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Dallas, TX
December 2, 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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To Survive The Current Environment Investors Must Remain Flexible
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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. There are two private employment surveys out this
morning and the Feds' Beige Book is out this afternoon. Those are two reasons
to be cautious in the early going. The rest of the economic calendar includes
oil supply and mortgage data, which means that there are all kinds of reasons
for the market to be volatile.
Today's Economic Calendar:
- MBA Purchase Applications 7:00 AM ET
- Challenger Job-Cut Report 7:30 AM ET
- ADP Employment Report 8:15 AM ET
- EIA Petroleum Status Report 10:30 AM ET
- Beige Book 2:00 PM ET
News For Thought
Alleged White House party crashers may have other significant issues to answer
to. Tareq and Michaele Salahi seem to have a history of controversy and may
be involved in potentially questionable activities with regard to their charity
organization. According to The Washington Post, the Salahis' "signature" charity
event, the annual Land Rover America's Polo Cup, which bills itself as the "world's
most prestigious and largest . . . charity polo event," benefiting the Salahi-run
charity Journey for the Cure may have some financial problems.
According to a report in The Post, reported sponsors and vendors for the event
including Land Rover, Cartier, the St. Regis Hotel in Washington and the Ritz-Carlton
Hotel Co. "say they are not sponsors for that event." In fact "Many vendors at
previous events said in interviews that the Salahis have not paid for their services
in the event's three-year history, expenses totaling about $500,000. Many have
filed lawsuits, and the couple has countersued often."
The event, according to the report "donated $15,000 to its stated causes in 2007,
financial disclosure forms show, and none since," while "Tareq Salahi told The
Washington Post last year that the 2007 event raised $250,000 for charity and
that he hoped to surpass that amount with the next event."
And there is more. According to The Post: "the foundation says on its Web site
that it is an "approved charity with Mission Fish," a nonprofit group that helps
foundations raise money on eBay. But a Mission Fish vice president said Journey
for the Cure was suspended in October over concerns about irregularities with
its tax-reporting status."
In fact, according to The Post, the foundation "filed conflicting reports about
its finances. Last year, $19,000 in donations were reported to state regulators.
Amounts that low are not subject to federal tax reporting. The foundation's Web
site lists $0.00 in online donations so far this year."
The Post added: "In sum, the portrait of the couple's twin entities is marked
by financial disarray, potentially false or misleading claims, broken friendships
and bitter court filings. The two entities -- the centerpiece of the Salahis'
public profile and their stated reason for going to the White House state dinner
last week -- have left many customers angry at poor service and many business
partners furious."
Notice to subscribers. Starting December 2, we are introducing a rating system
for individual stocks and ETFs. Visit our health and biotech as well as our energy
and S & P 500 sections for more information and ratings. |
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To Survive The Current Environment Investors Must Remain Flexible
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A Combination Of Strategies And Short Term Thinking May Be Useful These Days
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The S & P 500 (SPX) is once again knocking on the door of new highs from
the March bottom but the Russell 2000 (RUT), where the small stocks make their
home, is stubbornly lagging its larger cousin.
Chart Courtesy of StockCharts.com
The charts don't lie. And the picture painted by the S & P 500 (above) and
the Russell 2000 (below) is pretty clear. The pattern of money flows toward large
capitalization stocks continues.
Chart Courtesy of StockCharts.com
Even though the market survived a scare after the Dubai jitters hit last week,
traders are still confused between the potential choices they seem to have before
them. On the one hand, They could worry about the continuing technical divergences,
such as the lagging performance of the small stocks. On the other hand, they
could just continue to follow the leadership, which is clearly in the large cap
stocks at this point, and stack their portfolios with large S & P 500 names
that are doing well in this environment.
The answer is actually both. If you remain aware of the current divergences in
the market, you can trade the large cap stocks with more care while at the same
time avoiding the small stocks.
Chart Courtesy of StockCharts.com
There is more evidence, though, that money is moving into larger stocks. The
NYSE advance decline line (NYAD) is showing signficant improvement, while the
Nasdaq advance decline line (NAAD) is still lagging. In past cycles, traders
tended to ignore the Nasdaq's breadth. But lately, some money managers, such
as Stadion's Greg Morris are putting more weight on the Nasdaq advance decline
line. The rationale is fairly simple, there are more preferred stocks and bond-like
instruments that trade on the NYSE, which can distort the market's breadth. We
like to use both advance decline lines, especially in situations such as the
one in the current market.
Chart Courtesy of StockCharts.com
If you continue with the top-down analysis, at this point you are looking to
invest in large cap stocks. Yet, not all ships are likely to rise with the tide
in this kind of market. That's where some sector analysis is useful. There are
several sectors where large companies tend to rule, including pharmaceuticals
(DRG), cyclical stocks such as Caterpillar (NYSE: CAT), and consumer stocks (CMR)
such as Colgate-Palmolive (NYSE: CL). Both CAT and CL had excellent days on Tuesday.
And the drug sector is near a breakout.
Chart Courtesy of StockCharts.com
If you compare the action in these sectors to the small stocks in the Russell
2000 you get a much better picture of where the money is flowing and can make
better decisions. To get an even clearer picture of which stocks to consider,
look inside the indexes. By scrolling through the chart of each individual index
component you get a visual inventory of where money is going.
