A Mature S&P500 buy signal

The NYSE tape has improved since year end with the NYSE advance / decline line and the S&P500 breaking to new highs. The only major technical impediment remaining was the failure of the Dow Industrials to the confirm last week’s 52-week high posted by the Dow Transports. The Dow confirmed on January 23 when IBM alone contributed 66.35 points to the total gain of 67.12 points

Last January 18 (see last post) our own TSX60 Index which has been in a “sell” mode since June 2011 issued a new “buy” signal. The model is a simple strategy with no math required. Set your “sell” at the lowest low of the past twenty six weeks. This is a moving 26-week window, so each week add the new week and drop the oldest week. The model “Sells” if the weekly price closes below the prior lowest 26-week low. The reverse is applied to the “buy” signal if the price closes above the highest 26-week high. The sector correlation on the S&P is higher than the sector correlation of the TSX60 and so a 30-week price channel is required.

Below is the summary of S&P500 trades from 1990 to date. 
 

There were only 6 trades issued from February 1990 to date and the model beat buy and hold by 608 points over the period. Below is a zoom over the last 5-years. Note at the close last week the upper channel printed 1486 and the lower channel printed 1309.

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A new TSX60 Index buy signal

The NYSE tape has improved since year end with the NYSE advance / decline line and the S&P500 breaking to new highs. The only major technical impediment remaining is the failure of the Dow Industrials to break above the October 2012 peaks the confirm today’s new 25-week high posted by the Dow Transports.

Most investors know that our own TSX Composite has been a global laggard for several quarters – but finally today my simple TSX60 timing model – which has been in a “sell” mode since June 2011 has today issued a new “buy” signal. The model is a simple strategy with no math required. Set your “sell” at the lowest low of the past twenty six weeks. This is a moving 26-week window, so each week add the new week and drop the oldest week. The model “Sells” if the weekly price closes below the prior lowest 26-week low. The reverse is applied to the “buy” signal if the price closes above the highest 26-week high.

Below is the summary of trades from 1994 to date. 

At first glance it seems like a lot of trades (8) to beat buy and hold by 4 points on the TSX listed XIU but it did keep us out of the bears of 2000 – 2002 and 2008 – 2009. Below is a zoom in on today’s “buy” signal.

Apple Charting:

On December 31, 2012 I was quoted by stockchase.com for uttering the following opinion on Apple on BNN’s Market Call, “Apple has not violated a long term trend line.  It could go down to $490 and not violate it.  The selloff is over.  It could still run up, technically.”

The following blog conversation took place and I quote.

On December 31, 2012   dh12 said: I disagree with your call on apple to go higher. Vied on a monthly chart it is up already 700 percent in a few years and already far extended from it's long term moving averages. What happens now usually is a strong snap back to correct this overbought condition. To go long here on apple is just poor analysis.

On January 6, 2013 Getting Technical said: Hi DH12, On Apple – when plotted on a semi log scale AAPL found support at a 10 year primary trend ($500) line and so has not violated the 2002 – 2012 advance – I have no idea what you are using as a long term moving average – my analysis is based on a very long term 15-y monthly chart.

On January 8, 2013 dh12 said: I am not using a semi log chart. IMO it's not needed in this case. Apple may get an earnings bump this month but it will be all weakness going forward. I am also looking at the long term monthy chart which in 2012 went parabolic. It is very far from it's 200 month Moving average and will correct sharply. And remember this about technology stocks in general. If Apple can go from not even being in the market to the best phone on the market in two years, the barrier to entry is pretty low, i.e., there is very little first mover advantage in this market judged by how fast the technology is reinventing itself. In other words, today`s leader can be tomorrow`s also ran faster than Moore`s law can bat an eye. Invest here in apple at your own risk

I do appreciate the input from dh12 and because Apple is such a high profile stock we need to do more work here and also invite all opinions as to the price direction of Apple.

Now: just to state Getting Technical’s (GT) position on the analysis of Apple

Firstly the opinion of GT is based on technical analysis only and so the merits of the iPhone and iPad and iWhatever is not relevant and while dh12 appears to not be a fan of Apple products GT is also not an Apple fan having no ownership of any Apple Products. Also I never said Apple was a good investment – I just said the selloff was over.

Secondly we need to question dh12 as to the claims that a semi log chart is not needed and also the claim that Apple went parabolic and it is “very far from it's 200 month Moving average.”

Our first chart is Apple monthly spanning 16 years with a linear scale. I did not use dh12’s 200-month average because such a long term average eliminates the study of any stock listed after 1995. As you can see this scale distorts reality because it makes the recent 2008-2012 advance look huge relative to the puny looking 2003-2007 advance. Note also the primary trend line joining the important 2003 and 2009 lows which when applied on this scale is non-functional.

