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Dallas, TX
November 18, 2009, 08:00 EST |
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Dr. Joe Duarte's Market I.Q. |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Does The Market Have Enough For A Santa Rally?
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What's Hot Today: |
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U.S. stock index futures were pointing to a flat opening
on Wednesday morning. Global markets were mixed overnight with an upward
bias. The S & P 500 has spent two days above the 1100 area.
Today's Economic Calendar:
- MBA Purchase Applications 7:00 AM ET
- Consumer Price Index 8:30 AM ET
- Housing Starts 8:30 AM ET
- EIA Petroleum Status Report 10:30 AM ET
News For Thought
Fannie Mae and Freddie Mac continue to sink. According to The Wall Street
Journal: "The firms, which together have taken more than $110 billion in capital
infusions from the Treasury, stepped up their lending for apartment buildings
as the commercial real-estate market peaked, and they are now facing rapidly
rising loan losses. Fannie, which has been more active than Freddie, faces the
biggest problems. Its serious delinquency rate, or loans that were 60 days or
more past due, stood at 0.62% at the end of September, up from 0.16% a year ago.
One troubling sign: one-quarter of the $180 billion of apartment-building loans
on Fannie’s books were originated near the top of the market in 2007 and those
loans account for nearly half of all its commercial-loan delinquencies." The
bottom line seems to be that more taxpayer money will be infused into the two
companies. The alternative is to let the whole thing implode, a move which could
lead to a major implosion of the financial markets and another leg down in the
recession. Stay tuned for this one folks.
Obama warns about deficits. If the above story is scary, think about this,
President Obama, as the mid-term election nears and polls show that voters are
increasingly fretful about deficits and the economy, is starting to talk tough
about deficits. According to Reuters: "President Barack Obama gave his sternest
warning yet about the need to contain rising U.S. deficits, saying on Wednesday
that if government debt were to pile up too much, it could lead to a double-dip
recession. With the U.S. unemployment rate at 10.2 percent, Obama told Fox News
his administration faces a delicate balance of trying to boost the economy and
spur job creation while putting the economy on a path toward long-term deficit
reduction."
So, does that mean that Fannie and Freddie are running out of time? Or is this
just more talk? Who knows? The fact is that some sectors of the economy have
stopped or decreased their bleeding. But if Fannie and Freddie were to fail,
and real estate prices were to hit another down leg, all kinds of problems could
result.
Health care reform brings change, less change in your pocket. According
to New York Times: "Even as drug makers promise to support Washington’s health
care overhaul by shaving $8 billion a year off the nation’s drug costs after
the legislation takes effect, the industry has been raising its prices at the
fastest rate in years." How bad is it? Try about a 9% increase on average. According
to The Times: "That will add more than $10 billion to the nation’s drug bill,
which is on track to exceed $300 billion this year. By at least one analysis,
it is the highest annual rate of inflation for drug prices since 1992."
In other words, the average American has already had an indirect tax increase
resulting from Washington's policies. The real sticker shock will come in 2011
when the Bush tax cuts are set to expire. To be sure, a lot can happen between
now and then, but most folks better get ready to write bigger checks to the IRS,
their drug store, and their health insurance company. What's even more dire is
the fact that these price increases will eventually work their way to the Fed's
radar screens, and interest rates will rise. What a nice triple whammy that will
be.
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Does The Market Have Enough For A Santa Rally?
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Making The Case For The Seasonal Finale
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The stock market still has pockets of strength. Yet, the
overall market is not quite as robust as it was a few months ago. That means
that investors should be more careful in choosing their sectors and individual
stocks in order to maximize their chances of success.
Someone’s got to do it, so we’re going to say it. The market is nearing the two
biggest holiday rally periods of the year, Thanksgiving and Christmas, which
means that talk of the Santa Claus rally is about to hit the airwaves. That means
that it’s a good opportunity to look through the hype and see what’s really happening
when the market strategists for Wall Street firms hit CNBC, Fox Business News,
and the major news outlets.
Chart Courtesy of StockCharts.com
The Dow Jones Industrial Average and the S & P 500, along with the Nasdaq
100 Index have all taken over the leadership of the market. That means that money
is moving into blue chip and large cap stocks at the expense of the small stocks.
This is clearly illustrated by the fact that the Russell 2000 index has yet to
confirm the new highs from the March bottom on the big cap indexes.
Chart Courtesy of StockCharts.com
The real question for investors is whether this means that the market is near
a major top, or whether it just means that the small stocks are not as attractive
to investors at this time. If you look at the market, and what traditionally
makes bull runs last, this one continues to have all the ingredients. For one
thing, interest rates remain low. There is still plenty of pessimism. Just look
at any of the notes written by bank analyst Meredith Whitney and gloom and doom
prophets such as Nouriel Roubini and Marc Faber. And there is still some cash
out there waiting to come into the market.
