2011 Year End Summary for Stock Indexes

The Performance chart below gives you an excellent picture of where the indexes ended 2011. We started the year with the normal bravado that the Holidays seem to bring and then reality caught up to most investors by the end of April. We ended the year with majority of the indexes losing money. This picture points the way forward as well. It shows you that you have to, unfortunately, watch your money much closer than in the past. Its likely you will have to be in and out of the market a couple of times a year if you want to take advantage of the wild swings in volatility that are going to be a part of the markets for some time to come.

The following charts on the VIX (volatility index) show you how you can use the index to help time your investments. The first chart shows the VIX as a 10 period (weekly in this case) moving average overlay-ed on an area chart of the SP500 index. As you can see the index does a good job of timing the tops and bottoms. As the index approaches the 20 level you need to start preparing for a top. The index has an inverse relationship with the market. A lack of fear signals a top and excessive fear infers a bottom is likely about to form.

This last chart from readtheticker.com uses their proprietary cycle studies to forecast likely outcomes in the future. It suggests the early days of 2012 should see a rising VIX which means a falling stock market.

Hopefully you can prepare for the coming ups and downs by using simple charting methods and slightly longer time intervals.  Get ready as 2012 could be a wild ride.

Happy New Year to All

SPX 500 - Where are we?

Here's a very interesting chart to watch as we head into 2012. The key elements present in the chart are a combination of indicators that give an advanced warning of a turn to come, an indicator of the fear level in the markets and finally a slower moving indicator that confirms the change of direction. The pink boxes at the top contain, on the left a fractal that formed at the top in late 2008 and on the right there appears to be a similar fractal forming.  Not hard to see what happened in 2008 and a repeat is possible again in 2012 if the fractal pans out.


Before we look at the chart further, a few definitions may be in order:

1. A fractal has been defined as "a rough or fragmented geometric shape that can be split into parts, each of which is a reduced-size copy of the whole," a property called self-similarity.
2. The TED spread is now calculated as the difference between the three-month LIBOR and the three-month T-bill interest rate. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.
3. The Libor rate is the average interest rate that leading banks in London charge when lending to other banks. It is an acronym for London Interbank Offered Rate(LIBOR), Banks borrow money for one day, one month, two months, six months, one year, etc., and they pay interest to their lenders based on certain rates

SP 500 Weekly Chart

So technically going forward into 2012 we are on a sell signal:

1. The early indicators have given us a sell signal in the top chart (indicator 1 and 2)
2. The TED Spread is rising and continues to rise en-light of the current rally.
3. The Fractals are hinting at a possible major top similar to 2008.
4. The lower indicator is below the zero line and has confirmed the early sell signal.

As for the economy,we should try to wrap our minds around these seven mathematical facts:

1. Every day, the U.S. government takes in $6 billion and spends $10 billion.  This means that every day the federal government spends $4 billion more dollars than it has.
2. The real unemployment rate is a jaw-dropping 11 percent.
3. Every fifth man you pass on your way to work is now out of work.
4. College graduates are now 34% less likely to find a job in this economy  than they were three years ago.
5. Every seventh person you pass on the sidewalk now relies on food stamps.
6. The ravages of this economy now mean that more Americans live under the federal poverty line than at any time in U.S. history since records have been kept.
7. Every fifth child in America now lives in poverty.

Lots of things going the wrong way at the moment ... caution is warranted.

Time to Look Ahead by Looking at the Past

If there is a picture that says a thousand words, this has to be it. It is also a very true representation of where the markets have been since 2000. We've been going sideways to lower and if you are a "buy and hold" investor you haven't made much unless you got out when the market reached it's peak during the trading year. 2011 was a great example of why you need to look at the markets in a different light going forward. You need to find a means of seeing through the volatility of the short term market swings and the smoke and mirrors from the "Talking Heads" whose only vested interest is their own pocket books.

Business Insider article - Richard Koo chart

The important thing to take away from this graph is the targets (box upper right hand corner) for the market that the guru's and economists forecast going into the year. Pathetic misses and these are the same people who didn't have a clue as to the 2008 top and the downdraft that ensued.

