November 13, 2009
In a Special Update after the close on October 14, I made the following assessment. “The overall technical health of the market is in good shape. The advance/decline line is making new recovery highs along with market averages, and the number of stocks making new highs continues to expand, with today’s tally over 450. Last week almost 700 stocks made new 52 week highs. This suggests that the 1 to 3 month outlook remains constructive.
The next few weeks are a bit more problematic. As measured by the 21 day average of total volume, volume expanded 5.9% as the market declined between September 29 and October 2. (1.309B to 1.378B). This is the first time volume has expanded on a decline since the March low. Since October 2, the S&P has rallied from 1,019 to 1,092, but total volume has shrunk from 1.378B to 1.255B, or -8.9%. As noted last month, I thought the S&P could trade up to 1,095. Although 1,109 is possible, doing a little selling or hedging into strength is a good idea. A decline to 990-1,015 by the end of October, or early November is likely, given the technical back drop. The DJIA closing above 10,000 and Intel’s good news should help the market hold up a bit more, although trading is likely to be choppy.”
On October 15, the day after the Special Update, the S&P closed at 1096.56, and then traded down to 1029.38 on November 2. On Wednesday, November 11, the S&P closed at 1098.51, a new recovery high. The DJIA closed at 10,291.26, versus a close of 10,062.94. The DJIA was 2.27% above its October 15 close, while the S&P was only up .18%. More importantly, the broad market is acting far weaker. On October 15, the Russell 2000 closed at 623.34, but was -4.91% lower as it only reached 592.71 on November 11. In addition, on October 14, 462 stocks made new 52 week highs, but only 211 did so on November 11. As the market declined from October 14 to November 2, the 21 day average of total volume rose, but has declined -6.9% during the rally from November 2. The 10 day average of down volume rose 46.3% as the market fell into the low on October 2, but increased by 97.8% during the decline from October 14 to November 2. This is a clear indication that selling is increasing as the market falls.
In mid October, the overall health of the market was in good shape. That isn’t the case now, as the internal strength of the market has clearly weakened, especially when compared to the increase in the DJIA, which only measures 30 stocks. This means the market is vulnerable to the largest decline since the March lows, and will likely fall below the recent low of 1029.38 on the S&P. Selling into strength and taking a more defensive posture is more warranted now than in mid October.
Since the Russell is the weak sister, shorting the Russell 2000 by buying TWM makes the most sense. Establish a 50% short position now (TWM under $29.35), and add if the S&P climbs above 1105.37. The short term price pattern on the S&P and DJIA suggest that there could be one more move above the intra day highs established on November 11(DJIA 10,341.97, S&P 1,105.37). For those who prefer the S&P, go 50% short above 1,105.37, and add if the S&P reaches 1,115.00.
Gold and Gold Stocks
In a Special Update on gold and the gold stocks on November 5, 2009, I laid out the following analysis and trading strategy. “I would be surprised if gold doesn’t push above $1,100, at least temporarily. However, gold should not close above $1,115, so that will act as the stop for the following strategy, which is going to break the exposure into thirds.”
DZZ – Buy 33% now ($15.20), 33% below $14.95, and 33% if it trades down to $14.65 – $14.35.
GLD – Short 33% now ($106.82), 33% above $107.50, and 33% if it trades up to $108.50 to $110.50.
On November 11, December gold closed at $1,114.60. If I’m right about stocks having one more push to a higher high on the DJIA and S&P, gold will likely make a higher high. For now, cancel the stop at $1,115.00.
Here are the comments from the October letter. “The dollar continues to grind lower. We are long the December futures from last month under 76.40, which was reached on October 6. The long dollar ETF UUP was simultaneously purchased on October 6 with UUP at $22.60. The stop on both positions remains 74.50 on the December futures. I am looking for the dollar to rally to near 81.00, which is just below the high in early June at 81.50.” Lower the stop on the December dollar futures to 74.00, and add to UUP if the futures trade below 74.85.
E. James Welsh