Pre-opening Comments
9:00 AM EDT: U.S. equity index futures are sharply lower this morning. S&P 500 futures are down 21 points despite news that a $700 billion rescue package for the U.S. financial service sector has been approved by Congressional leaders on a bi-partisan basis. President Bush approved the package in a national television message this morning. Federal Reserve Chairman Bernanke also approved the package this morning.
Approval of the package is far from a “slam dunk”. The House of Representative is scheduled to vote on the package at approximately noon today. The Senate is expected to vote on Wednesday. Congressional leaders have been unable to confirm that they have a majority before the votes.
Despite the rescue package, fears of a meltdown in the world’s financial system continue to grow. This morning, the FDIC brokered a deal for Citigroup to purchase most of Wachovia’s banking unit. Wachovia’s common share value will be virtually wiped out. Its stock closed on Friday at $10.00 and is trading at $0.90 in pre-opening trade. Citigroup is down 5% on the news.
Chart courtesy of StockCharts.com www.stockcharts.com
Most of the fear came from news that major banks and trust & loan companies in Europe are in difficulty and need central bank or government support. Bradford and Bingley, a major mortgage lender has been nationalized by the U.K. government. Fortis received a $16 billion capital infusion by the European Central Bank overnight. Share prices of several other European financial institutions including Dexia and Royal Bank of Scotland are under significant pressure on European equity markets.
Outlook this week
The focus this week (other than the decision by Congress on the recovery program) is on the September employment report on Friday.
Source: www.cnbc.com
Earnings reports by prominent U.S. and Canadian companies are virtually nil this week.
Trends
The ratio of S&P 500 stocks in an uptrend versus a downtrend (i.e. the Up/Down ratio) eased last week from 0.77 to (164/242=) 0.68. The frequency of breakouts and breakdowns was surprisingly low despite volatility in the S&P 500 Index. Only two S&P 500 stocks broke resistance and 18 stocks broke support (including eight stocks on Friday).
Bullish Percent Index for S&P 500 stocks eased last week from 53.20% to 43.80%. It also fell below its 15 day moving average. The Index remains in a neutral level.
Chart courtesy of StockCharts.com www.stockcharts.com
The Up/Down ratio for TSX Composite stocks improved slightly last week thanks mainly to breakouts by gold stocks. Eight TSX Composite stocks broke resistance last week and two stocks broke support. The Up/Down ratio improved from 0.25 to (32/120=) 0.27. The ratio this week includes the addition of two stocks and deletion of five stocks from the Index.
Bullish Percent Index for the TSX Composite Index eased last week from 28.29% to 27.20%. The Index remains above its 15 day moving average. The Index remains intermediate oversold and trying to bottom.
Chart courtesy of StockCharts.com www.stockcharts.com
The S&P 500 Index fell 41.81 points (3.33%) last week. New support at 1,133 set on Thursday September 18th is evolving. Resistance remains at 1,313. Intermediate trend remains down. The Index tried but failed to move above its 50 day moving average at 1,257 last week. Short term momentum indicators (RSI, MACD and Stochastics are recovering from oversold levels. MACD is close to recording a buy signal. Positive divergence by MACD relative to the Index is encouraging.
Chart courtesy of StockCharts.com www.stockcharts.com
Percent of S&P 500 stocks trading above their 50 day moving average fell last week from 47.4% to 31.8% last week. Percent is intermediate term oversold with significant upside potential.
Chart courtesy of StockCharts.com www.stockcharts.com
Percent of S&P 500 stocks trading above their 200 day moving average fell last week from 40.8% to 29.6%. Percent remains intermediate term oversold and has significant upside potential.
Chart courtesy of StockCharts.com www.stockcharts.com
The Dow Jones Industrial Average fell 245.31 points (2.15%) last week. Gains recorded on Friday were concentrated in the financial service sector. New support is trying to form at its Thursday September 18th low at 10,754. Resistance remains at 11,867. Intermediate trend remains down. The average tried, but failed to move above its 50 day moving average at 11,375. Short term momentum indicators (RSI, MACD and Stochastics) are recovering from oversold levels. The Average is close to recording a MACD buy signal. Positive divergence between MACD and the Average is encouraging. Strength relative to the S&P 500 remains positive.