With 2011 just about in the books, let's look at the potential problems facing the markets in 2012:

1. Europe will remain a continuous problem for next year.
2. Iran is becoming a potential Iraq.
3. North Korea is back on the radar.
4. Lack of growth in terms of GDP - estimates as low as 1.5%  for all of 2012 
5. Oil prices persistently high and likely to go higher.
6. Little to no wage growth and high unemployment continues.
7. Consumers will continue to pay down their debt and save more (little spending).
8. Can't count on any Leadership out of Washington.
9. Businesses will likely not start hiring until tax situation and effects of Obamacare are known.
10. Still possibility of a double dip recession which we may be in already.

A couple of charts (from James Pethokoukis, Business Insider article) to reinforce the comments above:

Next week we will try and put together a few hints on where the markets could end up in 2012. We now have the tools to help us to take advantage of the big moves and hopefully keep us safe when things begin to go the wrong way. 

Merry Christmas

Housing driven Christmas Rally?

Homebuilders ETF

Well just like I said in the weekend review the market was moving sideways and only something major would move the markets before Christmas. However, the news we got was certainly not what you would call earth shattering by any means. Some upbeat news out of Europe concerning the German's confidence rising and the rise in housing starts in the US beating expectations. My take on the day:

1. It's not the Germans we have to worry about in Europe.
2. The Housing numbers are easily debunked. (see article from Zerohedge.com below)
3. The upshot of the day was the markets wanted to rally and they did. Beware of rallies on low volume.

REMAIN CAUTIOUS

Housing Starts Surge Entirely Due To Year End Channel-Stuffed Multi-Family Units

Submitted by Tyler Durden on 12/20/2011 - 08:55Housing Starts Reality

Once again the US Department of Truth succeeds in fooling the algos: today's November Housing Starts number was a blockbuster: at 685K annualized units, it came higher than the highest estimate (range was 600K to 655K), and certainly higher than the average estimate of 635K. It was obviously higher than the downward revised previous number of 627K. All great: housing soaring, employment must be back. Right? Wrong. One peek under the covers shows where all the "growth" comes from - the entirety of the surge was due to the absolutely hollow 5+ multi-family units which jumped by a whopping 25% sequentially, and which as everyone in the industry knows are nothing but inventory padding by homebuilders who "build just to build." Unfortunately, as the all important 1 Unit structure trendline shows, there is absolutely no improvement in this critical series. But hey - it fooled the robots. And now it will take at least 12-24 hours before vacuum tubes process the reality of this latest spin. By then, however, we may well have had our Christmas rally.

Weekend Update

After looking at several of the market breadth charts in an attempt to see when the next oversold bounce is likely to arrive, it looks like we are in more of a neutral (sideways) type of environment. We don't have company insiders gobbling up company shares or a major short interest condition that might give us a kick start higher. Commodities have been getting hit rather hard of late so I thought there might be a sign on one of my trend charts ...... the Copper/Gold spread.  The chart below shows the spread in the solid blue line and the SPX is in grey in the background. The lower box on the chart contains a long term indicator with a 30 period moving average. The Indicator has been very accurate over the last 6-7 years.

The spread is showing a small potential bottom and the indicator in the lower window is just ignoring it at the moment. Given currant conditions, only more rumors from Europe or the Fed are likely to move the markets significantly until we get past the Holidays. Any contrived rallies on low volume will be suspect and should be avoided by all but the short term traders.

Let's see what Santa brings next week.

Still Waiting for Confirmation Of Down Trend

Below is a monthly chart of the SP500 index shown in grey bars. Overlaid on the price chart are 3 indicators I use to confirm the trend change. Right now we have 2 out of 3 showing a negative divergence to the SP500 price trend. The upper level indicator is the RSI (Relative Strength Index) and it is hovering around the 50% level which is neutral. The lower boxes are Stochastic, MACD and cumulative NYSI indicators. All of which are neutral at the moment.

The chart shows price momentum trending sideways. The market is likely going to be in limbo until after Christmas unless a major bit of news, good or bad, comes out of Europe or the Fed. The key line in the sand for the moment is the 20 month moving average shown as a gold dotted line.

Caution remains the prudent position for the moment.

What's up with Gold?

