Saturday, April 26, 2008

Weekend indicator review: continuation of the uptrend.

I was looking at some of the indicators I have reviewed before, and I see a continued rotation among asset classes.

In the last review, TIPS had started breaking down and the ten year bond yields had just started breaking out. This review is a continuation of the trend I had first highlighted in the earlier post.

Yen is up. Carry trade is back, or at least the unwinding of the carry trade is over for now. I won't be surprised to see Yen hitting 108 on the dollar with the current momentum.

VIX looks oversold. The last time it was as much under the 200 day MA as it currently is, equities performed well for quite some time (late 2006). (No chart) . VIX bottoming indicator is not as reliable as when VIX reaches new highs, so take this with a pinch of salt.

Ten year yields have also broken out, suggesting this might just be a little more than a counter trend rally, and we'll at least break the previous trading range.

Similar conclusion with the TIPS. Breaking down, after being an asset class of choice for the past few months.

All the indicators look like they will hit the 200 day moving averages of their respective charts. Stocks should be headed up/sideways at least until that happens.

Note that I use these indicators to get a broader feel of where we are on an intermediate term basis. These are the supporting arguments, not the main ones. You know you should have been playing on the long side given the panicky investor sentiment earlier this year: supported by the oversold readings, high put-call ratios, record bearish AAII sentiment reviews, and VIX levels in excess of 30.

My gut feeling is that this a momentum driven rally because of the oversold conditions we had earlier this year. Since we have some ways to go before hitting the 200 day MAs, I would be comfortable being long for the next two weeks. Remember to have those stop losses! A Fed week, and the month-end window dressing makes me even more certain of that.

There’s a bunch of cash sitting on the sidelines. The rotation which I highlighted above suggests that this is being deployed in the markets. A break above 1400 on the S&P 500 should see a fresh surge towards 1430. Position yourself before the crowd does.

Given the low volatility numbers, it might be an interesting trade to load up on long straddles on the Spiders (SPY). We either break out, or go back towards the lower end of the trading range.

Adam chimes in with his thoughts. He is reminded of April 2001.

Watch the breadth or momentum indicators for possible divergences. Stock charts has a nice market summary page which I find very useful. Or just check out what Brett is saying about his money flow indicators!

On a fundamental/sentiment analysis level:

-I don’t think we’ve seen capitulation yet. There’s been no blood on the street, just an orderly ~15% decline.

-Investors who forget about CDS, ARM-resets, Fannie Mae leverage ratios, do so at their own peril!

-Valuations don’t look that great either.

-I think 1350-1400 could possibly be a year-end target, suggesting a possible late summer shakeout.

-Mean reversion in profit margins, with high commodity prices and a tough consumer environment.

If you're in it for the long haul, just stay invested and ignore these gyrations. Market declines like the ones we've seen have always been excellent investment oppurtunities with a five-year time frame.

If you found this useful, please drop me a note. I'm compiling my weekend quotable quotes list. Will send it out tomorrow night.

Stay tuned.