To be sure, this may be a risky trade, given the fact that the stock market has
already had a big rally in 2009. Yet, it’s not one that should be avoided altogether,
given the fact that we are in a bullish period for the markets. In the short
term, you have a couple of days left in the turn of the month period, where institutions
put money to work at the start of a new month. In the longer term, say the next
couple of weeks, you have the month of December, which is traditionally a bullish
month for the market in your favor.
Conclusion
The end of a profitable year can be both confusing and risky. The market certainly
has some seasonal tendencies. But seasonality does not guarantee that anyone
particular outcome is more likely than any other. Current events, such as interest
rates, geopolitics, and the potential for taxes in the future play a much greater
role in influencing stock prices.
By developing and using a top down approach based on technical analysis, investors
can visualize where the money is flowing and make better potential investment
choices.
The key is to keep seasonality in the background while looking at the charts.
Yes, the odds are more in your favor than not in the month of December, but that's
not a guarantee that you can make money in anything and everything. The mistake
that many investors make is to believe that this kind of wishy-washy market can
rally until the end of time.
Finally, it’s important to look at individual positions separately. If you’ve
got big profits in some areas, this may be a good time to trim positions. If
something isn’t working, it may be time to sell it. More than anything, though,
this is a good opportunity to trade, not to fall in love with anyone company
or sector, and to discuss strategies with your financial advisor.
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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Caterpillar (NYSE: CAT) and Colgate-Palmolive (NYSE: CL) Show Two Sided Strength Of Large Cap Stocks
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Chart Courtesy of StockCharts.com
Caterpillar (NYSE: CAT) and Colgate Palmolive (NYSE: CL)
are at opposite ends of the economic spectrum, yet both
stocks share one thing, they are large cap stocks, which
means that money is flowing into both of them in the current
market.
Chart Courtesy of StockCharts.com
Traditional investment strategy suggests that stocks of
economically cyclical stocks, such as Caterpillar, tend
to do well when the economy is expanding. Consumer stocks,
such as Colgate, are seen as stocks which do well when
the economy is not as strong and consumers are buying essential
products such as toothpaste and deodorants.
So, why are both stocks doing well at the same time? The answer is multifactorial.
For one thing, if you only look at the sluggish U.S. economy, you'll miss the
bigger picture. China is still growing, as is India and other parts of Asia.
That's where companies like Caterpillar and their products are in more demand.
And that's what the bet on the cyclicals is all about.
Colgate is a bet on the weaker U.S. economy. What unifies them both is that we
still have a weak dollar and that both companies do plenty of business outside
the U.S.
When you throw in the weak dollar, you can see why more money is now moving into
the large multinational stocks that populate the Dow Jones Industrial Average
and the S & P 500.
Smaller companies traditionally do more business in the U.S. where the economy
is weaker than in some parts of the world, and where a weak dollar is not helping
sales.
Editor's note: Colgate-Palmolive is an excellent example of a 5-star stock while
Caterpillar fits the criteria for a 4-star stock. Dr. Duarte does not own Caterpillar
or Colgate-Palmolive.
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Technical
Look at the Market |
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Back Above 1100 - SPY ETF Coverage Started at 4-stars
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The S & P
500 moved back above 1100 on Tuesday. What's interesting
is that the rally may have started to repair the market's
breadth, at least on the NYSE. If the NYSE advance decline
line can muster a new high in the next few days, it would
give the bullish side of the ledger a nice boost.
The key is that once again the 20-day moving average has provided support for
the S & P 500. That means that unless things fall apart, we could have another
shot at 1100.
So the real question is whether this market is worth trading at all. And the
answer lies in how well you may have done for the year. If you've done well,
you can consider taking the rest of the year off, barring some really aggressive
up side action starting in the next few days.
This is still a good time to reassess any positions that aren't working, especially
as the market's advance has become narrower over the last few weeks.
Raising cash, along with sector and individual stock selection are still the
most important aspect of trading this market. With an employment report due out
on Friday, anything is possible.
We are adapting our star based rating system to the S & P SPDR ETF (NYSE:
SPY). In this section a 5-star rating for SPY is a signal that down side risk
is very low and that the chances of a further rise in prices are greater than
those of a fall. A 4-star rating Means that the risk is less attractive but that
the odds of a rise in SPY still outweigh the risks of a fall.
A 3-stars rating on SPY suggests that the odds of a rise and a fall are even.
2-stars and 1-stars suggest that down side risk is on the rise.
In no way is this star rating system intended as a series of buy and sell recommendations.
The system is intended as a guide to the general trend of the market and the
S & P SPDR ETF.
Star ratings can change rapidly based on the market's action. Followers of the
ratings should review them on a daily basis.
Star Ratings for S & P SPDR ETF (NYSE: SPY) - updated 12-1-09
S & P SPDR ETF (NYSE: SPY), 4 stars on 12-1-09 - closing price 111.30. Short
term support is at 109.57. Resistance is at 111.74. A move above 111.74 would
raise the rating to 5-stars.
Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
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