Pre-opening Comments for Monday September 21^st

U.S. equity index futures are lower this morning. S&P 500 futures are down 8 points in pre-opening trade. Futures are responding to an overnight recovery in the U.S. Dollar. Commodities priced in U.S. Dollars including gold, silver, copper and crude oil responded by trading lower.

Gold is down $11 U.S. this morning for another reason. Over the weekend the International Monetary Fund confirmed its intentions to sell 403 tonnes of gold in an orderly manner. Sales will be coordinated with central bank sales under the recently updated Washington Agreement. Short term momentum indicators (RSI and Stochastics) for gold and gold stocks have rolled over. Weakness in gold is expected to trigger profit taking in gold stocks at the opening.

Potash Corp lost 5% in pre-opening trade after lowering guidance for third quarter and 2009 earnings. This morning Soleil downgraded the stock from Buy to Hold and lowered its target price from $105 to $88U.S.

Wells Fargo upgraded the computer hardware sector from Market Weight to Overweight. Wells Fargo sees pent up demand by corporations to replace aging computers with new technology. A refresh cycle to begin next year is anticipated. Wells Fargo’s top picks in the sector are Dell and Hewlett Packard.

Dell lost 5% after announcing an acquisition of Perot Systems for $3.9 billion cash. Dell is offering $30 per share. Premium paid for Perot System shares is 68% from the close on Friday. Perot Systems quickly added 65% in pre-opening trade. The acquisition is expected to add to Dell’s earnings by 2012.

General Electric was unchanged despite Morgan Stanley reiterating an Outperform rating and raising its target price to $19.

Costco was unchanged despite an upgrade by William Blair from Market Perform to Outperform.

Lennar is down 2% after announcing a higher than expected loss. Consensus was a loss of $0.46 versus a loss of $0.56 per share last year. Actual was a loss of $0.97 per share.

Economic News This Week

The focus this week is on the Federal Reserve Open Market Committee Meeting on Wednesday. Following is a summary:

August Leading Economic Indicators are released at 10:00 AM on Monday. Consensus is a gain of 0.7% versus a gain of 0.6% in July.

FOMC meeting results are released at 2:15 PM on Wednesday.

August Existing Home Sales are released at 10:00 AM on Thursday. Consensus is 5.35 million versus 5.24 million in July.

August Durable Goods Orders are released at 8:30 AM on Friday. Consensus is 0.3% versus 5.1% in July.

August New Home Sales are released at 10:00 AM on Friday. Consensus is 440,000 versus 433,000 in July.

Earnings News this week

The earnings focus this week is on Research in Motion. Following is a summary:

Conagra reports first quarter results on Tuesday. Consensus is $0.25 versus $0.45

Autozone reports fourth quarter results on Wednesday. Consensus is $4.45 versus $3.88

General Mills reports first quarter results on Wednesday. Consensus is $1.03 versus $0.95

Research in Motion reports second quarter results on Thursday. Consensus is $1.00 U.S. versus $0.86 U.S.

Rite Aid reports second quarter results on Thursday. Consensus is a loss of $0.15 versus a loss of $0.27.

Trends

The ratio of S&P 500 stocks in an uptrend versus a downtrend rose last week from 11.05 to an all time high of (430/32=) 13.44. 103 S&P 500 stocks broke resistance (including nine stocks on Friday) and seven stocks broke support (including two stocks on Friday). The ratio remains intermediate overbought, but has yet to show signs of peaking. .

Bullish Percent Index for S&P 500 stocks increased from 84.60% to 88.00% last week, the second highest level in history. The Index remains above its 15 day moving average.

Chart courtesy of StockCharts.com www.stockcharts.com

The Up/Down ratio for TSX Composite stocks increase last week from 5.52 to (120/20=) 6.00. Sixteen TSX stocks broke resistance (including two stocks on Friday) and three stocks broke support (including one stock on Friday). The Index remains intermediate overbought, but has yet to show signs of peaking.

Bullish Percent Index for TSX Composite stocks increased last week from 74.40% to 78.74% and remains above its 15 day moving average. The Index remains intermediate overbought.

