Pre-opening Comments for November 13^th

U.S. equity index futures are slightly higher this morning. S&P 500 futures are up 3 points in pre-opening trade. Slight weakness in the U.S. Dollar contributed to strength.

Equity index futures did not respond significantly to news on the U.S. Trade Deficit released at 8:30 AM EST. Consensus for the September trade deficit was $31.9 billion versus $30.7 billion in August. Actual was a deficit of $36.5 billion. The larger than expected trade deficit implies that the initial report of 3.5% annualized growth in the U.S. in the third quarter likely will be revised downward slightly.

Several companies reported higher than expected third quarter earnings overnight including Abercrombie and Fitch, JC Penney and Disney. Abercrombie and Fitch added 6%, JC Penney improved 6% and Disney rose 2%.

Group Aeroplan reported lower than expected third quarter earnings. Consensus was $0.25 per share. Actual was $0.23 per share.

Bank of America/Merrill Lynch upgraded several Canadian oil stocks involved in oil sands projects this morning. All are trading slightly higher before the opening. Talisman was upgraded from Neutral to Buy. Nexen was upgraded from Underperform to Buy. Suncor was upgraded from Underperform to Buy.

Encana was upgraded by Raymond James from Market Perform to Outperform.

Sunoco slipped 2% after Goldman Sachs downgraded the stock from Sell to Conviction Sell.

UBS initiated coverage on the U.S. software sector with buy ratings on Oracle, Microsoft and Adobe. ‘Tis the season for U.S. software stocks to move higher.

Technical Action Yesterday

Technical action by S&P 500 stocks remained bullish yesterday. Nine S&P 500 stocks broke resistance (Advanced Micro Devices, Conagra, Campbell Soup, Dow Chemical, Corning, Goodrich, Microsoft, Prologis and Stryker) and none broke support. The Up/Down ratio improved from 2.27 to (294/127=) 2.31.

Technical action by TSX Composite stocks was quiet yesterday. One TSX stock broke resistance (Empire Companies) and none broke support. The Up/Down ratio improved from 2.98 to (132/44=) 3.00.

An Update on the Seasonal Trade in the U.S. Transportation Sector

Thackray’s 2010 Investor’s Guide notes that the average optimal date to enter the U.S. Transportation sector is September 24^th and the average optimal date to exit the sector is November 13^th. The trade has been profitable in 16 of the past 19 periods for an average return per period of 5.4%. However, September 24^th and November 13^th are average optimal dates to enter the trade over the past 19 periods. Entry and exit points each year can be fine tuned by using short term momentum indicators (plus price required to exceed the previous day’s price range). This year, the Dow Jones Transportation Average was overbought on September 24^th and was showing short term technical signs of moving lower. Tech Talk noted on October 7^th that short term technical requirements for entering the seasonal trade had been met. The Dow Jones Transportation Average at the close on October 6^th was 3,780. Yesterday, the Average closed at 3,938. Today is November 13^th. What to do now? The answer is “Hold for now, but put your finger on the trigger”. The Average is short term overbought. Technical requirements for the exit are lining up, but are not there yet. Stay tuned.

Chart courtesy of StockCharts.com www.stockcharts.com

Interesting Charts

Technical profiles on selected stocks in the information technology sector continue to improve. Microsoft Co. (NASDAQ:MSFT) – $29.36 broke resistance at $29.35 yesterday. Notice the importance of the stock’s 50 day moving average where the stock has provided multiple technical entry points in recent months. Accumulations closer to its 50 day moving average are preferred. Upside potential based on the breakout is to $31.45.

Optimal entry and exit dates for a seasonal trade in Microsoft are October 8^th and January 31^st respectively. The trade has been profitable in 18 of the past 20 periods. Optimal entry date this year based on technical analysis was October 6^th at $25.11

Chart courtesy of StockCharts.com www.stockcharts.com

Walt Disney Co (NYSE:DIS) – $29.05 reported better than expected fiscal fourth quarter earnings after the close. Consensus was $0.41 per share. Actual operating earnings were $0.46 per share. The stock moved higher on the news and is expected to test resistance at $29.98 at the opening. A break above resistance implies an intermediate upside potential to $33.25.

