The Digital Entertainment Network Stock Market Blog

The key indicator to watch is the vix. The vix is now near the top of its downtrend channel that has been in place since March, 2009. The vix is getting squeezed between its rising 21 day moving average and its descending 200 day moving average. We will not know the ultimate resolution to this scenario until the vix either breaks out of the channel to the upside or resumes its trend to the downside of the channel. A breakout to the upside would indicate a trend reversal that could be significant.

Based upon today’s price action, it appears that S&P 1100 is the line in the sand where the bears are going to make their stand. If we can get above that level we should see a massive short covering rally possibly sending the market to new highs.

From a fundamental point of view irrational fear has overtaken the markets but markets rarely act rationally nor do they always go up. Everyday the market commentators have some specific reason why the market either goes up or down but for the most part those reasons are bogus. In the long term markets tend to move in cycles regardless of what the commentators have to say.

The retail investor is the first to panic but most retail investors have sit out the rally due to fear of further losses so I do not believe there have been enough participants for the bear market to resume at this time. Many companies with cash have been buying back their stock since the March, 2009 lows thereby limiting the supply of stock in the market so this puts a further constraint on the potential market downside. Many companies have been reporting excellent earnings and increasing dividends so this also provides further support for the market.

According to various sources, insiders have been selling a lot of their company stock but I have found this to be a poor indicator of anything. Many times insiders sell loads of stock only to see the stock price rise in value and the opposite is also true. In any case both the CEO’s of Cisco and Novellus say business is booming in the IT sector. With Apple and Amazon reporting blow out earnings the consumer is obviously far from dead. Interestingly enough the retail sector whose untimely death has often been predicted was the only one that gained in the markets today.

The carry trade of selling U.S. dollars and buying everything else is also winding down due to the strengthening dollar. The correllation between the rising U.S. dollar and the dropping stock market however is not clear cut. The dollar has been in an uptrend since Dec, 2, 2009 but the stock market continued to rally until Jan. 20, 2010. There also seems to be a disconnect between the dollar action and commodities as on some days they all head in the same direction and on other days they diverge. It appears that each market is moving to the rhythm of its own beat. In any event first the yen was used for the carry trade and then the dollar. I would not be surprised to find another vulnerable currency such as the Euro being used to fund the carry trade in the near future.

The average correction since the March, 2009 bottom lasted about 2 weeks with the one from June-July 2009 lasting about 4 weeks. So far we are 12 days into this correction. During each correction there was the same doom and gloom scenario as market sell-offs are never pleasant. A perma-bear whose newsletter I receive announced today the official end of the bull market. Interestingly enough, just a few weeks before the correction began he told his subscribers to sell their shares in DOG for a loss as he believed the bull market was in full force. DOG is an inverse etf that goes up when the Dow Jones Industrial Average goes down. Talk about bad timing.

It is way too early to tell if the bull market is over as all the major averages are well above their 200 day moving averages and there have been no bearish moving average crossovers. At this point in time the major trend is still up and regardless of the day to day market fluctuations this trend appears to still be strong.

The chart on SPY looks identical to that of the QQQQ. As I indicated in the last update GLD is also at the bottom of it’s long term uptrend channel. Since Jan. 10 the SPY has been in a descending wedge that many times indicates a reversal. With everybody expecting more selling, sentiment extremely negative, selling volume large on the way down, the vix already spiking about 45% and the markets way oversold, I believe we are heading up with the Nasdaq, Chinese stocks, financials, Gold and miners leading the way. I also expect the U.S. dollar to decline.

The alleged headwinds to the market are:

1) Greece – About 6 months ago Dubai was going to bring the world economy down and now it’s Greece. While I am sure that Greece is a lovely country, the notion that financial problems there are going to bring the world markets down is laughable at best.

2) Slowdown in China – China’s economy is going to slow down from about 10.7% growth to 10%. We wish we could have a slowdown like that here.

3) The World Economy Grew Too Fast – I find this one to be really hilarious. First the pundits said the Obama plan would never work. Now that the U.S. racked up 5.7% GDP growth last quarter with many companies turning in record profits they are saying we grew too fast with the implication being that it can only be downhill from here. With the economic recovery just getting started and much of the stimulus kicking in this year we should expect further upside economic surprises.

4) A Jobless Recovery – Many companies just announced that they will start hiring in the spring.

Some stocks you may wish to consider buying are AMZN, AAPL and GOOG. These are high beta stocks and are extremely volatile but they will be the first to hit new highs if the market does move up. Some Chinese stocks to consider are CTRP and CRIC. CTRP has a virtual monopoly on Chinese travel arrangements and CRIC on Chinese real estate information services. If you wish to play gold, GLD is the etf for a straight play on the price of gold and GDX is an etf for gold miners. A new etf with the symbol GDXJ that covers junior miners recently came to market and this could move even faster than GLD and GDX.

Except for extremely long term investors this is not a buy and hold market so sell 1/3 of your shares if the S&P hits 1120, 1/3 at 1150 and 1/3 if it hits 1200. Move your stop loss up at each target price.

