Archive for the ‘Technical Analysis’ Category

Think Like a Rat

Friday, March 28th, 2014

Experiments show that if you put rats in a maze and give them a jolt of electricity when they go the wrong way, they will eventually go the right way.

Apparently, humans may not be that smart.Two white laboratory rats in a maze

OK, we’re smarter than rats.  We know better.  But we believe what we want to believe.  And right now, a majority of those who invest believe the “trend is our friend.”

We forget that what goes up must come down, regardless of how many bonds the Fed buys.  It’s a scary world and no amount of irrational investor confidence can keep the market aloft forever.

In the first decade of the new millennium, we lived through two difficult bear markets, each of which chopped stock prices nearly in half.  The bear market of 2000 to 2003 was caused by the irrational belief that tech stock prices moved in only one direction.  The bear market of 2007 to 2009 was caused by the irrational belief that housing prices moved in only one direction.

So here we are just five years removed from the last bear market and investors are acting as though stock prices move in only one direction.  Investors have already forgotten that bubbles burst.

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September Is the Cruelest Month

Thursday, August 22nd, 2013

Oh, it’s a long, long while from May to December
But the days grow short when you reach September.

                                                                  September Song

T.S. Eliot was wrong about April being the cruelest month.  For investment managers, it’s September.

It’s bad enough that September marks the end of summer, shorter days, cooler weather, the beginning of school and the almost annual Red Sox meltdown.  It’s also the worst month, by far, for stock market performance.

Since 1955, the Dow Jones Industrials Average (DJIA) cumulatively has lost just under 50% during September, according to “Jay on the Markets.”  In contrast, the DJIA has gained 200% in April over the same period.  So, in spite of Mr. Eliot’s claims, April is the kindest month, not the cruelest.

Cumulative gains and losses in the DJIA by month since 1955.

Cumulative gains and losses in the DJIA by month since 1955.

May (-10.6%), June (-20.9%) and August (-11.6%) have also registered net losses over that period, as the chart shows, but September losses (-49.1%) total more than those three market-declining months added together.  In other words, September is a big loser.  Take September out of the calendar and the market would historically be flying high.

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200-Day Moving Average Says the Bear Is Back

Wednesday, August 10th, 2011

Investment managers regard the 200-day moving average price of an index such as the S&P 500 or of an individual stock as the dividing line.  An index or stock trading above the 200-day average is being bought and is in an upward trend.  An index or stock trading below the 200-day average is being sold and is in a downward trend.

The moving average smoothes out short-term price fluctuations and provides a high-level look that makes sense of the market.  For money managers attuned to managing risk, a close below the 200-day moving average marks a change in trend, from a bull market to a bear market.

The market moved prices below the 200-day moving average on Tuesday, Aug. 2, indicating the start of a bear market.

In response, we recommend that portfolios remain diversified, with higher-than-normal money market balances, fixed-income holdings and low-correlated assets.  This will protect investors from experiencing the full brunt of the stock market sell-off.   While buying opportunities are likely to present themselves, they should be considered cautiously and with discipline.

Signs Of A Market Breakout

Tuesday, September 14th, 2010

The S&P 500

While nothing is ever certain until it happens, the stock market appears to be ready for a major breakout from its recent short-term trading range.

If the S&P 500 closes above the upper resistance level of 1131.00, we should see additional money flow into the stock market, which will boost stock prices further.

The S&P appears positioned to break out, having rallied 6.9% over the last nine trading sessions.  While the month is not over, the market weakness historically seen in September has not played out this year.  And with this being an options expiration week, there is an added positive bias to the market.

You may have noted that consumer sentiment was incredibly low at the end of August, but the market, of course, typically reacts in the opposite way from what investors are feeling.  So if you’ve put a lot of your portfolio into cash in anticipation of a buying opportunity, this may be it.

Payrolls Up Just In Time For Labor Day Weekend

Friday, September 3rd, 2010

The stock market was given another boost by better-than-expected economic data today, with an August jump of 67,000 jobs in the private sector.  Overall, non-farm payrolls declined by 54,000, but that was primarily due to the elimination of 114,000 temporary jobs created for the federal census. 

S&P index futures rallied over 14 points on the news. And with demand for stocks increasing, both 10- and 30-year Treasury bonds continue to sell off from their lofty levels and yields are moving up for the second day in a row.

While the data still shows a fragile economy, a double-dip recession seems increasingly less likely.  Building off of 1080 on the S&P 500 will be important to establish a short-term trend. All eyes will be focused on next week’s economic calendar and whether the market can continue its uptrend.

Economic Briefs

Thursday, August 5th, 2010

 Supply Chain Strengthening

The ISM Service Index came in at 54.3 for July, a number that’s better than expected.  The index was at 53.8 in June and was expected to sink back to 53 in July.  The ISM is the Institute for Supply Management, so its indices for both the service and manufacturing sector signal growth in the supply chain when they rise.

Jobs Are Up

The ADP employment report shows that 42,000 jobs were added in July and Friday’s Nonfarm Payrolls could surprise to the upside.  July’s rise in private employment was the sixth consecutive monthly gain.  However, over that period increases have averaged a modest 37,000, with no evidence of acceleration.

Market Update

Yesterday’s market action remains in a tight trading range.  Can the S&P 500 close above 1130 by week’s end?  It’s possible.

Overall, the news has been positive, but underwhelming.  However, given the long stretch of bad economic news we’ve been enduring for the past several years, any improvement is welcome news, indeed.