The Week Ahead Highlights from February 2011

 Notes for the week of February 28, 2011

We're at an interesting point here. The major indexes have gone through a pullback, but only of a degree to temporarily alleviate overbought conditions. The Dow pulled back 3.3%, the S&P 500 3.7%, the NASDAQ 4.7%, and the Russell 2000 5.2%. The thing to note however is that the pullbacks were relatively orderly, and some indexes, and many individual stocks as well, stopped nicely at their 50-day Moving Averages (just like 3 months ago):

chart courtesy of Worden − www.Worden.com

The chart of the Q's (QQQQ) looks virtually identical, and DIA and SPY both came close to their 50-day MA's. All of them have bounced upwards the past 2 days, making it seem this might just be a 'pause-to-refresh', similar to 3 months ago. It's important to note however that the recent decline sported above-average volumes, and the bounceback of the last 2 days was on lower volume.

Caution is the keyword here. There are numerous things bubbling right now, such as the Middle East, the Dollar, possible news on inflation, the deficit, and much more, that could trigger a significant sell-off at any minute. But still, the upward trend has not been broken yet. You have better odds trading in the direction of the trend than trading opposite it, unless you are gifted with the ability to accurately predict reversals and their timeframes.

Is there any seasonal bias right now?

For several weeks now we've seen little in the seasonal charts for most of the major indexes and sector ETFs we follow. But that is starting to change. The S&P 500 and Russell 2000 have moderate upward biases over the next several weeks. The NASDAQ and QQQQ don't have any noticeable bias. The Dow however does, but DIA is even better:

GLD, $HUI, and XAU, (Gold ETF, AMEX Gold Bugs Index, and World Gold) have a slight downward bias for the next few weeks. $SOX, SMH, and XLK (semiconductor index, semi ETF, and tech ETF) don't show any net movement historically over the next several weeks. TLT (Bonds) has fallen 8 out of the past 8 years over the next 7 weeks, an average of 2.4%.

XLB, the Materials Sector SPDR, has a nice upward bias:

The energy ETFs have an upward bias. The surprise is XLF, the Financial Sector SPDR, is finally showing a good seasonal, especially over the next 10 weeks. For shorter periods however, the Win/Total rate is much lower (50-74%). It's only when you look at periods greater than 7 weeks that you get the preferred 75% or greater track record of gains.

In summary, the good upwards seasonals on several indexes/sector ETFs encourage suggest good trade candidates might be found investigating the major stocks that make up those indexes/ETFs. Check out the Quirky Blog entry for this week for some examples. But considering the possibilities for sudden reactions to negative news, consider smaller positions and tighter stops/exit points.

 Notes for the week of February 21, 2011

Another week, another gain in the markets. A number of analysts are pointing out that levels of trader confidence are high, the volatility index is very low, and many are comparing the current environment to late 2007, and even fall of 1987. On the StockQuirks site, while we concentrate on a select series of stocks for short-term trading, we follow a handful of major indexes and ETFs to keep a sense of the overall market characteristics.

This week, a number of indexes and ETFs are at, or just approaching, their 2007 highs. For indexes, the NASDAQ Composite and the Russell 2000 are there. For ETFs, XLK (Technology), IYC (Consumer Services), XLY (Consumer Discretionary), and RTH (Retail) are there as well. Not far away are the SOX (Semiconductor Index), SMH (Semiconductors) and XLB (Materials). The 2007 highs are very significant resistance levels. As far as entering new positions, the odds would probably be better to let the market prove itself first. That is, let these indexes/ETFs penetrate the previous highs and fall back to retest the was-resistance/now-support levels. If they instead rebound downwards, then consider short positions.

Looking at this week's seasonal charts for our list of indexes/ETFs, there's still no decent historical upward (or downward for that matter) bias in most of the indexes/ETFs. The DJIA has an upward sloping seasonal bias, producing an average 3.5% gain over the next 10 weeks, with gains in 23/28 years (82%) - see the chart below. The S&P 500 shows a weaker seasonal with an average 2.9% gain over the next 10 weeks, with gains in 21/28 years (75%).

A follow-up to my note on TLT back on February 7th - TLT has risen to touch the violated support level I pointed out. It has since started to decline again. This could be a good Short entry.

Gold doesn't show much for a seasonal right now. XLB (Materials) shows an average 5.8% gain over the next 10 weeks, with gains in 10/12 years (83%). XLE (Energy) shows an average 7.3% gain over the next 10 weeks, with gains in 11/12 years (92%).

And the AMEX Oil Index is still the best candidate. Since I mentioned the top 5 stocks in the XOI in last week's commentary, COP is up 7%, APC is up 3.1%, BP is up 4.7%, CVX is up 1%, and HES is up 5.5%. Weekly volume on all of these could have been more impressive though.

Here's the seasonal for the Dow Jones Industrial Average, with the year-by-year results for the next 10 weeks:

 Notes for the week of February 14, 2011

The AMEX Oil Index has a good seasonal lining up. In the past 21 years, the index has averaged a gain of 7.5% over the next 12 weeks, with gains in 19 out of 21 years (90%). Most of the top 5 stocks in that index are currently moving sideways or pulling back. COP however is showing a good pattern. Keep an eye on the other four (APC, BP, CVX, and HES) for new moves upward. If accompanied by increasing volume, these could be good tradable moves.

None of the other major indexes and ETFs are showing much as far as seasonal biases, one way or the other. I just don't like the feel of this market. A lot of the big stocks are getting too far away from their major moving averages, like the 50 and 200-day MA's. I feel a sudden news event, major earnings disappointment, Federal Reserve action, or even just the tapering off of this quarter's earnings announcements, could trigger a sudden, sharp head-for-the-exits. I'm cutting back my Long positions, and will start taking small positions in inverse ETFs. But no normal sized bets for now. Consider doing the same.

 Notes for the week of February 7, 2011

Another week with the major indexes moving up, around 2 to 3% each. At the end of 2010, the Russell 2000, an index of small caps, was stronger than the larger-cap indexes. This week the NASDAQ, Dow, and S&P 500 set new highs, however the Russell 2000 merely approached new highs.

GLD, the SPDR Gold Trust, formed a 'Hammer' candlestick pattern last week (often a reversal pattern), and rebounded nicely this week. A short-term bottom may have formed in gold (see the mention of a possible short-term bottom in GLD in January 17th's 'The Week Ahead' notes). HUI, the AMEX Gold Bugs Index, displayed a possible reversal off a short-term low as well.

Oil stocks and energy stocks in general showed strength. Semiconductor stocks and technology in general also showed strength.

TLT, the 20 year bond ETF, broke below a support level and will likely have further downside:

The S&P 500 is being squeezed within an ascending triangle. A breakout in either direction is likely to offer a good directional trade:

XLB, the Materials sector ETF, is probing new highs. It may be worth investigating individual stocks in that sector for good breakouts and other tradable patterns. The same goes for oil and energy stocks.

As far as seasonals, XLF, the financial sector ETF, shows a downward tendency over the next several weeks. The oil and energy ETF's show an upward bias, but there's still a few weeks of non-movement, historically, before the upward bias.