Chart courtesy of StockCharts.com www.stockcharts.com
Bullish Percent Index for Dow Jones Industrial Average stocks eased last week from 56.67% to 50.00%. It remains above its 15 day moving average. The Index has recovered to a neutral level. Upside potential is to the 80%-90% level.
Chart courtesy of StockCharts.com www.stockcharts.com
Bullish Percent Index for NASDAQ Composite stocks eased from 41.56% to 38.10% last week and moved below its 15 day moving average. Intermediate trend remains upward. The Index remains slightly oversold.
Chart courtesy of StockCharts.com www.stockcharts.com
The NASDAQ Composite Index fell 90.56 points (3.98%) last week. Support is trying to form at its Thursday September 18th low at 2,070. Resistance exists at 2,473. Intermediate trend remains down. The Index tried, but failed to move above its 50 day moving average at 2,309. Short term momentum indicators (RSI, MACD and Stochastics) are recovering from oversold levels. MACD is close to recording a buy signal. Strength relative to the S&P 500 Index remains positive.
Chart courtesy of StockCharts.com www.stockcharts.com
The Russell 2000 Index plunged 48.95 points (6.49%) last week. The Index tested resistance at 764, but failed. Support is indicated at 647. Short term momentum indictors (RSI, MACD and Stochastics) are mixed. The Index fell below its 50 and 200 day moving averages last week. Strength relative to S&P 500 Index remains positive.
Chart courtesy of StockCharts.com www.stockcharts.com
The Dow Jones Transportation Average fell 349.45 points (6.68%) last week. The Average remains in a triangle pattern. Support is at 4,571. Resistance is at 5,537. The average fell below its 50 and 200 day moving last week. Short term momentum indicators (RSI, MACD and Stochastics) are oversold, but have yet to show signs of recovery. Strength relative to the S&P 500 Index remains positive.
Chart courtesy of StockCharts.com www.stockcharts.com
The TSX Composite Index gave up 786.99 points (6.09%) last week. Over half of the loss occurred on Friday when Research in Motion reported less than consensus second quarter earnings and offered third quarter guidance below consensus estimates. Support by the Index is trying to form at its Thursday September 18th low at 11,788. Resistance remains at its all time high at 15,154. Short term momentum indicators (RSI, MACD and Stochastics) are recovering from oversold levels. A MACD buy signal was recorded late last week. Strength relative to the S&P 500 Index remains negative (mainly due to strength in the Canadian Dollar relative to the U.S. Dollar). See additional comments at the end of this report.
Chart courtesy of StockCharts.com www.stockcharts.com
Percent of TSX stocks trading above their 50 day moving average dropped from 30.28% to 14.80% last week. Percent is substantially oversold and at a level where a recovery normally occurs.
Chart courtesy of StockCharts.com www.stockcharts.com
Percent of TSX stocks trading above their 200 day moving average fell from 23.11% to 14.40% last week. Percent is substantially oversold and is at its second lowest level since data became available at the end of 2001. The lowest level was reached in January this year at 13.88%.
Chart courtesy of StockCharts.com www.stockcharts.com
The Australia All Ordinaries Index added 93.90 points (1.93%) last week. Intermediate trend remains down. Support is trying to form at its Thursday September 18th low at 4575.20. Resistance exists at 5,321. Short term momentum indicators (RSI, MACD and Stochastics) are recovering from oversold levels. A MACD buy signal was recorded last week. Strength relative to the S&P 500 Index slowly has recovered in recent weeks and turned from negative to neutral .
Chart courtesy of StockCharts.com www.stockcharts.com
The Nikkei Average eased 27.50 points (0.23%) last week. Support is trying to form at its September 18th low at 11,401. Resistance remains at 14,601. Intermediate trend remains down. Short term momentum indicators (RSI, MACD and Stochastics) are recovering from oversold levels. A MACD buy signal was recorded last week. Strength relative to the S&P 500 Index remains negative.
Chart courtesy of StockCharts.com www.stockcharts.com
The Shanghai Index was the star performer last week: up 218.69 points (10.54%). Indeed, the Index has been up as much as 29.5% since bouncing from indicated support set at its Thursday September 18th low at 1802.33. Short term momentum indicators (RSI, MACD and Stochastics) quickly recovered from oversold levels. Strength relative to the S&P 500 Index has been negative, but is about to change trend.
