The Week Ahead Highlights from August 2011
Notes for the week of August 29, 2011
(While we had most of this week's commentary ready before the hurricane hit this weekend,
a loss of power prevented us from uploading it to the site until Tuesday morning)
S&P 500 Chart Analysis and Seasonals
The markets are still trying to sort out the numerous factors right now, and a hurricane will only add to
the mix of variables. The S&P 500 (and DJIA, and NASDAQ Composite, and most major ETFs) this
week did not move above, or below, the range of the eight days right after the big drop.
Some chart technicians call this a 'coil', a tightening of a spring, from which a breakout
is likely to define the strength and direction of the market for several weeks afterwards.
chart courtesy of Worden − www.Worden.com
In recent weeks, a lot of damage was done to the technical picture of many indexes, ETFs,
and stocks. An experienced short-term trader will want to see some consolidation, to
define clear support and resistance levels that will help determine trades with good
probabilities and Reward-to-Risk ratios.
We're always looking for 'tailwinds' to help support overall market, and individual stock,
direction. Since we're looking at the S&P 500, let's see what the seasonals, the
historical track record over the next several weeks, look like. Is there any evidence of
seasonal buying or selling this time of year?
The short answer is no. For the next nine weeks, which takes us through October,
there's no net gain or loss of the index. As you can see, 1987, 2000, and 2008
had large losses. 1982, 1988, 1996, and 2010 had large gains. But theoretically,
if you had bought the S&P 500 index each year (of course you really can't),
after 31 years, you'd have nothing to show for it, except for maybe some good war
stories.
The Dow Jones Industrial Average, and the Russell 2000 are virtually identical. The NASDAQ
Composite would have given you an average 1.5% gain over the next 9 weeks, for all your
effort.
This is however a good period for trading individual stocks. For example, in 2004 through
2007, Apple (AAPL) gained 54%, 20%, 17%, and 34% respectively over the next nine weeks.
Amazon.com (AMZN) gained 117% in 1997, 34% in 2002, 34% in 2006, 45% in 2009, and 31% in 2010.
Even Johnson & Johnson (JNJ) eked out double digit gains of 11% in 1994 and 2010 and
18% in 1995.
While I still suggest caution on entering new trades right now, I've still got a couple
good trade candidates, a Long and a Short, to cover in Stock Talk. See you there.
Notes for the week of August 22, 2011
This is the best of times, it is the worst of times
With apologies to Charles Dickens, this really is the tale of two markets. With the recent sharp pullback
in the markets, the universal question right now is whether it's time to bargain-hunt and re-enter the
market, or if it's time to stock the figurative portfolio basement with non-perishables.
There are strong opinions and well-reasoned arguments in both directions. Just this morning I received
a newsletter promotion stating:
The bear market rally that started in October 1934 lasted until August 1937 - 35 months - and took
the Dow Jones Industrial Average from a level of 90 to 185, a gain of 106%. The Dow Jones then
plummeted and didn't recover until seven years later, 1944.
So similar it's frightening: The bear market rally that started in March 2009 has lasted
around 30 months so far and has resulted in the Dow Jones Industrials rising close to 100%.
Another analyst started his newsletter last week with:
Best Seven Years Ever... Starting Now? It's Possible
History says stock prices and home prices could soar... Is it time to get in?
So is it a good time to catch good stocks at bargain prices, or is it Something wicked
this way comes.
'V' bottoms are not common in markets, even though that's exactly what we had in early March, 2009.
It was too much to expect another 'V' bottom last week, when the markets formed a short-term low on
Tuesday.
One good, higher probability setup many professional traders look for is a successful retest of
a significant low. If the stock or index bounces off the low on increasing volume,
falls back on decreasing volume, and reverses upwards from slightly above the previous low,
then many traders feel that offers a higher-probability trade.
The S&P 500 may be retesting last week's low:
chart courtesy of Worden − www.Worden.com
The strong volume on the most recent two down-days is a warning though. The index may not stop above
last week's low.
Let's look at OIH, the Oil Services ETF:
chart courtesy of Worden − www.Worden.com
Not only did OIH close lower than last week's low, it gapped down on strong volume.
As I mentioned last week, many institutional traders pay attention to 50-day/200-day crossovers
(called 'Death Crosses' by some). Many stocks and indexes have just formed 'Death Crosses'
(see the above two charts for example).
This site is focused on identifying stocks with good stories, good technical patterns,
and have 'tailwinds' (good historical track records, or 'seasonals' is one of the biggest things
we look for). We further filter such trade candidates to only those offering good Reward-to-Risk
ratios.
Right now, nearly everything I look at fails one or more of those goals. Give the market a little
more time to show its hand. If you're sitting on a beach reading this on your iPad, stay there.
Extend your vacation and just be a spectator for now. It should be a lot more entertaining than
that novel you bought in the airport store.
Notes for the week of August 15, 2011
I'm still recommending sitting on the sidelines right now. Unless you are a day-trader, this is not
a good environment for short and intermediate term trades. Because of the wide swings, even wide stop-losses
can be taken out quickly. The risks are higher, providing lower Reward-to-Risk ratios.
It always is a good time to prepare for new trades though. Continue to do your homework. Keep an active
watchlist, looking for stocks with good historical track records (seasonals), setting up good chart
patterns, that respond better to market events than most other stocks.
In this week's Focus List for members, I'll be restating last week's advice - that even though there are
several stocks with very good seasonal track records right now, it's best to wait for better setups.
There are traders though that still want to make trades. There is one interesting stock that I'll mention
in this week's Stock Talk, that not only has a very good seasonal, and as soon as you hear the name of the
stock you won't be surprised, but it also has shown very good strength relative to the rest of the market.