Our second chart is Apple monthly spanning 16 years with a semi-log scale and as you can see in reality the 2003-2007 ($5 to $200) advance is greater (n per cent) than dh12’s so-called parabolic advance of 2009 through 2012 ($100 to $700). Note also the primary trend line joining the important 2003 and 2009 lows also joins the recent 2012 lows and so I state again “Apple has not violated a long term trend line.  It could go down to $490 and not violate it.” As usual all comments are welcome

AAPL Linear Scale

 AAPL Semi-log scale

Glossary of investment terms

This item appeared in the Toronto Star Business January 5, 2013 - Enjoy!

Did you hear the one about the financial planner who walked into a pizzeria to order a pizza? The server asks him: "Should I cut it into four pieces or eight pieces?"

The planner replies: "I'm feeling rather hungry right now. You'd better cut it into eight pieces."

Think of the eight pizza slices as an 8 for 1 stock split – you get twice as many pieces as the four slice pie and so you feel richer.

I know it was a corny joke but I was just trying to do contribute to the investor education movement that is being championed by the business media, various financial institutions and our own Ontario Securities Commission (OSC). The OSC invite visitors to “Check out our brochures to learn more about investing and how to protect your money.”

There is no doubt that an informed, educated investor will make better investment decisions and so with the New Year upon us I now use this space to table my own glossary of investment terms that should serve us well through 2013.

Bear Market: This is what the markets do after you buy because of bright economic conditions, record corporate earnings growth, peace in the Middle East, and low oil & gold prices.  

Bond: A bond is a magical piece of paper that is worth more when the economy is bad and then worth less when the economy is really bad.

Bull Market: This is what the markets do after you sell because of a recession, corporate scandals, political unrest, war jitters and soaring oil & gold prices.

Cash Flow: Cash flow is the movement of money from a mutual fund to the fund manager. Sometimes called the management expense ratio or MER.

Commissions and Trailer Fees: The commission is money you pay to buy and sell. A trailer fee is the money you pay to buy and never sell.

Day Trader: The day trader has the opportunity to lose large amounts of money over short time periods. See long term investor.

Diversification: In a bear market a diversified portfolio will collapse more slowly.

Financial Planner: A financial planner is a jack of all trades and master of none.

Financial Columnists and TV Experts: They are legends in their own mind.

Fundamentals: Otherwise known as the “compelling story”. The compelling story is what draws you in and keeps you intoxicated until closing time.

Fundamental Analysts and Technical Analysts: The fundamental analyst thinks he or she is right and the technical analyst thinks the market is right.

Growth Stocks: Growth stocks are the ones then go up when you don’t own them.

Investment Math: When it comes to investing math is everything.  I have learned there are three kinds of investors - those that can count and those that can't.

Investor Advocate: An investor advocate is a bad investor looking for someone else to blame

Long Term Investor: A long term investor is a day trader who has refused to sell a losing trade.

Margin Debt: Using margin is the unique opportunity to have your original investment go to zero and yet lose 200 percent of your capital.

Market Correction: A correction is what the markets do the day after you buy stocks.

Options: Buying call options is the opportunity to lose small amounts of money over short time periods. Writing covered calls is the opportunity to either trade away a rising stock or to hold on to a falling stock

P/E Ratio: The P/E ratio is also known as the panic/exit ratio. Fund managers use this number to calculate the time required for all of the unit holders to bail out of a fund.

Seasonal Investing: In a bull market seasonal investing is the strategy of buying low, selling higher and then buying back even higher. In a bear market it is the strategy of selling high, buying low, and then selling even lower.

Stock: A stock is magical piece of paper that is worth more when the economy is good and then worth less when the economy is really good.

Value Investing: Picking stocks that go down as soon as you own them, otherwise known as value traps..

On the topic of value traps this is a comment on Shoppers Drug Mart Corporation I found posted on found on stockchase.com “Generating so much free cash flow that they don’t know what to do with it so they are buying back shares and raising dividends”

Our chart of Shoppers displays a classic value trap with the current price sitting just below the March 2009 lows posted by just about every listed large cap stock on the planet and that is a compelling story.

Dow Theory and the Transports

At the close Friday January 4, 2013 the Dow Transportation Average posted a new 52-week high and part of Dow Theory states the Industrial and the Transportation averages must eventually confirm any moves above or below significant junctures. Last Friday the Dow Industrial Average closed at 13435 just below the 52-week high of 13662 and so has not yet confirmed last week’s new high of the Transports

Problem; is the post fiscal cliff advance the beginning of a big advance or is it a bull trap? A bull trap is a condition that occurs when prices break above a significant level and generate a buy signal, but suddenly reverse course and negate the buy signal, thus "trapping" the bulls that acted on the buy signal.

We will know over the next few weeks if both the Industrials and the Transports can rally and stay above 52-week high levels or if the Transports reverse here and setup the bull trap. It is possible that last week’s 52-week high of the Transports a false move. A look at the table below displays the top ten of the twenty components by weight with the bold symbols identifying the four names that also closed last week at a 52-week high.

When you look at the bottom ten we find that only one component closed last week at a new 52-week high.  In summary out of twenty components, only five posted a new 52-week high suggesting thin leadership.