Chart courtesy of StockCharts.com www.stockcharts.com
The London FT Index gave up 222.83 points (4.20%), the Frankfurt DAX Index fell 126.03 points (3.04%) and the Paris CAC Index lost 161.49 points (3.73%) last week. All are trying to form support at their September 18th lows.
The U.S. Dollar continues to weaken. Last week it eased from 77.87 to 76.99. Support is likely at its breakout level at 74.31 and its 200 day moving average at 74.46. Short term momentum indicators (RSI, MACD and Stochastics) have rolled over from a substantially overbought level. Resistance has been established at 80.38.
Chart courtesy of StockCharts.com www.stockcharts.com
The Euro remains a mirror image of the U.S. Dollar. It rose last week from 144.84 to 146.24. Support is indicated at 138.82. Upside potential is to its breakdown level at 153.14 and its 200 day moving average at 151.89. Short term momentum indicators are recovering from deeply oversold levels.
Chart courtesy of StockCharts.com www.stockcharts.com
The Canadian Dollar continues to trend higher. Last week it broke resistance at 96.02. Short term momentum indicators continue to recover from oversold levels.
Chart courtesy of StockCharts.com www.stockcharts.com
The CRB Index continued to rise last week, reflecting additional weakness in the U.S. Dollar. It rose from 359.58 to 364.57. Support is indicated at 337.44. Short term momentum indicators continue to recover from oversold levels.
Chart courtesy of StockCharts.com www.stockcharts.com
Crude oil continued to advance last week, adding another $4.14. Weakness in the U.S. Dollar contributed. A MACD buy signal was recorded last Monday. Crude oil is testing its 50 day moving average at $113.60 and its 200 day moving average at $112.25.
Chart courtesy of StockCharts.com www.stockcharts.com
Natural Gas eased $0.22 last week with more than all of the decline occurring on Friday. Just a reminder that last trade day for the October (spot) contract was Friday. Just as prices during the last trade for October crude oil were anomalous, prices for the last trade date for natural gas likely were anomalous. Support is indicated at $7.02. Resistance is indicated at $8.59.
Chart courtesy of Stockcharts.com www.stockcharts.com
The Natural Gas/ Crude Oil ratio returned to 0.700, a level that once again favours natural gas over crude oil.
Chart courtesy of StockCharts.com www.stockcharts.com
Gold continues to move higher in response to a weaker U.S. Dollar. Gold added another $23.80 last week and moved above its 50 and 200 day moving averages. Short term momentum indicators continue to recover from oversold levels.
Chart courtesy of StockCharts.com www.stockcharts.com
Gold stocks have exceptional value relative to gold at current prices. The gold stock/gold ratio based on the Philadelphia Gold and Silver Index recently fell to 0.14, the lowest level since the ratio was first calculated by StockCharts.com in 1984. The ratio began to recover from its all time low set last Wednesday.
Chart courtesy of StockCharts.com www.stockcharts.com
Gold equity ETFs on both sides of the border are forming potential reverse head and shoulders patterns. A break by Market Vector Gold Miners ETF above $38.88 or iShares on the TSX Gold Index above $18.40 will complete the pattern.
Chart courtesy of StockCharts.com www.stockcharts.com
Silver has a technical profile similar to gold. It recently recovered from support indicated at $10.31 U.S. per ounce. A break above $14.13 will complete a short term head and shoulders pattern. Short term momentum indicators continue to recover from oversold levels.
Chart courtesy of StockCharts.com www.stockcharts.com
Bill Carrigan recently mentioned in his blog that silver looks particularly attractive relative to gold. He favours silver stocks over gold stocks. His comments are available at http://www.gettingtechnicalinfo.blogspot.com/ . A longer term study of the silver/gold ratio confirms Bill’s observation. Since 1995, the silver/gold ratio has fallen to 0.012 on three occasions. A unique opportunity to buy silver appeared in 1997 and 2003. The ratio reached 0.0123 last week and recovered to 0.015 on Friday. The stage is set for a significant upside move in silver and silver stocks. Symbol for the silver ETF is SLV.