Companies like Google and Goldman Sachs reported blow out earnings but there was a sell on the news effect when the President started talking about regulating banks. Some democrats are now saying that they will not support Ben Bernanke’s reappointment as Fed Chairman. China has also announced it is tightening credit at least temporarily. According to some analysts that I follow and who live in China, that country is not in a bubble economy at all as they run a cash economy. Bull markets climb a wall of worry and that wall seems bigger than ever now but there is a wildcard present in the form of the politics that is currently being played out.

While some technical damage has been done to the major indices, the market is sending mixed signals and is clearly going through a period of indecision. Some stocks have cratered, some have pulled back to support levels and others have rallied. Corrections are perfectly normal in bull markets and the market has already corrected 5%. The markets quickly moved into oversold territory so I would expect at least a bounce to the S&P 1120 area. The bears are in all likelihood aggressively shorting this market so if there is a rally it’s possible that short covering could push the market to new highs. In any event I do not see any reason at the present time to panic.

Ben Bernanke will probably be reconfirmed and that may be the impetus needed to send the market higher. If for some reason he is not confirmed, that would be extremely negative for the markets as it is unclear who would take his place and what subsequent Fed policies might be. With Bernanke in control we know that he is going to continue to flood the markets with liquidity until the economy is self-sustainable.

Unfortunately the Republican Party starting under Bush and Cheney has become the Republican Party of old: pro-rich and screw everybody else. Their economic plan calls for reduced spending, cutting taxes and increasing interest rates. To implement those proposals at the present time would be economic suicide. The Republican’s exist for one purpose only: to oppose the Obama administration.

Now there are allegations that Timothy Geithner was involved in some sort of cover-up regarding the AIG bailout and that Bernanke had to have known about it. I’m not exactly sure what was allegedly covered up but I’m certain the Republicans will milk it for every ounce they can squeeze out of it. From what the Republicans have been saying, they could care less if the market crashes and people’s IRA’s get wiped out yet again. They’re a real bunch of working class heros.

I was watching a special on the great depression and while people were lined up in droves at soup kitchens just to eat, Henry Ford was on the radio expounding the benefits of hard work and enterprise. It is difficult to work hard and be enterprising when you can’t find a job, can’t borrow money, and can’t pay the mortgage. Thanks Dr. Henry, that’s just what the dying patient needed, a good pep talk. I’m sure he must have been a Republican.

Here is a 2 year chart of GLD. You will notice that it has been in this wide uptrend channel since August, 2008 and it is now sitting near the bottom of the channel. The stochastic is in oversold territory and has consistently rallied to some degree off these levels. While the U.S. Dollar has rallied and could possibly rally more, I believe that this is just another bear market rally and the downtrend in the dollar will eventually resume.

From a technical point of view nothing has changed. The U.S. dollar is still in a downtrend and its recent rally is merely a bear market rally off the bottom of its downtrend channel while Gold and the U.S. Stock Market are still in an uptrend. The dollar managed to rally only to the mid-point of its upper channel, something it has done numerous times in the past few months, and the stochastic is approaching overbought levels.

Here is a 2 year chart of GLD that I have broken into 4 trading channels labelled 1-4. Since last November GLD has traded primarily within channel 2 and its recent break out pushed it to to the top of channel 3. It has now corrected to the bottom of channel 3 and it is approaching an uptrend line that connects the price lows from September. This coincides with the 50 day moving average that now sits at about $108. While GLD is 1/10 the price of an ounce of gold, there is about a $2. difference due to embedded fund fees so this price corresponds to approximately $1,100. for an ounce of gold. The stochastic for GLD is in oversold territory and the MACD has crossed over negatively but it is well above 0 and the moving averages are trending higher. Around these price levels looks like a good buying opportunity for GLD as the next move up should push it into the 3rd and 4th channels yielding a gold price in the $1,300.-$1,500. per ounce range.

Oil presents another interesting chart. While on initial appearance it looks like it has broken down from a bull flag pattern, if we take a closer look at it on the 3 month chart we can see that it has culminated in a descending wedge. Many times this pattern signifies the end of the correction. Since Deutsch Bank just predicted $60. a barrel oil and with the stochastic in oversold territory I will take the contrarian point of view. I believe oil is going to rally and will be trading in the $80.-$100. per barrel range sooner than anybody expects it. If oil does break below $70. per barrel then Deutsch Bank may turn out to be right after all.

The price of oil should be monitored carefully for cues as to where the stock market may be headed as it presents a catch-22 situation. When oil is less than $75. per barrel there is no financial incentive for oil companies to drill for more oil as the cost of exploration exceeds $75. per barrel. If oil is greater than $75. per barrel it is bad for the consumer and businesses that rely on it as the cost of gasoline will rise thereby increasing business costs. Since oil production and exploration were put on hold for most of 2009 due to depressed prices and the recessionary economy, we should eventually see higher oil prices due to increased worldwide demand and decreased supply.

Conclusion: The trend of the stock market, gold and commodities heading higher and the U.S. Dollar heading lower is still intact. I view this pull back in commodities as a normal correction and a buying opportunity. Traders and investors are waiting for the “right price” to jump back in and when they do expect the next leg up in the markets to be fast and furious.

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