Stock Trader's Almanac

April 2010

March 25, 2010 - Volume 9, Number 10

Market at a Glance

Psychological: Bi-polar. Average consumers, a.k.a. Main Street, are still feeling the effects of the financial crisis and deep recession. Their confidence has begun to wane again as real energy prices (never seen a “seasonally adjusted” price listed at the pump) continue to creep higher while wages and job security remain major concerns. Wall Street has a much different view. Depression averted, the recession is over and corporate earnings are on the rise. There is clearly a bright future ahead (and a big bonus now that TARP has been repaid). At some time in the future these opposing views will need to find the middle ground for the economy to truly recover. Usually it takes about six months as stocks due lead the economy.

Fundamental: Disappointing. Literally trillions have been spent and the labor market has yet to show definitive signs of recovery. Sure, the unemployment rate has improved slightly (fuzzy math), but there has only been one month of job gains in the last 26 months, November 2009. And the housing market is in nearly the same shape. Labor and housing markets are likely to move sideways until Corporate America can clearly and vividly see signs of recovery and improving demand. Only then will they be willing to hire and expand.

Technical: Breaking Out. 50-day moving averages were reclaimed in early March after nearly two weeks of failed attempts. Markets have surged to new recovery highs on strongly positive market breath accompanied by an expanding number of new highs. Markets have finally recaptured the losses from the waterfall decline that begun on October 2, 2008, the day before the passage of the Emergency Economic Stabilization Act of 2008 (TARP or “Bank Bailout” as it is better known). There are indications of an overbought market, but bulls have the momentum for now.

Monetary: Tightening. By traditional metrics, such as mortgage rates and the fed funds rate, money is still ultra cheap. However, quantitative easing measures like mortgage-backed security purchases by the Fed are ending. Mortgage rates remain low for now, but great uncertainty remains in this market and government debt markets as developed nations around the globe run record deficits into the foreseeable future. At some point in time, the secondary market is going to demand higher rates in return for the increasing risk of default.

Seasonal: Fading. April is the last month of the “Best Six Months” for the Dow and S&P. April is the top performing Dow month since 1950 and third best for S&P, so use any strength and a corresponding MACD Seasonal Sell Signal to exit positions linked to these indices on or after the first of the month.

As most market observers and participants have now moved into the bullish camp, our seasonal antennae are purring ever louder. We have also heard several boastful trading remarks from some of the folks we know on Main Street. While we are pleased that some friends and associates have logged solid gains over the past several months, when the talk on Main Street turns to bragging about stock market profits its usually close to the end of a bull run.

The economy continues to improve, though there are still some areas exhibiting weakness; housing and jobs in particular. The Federal Reserve is expressing some confidence in the economy, keeping on track to shut down the $1.25 trillion program for buying mortgage-backed securities at the end of March, but still concerned enough to keep the Fed Funds rate near zero.

Corporate America continues to post encouraging results and we have been hearing from our head-hunting colleagues that hiring is beginning to pick up. But with the Dow now up nearly 70% since the March 2009 low, the S&P up almost 75%, NASDAQ pushing 90% and the Russell 2000 up 100%, most of the good economic and corporate news is already baked into the market. The already overbought conditions and extreme bullishness of the sentiment indicators are likely to persist and magnify further before this bull exhausts itself.

After a couple rough years, seasonality returned to the stock market last September with the usual end-of third-quarter weakness followed by October volatility, strength in the best three months November-January, an interim low in February and a strong March. As we enter the last month of the Best Six Months and the market begins to run out of fundamental fuel, the technical picture is setting up for a quintessential Best Six Months MACD Seasonal Sell Signal.

So far the Dow is up about 10% for the Best Six Months from our October 9 MACD Buy Signal. This was the average return 1950-2006 before the first two back-to-back down Best Six Months we suffered in 2008-2009; the first time since 1973-74. 2008-2009 was the first time this happened using MACD timing. Following such a strong move some profit taking is likely to occur and it could gather momentum as traders and investors opt for the out-of-doors during the often bearish summer months.