Chart courtesy of StockCharts.com www.stockcharts.com

The S&P 500 Index added 25.57 points (2.45%) last week. Intermediate trend remains up. The Index remains in a rising wedge pattern, a bullish pattern until the bottom trend line is broken. Then, look out below. Downside risk is to its 50 day moving average at 998. MACD, RSI and Stochastics are short term overbought. RSI is above 70%, an early warning sign that will become a short term sell signal on a break below 70%. Stochastics are above 80%, an early warning sign that will become a short term sell signal on a break below 80%.

Chart courtesy of StockCharts.com www.stockcharts.com

Percent of S&P 500 stocks trading above their 50 day moving average increased last week from 89.40% to 92.60%., just below the all time high at 93.00% set last week. Percent remains intermediate overbought.

Chart courtesy of StockCharts.com www.stockcharts.com

Percent of S&P 500 stocks trading above their 200 day moving average increased last week from 93.00% to 95.40%, an all time high. Percent remains intermediate overbought.

Chart courtesy of StockCharts.com www.stockcharts.com

The Dow Jones Industrial Average gained 214.79 points (2.24%) last week. Intermediate trend remains up. The Average has formed a rising wedge pattern. Downside risk is to its 50 day moving average at 9,251. MACD is trending lower. RSI has moved above the 70% level, an early warning sign. Stochastics moved above the 80% level, an early warning sign. Strength relative to the S&P 500 Index has resumed an intermediate downtrend. Volume continues to trend lower.

Chart courtesy of StockCharts.com www.stockcharts.com

Bullish Percent Index for Dow Jones Industrial Average stocks increased last week from 86.67% to 93.33%, the second highest level in history. The Index remains above its 15 day moving average.

Chart courtesy of StockCharts.com www.stockcharts.com

Bullish Percent Index for NASDAQ Composite stocks increased last week from 71.59% to 74.13%, the second highest level in history. It remains above its 15 day moving average.

Chart courtesy of StockCharts.com www.stockcharts.com

The NASDAQ Composite Index rose 51.96 points (2.50%) last week. Intermediate trend remains up. The Index remains in a rising wedge pattern. Downside risk is to its 50 day moving average at 1,986. MACD remains short term overbought. RSI is above 70%, an early warning sign. Stochastics are above 80%, an early warning sign. Strength relative to the S&P 500 Index remains positive.

Chart courtesy of StockCharts.com www.stockcharts.com

The Russell 2000 Index gained 24.29 points (4.09%) last week. Intermediate trend remains up. The Index remains well above its 50 and 200 day moving averages. Short term momentum indicators are overbought, but continue to trend higher. RSI is above the 70% level. Stochastics are above the 80% level. Strength relative to the S&P 500 Index remains positive.

Chart courtesy of StockCharts.com www.stockcharts.com

The Dow Jones Transportation Average added 5.10 points (0.13%) last week. Intermediate trend is up. The Average trades well above its 50 and 200 day moving averages. Short term momentum indicators are overbought. RSI moved below 70% on Friday, Stochastics are above 80% and may have rolled over. Strength relative to the S&P 500 Index remains positive.

Chart courtesy of StockCharts.com www.stockcharts.com

The TSX Composite Index gained 192.72 points (1.71%) last week. Intermediate trend remains up. The Index remains well above its 50 and 200 day moving averages. Short term momentum indicators are overbought. RSI slipped below 70% on Friday. Stochastics are over 80% and likely turning lower. Strength relative to the S&P 500 Index remains negative.

Chart courtesy of StockCharts.com www.stockcharts.com

Percent of TSX stocks trading above their 50 day moving average rose last week from 75.36% to 79.71%. Percent remains intermediate overbought.

Chart courtesy of StockCharts.com www.stockcharts.com

Percent of TSX stocks trading above their 200 day moving average increased last week from 75.36% to 81.64%. Percent remains intermediate overbought.

Chart courtesy of StockCharts.com www.stockcharts.com

The Australia All Ordinaries Composite Index added 97.40 points (2.12%) last week. Intermediate trend remains up. The Index remains well above its 50 and 200 day moving averages. Short term momentum indicators are overbought, but continue to trend higher. RSI is above 70%. Stochastics are above 80%. Strength relative to the S&P 500 remains undetermined.

