I’m feeling Gassy

According to the bible on commodity seasonality – The 2010 Commodity Traders Almanac, natural gas has a tendency to bottom in July and then peak in December. If you have the publication they go into detail on page 147. This is the Forty-Third annual edition and their success is likely due to their large institutional following in the U.S.

Now again a word of caution on seasonal investing because nothing works all the time and the only “sure thing” is that annual seasonal publications will occur once a year and they will say the same thing as the year before. So in this case seasonality always works – otherwise any other seasonal call should be confirmed by technical analysis.

In the case of natural gas the technical picture supports the case for a new bull market. When we study a weekly chart of the natural gas the continuous contract NYMEX (lower plot) we can see the completion of a first up-leg advance from September 2009 low of $2.50 through to the January 2010 peak of $6. The subsequent correction took us back down to the $3.80 level in early April 2010. Our weekly down cycle in now bottoming at week-16 with the price posting at all-important higher low

Unfortunately if you owned the toxic Horizons BetaPro NYMEX Natural Gas Bull+ ETF (TSX-HNU) you would not feel too bullish on natural gas. Note the recent 52-week low on the HNU. There are much better ways to enjoy the new gas bull. Our Level I and Level II seminars cover all this material. The current Oakville dates are May 4 and May 6, 2010. To enrol visit www.gettingtechnical/seminars our use this link http://www.gettingtechnical.com/07_seminars/index.shtml

The Place to be Through 2010

At Getting Technical we manufacture Canadian, U.S. and Global Sector Rotation Tables on a weekly and monthly basis. The weekly tables are good tools for a trader strategy and the monthly tables are good tools for an investor strategy. Sometimes a sector will jump out at us when it is ranked in the top 5 on both the weekly and monthly tables. Currently the Canadian and U.S. Industrial sectors are ranked a 4 (and rising) or better on the weekly and monthly tables. The North American Industrial sectors are economy sensitive and the implication here is that we have a strong recovery underway and so far many investors are not participating in this over-looked group. The other reasons to consider the industrial sector is because it is currently under-owned primarily due to the ETF manufactures such as iShares, Claymore and Horizon ignoring the group. So with no Canadian ETF available to replicate the TSX Industrial Index we are forced to engage in stock picking.

One component of the TSX Industrials is Bombardier Inc. and when we study a weekly chart of BBD.B we can see a clear up-trend that is interrupted by regular "earnings torpedoes" which drive the stock down from the upper growth channel to the lower growth channel. Note the stock in the past has recovered and pushed on to new highs. We think new highs are probable because of the strength of the overall industrial sector.

There are currently 19 components in the TSX Industrial Sector and 8 of them are must own through 2010. Our Level I and Level II seminars cover all this material. The current Oakville dates are May 4 and May 6, 2010. To enrol visit www.gettingtechnical/seminars our use this link http://www.gettingtechnical.com/07_seminars/index.shtml

Canadian, U.S. and Global Sector Rotation Tables © 2010 Getting Technical

Something is Wrong with Energy

According to the bible on seasonality – The Stock Traders Almanac, the strongest North American Energy trading window is from December through to July. Now the only thing I know about seasonality is that annual seasonal publications will occur once a year and they will say the same thing as the year before. So in this case seasonality works – otherwise any other seasonal call should be confirmed by technical analysis.

I reason if a seasonal call must be supported by the technical picture when you may as well just do the technical work. When you look at the North American Energy sectors in this case the iShares CDN S&P/TSX Capped Energy Index Fund (XEG) and the Energy Select Sector SPDR (XLE) you get the same troublesome signals
When we study a weekly chart of the XLE we see our Spread MA is printing a series of lower highs of relative perform vs. the U.S. dollar beginning October 2009. Note also the trend line break at the week ending January 29, 2010. Also of technical concern is that apparent triple top formation. A triple top is rare but deadly. It is a price pattern with three prominent peaks, similar to the head and shoulders top, except that all three peaks occur at about the same level. Triple tops usually form over a 3 to 6 months time frame. Our Level I and Level II seminars cover all this material. The current Oakville dates are May 4 and May 6, 2010. To enrol visit www.gettingtechnical/seminars our use this link: http://www.gettingtechnical.com/07_seminars/index.shtml

The Trouble With Crude

Forget the 1929 - 2008 crash scenario – right now the last thing we need is another 1973 style energy price shock. The real technical problem is the price of crude pushing above $80. This appears to be the “tipping point” at which the fragile U.S. recovery cannot afford.

