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Time to Retrench.
ON THE MARKET Commentary and Insights
By Dr. John L. Faessel
Monday - 1/12/2009
The major indexes tanked again on Friday with the major indexes ending near their lows on the back of a dismal (16-year high) jobless rate report and Robert Rubin's plan to leave Citigroup (C). The big indexes were off over 2% but the Dow eked out a less traumatic rip of 1.6%.
So, lets revisit the S&P 500 (SPX) chart; we have just peeled back 66 (SPX) points from the highs just above 940, a realm that was last visited before on November 6th. Important in this discussion is that that 940 ish ticking occurred on the highest overboughtness ever recorded (since the McClellan Oscillator was originated / developed by Sherman and Marian McClellan back in 1969. Also noteworthy; the (SPX) 940 ish top was colored by another McClellan facet, that of a couple of close in time Narrow Range back-to-back days, that in the lore of the McClellan, prognosticate large moves of 2% or 3%. The recent down trend also started after back to back “doji’s” suggesting - end of trend. (In Japanese Candlestick idiom.) Once again I should give acknowledgment and appreciation to the late and esteemed Ken Gammage who began proffering me McClellan wisdom back in 1973. (More on Ken Gammage below)*
Friday the McClellan (favorite overbought / oversold indictor), posted a plus and still overbought 133. Thursday’s was 235 after Wednesday’s plus 234. On the January 6th it was plus and overbought all-time high of 386. Neutral is thought to be below a plus 100. so we are approaching a neutral zone and the support of a ZERO McClellan.
The backdrop now looks like this to me. Overboughtness has burnt off to a large degree. Consensus long term sentiment remains horrible but not as bad as it was a month ago. Price is approaching decent support after giving back 66 S&P (SPX) points. Highly likely that we retrench right here at the 50-moving average. I think worst case (SPX) 860 will hold up as it would then given back all the overbought.
The important 50-day moving average (support that held-up on Friday) currently at S&P 500 (SPX) 888. Channel support (off the lows of the late November to present channel) is at (SPX) 880. Support at 860 looks good and so does 820.
First resistance in the (SPX) is at 912 / 910 - then at 920 and 943ish.
Better mention right about here re the recently cited Stock Trader's Almanac, that submits that; the first five trading days are important barometers for the rest of the year. Over the last 36 years the up “first five days” were followed by full-year gains 31 times, for an 86.1% accuracy ratio. So how did we do? We closed 12/31/2008 at (SPX) 903. On January 8th, the 5th day of trading, we closed at (SAX) 909. Maybe too close for comfort, but we made it by a nose. No problem in 2009; right? On Friday we closed at (SPX) 890.
All that said, let’s plow on. While we face rising unemployment, falling real-estate prices, recession and who know s what other horror, probably nothing good really good happens in this mess until the credit crunch begins to show sighs of easing - Halleluiah if there is a good sigh out there it’s that the credit spreads continue to narrow.
Last week’s mathematical generated BARRON’s Confidence Index was 54.8 the prior week it was 52. On December 22, 2008 it posted the all time lowest post ever of 45.2. That’s 4-weeks of steady improvement and the first such % upticks in over a year. The Confidence Index is the High-grade bond index divided by the Intermediate grade. We are making progress, it’s a trudge, but we are grinding it out. For comparison purposes one year ago it had begun to turn down at was 77.5. In good times the number is in the mid 80s. The significance of the all-time low number is that credit-givers had registered the worst ever outlook for the less than prime paper. Assessment of how the bond markets many $ trillions are allocated and what "they" herald is the focus of all the major players.
Barron's magazine follows this key data point in the form of a Confidence Index* each week. Until they continue to improve - do not expect the market to really turn.
And conspicuously the TED spread, LIBOR and the Libor OIS spread, Ex Fed boss Alan Greenspan’s pet indicator, are all showing good sighs of improvement over that last months or so.
The Treasury 10-year yield fell 6 basis points to 2.39%.
Yields on TIPS (U.S. Treasury Inflation-Protected Securities), point to almost no rise in consumer prices for the next decade. Yet with the flood or $3 trillion in assorted “rain money on the country” programs, and the money supply mushrooming from the Treasury's TARP, the FDIC's TLGP and the Fed's TAF, TALF, CPFF and MBS purchase programs how in the world can’t there be inflation downstream?
*Ken Gammage passed away a couple of years ago was a pal of mine. He was a Harvard MBA fought in WW2 and was about the most charming and delightful "glint in the eye" kind of wonderful guy you would ever want to know. Furthermore he was a master of the McClellan Oscillator’s many nuances; he called these deeply overbought & oversold penetrations of the McClellan "buy or sell spikes." He would bite his tongue close his eyes and buy ‘em when the McClellan got to huge negative numbers. And do the same ie sell ‘em when they were in high numbers. He was remarkable at calling market bottoms - both intermediate and longer term. Ken also penned the term "Hindenburg Omen" another classic market warning. His Richland Report was a bears "dream read."
Here's a Rudyard Kipling verse that Ken Gammage whispered to me from his cupped hand back in 2001 right after we went into Afghanistan to fight the Taliban. It seemed apropos at the time and I recollect the charm and wonder of the fact that he could reel off such pertinent, charming and whimsical couplets right out of the blue.
Dr. John L. Faessel
ON THE MARKET Commentary and Insights
Dr.Faessel@onthemar.com
Email Request for "Best Ideas for 2009": Dr.Faessel@onthemar.com
From - The Young British Soldier.
When you`re wounded and left on Afghanistan`s plains,
And the women come out to cut up what remains,
Jest roll to your rifle and blow out your brains
An' go to your Gawd like a soldier.
Go, go, go like a soldier,
Go, go, go like a soldier,
Go, go, go like a soldier,
So-oldier of the Queen!
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