When you add the fact that it’s that time of the year when good cheer tends to
take over, no matter how much people try to resist it, you have the ingredients
of higher stock prices. The problem is that every good party has a hangover around
the corner. And 1999 comes to mind as such a party, when the Nasdaq soared in
the last three months, only to enter a three-year bear market in the New Year.
So what should anyone do? Pay attention to each open position individually, while
watching the market. Money is moving into blue chip stocks. That means that this
is where investors should be looking. It’s probably too late to make big bets.
But if you’ve missed the rally, you may be better off buying a blue chip dominated
ETF such as the Dow Jones Industrials Diamonds (NYSE: DIA), just to stay with
the dominant trend of the moment.
What about your time frame? Keeping it short is probably the best way to go,
which means that holding onto your stocks as long as they stay above their 20
and 50 day moving averages is prudent. Otherwise, don’t be surprised if volatility
appears in a big way, especially later this week as options expiration develops.
Finally, if the Santa Claus rally choruses begin, make sure that the market is
actually doing what it’s supposed to do during this time of the year, which is
to rise. If the talking heads are giddy and stocks are falling, don’t believe
what you don’t see.
Conclusion
We are headed into a traditionally bullish time of the year for the stock market.
The way it usually works out is that the Thanksgiving week has an upward bias,
but prices drift higher in low volume.
Somewhere in early to mid-December, some kind of rally is fairly common. It can
be a huge affair as it was in 1999, or it could be fairly sedate. Even in 2007,
after the October implosion when the subprime mortgage crisis became obvious,
the S & P 500 was up during Thanksgiving week and the early part of December.
This year may be different as money managers try to lock up profits from a good
year. But not all money managers captured the rally, so some end of the year
window dressing is likely.
The bottom line is that seasonal trading is a background indicator. The odds
favor a continuation of the upward bias in the stock market. But it doesn't have
to be that way.
Responsible investors, though, should be aware of this phenomenon, factor it
into their analysis, and try to capitalize on it if possible. When all this is
taken into consideration, in this market, the money is flowing into large cap
and blue chip stocks. So if we bring up that old cliche' about why we rob banks,
it's because that's where the money is. And the money, until proven otherwise
is in the Dow Jones Industrials, the S & P 500, and the Nasdaq 100 index
stocks.
Know when to sell and how to make money when the market falls. Get a detailed
trading plan in your pocket. Read Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
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Market Moves - Stock Of The Day
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Comparing The S & P 500 SPDR (NYSE: SPY) and the Russell 2000 Small Cap (NYSE: IWM) ETFs
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The S & P
500 SPDR (NYSE: SPY) and the Russell 2000 Small Cap (NYSE:
IWM) have both done well since the March bottom in the
stock market.
Chart Courtesy of StockCharts.com
Over the last several weeks, though, the large cap stocks
have powered to new highs while the small stocks are some
4-5% from making a new high and confirming the up trend
in the stock market. That's clearly a negative for technical
analysts.
Yet, there is some nuance involved. For one thing the small cap ETF (IWM) is
up some 76% from its March bottom, while the SPY ETF only up 60%. That means
that the rally in the rank and file stocks, or the smaller names where growth
investors ply their wares has been much bigger than the rally in the blue chips.
That brings up an important question. Does the lack of confirmation of the new
highs in the big cap stocks from the small stocks matter?
The answer as always is elusive. If you're a purist, then the answer is yes.
You want to see all areas of the market move in unison. Otherwise you have a
divergence. And divergences often lead to corrections.
If you bought the small stocks in March, and you're up nearly 80%, though, you
should be taking some profits, especially as the year draws to a close.
In other words, the jury is still out on whether the recent lag in the small
stocks is anything but a pause after a huge rally or something else. From an
investment standpoint, it makes sense to monitor the small stocks while you still
participate in the rally in the larger stocks. We are neither recommeding the
sale or the purchase of SPY or IWM. The purpose of this article is to educate
subscribers as to the presence of an interesting trend in the market. Dr. Duarte
does not own or short shares of SPY or IWM.
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Technical
Look at the Market |
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S & P 500 Says Above 1100
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The S & P
500 rallied above 1100 on 11-16 and finally stayed above
the key chart point for the second day running. You've
got to like that if you own blue chip and large cap stocks.
The 1100 area has been formidable resistance, having served as a ceiling for
stock prices since October. Still, money is not moving as rapidly into the small
stocks, which is a troubling thing if it's not corrected in the near future.
We are still concerend about market breadth, although momentum in the large cap
stocks remains favorable.
The market can function like this for a while. But at some point, especially
if things get even worse in the rank and file stocks, there will probably be
some kind of correction.
Sector and individual stock selection is the most important aspect of trading
this market.
Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
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