When we look at a long term monthly chart of the Dow Industrials plotted above the price of crude we can see the pre 2002 “Old Economy” comfort zone of under the $42 level. Also note the post 2003 modern trading range of crude – between the $42 floor and the $80 upper level. The North American markets can tolerate the higher floor because of peaking crude consumption due to alternate sources and more fuel efficient autos combined with muted long term growth prospects. The last time crude ran above $80 was in October 2007 – the same week the Dow Industrials peaked at over 14000.

Traditionally gold and crude have traded together with some lead and lag but now gold is the preferred sector – see chart below where we can see the traditional Crude / Gold relationship during the 2002 to 2008 period when the price of crude led the price of gold. Now gold is the better relative performer from mid 2008 to date.

Something is up with Gold

Now if there is one thing we all know about gold – it is the dollar / gold rule. We are told by analysts that gold is the perfect hedge against a declining U.S. dollar. So if the dollar is weak, gold is strong and if the dollar is strong, gold is weak. In other words the two have an inverse relationship. The problem with the gold complex so far this year has been the persistent strength of the dollar due to the Euro problems. Since early December 2009 the US dollar index has run up from 74.27 to over 82 for a pop of over 10 per cent on the index. This in turn had gold reverse from a peak in December 2009 to post a 14-week low in early February 2010.

A look at a weekly chart of gold and the U.S. dollar tells me “something is up with gold” because ever since the February low – gold has rallied along with the dollar. When I examine a weekly gold vs. U.S. dollar chart I see that gold is returning the relative out perform in the face of a rising U.S. dollar. I can also see an elevated base and a bullish large inverse head & shoulder pattern.

One has to wonder if gold can rise against a strong U.S. dollar what would happen should the dollar turn lower?

A Stock Picker’s Market

We are now into the 13th month of our Rebound Bull and so we shift strategies from just getting invested to a sector selection strategy. We could go further and engage in stock picking which while more difficult can generate above market returns with lower risk. Now in order to limit the downside and still have some surprise upside potential we need to employ the following tests.

The candidate should be a real business – a company that generates revenue by providing a service or a product to unrelated third parties. This would exclude themes or stories of greatness if this discovery or “new thing” occurs. Our candidate should also be unpopular – sort of a hard sell by an advisor to a retail client – almost like an airline stock. When I was a retail broker I always knew the easy sell (like a gold stock) was a bad idea and a hard sell (like a stripped bomds) was a good idea.

Now one of the most ignored sectors in Canada is the Health Care Sector – with good reason because there is basically no choices in Canada and besides, most retail investors are only interested in gold and copper stocks.

Can you imagine the reception a retail broker would get calling a client and suggesting to acquire some Biovail Corporation (BVF-T) closed today at $16.98 on 363,000 shares.
Did you say Biovail? Isn’t that the company with that fishy accident and that insider trading noise? Well yes but that is all behind the stock but the “smell” lingers on. On the plus side the technical’s suggest someone is buying. Look at the rising money flow numbers and the recent move up and out a bullish ascending triangle. The weekly or intermediate cycle has also turned up. The TSX Health Care sector is also top 3 ranked in the Getting Technical weekly and monthly rotation tables.

David Rosenberg vs. the Equity Markets

Google “The Dow Industrials 1929 vs 2010” and you end up with pages of historical comparisons between the Crash and rebound of 1929 and the current “rally”. David Rosenberg economist and strategist for Gluskin Sheff + Associates Inc., and a guest columnist for Report on Business authored yet another comparison item entitled “Current rally has echoes of 1930 snapback” Wednesday's Globe and Mail March 31, 2010. I initially brushed off the item to be just another bear (who has missed out on the big 2009-2010 advance) who is arguing with the markets in a public forum but the weak technical arguments grabbed my attention and I quote.