Chart courtesy of StockCharts.com www.stockcharts.com
Chart courtesy of StockCharts.com www.stockcharts.com
Seasonal characteristics for silver are slightly different than seasonality for gold.
Silver
Chart courtesy of seasonalcharts.com www.seasonalcharts.com
Copper and aluminum prices were mixed last week despite weakness in the U.S. Dollar. Early technical signs of a bottom have appeared.
Chart courtesy of StockCharts.com www.stockcharts.com
The yield on 10 year treasuries was virtually unchanged last week. Yield is in the middle of a trading range between 3.25% and 4.32%. Short term momentum indicators are recovering from oversold levels.
Chart courtesy of StockCharts.com www.stockcharts.com
Other Factors
The U.S. Congress and the Bush Administration have reached the framework of an agreement that will provide up to $700 billion to reliquidate the U.S. financial service sector. The devil is in the details. More information is needed. The final version needs to be approved and signed, an event that is expected to occur today. The news clearly is a positive event that will impact equity markets this week.
The VIX Index remains high, but continues to show technical signs of post-capitulation. The spike by VIX to 42.16% likely is the high for this cycle.
Chart courtesy of StockCharts.com www.stockcharts.com
Seasonal influences for most markets and sectors turn positive at the end of September. Seasonal influences are appearing earlier than usual this year. The lows set on September 18th likely are seasonal lows.
The fastest growing investment asset class is cash and treasury bills. One month treasury bill yields fell to 0.16% last week as investors moved deposits in excess of $100,000 out of banks such as Washington Mutual and into treasury bills.
Third quarter earnings reports will become a focus. Reports start to trickle in next week. The key is guidance on fourth quarter results that are released with third quarter reports.
Recent polls on the U.S. presidential election following the leader’s debate show Obama taking a small lead. That’s not friendly for equity markets.
The Bottom Line
Tech Talk’s Weekly Column in Saturday’s Financial Post
(Originally published in the National Post. Available by paid subscription at www.nationalpost.com
Seasonal Investing in the Canadian Equity Market
The Canadian equity market has a history of moving higher from October to April. Will history repeat this year?
Seasonal Influences
“Buy when it snows, sell when it goes”! The TSX Composite Index has a history of moving higher from the end of September (i.e. when the first snow fall frequently appears in southern parts of Canada) to the end of April (i.e. when the winter snows finally melt away). The trade has been profitable in eight of the past 10 periods. Average gain per period was 7.64% plus dividends. Conversely, the TSX Composite Index from the end of April to the end of September recorded a gain in only four of the past 10 periods. Average loss per period was 0.59%.
Seasonal strength can be attributed to a series of annual recurring events. The first event is tax loss selling in the fourth quarter that tends to cause a seasonal low. Tax loss selling is expected to be particularly important this year due to significant unrealized losses that many investors and institutions currently hold. Thereafter, annual recurring events turn positive including the Christmas rally, investment of year end bonuses and contributions to Registered Retirement Savings Plans.
The following chart shows optimal entry points for the seasonal trade during the past seven years:
Chart courtesy of StockCharts.com www.stockcharts.com
Fundamental Influences
Third and fourth quarter earnings reports plus analyst comments about prospects for the following year tend to have a favourable influence on stock prices during the period of seasonal strength. In addition, rising commodity prices in the fourth quarter and first quarter frequently help the earnings of Canada’s natural resource companies .
Third and fourth quarter earnings prospects by Canada’s top 60 companies are better than usual this year. Third quarter consensus estimates for the TSX 60 companies predict an average (median) gain of 17.1% on a year-over-year basis. In the fourth quarter, average gain is 17.4%.
Technical Influences
The TSX Composite Index currently has a negative technical profile. Intermediate trend is down. The Index trades below its 50 and 200 day moving averages. However, short term momentum indicators (RSI, MACD and Stochastics) are recovering from deeply oversold levels. An intermediate low probably was reached on Thursday September 18th at 11,788.
The low on Thursday September 18th coincided with a low by U.S. equity indices when classic technical signs of capitulation were recorded. The VIX Index (better known as the Fear Index) reached a peak at 42.2% and U.S. equity markets bounced from lows on record volume.
