Good News – The Recession is Over

By Jim Farrish | September 23, 2010 | 1:52 PM |  0 CommentsTweet This

The National Bureau of Economic Research declared the recession over in June 2009. I am not doubting the calculation, but someone needs to let the housing market and corporate America know. The unemployment rate stands at 9.6% and according to the August data we are still losing jobs. The housing market isn’t doing much better with the price of homes still declining and the homebuilder sentiment as record lows. If the recession ended 15 months ago where is the improving economic data?

Main street has a different opinion relative to the outlook for the economy. Its benchmark tends to revolve around jobs, income, and opportunities for advancement. On all three accounts the picture is not pretty. Thus, the negative report on consumer confidence last week. There may be some optimism in the markets, but the feeling on main street is still fairly pessimistic. In fact many economist are still calling for a second dip of the recession before it gets better.

The FOMC meeting yesterday offered concerns relative to deflation. A growing economy generally struggles with inflation? I thought the recession was over? Reading the comments from the Fed after the meeting was not encouraging. In fact, investors didn’t know how to respond. Look at a chart of the Volatility Index the last 90 minutes of trading and you see the scrambled reaction. Gold was down heading into the announcement, but move up $22 to $1294 following the comments. The dollar fell to $1.33 on the euro and interest rates on the 10 year Treasury dropped 12 basis points to 2.59%. Not normal reactions to a positive economic environment.

Investors have been buying into stocks in belief the recession is over and the economy is on the mend over the last four weeks. After testing support at the 1040 level the index has moved through resistance at the 1130 mark on the S&P 500 index. The gains were prompted by improving manufacturing data and improving economic data globally. If we were to dissect the word improving we would see the numbers were up slightly in August. They were enough to keep the negative discussions relative to a stagnate economy at bay. For example, ISM Services for August were 51.5%. Anything over 50% shows expansion. That is very modest expansion for the services’ sector. The ISM Manufacturing number for August showed a similar increase above 50% and the market rallied on the news. But, when the Federal Reserve Governors put out statements relative to deflation, investors have to rethink their views on growth looking forward. Depending on the psychological toll of those comments, the market could test the recent move higher.

The confidence of the investor took a gut punch from this report by the Fed. The data points will ultimately determine the reality of the economic growth or retraction, but in the meantime sentiment will drive the day to day activity. The sentiment has been on the rise along with confidence in a modestly improving economy. It is like getting hit by a pitch in baseball. The coach says shake it off, but next time you step in the batters box the thought is still there. Investors will attempt to shake off these comments, but browsing through the headlines this morning they are focused on the comments from the Fed and the meaning. They will go away with more data and time, but the short term reaction is worthy of our attention.

The data from the National Bureau of Economic Research may say the recession is over, but the recovery process is still a work in progress. Investors will have to put blinders on and ignore the day-to-day chatter if the market is heading higher. The short term impact is likely to be a confidence check in the form of a pullback. They will have to shake it off and get back in the batters’ box and hit away. Don’t be surprised if they bailout on a few curve balls in the meantime.

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Charting the Bond Yields

By Jim Farrish | August 26, 2010 | 12:25 PM |  0 CommentsTweet This

Technical analysis of the stock market has become more mainstream. When I first started in the financial services business it was referred to as voodoo analysis. More and more investors refer to pieces of technical analysis as an accepted science. That said, fundamental analysis is still the most accepted form of research on Wall Street. From my view both are a study in statistical probability using a different set of parameters. Both take faith on behalf of the person using them to put their money at risk based on the statistical calculation which draw a specific conclusion. The key to both is having a disciplined strategy for implementing the process. Without discipline neither will succeed.

With that in mind, today I wanted to look at a chart that has many implications to both sides of the table, interest rates. The yield on the 10 and 30 year bond have been in a decline since the S&P 500 hit a high on April 15th. Why the shift? Primarily the shift in economic outlook combined with fear from the investor seeking shelter from a declining equity market.

As you can see on the chart above (10 year Treasury yield) The decline started several weeks prior to the equity markets moving lower from a peak. Was this an indicator of money moving away from stocks? With hindsight you could say yes, but at the time it was not that clear. As yields broke below the 3.7% level however, you knew something was up. Bonds are a great indicator of fear or perceived problems in stocks relative to a specific event.

There are several points of interest on the chart worthy of learning from. The first was the break below the 3.15% mark. This corresponded with the peak of S&P 500 index hitting 1130 on a bounce off the 1040 low in May. The next two weeks the index fell to 1022 or approximately 10%. The index then rallied back to 1130 again in early August, but the yield on the 10 year Treasury stayed in a narrow trading range only to break lower below the support at 2.88% as the market started its present decline.

As an indicator the yield may not always be right, but it does bare watching relative to investor sentiment. When investors lose confidence in the equity market they shift to safety and that is predominately Treasury bonds.

