price is trading below the current and expected value of earnings. With the economies effectively in recession, and likely to get substantially worse, the current and future expectations will have to be reduced. In turn prices will fall to adjust for that recalibration.

Patience will provide a much better opportunity to invest in international markets in the future.

Emerging Trouble?

Emerging markets, like industrialized Europe, are negatively biased right now. Their economies are dependent on the U.S. and the Eurozone for exports and slowdowns will impact their export capabilities and economies.

We have already been witnessing negative net exports in the U.S. as imports have been declining due to slackening U.S. consumer demand. With Europe in recession demand will continue to be sluggish there as well. Recent reports out of China show slackening economic growth and concerns over production linger.

While the emerging market indexes have ticked up over the last couple of weeks; it has been more about short covering and a money chase rather than a real recovery.

With multiple layers of resistance ahead in the emerging markets we suggest waiting for more clarity and an actual change to a positive trend before speculating in this market.

Commodities Ticking Up

Commodities, on a broad scale are still in a correction that began with the market correction in April. With the broader index on a sell signal and the overall market in a downtrend there is no need to rush in trying to speculate on a turn in commodities.

There are tremendous deflationary pressures on the overall economy from housing to the Euro-zone. While food prices have risen as of late, along with oil, other primary commodities still remain weak due to real weakness in construction, manufacturing and industrial production.

The recent uptick in commodities is coming off a much oversold level and, in the short term, we could see commodities rally a bit more. This could particularly be the case if we see a continued correction in the U.S. Dollar which we will discuss more in a moment. For nimble traders there is a very short term opportunity that could last a month or two.

However, with weakness emerging in the Euro-zone and developing economies this will likely crimp demand for commodities in the near term. For longer term investors we recommend waiting for a clearer signal that the commodities are back in a positive trend.

Oil – The “Black Gold”

Being in Texas we all have a special affinity for oil - but oil is also the life blood of the economy as a whole. Energy as whole affects everything we see, consume and use from iPods and cars to the food we eat the computer you are using to read this newsletter.

It is hard to believe now - but oil was just a little more than $17 a barrel in late 2001. In just a quick decade we saw those prices skyrocket to an economy breaking high of almost $140. Today with oil hovering near the century mark for the second time in less than a year – the question is what will happen next?

Oil currently resides in a welldefined long term uptrend. While it didn’t get a lot of press last year due to the Japanese earthquake and the debt ceiling debate – oil peaked at $115 a barrel as it crimped the domestic economy. Consumer spending was siphoned off to cover higher utility costs and the economy softened considerably.

It wasn’t until oil prices, and ostensibly gasoline prices, corrected sharply during the summer plunge that the consumer was able to regain their footing. The modest boost in consumption during the remaining two quarters of 2011, due to the $60 Billion tax credit of lower gasoline prices, kept the economy from rolling off into a recession.

Currently, oil is back on a buy signal and looks to be headed higher in the short term until it impacts the economy again. However, in the short term oil is overbought and has been consolidating in a trading range around the century mark. If that consolidation continues and we get the overbought condition worked off, we can expect oil prices to make another push higher.

Currently, there is very good support around $95 a barrel and I expect that $90 a barrel will provide strong downside support. Any corrections to that level that do not reverse the current positive trend in oil prices will provide good levels to add further oil and gas exposure to portfolios.

Gold – The Shiny Stuff

Let me just be clear up front that I am not a “Gold Bug” and do not believe that you need a hoard of gold locked up in your closet. The reality is that IF the world ever came to an end, and we reverted back to a system of trade that required gold, you will be MUCH better off owning a lot of lead. In a post-apocalyptic world those people with a good supply of lead – will get the gold.

However, from an investment standpoint we can use gold as a vehicle from which to make money. As long as the “fear” that the U.S. economy is on a collision course with destruction – gold will have buyers. Currently, as we have written about several times since August, we are still within the context of a classic correction/consolidation process post the parabolic spike in gold prices during last summer’s crisis.

The dotted green line is the current projected path of a normalized 30% correction from the peak much as we saw in 2007-2008 during the last recession. Whether gold completes the full correction process, or not, will depend largely on what happens in the coming months.

Potential catalysts to move the price of gold higher will be a weakening of the U.S. dollar due to domestic economic weakness. Also, the resurgence of Euro crisis worries will likely spur gold prices higher as well as another fight between members of the U.S. Congress over pending issues.

While we are currently long gold from our recent August purchases post the initial summer decline. We are looking for lower levels to add exposure to the portfolio. Currently, gold is correcting the oversold condition that existed in August and is currently getting overbought. With downtrend resistance just above the current price level – it will be imperative that the next correction in gold holds support at $1550 per ounce.

As we stated in our 2012 Outlook it is highly likely that gold will not do a lot this year. However, that may be better than a lot of other areas.

King Dollar – For Now

The U.S. dollar, after a pretty strong sell off in the first half of 2011, has found a lot of love as of late as the safe haven for countries around the world. With the Eurozone on the verge of bankruptcy and breakup – money that had been hiding in the Euro has been fleeing to the safety and liquidity of the U.S. dollar.

No, this isn’t a statement that the U.S. economy is in great shape or that ultimately the impact of running massive deficits for the last two decades won’t have some unintended negative consequences. It just means that we are not just the best of the worst in terms of currencies – we are the ONLY currency that is liquid, deep and safe enough for countries to store reserves in.

Dollar weakness has been driven by the change in dynamics of the industrial economy about 30 years ago. As economic output has declined so has the value of the dollar. The decline in economic strength can be directly attributed to the massive surge in debt accumulation and decrease in savings which has deterred productive investment.

The current rally in the dollar will ultimately fail – it is just a question of when. As long as the insolvency crisis of Europe continues the dollar will likely hold some favor. However, in the longer term reality will collide with the world and the dollar will decline.

The dollar did break a bit on Friday money ran from safety into the stock market. Support for the dollar is currently at $79. There is very strong support currently at $77 with the long term bottom likely at $75. These numbers will change over time somewhat due to price action; however, if you are looking to add long dollar exposure to your portfolio I would do so on corrections. With the dollar extremely overbought on a weekly basis right now a correction could come sooner rather than later.


As you can tell there are no areas currently in the market that are screaming “BUY ME” currently. This is because the markets have gotten a bit too far ahead of themselves and a correction is imminent.

There are only two questions that need to be answered – when and how much? The exact answers to those questions are unknowns. This is why, as investors, you cannot invest money in the market and simply forget about it. The current market environment, while currently in a positive trend, is fraught with risk. It is only a function of time before negative headlines reemerge from Europe, or from the domestic economy, and potentially destroy a good portion of your hard earned savings.

There are no quick fixes, easy moves or products that will make you rich. There are, however, many traps and pitfalls that will make you substantially poorer.

Remember, as always, when you are sitting at the table to play in the investment game – if you can’t identify who is going to be the sucker; odds are it is probably you.

Have a great week.


Lance Roberts

(c) Streettalk Live


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About the Author

Lance Roberts is the host of Streettalk Live and author of many online articles pertaining to economics and the financial sector. Lance Roberts is also Chief Editor of the X-Report, a weekly nationwide newsletter. His investment strategies have been featured on CNBC, Fox News and Fox Business News. He has been quoted by many publications such as Reuters, The Wall Street Journal and The Washington Post. He has also been featured on some of the biggest and most popular financial blogs.

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