Recent market strength is evident in the chart below. At the end of February the Dow found support at the monthly pivot point (blue dotted line) before reclaiming the pink 50-day moving average and then blasting through projected monthly primary resistance (red dotted line) for March. Over the past three days the Dow has been challenging secondary resistance (yellow dotted line) and looks like it will win that battle and push us over 11000 by month-end, if not in early April. 

NASDAQ, as well as the S&P 500 and the Russell 2000, have already surpassed these monthly resistance levels and the Dow is finally catching up. Monthly resistance for the Dow in April is currently projected in the 11100-11300 range and this is where we could see the bull ending. If we get a MACD Sell Signal on or after April 1 an alert will be sent.

We are still comfortable with our forecast for a more substantial pullback of 20-30 in the middle of 2010. To reiterate, with the January Barometer already negative, the December Low Indicator triggered, midterm election forces coming into play and seasonality back on track, it is conceivable for the bear to emerge from hibernation this spring.

We have also included in the chart above our current counts of the Three Peaks and a Domed House Pattern we have been tracking since September 2009. This was the subject of my February 24 Blog Post. By these calculations, if we are indeed in another Three Peaks/Domed House Pattern, the Dow would return to the area of point 14 near the July 2009 lows. From the Dow 11000-12000 range this would represent the 20-30% bear market pullback we are concerned about.

Pulse of the Market

In the chart below the Dow reclaimed its 50-day moving average (black line) (1) on March 4 and has continued higher since. This 50-day MA has now returned as support. A breach of this line in conjunction with Best Six Months MACD Sell Signal would add to the likelihood of a deeper pullback. Should the 50-day MA cross below the 200-day MA (red line) for the first time since January 2008 that would be an even more ominous sign.

However, if we can hold the 200-day MA a nasty decline can be avoided, especially now that the 200-day MA has moved into the area of projected monthly support as illustrated on the chart above. The advance since February has set the MACD Sell indicator up for a clear Sell Signal in April (2). 



Market internals were strong the first two weeks of March, but are showing signs of waning. The Dow posted its first Down Friday in five weeks (3), but it has not logged a Down Friday/Down Monday since October 23/26.A Down Friday/Down Monday frequently foreshadows a market inflection point. If one occurs in the coming weeks as we get a MACD Sell Signal and other market internals look weak, a pullback could follow shortly thereafter.

Tech leadership has begun to diminish. NASDAQ was unable to outpace the big caps last week (4) as is often the case in midterm election year Aprils. After expanding to a 6:1 ratio two weeks ago for the first time since July, the advance/decline line weakened last week (5). New highs reached their highest level since December 8, 2006 two weeks ago (6). Now that the bottom is more than a year behind us this metric could deteriorate. If more stocks fail to make new 52-week highs, the rally will be in jeopardy.

Sentiment as measured by the CBOE Equity Put/Call ratio is at extremely bullish levels again (7). The last time we saw these levels in mid-January the Dow fell 7.6%. Interest rate spreads have tightened ever so slightly (8) as the 90-Day Treasury Rate has crept higher in anticipation of a near-future rate hike or it could just be the tremendous amount of supply that is available.

The market appears to be putting in a seasonal top right near the bottom-end of our 2010 forecasted high. Continue to use strength to take profits and position yourself defensively for the Worst Six Months May-October as the potential for a deeper correction continues to exist. 

Getting More Comfortable with "Personal" Medicine - Microcap Biotech Poised to Double

In May of 2009, I wrote to you about a new wave of technology that could revolutionize the way disease was both diagnosed and treated, and offered my top two picks at that time to take advantage of what seemed to be outstanding market opportunity. Accelrys (ACCL) has moved from $4.50 to $6.60 on strengthening fundamentals and technical patterns. Caliper Life Sciences (CALP) has moved up sharply from $1.28 to $3.78 on a slightly better than expected quarter and recognition as a pedigreed player in the genomics space.

Another one that we have taken a shine to in recent months has a reward/risk profile that looks off the charts if they can stay independent past 2011. The company manufactures and distributes instruments and consumables for genetic analysis, and despite a mere $37 million market cap, is a pedigreed company that seems to be positioned front and center in the race for success in the burgeoning personal genomics space.