What to do? Favourable seasonal influences have arrived earlier than usual this year. The best time to own the Canadian equity markets is when prices are low and uncertainties are high, conditions that currently exist. The easiest way to invest is through Exchange Traded Funds that track the Canadian equity market. Choices include iShares on the TSX 60 Index (Symbol: XIU) and the Claymore Canadian Fundamental Index ETF (Symbol: CRQ). Traders interested in double leverage can consider the Horizon BetaPro 60 Bull + ETF (Symbol: HXU).
Interesting Charts
An update on the U.S. Technology sector! The Financial Post column on September 20th noted that fundamentals for the sector are attractive during the current period of seasonal strength from the end of September to the middle of January. However, technicals were not attractive enough to enter the seasonal trade. Technicals have improved during the past ten days. Technology SPDRs found support at $18.78. Short term momentum indicators (RSI, MACD and Stochastics) are recovering from oversold levels. A MACD buy signal was recorded on Friday.
Brooke Thackray noted in Thackray’s 2007 Investor Calendar that the U.S. technology sector has a period of seasonal strength from October 9th to January 23rd. From 1990 to 2005, the trade based on the S&P Information Technology Index was profitable on 13 of 16 occasions for an average gain per period of 14.6%. Also, the S&P Information Technology Index outperformed the S&P 500 Index on 12 of 16 occasions for an extra return of 7.7% (Average gain per period for the S&P 500 Index was 6.9%). During this same period, the NASDAQ Composite Index (with its heavy technology weighting) was profitable on 14 of 16 occasions for an average gain per period of 14.1%. The NASDAQ Composite Index outperformed the S&P 500 Index by 7.2%.
Chart courtesy of StockCharts.com www.stockcharts.com
Comments and Questions
Feel free to ask questions or to provide comments on Tech Talk articles. Two opportunities are available. Tech Talk Forum is an area on the site where people can share investment ideas (no penny stock promotions or spam please). An opportunity to reply to daily letters is available at the end of each report. Both areas of the site are monitored daily and Tech Talk comments are offered when appropriate. Following is an example of a response to a recent question:
1. rookieps Says:
September 26th, 2008 at 8:28 am
Don, I have being waiting to buy into UNG, watching natural gas price recovered. I finally I bought into it yesterday, but today it is dropping, how much downside am I looking at? How much will the economic down turn in the states affect natural gas price?
Thx
2. Don Vialoux Says:
September 27th, 2008 at 8:51 am
UNG has formed a tight trading range between $32.30 (support) and $37.41 (resistance) during the past four weeks. Seasonal influences currently are positive and continue to the middle of December. Seasonal sweet spot lasts until the end of October. Short term momentum indicators (RSI, MACD, Stochastics) are recovering from oversold levels. UNG needs a trigger to move it above the $37.41 level. A possible trigger includes colder than average weather in the northern half of the U.S. and Canada. According to Dennis Gartman in a report released on Friday, frost threats later this week are developing in these areas with possible favourable influences on natural gas and grain prices. Another possible trigger is a decline in weekly U.S. inventory figures released each Thursday at 10:35 AM EDT. Prior to Hurricanes Gustav and Ike, natural gas injections were running about 80 bcf per week. Now they are running 50-60 bcf per week. Gas production from the Gulf has been slow to return since the hurricanes and raises questions about sufficient inventories available for the winter heating season starting November 1st. Inventories already are significantly less than last year at the same time and currently are near their five year average. A drop below the five year average will “raise some eye brows”.
P.S. Hurricane Kyle is about to hit the north eastern U.S. coast and New Brunswick. Hurricanes at this time of year frequently “suck in” cooler than average weather into southern Canada and the north half of the continental U.S. Current forecast for Toronto this Friday is a high of 10 degrees Centigrade and a low of four degrees Centigrade. Bring out the sweaters!
Chart courtesy of StockCharts.com www.stockcharts.com
Bill Carrigan’s Blog
Bill’s latest blog focuses on end-of-quarter window dressing. Access to his site is at http://www.gettingtechnical.com/01_home/index.shtml . Access to his blog is at
http://www.gettingtechnicalinfo.blogspot.com/
Matt Blackman’s Blog
Matt discusses, “Playing around a black hole”. His blog is available at http://tradesystemguru.com:80/content/blogcategory/34/68/
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Disclosure: Mr. Vialoux does not own securities mentioned in this report.