Check out the Stock Talk column later this weekend.
As I've covered over the past several weeks, we're heading into the time of year where many stocks and
indexes have good seasonal patterns. In StockQuirks, our seasonal analysis is updated each week to show
the track records of the coming weeks in previous years. Many of the stocks and indexes we cover are
starting to show good seasonals over the next several weeks.
For instance, the NASDAQ Composite has gained an average 2.8% over the next 5 weeks, with gains in
16 out of the past 20 years (80%).
The Russell 2000 has gained from 2.1 to 3%, over the next 3 to 5 weeks, with gains in 80% of the
past 20 years.
OIH, the Oil Services HOLDRs, has gained an average 2.9% over the next 3 weeks, with gains in
9 out of the past 10 years.
TLT, the iShares Barclays 20+ Year Treas Bond ETF, has a historical upward bias through the next 7 weeks.
But with the current market situation, I'd say none of these seasonals are worth trading. The risks
are just too high. Give the market a little more time to settle down and provide better setups for trade
entry.
To emphasize, allow me to point out something with the S&P 500. Probably the two most widely
watched moving averages on stocks and indexes are the 50-day and 200-day moving averages.
On the S&P 500, the 50-day has just crossed below the 200-day (the yellow line is the 50-day MA,
the orange line is the 200-day MA):
chart courtesy of Worden − www.Worden.com
There are many other stocks and indexes showing a similar pattern.
This is a strongly Bearish sign for the market. Keep that in mind when thinking about all the
"this may be the best time in years to buy stocks" advice circulating in the media, reports, and newsletters
right now.
Notes for the week of August 8, 2011
Well, this was an entertaining week. Next week is not likely to be boring either. With the potential
for large swings either way, (and they usually aren't your way, are they?), this is one of those
times where it may be best to sit as a quiet observer on the sidelines. You don't need to trade,
and take risks, every day.
Looking at the seasonals of the major indexes and ETFs I watch, for the most part they are still either
sideways, or have slight upward biases for the next several weeks. So don't look for any 'tailwinds'
from the seasonal tendencies.
The NASDAQ Composite, and the Russell 2000, representing many lower cap stocks, have the best
upward seasonal biases right now. For example, the Composite has a track record of an average 2.6% rise
over the next 6 weeks, with gains in 16 out of 20 years (80%). The Russell 2000 has a track
record of an average 2.7% rise over the next 6 weeks, with gains in 17 out of 20 years (85%).
But neither of these seasonals are strong enough to base a trade solely on. There are a number of
well-known advisors and newsletter writers preaching the markets may bounce upwards briefly, but
will continue to plunge further. Another group of them support the theory this is the best time
to buy in decades. There are good arguments on both sides.
The current price charts suggest to me that right now, the risk is too high for the possible reward.
Again, you don't need to be in trades every day.
Should you still want to trade, I will note that our Weekly Focus List has identified a large
number of stocks within our Select List that have current Historical Volatilities within the top
15% of their past year's range. If you believe that a bottom is being put in, then Covered
Calls and Bull Put Credit Spreads may be very good trades right now. But plan your exits
carefully before entering new trades, and follow your trade plan precisely!
Notes for the week of August 1, 2011
It was a nasty week for the market. But so far, the charts don't look too bad. Most of the major indexes
and ETFs I follow still show well-defined trading ranges, and this past week's action merely dropped
most of them further down in the trading range. Volume has picked up, but in most cases was at, or below,
average. After five or six consecutive downdays, many of these indexes and ETFs can be considered
oversold. However, with the debt limit still not resolved, news can drive this market much lower,
and much more oversold.
As far as seasonals for the near term, most of the indexes and ETFs don't show much bias one
way or the other. There are a couple of exceptions.
First, the NASDAQ Composite seasonal is now starting to show an upward bias. I've highlighted the
7-week period, showing that over the past 20 years, the Composite has risen an average 2.3%
over the next 7 weeks, with gains in 16 of those years:
The seasonals on the S&P-500 and Dow are still pretty much sideways - no upward or
downward bias for several weeks yet.
Interestingly, the NASDAQ Composite price chart doesn't look quite as bad as the S&P-500's
or the Dow's. The past three days' closes were actually rather close:
chart courtesy of Worden − www.Worden.com
Not only is the NASDAQ's daily chart showing a little more strength (relatively) right
now, historically, NASDAQ has been a little stronger than the S&P and Dow this time
of year as well. But, this isn't strong enough to trade on. How are other indexes and
ETFs doing?
I've focused on SMH, the semiconductor ETF recently. It still has a negative seasonal for the
next several weeks, meaning historically, a tendency to move downwards this time of year.
Looking at the seasonals of some of the top holdings in SMH, I found a negative bias in
every one I looked at. They were of varying degrees. ALTR for instance has only a slight
downward seasonal, while AMAT has a very strong one. INTC is in the middle.
Finally, Gold and the mining stocks deserve some comment. The price of gold, as reflected
by the world gold price (XAU) or the primary gold ETF (GLD), has broken above the early
May highs.
The mining-related stocks however haven't shown as much strength. Many articles and investment
newsletters have recently covered the historical gold to mining stocks relationship.
To revert to the mean, either gold has to fall significantly, or the mining stocks have
to catch up to the price of gold. There are strong arguments for either case.
HUI, the AMEX Gold Bugs Index, is showing a good short-term upward bias right now in its
seasonal. Focusing on the next 6 weeks, the HUI has risen an average 7% in the past, with
gains in 14 out of 15 years (93%):
We have a handful of gold and silver stocks in our StockQuirks Select list. This week's
Focus List commentary will cover the best trade possibilities.
Be very cautious though - news and events related to the debt crisis has the potential
to turn the market on a dime - perhaps several times!