“Not only is the U.S. equity market overvalued by more than 25 per cent, it is also extremely overbought, having gone 24 sessions without a decline of 1 per cent or more. Moreover, 89 per cent of the stocks in the S&P 500 are now trading above their 50-day moving averages - and volume remains tepid at best.”

And:

“From our lens, the rally of the last 12 months smacks of the 1930 snapback, and if I'm not mistaken the S&P went on to hit new lows in subsequent years and the next secular bull market did not start until 1954.”

And:

“The theory that the stock market has turned in a "double top" may not have gone the way of the dodo bird after all, following the reversals we saw in the last two trading days of last week”.

Before I continue we need a little background on the structure of the 1929 Crash. The Dow entered the “Roaring Twenties” running up non-stop from an October 1923 low of 85.70 to peak at 381 In September 1929. From there the Dow plunged 48% to 198 in just 71 days to bottom in November 1929. The following recovery wave – or bear market rally lasted 155 days to peak at 294 on April 1930 for a gain of 48%. The final down wave lasted 800 days taking the Dow to a low of 41 in July 1932 for a loss of 86%.

In terms of Elliott Wave we had an A-B-C corrective bear with the low at C (July 1932) the point of origin for the famous 20th century Supercycle Wave as set out in the respected publication - Elliott Wave Principle by Frost and Prechter. In other words the July 1932 low was the Buy-of-the-Century. I should also mention that Rosenberg refers to the S&P which was not published until 1957.

Ok now I admit to being no match for Rosenberg the economist although I did study Paul A. Samuelson’s – Economics An Introductory Analysis at my first year at Ryerson University but - I also studied the works of Ian S. Notley, Martin Pring, Frost & Prechter and John J. Murphy. Now if there is one thing history has taught me about the capital markets it would be - an economist should never manage money - because they are always mucking about in ancient data that has no relevance to the equity markets that are always pricing “valuations” on what will happen and not on what has happened.

First lets examine the “From our lens” stuff with the overbought comment and the observations relating to the 50-day moving averages. The 50-Day MA is a trading tool that generates over-bought and over-sold signals about every 15 days and an experienced technician would never compare a short term trading condition to a much larger November 1929 to April 1930 recovery wave that spanned 155 trading days

Next Rosenberg supports the theory that the stock market has turned in a "double top" – sorry but where? Would that be the 2000 and 2007 peaks of the S&P500? Certainly not the Dow Industrials, the Dow Transports, the Russell 2000 or the TSX Composite. Now about those reversals we saw in the last two trading days of last week (I assume the week ending March 26, 2010). One day reversals are for day traders. Is Rosenberg actually using a one day reversal to support his “echo of 1930 theory?

Now I think Rosenberg’s economic arguments have merit when he claims - “the current rebound in the economy is a statistical mirage orchestrated by record amounts of monetary and fiscal stimulus that are simply unsustainable and actually risk precipitating a very unstable financial and economic backdrop in coming years.” I do however think Rosenberg is getting poor advice on the technical side because to-day’s technical picture has no relevance to the 1929 – 1932 technical structure.

The 1929–1932 bear was of 34-months in duration and we are now into month 30 following the last modern October 2007 bull peak of the S&P500. That means to-day’s S&P500 has only 4 months to fall from the current 1178 level to below the March 2009 low of 666 in order to mirror or “echo” the 1929-1932 bear. In addition the current “flashy bear market rally” is in fact a bull market because we are into month 13 above the March 2009 low. No bear market has ever failed to break to new lows within a 12 month window.

The real technical problem (too bad Rosenberg never gave me a call) is the price of crude pushing above $80. Note the long term monthly chart of the Dow Industrials plotted above the price of crude and note the modern trading range of crude the North American markets can tolerate because of peaking crude consumption due to alternate sources and more fuel efficient autos combined with muted long term growth prospects. Forget 1929 – right now the last thing we need is another 1973 style energy price shock