Chart courtesy of StockCharts.com www.stockcharts.com

The Nikkei Average slipped 73.79 points (0.71%) last week. Intermediate trend is up. The Average remains above its 200 day moving average and is testing its 50 day moving average at 10,185. The Average has formed a tight seven week trading range between 10,142 and 10,767. A break below support completes a short term head and shoulders pattern with downside risk to near 9,500. Short term momentum indictors have rolled over from overbought levels. Strength relative to the S&P 500 Index has turned negative.

Chart courtesy of StockCharts.com www.stockcharts.com

The Shanghai Composite Index slipped 27.13 points (0.91%) last week. Intermediate trend remains up. The Index trades above its 200 day moving average, but recently found short term resistance at its 50 day moving average. Support is at 2,639.75. Intermediate resistance is at 3,378.01. MACD and RSI are recovering from short term oversold levels. Stochastics already have recovered to an overbought level. Strength relative to the S&P 500 Index remains undetermined.

Chart courtesy of StockCharts.com www.stockcharts.com

The London FT Index gained 161.42 points (3.22%), the Frankfurt DAX Index improved 79.81 points (1.42%) and the Paris CAC Index rose 92.95 points (2.49%) last week. Charts courtesy of StockCharts.com

The U.S. Dollar eased another 0.20 last week. Intermediate trend is down. The Dollar trades well below its 50 and 200 day moving averages. However, short term momentum indicators have bottomed. Stochastics at 8.79% are substantially oversold and trying to recover and RSI recovered on Friday from below the 30% to 34.30%. Dennis Gartman noted on Friday the trade has become overcrowded on the downside. A short term rebound is likely.

Chart courtesy of StockCharts.com www.stockcharts.com

Conversely, the Euro added 1.42 last week. Intermediate trend remains up. The Euro trades well above its 50 and 200 day moving averages. Short term momentum indicators are overbought. Stochastics at 94.95% are substantially overbought. RSI recently moved above 70%, but closed at 69.51% on Friday (i.e. recorded a short term RSI sell signal).

Chart courtesy of StockCharts.com www.stockcharts.com

The Canadian Dollar added 0.43 last week. Intermediate uptrend was confirmed on a move above resistance at 93.95 U.S.. Short term momentum indicators are mixed. Lots of media comments last week about the possibility of the Canadian Dollar moving to par soon However, the Canadian Dollar has significant resistance between 97.7 and 102.00 and is unlikely to reach par in the short to medium term.

Chart courtesy of StockCharts.com www.stockcharts.com

Commodities

The CRB Index gained 3.5% last week mainly due to a recovery in energy prices.

Chart courtesy of StockCharts.com www.stockcharts.com

Crude oil added $2.77 U.S. per barrel (4.0%) last week. However, crude oil remains in a four month trading range between $58.72 and $75.00. Short term momentum indicators are neutral. Seasonal influences turn negative at the end of September.

Chart courtesy of StockCharts.com www.stockcharts.com

Gasoline also added 4% last week. It remains in a four month trading range. Seasonal influences turn negative at the end of September.

Chart courtesy of StockCharts.com www.stockcharts.com

Natural gas continued to surge last week. Resistance at $4.57 and $4.75 were broken. Short term momentum indicators already have reached overbought levels.

Chart courtesy of StockCharts.com www.stockcharts.com

Gold added $1.40 U.S. per ounce last week. Intermediate trend remains up. However, early signs of a short term peak have appeared. Stochastics are substantially overbought at 87.13% and may have peaked. RSI moved above 70% last week, but closed at 66.37%, a short term sell signal.

