Click here to listen to Through A Trader’s Eyes Podcast 23 – June 29, 2010

Some people will say technical analysis is hocus pocus and voodoo.  I think just the opposite.  I think sometimes fundamentals don’t make any sense.  All you have to do is plot the news on top of the price of any security and you’ll often see that the technicals lead the fundamentals.  But, as many of you know, I’m not an all or none investor.  I combine the fundmanetals with the technicals.  In addition, I know that a lot of people that are controlling money DO watch the technicals so it becomes a self-fulfilling prophecy.

Given that, right now I’m focusing on the fact that technicians are watching the 50-day moving average and the 200-day moving average and how they interact and where they cross.  The last time the 50-day moving average crossed below the 200-day moving average was early 2008 (highlighted in yellow circle).  In June of 2009, the 50-day moving average of the S&P 500 went above the 200-day.  Now, we’re very close to getting the bearish crossover once again.  With that said, I am expecting a rally that will keep the 50-day above the 200-day based on some other technical indicators I watch.

The fundamentals continue to deteriorate and are conflicting with the technicals.  Therefore, I’m still approaching this market very cautiously.  I expect a few more weeks or months of upside.  However, this market will eventually need to be shorted but I don’t believe it’s yet.

I’ve commented before about jobs.  You’ll hear some say jobs don’t matter.  In this global economy, that may be partially true given the U.S. is a service based economy.  However, our job is to figure out what correlates with stock prices going up or down.  This morning, the initial jobless claims were released.  The number came in at 472,000 vs. the estimate of 450,000.  The last reading was 456,000.  Below is a picture of the initial jobless claims going back to year 2000 (inverted) versus the S&P 500.  You can see there is a very tight correlation.  Therefore, if you believe more and more people are going to be looking for work in the months ahead, you can’t be extremely bullish on stocks.  On the other hand, if you think the economy is recovering and jobs are coming back, you should be bullish.

Click here to listen to Through A Trader’s Eyes Podcast 22 – June 16, 2010

I did a lot of television interviews in 2009 and one of the things I got asked most during the rally was how can the market go up with such low volume?  My answer was and is simple.  I always look at the quality of the volume, not the quantity.  Today, we broke out of the downtrend that’s been in place for several weeks and the bears argued that there isn’t enough volume.  There are plenty of reasons to be bearish, but volume isn’t one of them in my book.

Above is the picture of the S&P 500 for the last twelve months.  First, you can see the breakout that occurred today.  More importantly is the volume at the bottom.  I’ve drawn a horizontal line based on today’s volume to get a perspecitve on where volume’s been the past year.  You can see during the run since March 2009 (which has been mostly up), volume has been higher and lower than what we are experiencing now.  I don’t know about you, but if I was using volume as an indicator to buy or sell stocks, I’d be lost. Don’t get me wrong, I like seeing stocks go up on heavier volume but it’s not critical.

Quality over quantity.  Every day, you have to look at what made the market go up or down and is there truly demand for stocks and less supply or vice versa?  In the past several days, the quality of the volume has been great even thought the quantity hasn’t.  The quality has lead to some nice gains.

Click here to listen to Through A Trader’s Eyes Podcast 21 – June 14, 2010

Click here to listen to Through A Trader’s Eyes Podcast 20 – June 7, 2010

With the market bouncing up and down on a daily basis, nerves are high.  The question I get more than any other is whether or not this is a new bear market or just a bump in the road.  I’m going to lay out some historical characteristics of bear markets vs. corrections in a bull market.  In 2007, there were several signs that the market was beginning to deteriorate.  It’s not just about looking at the level of the Dow Jones Industrials.  During 2007, in addition to the economy beginning to slow down, the internals of the stock market were getting weaker.  Anytime I analyze the NYSE, filtering through the various types of securities traded takes some time.  Closed-end bond funds, REITS, preferred stocks, etc. are traded on the NYSE.  Stripping those out and looking just at the operating companies gives an investor a much better sense of actual buying/selling and the future direction of the markets.  In 2007, the number of companies making new highs began to fall while the ones making new lows started rising.  In addition, the amount of volume (shares traded) was increasing on down days and falling on up days.  Various stocks began to enter their own private bear market.  Then, various sectors did the same.  Eventually by 2008, the entire market was in a downturn that eventually snowballed into what amounted to a stock market crash.  This progression that led to a new bear market was typical even though the drop in 2008 and the intensity were not.  Bear markets such as this one tend to look like a lower case “n” where they roll over.

A correction, on the other hand, happens very rapidly, is news driven and very scary.  As an trader and advisor, I tend to remember each year based on what the stock market does.  I remember 1998 as though it was yesterday.   In 1998, the stock market had started off the year very strong with 20% gains (based on the S&P 500) in just the first four months of the year.  That was followed by a mild correction (5%).  From the spring to midsummer, the S&P had gained another 10% and was at new highs.  Just as quickly as the rally had started, it came to a violent end.  What caused this abrupt turnaround?  In August of 1998, Russia defaulted on its debt and the financial markets went into a tailspin.  Long Term Capital Management (LTCM), a hedge fund collapsed.  The Federal Reserve sponsored a bailout of LTCM by its creditor banks. The Fed intervened and said they were trying to prevent a financial crisis.  Sound familiar?  LTCM eventually liquidated in year 2000.  In one month, the market had fallen 10%.  For a month it bounced around these low levels until it eventually fell another 10% bringing the correction to 20% from peak to trough.  It bounced 10% and eventually re-tested the lows.  That was the end of the correction, not the beginning of a bear market.

I believe Russia in 1998 is today’s Greece.  The stock market was in a well defined bull market and a 20% correction came virtually out of nowhere.  However, it ended and the stock market went on to make new highs before eventually peaking in March of 2000.

Below, I’ve overlaid the 1998 stock market on top of our current stock market.  There is a very similar pattern.  But notice in August 1998 (blue line) how the market took an initial drop (10%), paused and took another leg down.  I’m not necessarily predicting another 10% fall from these levels in the stock market, but it did happen in 1998 and that was a correction in a bull market, not the start of a bear market.

There are several instances over the past several decades of corrections that look very similar to what we’re experiencing in the markets in 2010.  With that said, there are several headwinds today that are different from 1998.  In 1998, we were dealing with taxes heading down, corporate profits rising, interest rates in a long-term downtrend, and a more peaceful geopolitical environment.  Therefore, there are more doubters of the recent rally than in 1998 and justifiably so.  It’s important to constantly monitor the overall strength of demand & supply of equities rather than try to predict how investors will feel a few months from now.  Over the next few days, I’ll be monitoring that demand & supply to see if any bounces are just the dead cat variety.