The chart below is the 30 year Treasury yield and you can see a similar correlation to stocks, but the decline in rates has not been as steep as the 10 year during this cycle. However, in 2008 the drop was more significant to reflect the decline in stocks. The credit crisis took a bigger toll on the long end of the yield curve and the recession has had a bigger impact on the middle of the yield curve. Either way they are worth tracking relative to investor sentiment and in this case benefiting from owning bonds.

The current levels would indicate caution relative to holding bonds. The yields can go lower, but a near term bounce or consolidation would be more likely. That would mean a short term rally in stocks, well worth considering and watching for short term opportunities.

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More Downside Ahead? Charting the S&P 500 Index

By Jim Farrish | July 07, 2010 | 9:33 AM |  0 CommentsTweet This

The market has taken steps to continue the downside leg started off the April high. The break of the 1040 support last week gives the 950 support level an opportunity. The chart below shows the current downtrend in play and technically what is happenings short term. As you are aware, technical analysis is a strategy like any other, it forecasts a specific outcome based on statistical probability. It is not a definitive indicator and the risk of any investment based on this process should be taken into account. In other words, defined entry, stop and target on any investment is a priority in the planning process.

The chart shows the initial leg lower to 1110 in May on the electronic crash. The bounce didn't hold and the next move lower was to support near 1060 resulting in a double bottom test of support near the 1040 level. The bounce back near 1120 failed and the current leg lower off the bounce is in play. Thus, the downtrend has been defined by lower highs and lower lows.

The downtrend off the April 23rd high is the primary trend to watch at this point. A bounce or relief rally could potentially move back towards the trend line as a test short term. What would be the catalyst? Earnings, if they are better than expected, we start reports next week and it could provide some short term relief to the selling. Watch the 1020 and 1000 levels for some short term support.

There is a head & shoulder pattern in play as well. The three white boxes show the left and right shoulder with the head as the peak in April. The shorter green horizontal line between 1040 and 870 is the height of the pattern and thus the target move for the break below 1040. The 870 level corresponds to one of the key support levels for the S&P 500 index as the low from last July. This pattern should be watched closely over the coming weeks. One thing is certain in technical analysis, the more people who recognize a pattern, the more likely is becomes a self-fulfilling prophecy.

Adding strength to the downside potential is the cross of the 50 day moving average (green) below the 200 day moving average (blue). This is known as the death cross in technical analysis and a clear indicator or confirmation of the downtrend in play.

Bottom line, there is plenty going on technically on this chart. They all add up to a negative trend in play, the second leg of the trend is in place with the move below 1040 and a target on the downside is 870. Thus, my conclusion would be to have a strategy in place to capture this downside opportunity as it plays out in the coming weeks or months.

Define the risk of any play and plan your entry, stop and target before you put money at risk in the market.

 

You can watch Jim Farrish each evening on the Daily Exchange and listen each morning on American Scene Radio via the web. You can also review more Sector and ETF commentary every day on SectorExchange.comDisclosure Statement: Jim Farrish is the Founder and Editor of SectorExchange.com and TheETFexchange.com. His primary goal is to educate people about investing. He has taught workshops locally and nationally for over 25 years, teaching thousands of individuals, business owners, and advisors how to focus on achieving financial independence. Jim Farrish is the CEO of Money Strategies, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Money Strategies, Inc., web site.

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Event Risk and Managing the News

By Jim Farrish | July 02, 2010 | 10:48 AM |  0 CommentsTweet This

It feels like we are back in the 1992 election campaign – “it’s the economy stupid!” The headlines are focused on the jobs report this morning, but that isn’t the entire picture of what is happening in the US economy. The biggest challenge is looking forward and seeing growth or lack of growth. Investors are seeing the growth projections slow and it is raising doubts. The primary concern now is a double dip recession. The talking heads saying the dip won’t happen isn’t convincing or soothing the fear factor. That has been reflected in the price of stocks over the last four weeks.

As an investor how do you manage the news of an event like today relative to your portfolio? First, understand the market currently is being driven on emotions. When the clarity factor is clouded it becomes a news driven, emotional event day to day. The best course of action is to set your stops according to the risk you are willing to accept and keep moving forward. Don’t get stuck in the holding pattern assuming you have a good stock and it will bounce back. That may be true, but you can also buy it back when things are looking better and potentially at a lower price.

Second, look forward. As the story unfolds and the clarity factor begins to clear build a watch list of sectors and stocks you would like to own. When clarity and confidence return the trend will shift to the buyers and you will be ready to build your portfolio based on what is leading the market. Keep your focus and be patient, let the market come around to your investment strategy.

Third, respect the risk of being short. It is too easy to step into short positions and assume the risk is equal to being long. They are not equal, and as an investor you have to manage the risk of your portfolio and each position. The leveraged short ETFs magnify the risk of being wrong. Going short also goes against the normal investor psychology. Make sure you understand completely the risk you are taking on before you venture into this process.