As we commented on yesterday, you would think with all the turmoil in the European markets and the rumor mills in the US that Gold would be starting a major move higher. Just the opposite is happening as gold is retreating with the equity indexes. There appears to be three reasons that make sense as to why the weakness now:

1. The gold index fell below its 200 day moving average which triggers the "bots" algorithmic models to generate a sell signal. This is just piling on for the moment.
2. The US dollar is gaining strength as the Euro is getting crushed. Normally in most market time frames there typically is an inverse relationship between the price of gold and the price of the dollar. 
3. The last and most likely culprit for the move lower is the liquidity drain on Dollars that seems to have hit the banks in Europe. The Banks are selling gold and beginning to hoard cash until early next year where they will get a chance to reassess the situation in Europe.

The following chart is rather busy but it shows graphically the change in direction for each of the subject commodities. Also note that the upper box on the chart shows the Gold Mining index (XAU) as it relates to the price of gold and it is falling as well. Normally we would expect to see miners lead gold higher if gold is ready for a major move. 

So should we jump in now to ride the next up leg? Lets look at the RENKO chart for gold and see if it can give us a hint.

Looks like a wait and see. Hold your money.

The Sales Bonanza Built on False Hopes

There appears to be a lot of hope in the market built around smoke and mirrors reporting. The market is extremely vulnerable right now and there are not a lot of safe areas to invest in at the moment. Lots of false signals, so the fall back should be cash until the smoke clears and a discernible trend can be identified. In yesterdays post I showed a long term trend chart for the SPX with a best guess on where its is heading. Today you will find a chart by Doug Short at www.dshort.com that clearly displays the way markets tend to revert to the mean over time. I would highly recommend you visit his site, one of the best I've found, and review the logic behind the chart. Study that picture if you have time as it will help explain why the markets even with good news are now pushing sideways to lower. Also note the data points next to his chart. Sobering.

We also noted that the Black Friday retails sales estimates were boosting the confidence in the market. Well the details are out and shown below with comments from Barry Ritholtz at The Big Picture. Things are certainly not as robust as the media would suggest they were and in fact his comments mirror mine concerning the logic of expecting heavy sales from a tapped out consumer. Today's market got an early  boost from comments, more like whispers, that the Fed is close to unleashing QE3.  The market closes lower as the Fed's QE3 big gun remains in the holster. The game of kick the can continues.

GLD  vs SPY

Just to emphasize the lack of safe areas to put money to work in, we have the chart on the left. It is a comparison of Etf's that represent Gold when compared to the SP 500. Gold is headed down and so is the SPY.With all the anxiety over the Banks, Europe, MF Glolbal  and the non functional Government in the United States, we would expect gold to be moving in the opposite direction to the markets. Clarity does not exist for the time being and it requires patience and possibly just sitting on the sidelines especially if you don't feel comfortable with the wild swings in trading ranges the market is working through.

Retail Sales Disappoint on False Black Friday Reports  (TheBigPicture.com)

 

By Barry Ritholtz - December 13th, 2011, 10:28AM

Last month, I published a post on the nonsense that is Black Friday sales (No, Black Friday Sales Were Not Up 16% (not even 6%). That evolved into a Washington Post article, Did Black Friday save the season? Beware the retail hype.

Today, we learn that many breathless forecasts from NRF to ShopperTrak were so much hot air and empty hype: Sales were flat to up only modestly. Total U.S. retail sales in November gained only 0.2%, following a 0.6% October. Even that month was revised downwards.

Retailers themselves may pay the price for their massive discounting: Not only might their quarterly earnings be affected by the margin pressure, but they continually train investors to hunt for discounts. Retail therapy and sport shopping are being replaced by extreme couponing and sites like Living Social and Groupon.

We are left to ponder what those folks who were lining up late at night at Wal-Mart and Best Buy for bargains were doing. No, it was not a sign of “shopping enthusiasm,” it was a sign of extreme economic distress. No one who can afford otherwise goes out Thanksgiving night to stand in the cold with a crowd, to fight the stampeding, pepper-spraying mob for a discounted X Box.

Here is your simple formula:

Thanksgiving Thursday night shopping + record food stamps = Bad Economy

Chart from dshort.com 

In the last 10 years the stock market:

• Lost 43.4% of its value early in the decade, and 56.8% in 2009
• Ended the decade down 2.0% from where it started
• $10,000 invested "buying the market" was worth $9,800 after ten years

Details from Investment Timing       Software site.