Chart courtesy of StockCharts.com www.stockcharts.com

Gold will be influenced at the opening this morning by the announcement (included below) made by the International Monetary Fund after the close on Friday. Although the IMF has provided assurances that 403 tonnes of gold held by the Fund will be liquidated in an orderly manner, the announcement raises two questions: When will it sell the gold? Who will buy it? Rumors continue to circulate that the Chinese will buy some if not all of the gold. Confirmation of the planned sale announced after the close on Friday was not a surprise. The IMF announced its intentions to sell the gold several months ago. The new news is that the IMF will coordinate its sales with other central banks that recently renewed their accord to sell up to 400 tonnes per year over the next five years (i.e. 7.7 tonnes per week) versus 500 tonnes per year (9.6 tonnes per week) in the previous agreement. The new agreement becomes effective on September 27^th. During the past fiscal year under the old agreement central banks sold approximately 160 tonnes, significantly lower than the maximum. The IMF news effectively says that the maximum frequently will be sold into the market each week (excluding separate agreements to sell to a major buyer such as China) until the 403 tomnes are completely sold, a mildly negative event for gold in the short to medium term. On the other hand, a sale of all or most of the 403 tonnes to China would remove consistent weekly sales and could remove major overhead resistance on the price of gold. Under this scenario, gold would quickly break to an all time, complete an intermediate reverse head and shoulders pattern and achieve an intermediate technical target of $1,300 per ounce.

Late note: Response to the IMF news was relatively muted as of 8:00 PM EDT last night. Gold was down $5 U.S. per ounce, but most of the decline could be attributed to strength in the U.S. Dollar.

 

Following is an excerpt from the IMF announcement on Friday:

IMF to Proceed with Limited Sales of Gold

By Glenn Gottselig
IMF Survey online

September 18, 2009

• Sales conducted under safeguards to avoid disruption of the gold market
• Essential part of IMF’s new income model
• Gold sale to boost IMF’s capacity to assist low-income countries

The Executive Board of the International Monetary Fund (IMF) has approved the sale of a limited portion of the institution’s gold holdings, stressing that the Fund will conduct the sales in a manner that does not disrupt the international gold market.

The Board approved the sale of up to 403.3 metric tons, or about one-eighth of the Fund’s total gold holdings. The proceeds will help finance a new income model for the IMF, making the 186-member institution less dependent on its lending revenue to cover expenses, which include surveillance of members’ economic and financial policies and other non-lending activities. Part of the money raised will also help boost financing for concessional lending to low-income countries.

“I am delighted that the Executive Board has given its overwhelming backing to limited gold sales to put the financing of the IMF on a sound long-term footing, and to enable us to step up much-needed concessional lending to the poorest countries,” Managing Director Dominique Strauss-Kahn stated. “These sales will be conducted in a responsible and transparent manner that avoids disruption of the gold market.”

Precautions to prevent market disruption

As the third largest official holder of gold after the United States and Germany, the IMF recognizes that it needs to pay close attention to the potential effect of its actions on the gold market. Certainly, unexpected large sales of gold could disrupt the gold market.

The IMF is therefore taking a number of precautions to prevent market disruptions. Importantly, a firm limit on the amount of gold to be sold has been set at 403.3 metric tons, and the gold market has been aware of this amount for some time, as it has not changed since the Executive Board endorsed the new income model in April 2008.

Transparency will play a key role in the gold sales, with the IMF set to inform markets before any sales on the gold markets begin. Prior to any sales on the market, the IMF would be prepared to sell gold directly to central banks or other official sector holders if they expressed interest. These sales to official sector holders would be conducted at market prices, and would shift official gold holdings without changing total official holdings.

Any gold sales on the market would be phased over time, following an approach similar to the one used successfully by the central banks participating in the Central Bank Gold Agreement.

Under this agreement, which was renewed in August, the participants announced ceilings on total sales of 400 tons annually, and 2,000 tons in total during the five years starting on 27 September 2009, and noted that the Fund’s sales can be accommodated under these ceilings.

As a result, on-market gold sales by the IMF will not add to the announced volume of official sales.

Regular external reporting on gold sales will also be provided to assure markets that the gold sales are being conducted in a responsible manner.

Gold equity indices and ETF have a similar technical pattern to gold. Intermediate trend remains up. However, short term momentum indictors (RSI and Stochastics) are showing early signs of rolling over. According to Thackray’s 2009 Investors’ Guide, the period of seasonal strength for gold equity indices ends on September 25^th. Technical indicators suggest that the current period of seasonal strength is ending. Investors keying on September 25^th should start to take profits. Other investors will want to hold until the end of the next period of seasonal strength in the first week in February.