Disclaimer: Comments and opinions offered in this report are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.
September 29th, 2008 at 5:30 am
I am just playing Don’s sidekick. The link to the forum is here:
http://timingthemarket.ca/forum/YaBB.pl
September 29th, 2008 at 6:05 am
Thanks for your opinions on RIM. I found that there were too much I do not know so that I decided that I will not buy any individual stocks like RIM from now on, only buy ETF or mutual found. But I still hold RIM with ~28% paper loss now. What should I do? Should I still hold it or sell it? Could RIM price get back to 100 in this technology seasonal run, or 147 even 190 in long term run? What is technical or fundamental picture now?
I know I maybe should put my questions in Forum, but I started here, I would like to finish here.
Thanks in advance,
June
September 29th, 2008 at 9:28 am
My take on the commodities and related stocks is that the commodity cycle on the upside is over – not just for now but could be for another two years. The recent decline as seen on the CRB index actually drops to levels not seen since late Year 2005. I am afraid the market has not priced in a world-wide recession which is last shoe to drop besides the daily news of the failure of financial institutions. So tighten the safety belt and ready for a rough ride of a life time.
September 29th, 2008 at 9:46 am
I’m not so sure… commodity cycles tend to be very very long lived… the reasons for this, for example, it takes 10 years or more to get a mine into operation… and about the same for an oil field…. not even including the exploration time to find new deposits.
We may get some softness in the next year or so, but long term IMO the commodity cycle is intact… the last nig commodity cycle ended late in 1981…. so unless one was around trading in the 50s,60s and 70s, one really has not seen the likes of it before.
Having said this, IMO we are on the cusp of a major depression 1930s style, if cooler heads do not prevail in Washington. IF this financial situation is not fixed ASAP… all bets are off.
September 29th, 2008 at 11:32 am
Now that the rescue package is rejected the market down trend is going to continue. A full fledge recession worldwide is imminent as the last worth creation mechanism – the stock market – collapses. It will take a long, long while to recover. I am going to sell all my position in stocks. Capital preservation is the key for future opportunity, hopefully we will see it coming in two to three years.
September 29th, 2008 at 11:45 am
I tend to agree… these idiots in Washington know not what they have done…. the average American will suffer even worse now as the de-leveraging process moves to Main Street.
I’m unwinding positions as we speak.
September 29th, 2008 at 12:08 pm
I’m with you Guys….Capital Preservation is crucial right now. Cash is King. All the rules have been tossed out the window with regards to the ‘normal’ ebb and flow of the markets. We all know that one day this monstrous Bear will be behind us and all will be rosy again, but at this time it’s a good idea for even the day traders to sit this one out for a bit……..
September 29th, 2008 at 2:32 pm
Well, I wouldn’t despair… there will be a massive rally out of this… way oversold. Near the end of the day I bought back some of my positions sold at a profit, a couple of bucks lower. I sold break-even positions to raise cash… this allows me to move back in the market in a hurry.
I’m not booking
September 29th, 2008 at 2:32 pm
ANY LOSSES.
September 29th, 2008 at 2:55 pm
Gold stocks performed exceedingly well today relative to the rest of the market. Now, there’s still a matter of the HUGE GAP between how far gold producers have fallen, and how far gold itself has fallen (or RISEN), but I still liked being long gold producers today.
September 29th, 2008 at 4:21 pm
I sold ABX today booking short term profits. In this market, book profits whenever you can.
When the market rallies, and it will from such an oversold condition, gold stocks will underperform.
Today and tomorrow buy oversold sectors.
September 29th, 2008 at 9:37 pm
What do you mean buy over sold sectors? Name a few? Energy? Tech? Telecom, utility?
Thx
September 29th, 2008 at 11:19 pm
Don, in this environment like we had back in 1987, what would you do? Would you still invest into this volatile market, one day down 10% the other day up 8%?
Does seasonality, technical & fundamental analyses still matter?
September 30th, 2008 at 4:55 am
Oversold sectors show bullish percent indices significantly below 50% and short term momentum indicators (RSI, MACD, Stochastics)significantly below their average level. Bullish Percent indices for major sectors are published each Friday in Tech Talk. RSI, MACD and Stochastics are published for major world equity markets each Monday.