Fourth, keep a tally of the data. When looking at economic data understand you are looking in the rear view mirror. The data is old and the current environment may have shifted in the last four weeks. Find the nuggets in the data versus the headline numbers. The jobs report will show how many jobs were created in the previous month. Currently it is important to look at the private sector jobs and hours worked. If they are improving it is positive for future hiring. That would be a positive for the psychology of today’s economic environment. Keep track of the data points that matter now. There is so much data produced weekly that some of it goes unnoticed. Find what impacts the market and specific sectors to find investment ideas.

News is important today! Focus on what will have a lasting impact on your portfolio and the markets overall. If the jobs report is good it will impact the markets today in a positive way. If it is bad, it will impact the market in negative way. The future growth will come from a combination of all the data building or eroding confidence and clarity. Short term the market thrives on news, longer term it puts the news in perspective relative to the possible outcome. Understand your time frame, your risk tolerance and patience towards your portfolio, then act according to your strategy and discipline.

It’s Your Money – Manage IT!

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Disclosure Statement: Jim Farrish is the Founder and Editor of SectorExchange.com and TheETFexchange.com.  His primary goal is to educate people about investing.  He has taught workshops locally and nationally for over 25 years, teaching thousands of individuals, business owners, and advisors how to focus on achieving financial independence.  Jim Farrish is the CEO of Money Strategies, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Money Strategies, Inc., web site.

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Lesson in Investor Psychology

By Jim Farrish | June 30, 2010 | 10:46 AM |  0 CommentsTweet This

Yesterday was a lesson in investor psychology. The confidence factor has been slipping the last six weeks as the economic data showed signs of slowing in the U.S. The consumer confidence number announced yesterday morning showed a drop from 62.8 to 52.9 leading to the selling. Some of the blame was given to China and the slowing in their economic data. It all comes down to confidence towards the  economy looking forward. Will it grow at a pace fast enough for earnings to grow along with stock prices?

The psychology lesson comes in understanding what makes investors react in unison on a day like yesterday. The catalyst was the news from China’s LEI data in combination with the consumer confidence data in the U.S. They were not the cause, that honor goes to investor confidence. Without repeating all the data points over the last six weeks each one had a hand in chipping away at the confidence in future growth. Jobs report, same store sales, monthly sales, ISM manufacturing, etc. Each took a chip away until the investor finally decided the risk/reward relationship doesn’t warrant being invested in stocks. The flight to quality begins with each chip and then accelerates the selling.

The Treasury bond yields gave another warning sign. The yields on the Treasury bond just eight weeks ago was at 4%. It has slowly declined on a flight to quality. The European worries started the movement and each data point has push more money in that direction. The flight to safety puts emphasis on the risk aversion by investors. Yesterday the 10 year bond fell to 2.96%, breaking below support. This is not a good sign looking forward for stocks. Psychologically the investor is throwing in the towel on risk.

The lesson is how investors migrate towards taking risk out of their portfolio. The data builds a case for the downside and in turn selling builds momentum. This is why stops keep you in line with the market direction. As the market drops the stops are hit and cash becomes your largest position. The downside trend will also begin to develop technically as lower low and lower highs are established. Support lines are broken and momentum gains in the selling. Thus, the ability to put money to work in being short stocks. Investor sentiment plays a big role in trend development and trend reversals.

Are we to conclude the investor is done and the downside is in control? No one knows for sure what will happen from this point forward, but we can see what we are looking at technically and fundamentally. First, technically support lines are the talk of the town. 1040 on the S&P 500 index has been on every billboard the last four weeks. We broke that level intraday yesterday. How the investor reacts to that will be see in the next couple of trading days. Thus, like everyone, we will watch to confirm the break below this level if the momentum continues lower. It may bounce and then retest this level on a news event in the future. I am watching the jobs report on Friday. Second, fundamentally the economic data is putting a big question mark around the outlook for second quarter earnings. More importantly the outlook for the second half of the year is being revised lower for growth. GDP is expected to be between 1-1.6% growth and some think that is optimistic. The impact the earnings will be an issue as revisions are made and pessimism creeps into the financial markets. Not the best of scenarios relative to stock growth.

As you can see the market data and the investor go hand in hand in determining direction of the market. Our job is to pay attention, listen to both the data and the investor and invest accordingly. We have talked many times in the past on the importance of a defined entry (strategy), a defined stop (risk management) and a define target (goal). Sound money management takes into account the probability of being right or wrong on every position in your portfolio.

This promises to be an interesting period looking forward, but the bottom line is – protect your assets. Risk management is the priority.

 

You can watch Jim Farrish each evening on the Daily Exchange and listen each morning on American Scene Radio via the web. You can also review more Sector and ETF commentary every day on SectorExchange.comDisclosure Statement: Jim Farrish is the Founder and Editor of SectorExchange.com and TheETFexchange.com.  His primary goal is to educate people about investing.  He has taught workshops locally and nationally for over 25 years, teaching thousands of individuals, business owners, and advisors how to focus on achieving financial independence.  Jim Farrish is the CEO of Money Strategies, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Money Strategies, Inc., web site.

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