Chart courtesy of StockCharts.com www.stockcharts.com

Silver added $0.23 U.S. per ounce last week. However, short term momentum indicators are rolling over from overbought levels.

Chart courtesy of StockCharts.com www.stockcharts.com

Ditto for Platinum!

Chart courtesy of StockCharts.com www.stockcharts.com

Copper continues to struggle. It slipped $0.06 U.S. per lb. last week and may be forming a modified head and shoulders pattern. A break below $2.66 U.S. per lb will complete the pattern. Short term momentum indicators continue to trend lower. The Chinese have reduced their buying. World inventories are rising.

Chart courtesy of StockCharts.com www.stockcharts.com

Aluminum has a similar technical profile.

Chart courtesy of StockCharts.com www.stockcharts.com

Grain prices finally are showing technical signs of bottoming from near support and from oversold levels.

Chart courtesy of StockCharts.com www.stockcharts.com

Agriculture equities and ETFs finally are showing positive momentum coinciding with their period of seasonal strength between August and December. COW broke resistance at $17.98 on Friday to reach a 3 month high. Units are expected to trade slightly lower at the opening this morning following lower guidance by Potash Corp. after the close on Friday.

Chart courtesy of StockCharts.com www.stockcharts.com

Financials

The yield on 10 year U.S. Treasuries rose last week by 0.15%. Yield has bounced from the bottom of a three month trading range between 3.29% and 3.99%. Short term momentum indicators are recovering from oversold levels.

Chart courtesy of StockCharts.com www.stockcharts.com

Conversely, long term U.S. Treasury ETFs (e.g. TLT) unsuccessfully tested resistance. Short term momentum indicators have rolled over. Jim Cramer noted late last week that U.S. long term treasury bond prices likely have reached an intermediate peak. That call makes sense. The Fed has been waiting until early signs of economic recovery in the U.S. appear before it acts. Economic “green shoots” have appeared during the past few weeks. The Fed could give us a clue this Wednesday about when it plans to take away the monetary “punch bowl”. If a clue is provided, bond prices likely will come under pressure.

Chart courtesy of StockCharts.com www.stockcharts.com

Other Factors

The VIX Index remains in an intermediate downtrend, but is showing early signs of bottoming.

Chart courtesy of StockCharts.com www.stockcharts.com

The Baltic Dry Index drifted lower to reach a four month low.

Chart courtesy of StockCharts.com www.stockcharts.com

Generally, technical indicators remain short to intermediate overbought. Strength last week made them more overbought. Rising wedge patterns are early warning signs. Several extreme technical conditions in key markets (e.g. the U.S. Dollar, Gold, Treasuries) may be reversing and could create a volatile scenario for markets this week.

Cash reserves on the sidelines have declined slightly in recent weeks, but remain huge.

International events (e.g. German election, G20 meeting in Pittsburg, the IMF announcement) could trigger extra volatility this week.

The Bottom Line

Trading strategies remain the same. Equity and bond prices are not compelling at current prices. Intermediate upside is limited and downside risk is significant (e. 10-15% for major U.S. and Canadian equity indices between now and late this year).

Tech Talk’s Weekly Column in the Financial Post

(Published on Saturday and available at www.nationalpost.com )

Why Bother Investing in the U.S.

Canadian investors owning U.S. equities have been sadly disappointed with their performance this year. Currency fluctuations have significantly impacted returns. Although the Dow Jones Industrial Average has gained 11.1% to date in 2009, the Dow Jones Industrial Average in Canadian Dollars has declined 3.4% due to weakness in the U.S. Dollar and corresponding strength in the Canadian Dollar. Should Canadian investors continue to own or buy U.S. equities? That depends partially on the outlook for the U.S. Dollar.

Seasonal influences on the U.S. Dollar

The U.S. Dollar has a history of peaking at the end of April, trending lower to the end of December and moving higher to the end of April. Seasonal trends are influenced by international financial transactions near year end and annual international trade patterns.