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Technology and Internet Shares Catch Second Wind

Doing more with less, that is Corporate America’s mantra. If you are uncertain about this take a look at the latest Productivity and Costs figures just released by the Bureau of Labor Statistics at http://www.bls.gov and while visiting the site be sure to review the latest employment numbers as well.

This is not a new concept, but it does often get overlooked during times of economic boom only to climb back to the top of the priorities list during tough times, like now. During the peak of the recession, costs were aggressively cut in every manner conceivable. Personnel were fired, investments deferred, benefits slashed or eliminated and so on.

Demand has begun to rise as the recovery slowly gains traction. To meet rising demand for products and services employers are going to squeeze every last drop out of their current staff before hiring as labor is typically the most expensive input cost. In order to extract that last ounce of productivity employers are going to need tools. Some of the best tools currently available are provided by the Technology sector and these tools are powered by the Internet.

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Happy Birthday Bull! Remember Us From the Delivery Room? Baker''s Dozen Rises 67%

We didn’t pay any attention to Roubini (and a host of other gloom-and-doomers) and hope you didn’t either. In fact, we were extraordinarily bullish because there were so many bargains lying around all over the place.

There aren’t nearly so many “bargains” today as there were then. But on the other hand, there are more than enough attractive ones to go around. The Baker’s Dozen is but 13 of them. For the record the Baker’s Dozen Portfolio is up 67% since that March 11, 2009 writing.

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Nature of the Bull

Now that this bull market is one-year old, everyone wants to know what kind of bull this is. Is this the dawn of a new long term secular bull market or merely a short term cyclical bull in the midst of the overarching secular bear market we have been in since 2000? Answering this important question can give us a better understanding of how the market is likely to perform over the near term and the next several years.

In the table we have redesigned and fine-tuned our secular/cyclical market trend analysis and gone back to the very beginnings of the Dow Jones Industrial Average on May 26, 1896, conveniently the same year a new secular bull trend began. But first let’s review.

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Short the Beef, Buy the Pound

Several opportunities can present themselves in the commodity arena in March. First, in the livestock category, Cattle prices tend to post a seasonal high in March. Producers tend to liquidate inventories as packers and processors prepare for BBQ season. On Monday, March 15 the front month April contract posted a high of 95.85, which according to technicians like myself, filled a gap left on the weekly charts from October 2008.

In addition, the CFTC Commitment of Trader’s (COT) report shows funds are holding a record net long position. The significance here is that these are speculators and as we close out the first quarter they have a tendency to exit profitable positions for compensation or performance fees.

Monthly Pivot Resistance is targeting 96.30 as a potential high, represented by the yellow dotted line in the TradeNavigator chart below. Those looking for a low-risk-high-reward trading opportunity may wish to consider April Live Cattle (LC) for a bearish reversal. Downside potential is closer to the 92.50 level by month-end.

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Putting Cash Back to Work

Over the past four weeks the stock-only portion of the portfolio has gained 4.6%, lagging the Russell 2000’s 9.5% advance. EFJI, ANLY, and NGAS are the drags on the portfolio, all posting double digit declines since being added to the portfolio. However, the open position average gain has increased to 40.8% from 35.7% over the same period.

There is and has been a substantial cash position carried in the portfolio. As a result of this cash the portfolio was spared from the worst of the bear market, but it has also limited the entire portfolio’s gain during the recovery. Beginning with the most recent recommendation, Transgenomics (TBIO), the initial hypothetical investment is going to be increased to $2000 from the current $1000.

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April Strategy Calendar

April 2010 Strategy Calendar

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Best Dow Month since 1950 Weakest in Midterm Years

April marks the end of our “Best Six Months” for the Dow Jones Industrials and S&P 500. This is the time of year when we begin to look for our MACD (Moving Average Convergence Divergence) indicator Seasonal Sell Signal for the Dow and S&P. As the market is up about 70% over the past year, this year’s sell signal could prove most timely.

The Best Six Months have been weak the past two years, but the April 14, 2008 MACD Seasonal Sell Signal at Dow 12302 proved to be quite effective, averting the bulk of the bear market and the October 2008 massacre. An interim alert will be sent on or after April 1st if a MACD Sell Signal is triggered.

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