Optimal entry and exit dates during the past 20 years for a seasonal trade are from November 11^th and June 4^th respectively. Technical analysis showed that the optimal entry point during the current period occurred on November 4^th with the stock at $28.03.

Chart courtesy of StockCharts.com

Weekly Bullish Percent Index Sector Review

Bullish Percent Indices generally moved higher last week. Nine indices moved higher, two were unchanged (Information Technology and Telecom) and one declined (Energy). In addition, four indices moved above their 15 day moving average (Financial Services, Industrials, Transportation and Gold) while the remaining eight indices stayed below their 15 day moving average. All indices remain intermediate overbought, but have yet to show significant technical signs of establishing a downtrend.

THE CASTLEMOORE INVESTMENT COMMENTARY

Several weeks ago we commented on the difference in earnings between two U.S. investment banking powerhouses: Goldman Sachs, whose earnings were strong, and Morgan Stanley, whose earnings were comparatively weak. We commented that the fact that GS historically derives much of its profits from its trading operations whereas MS tends to be more focused on the more traditional investment banking functions such as underwriting and wealth management. The conclusion to draw was that these results were indicative of the type of market environment we were in.

Last week, the Canadian experience provided more of the same (although we do acknowledge large differences between the two markets). Specifically, Canaccord and GMP both reported the same earnings number (12 cents for Q3), but while Canaccord’s were strong, GMP’s disappointed. And Canaccord derives a greater part of their earnings from trading than does GMP.

What does it mean that we’re in a trading market?

It indicates that there is a greater proportion of traders in the markets than during normal times. This doesn’t mean a lack of long term investors—obviously there are—but there quite a different dynamic at play when all partipants are present and in full vigour.

Moreover, the oft-discussed but heretofore unproven levels of cash on the sidelines further substantiate the notion that the market lacks a key component (participation from conservative investors). Now we had mentioned in a previous column why cash on the sidelines should not be used exclusively to forecast the future trend of the market, as even a modicum of market efficiency would prohibit it, but it does help us understand the type of market climate we are operating in.

At present the gold bulls stands at 78%, gold contracts just posted a record high number of contracts (271,564) and India just bought a half a years worth of “allowable” gold sales. Certainly the buzz around the shiny metal is there. Our model went sell sometime ago when the cumulative effect of the above and other facts generated sufficient extreme sentiment. When using a sentiment based model prices may persist higher for an undeterminable amount of time.

When compared to the gold producers in Canada bullion’s move has not been confirmed, and it appears the slow stochastic is rolling over….stay tuned.

A conservative reading of the S&P suggests that the short move since early November could extend itself, but it may run into MACD resistance quickly (upper). The even steeper pitch in the money flow indicator (lower) could jive with the rumours out there that the hedge funds who’ve driven this market have booked the year and are sitting it out now.

The rub we all know lies in the US greenback relationship with all else. Now whether we know who is wagging who is a good question but it really doesn’t matter the why of it all just that it is. We can say it’s the mother of all carry trades and leave it there. The greenback against the basket appears to be finding a level in the last month, but this has happened before in August and September/October. We also know there are substantial long contracts on the Euro, Loonie, Australian et al and short ones on the greenback. As we alluded to above when discussing sentiment, the boat can stay much tilted for longer than seems to make sense. You just don’t want to be in it when everyone moves to the other side.

The correlation between the NASDAQ and the US dollar decline should not be lost on anyone.

….or between the S&P and the dollar…..

…and for sure between Chinese shares and the dollar

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CastleMoore Inc.

Buy, Hold…and Know When to Sell

www.castlemoore.com

Tech Talk’s Weekly Financial Post Column

(Available in hard copy or by paid subscription at www.nationalpost.com )

The column gives an update on the seasonal trade in the base metal sector.

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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