Technical influences

The U.S. Dollar has established an intermediate downtrend. A high on the U.S. Dollar Index was established at 89.62 on March 4^th. Since then, the Index has taken a series of stair step drops. Its downtrend recently was confirmed when support at 77.43 was broken. Next support is at 75.88. Thereafter, support is at 70.70. A recovery bounce within the intermediate downtrend is likely in the short term. Momentum indicators such as Moving Average Convergence Divergence, Relative Strength Index and Stochastics are short term oversold.

Chart courtesy of StockCharts.com www.stockcharts.com

Fundamental influences

Rising supply and falling demand will lead to a lower U.S. Dollar. The supply of U.S. Dollars is rising rapidly due to an easy monetary policy and a liberal fiscal policy. The U.S. government is literally printing money in order to boost the economy out of its current recession. Meanwhile, the demand for U.S. Dollars is declining. Central banks of foreign countries including China, Japan and the Middle East oil producers already hold large positions in U.S. Treasury bonds valued in U.S. Dollars and have expressed concerns about the plethora of new bonds coming to market to finance the economic recovery. International bond buyers have become increasingly reluctant to add to their positions due to fear that the value of the U.S. Dollar will decline, U.S. interest rates will rise, and bond prices will fall.

What to do

Protect your equity investments against a likely decline in the U.S. Dollar until at least the end of the year. Investment opportunities include ownership of Exchange Traded Funds that are fully hedged against weakness in the U.S. Dollar. Exchange Traded Funds that track gold and gold equities are particularly interesting. Barclays Global Investors, Claymore Investments, Bank of Montreal and Horizon Beta Pro offer a wide variety of fully hedged Exchange Traded Funds that track major U.S. equity indices and commodities priced in U.S. Dollars. Please check their websites for background information and selection.

ETF News

Interesting comments on the harmonization of sales taxes in Ontario and British Columbia in Friday’s Globe Investor! Harmonization could add 8% to management fees in Ontario and 7 percent in British Columbia. Detrimental impacts include:

• Higher costs for investors in Ontario and British Columbia. Given that MERs on mutual funds are much higher than the MERs on ETFs, investors holding mutual funds will be particularly hard hit. Many mutual fund holders will consider the possibility of switching from mutual funds to comparable ETFs

• A decline in institutional interest in Canadian ETFs when comparable investment products are available in the U.S. Institutional investors will gravitate to the lowest cost investment product. Individual investors are less likely to follow because currency conversion costs frequently would more than offset the benefit of a lower MER.

• Volume in ETFs will decline and bid/ask spreads likely will rise as institutional investors move their trades to the U.S.

Mutual fund companies and ETF sponsors are considering the possibility of moving location of their funds to Alberta where no sales tax is charged.

Actively managed ETFs have arrived in the U.S. and Canada. Last week, Harry Dent, a U.S. economist and author known as the “sage of doom and gloom” launched the Dent Tactical Fund, an actively managed ETF.

In Canada, AlphaPro Management has three offerings and expects to launch 10 to 12 over the next year. According to AlphaPro President Howard Atkinson,”We certainly see an opportunity to build an actively managed ETF family”.

Interesting Comment From CNBC.com

Hirschhorn: Why You May Never Make Money as a Trader

While there are a lot of traders out there, many of them don’t make any money. Well, it’s time for a wake-up call folks. Here are six reasons why you do not — and may not ever — make money as a trader:

You don’t put in the proper amount of effort. You don’t put in the full-time commitment it requires to be profitable in trading because you treat it like a hobby. Trading is not a part-time job. It’s serious business.

Failure to be disciplined and consistent with your process. There’s no excuse for this. It’s all up to you.

Trading like a gambler instead of a trader. You’re taking irresponsible risks rather than thinking in terms of probabilities and trading when you have an edge.

Actually putting on trades without a solid game plan. What are you thinking? You must know your game plan and execute it.

You over think things. Trading is a simple game — up, down, sideways. Keep it simple and make money.

Not trusting yourself to do what you know you need to do. You spend too much time listening to other people. Trust yourself and execute what you know.

The good news: every one of these things is entirely in your control. All you have to do is choose to make things happen.

Disclosure: Mr. Vialoux does not own securities mentioned in this report.

Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca 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.

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