Thursday, September 30, 2010

MACD Crossover Imminent

Thus far this year there have been three occasions when MACD crossed over and Momentum turned negative. In each case, the equity markets experienced a meaningful decline (see chart for examples*). We are presently poised for a fourth occasion. Interestingly, October will likely produce lots of conflicting data for both bulls and bears.

For the bulls, earnings season will be more than satisfactory. The aggregate macro economic data produced in the third quarter plus the fact that the confession season has passed with little bad news suggests that earnings will meet or slightly exceed consensus expectations buttressing the bulls' case. On the bear side of the ledger is the emerging traditionally-thinking investor angst that the Republicans won't win either house of Congress, thereby knocking out the gridlock-is-good beam from the bullish structure.

Investment Strategy Implications

Because there are no external divergences, any market pullback in October will likely be minimized with many country/sector/industry/company specific cross currents occurring. Internal divergences on their own are a sufficient reason to lower one's equity exposure somewhat but insufficient to ring the bearish bell too loudly. That time will likely come after the pullback followed by a failed rally followed by the OMG-the-Republicans-didn't-win-either-house introduction to the bear of 2011.

*click image to enlarge

Wednesday, September 29, 2010 media appearance

Last Friday's interview has been published and posted today.

To view the interview, click here

Tuesday, September 28, 2010

Internal Divergences Emerge. Market Pullback Probable.

As noted in yesterday’s Bloomberg radio segment (see below), internal divergences are beginning to emerge for the first time since early August. The accompanying 3 charts* representing 3 key indices (US, EAFE, and emerging markets) illustrate identical action seen in virtually all indices with price moving up while the key near term internal indicators Momentum declining (a clear divergence) and MACD poised to rollover. Moreover, today’s bounce has lifted the short-term indicator (Slow Stochastic) back into overbought territory.

The net effect of the early August internal divergence was a negative 8% for the S&P 500. With so much enthusiasm behind the current market rally (see yesterday’s blog posting illustrating the record low cash levels of mutual funds and the valuation math supporting the current market, as examples), stocks are now in a much higher risk zone than is generally appreciated.

The saving technical analysis grace is the absence of any external (index to index) divergences. That said, a pullback now followed by a further run to higher highs (courtesy earnings season) may produce the external divergence condition necessary to signal an end to this rally followed by a far more meaningful decline. If no external divergences occur in an ensuing rally, however, then the bulls will rule the roost for a while longer.

*click images to enlarge

Monday, September 27, 2010

Bloomberg radio appearance

In case you missed the Monday appearance on "Taking Stock with Pimm Fox", click here

Media appearance on Bloomberg radio "Taking Stock with Pimm Fox"

Media appearance today on Bloomberg radio program "Taking Stock with Pimm Fox" at 4 PM (eastern).

Prospective talking points:

* There may be an enthusiasm gap in politics but there is certainly not one in the equity markets.
* The September relief rally has morphed into a more confidently bullish mode lifting valuation models well into overvalued territory.
* At to above average P/Es are now embedded in the data.
* Is the current environment average, which therefore justifies an average P/E of 15?
* Do the valuation math:
o current S&P 500 price: 1147
o required return: 11%
o future price (12 months ahead): 1273
o optimistic expected earnings (next 12 months): $86
o future price (1273) divided by exp. earnings ($86) = 15 P/E

Also, re enthusiasm - Cash levels at stock mutual funds are now at their lowest levels in decades. (see accompanying chart - click image to enlarge)

Plus market technicals - internal divergences have begun, no external divergences thus far.
Last time internal divergences occurred (early August), stocks dropped 8%.

Thursday, September 16, 2010

Beyond the Sound Bite: An Interview with Simon Johnson

"A fiscal agenda that is sensible and a fiscal message that makes sense has to make banking front and center."
Simon Johnson

The consequences of public policy decisions are front and center in my very informative interview with the coauthor of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown and highly regarded commentator. In the interview we explore many vital issues - too big to fail, shadow banking system, securitization, Basel III, US fiscal debt, Elizabeth Warren.

Beyond the Sound Bite podcast interviews can be found at the Blue Marble Research media blog. To listen to this interview, click here.

Thursday, September 9, 2010

Doing The Valuation Math

As the thank-goodness-we-aren't-headed-into-a-double-dip-recession-or-deflation relief rally continues, perhaps a quick look at the valuation math for the US equity markets might be helpful.

As the accompanying table illustrates, the three likely near term scenarios with expected earnings and prospective P/E ratios provide a useful valuation guide. I have bracketed the most likely P/E ratio for each prospective forward 12 month earnings scenario (mid 2011). (Obviously, an above average P/E for the doomsville scenario makes little sense.)

As I describe in the equity analysis classes that I teach every fall, the math is fairly easy. Getting the inputs correct is the hard part.

Note: even more difficult is getting the inputs correct for the right reasons!

Wednesday, September 8, 2010

Beyond the Sound Bite: An Interview with Dr. Rob Atkinson

Will President Obama's economic proposals help produce a sustainable economic expansion? For this and other timely topics, we once again turn to the CEO and innovation expert with the Information Technology and Innovation Foundation to help identify the key elements of public policy that can most effectively enable the US to achieve sustainable economic growth.

Beyond the Sound Bite podcast interviews can be found at the Blue Marble Research media blog. To listen to this interview, click here.

Friday, September 3, 2010 appearance

Yours truly pontificating again on politics, the economy, and the markets on

The interview is posted and can be found on the Beyond The Sound Bite media blog.

Thursday, September 2, 2010

Yahoo Finance "Tech Ticker" appearance

Yours truly pontificating on politics and the markets on Yahoo Finance's "Tech Ticker' media service.

Both interview segments are posted and can be found on the Beyond The Sound Bite media blog.

Wednesday, September 1, 2010

Here We Go Again

Another big up day! Yippee! Hooray! Mazel Tov! Burb.

The manic/depressive nature of the trading range market continues as we start the new month. Unfortunately, from a technical analysis perspective, the significance of today's latest bout of stock market euphoria is...nothing. To understand why there's no there there (at least, not yet), take a moment and step away from today's hoopla and look at the accompanying chart.

Since the fall of last year, stocks have been locked in a trading range - one that remains unresolved as to its future major direction. Is it a consolidation range of the bull market to be resolved with an upside break? Or is it a distributional range to be resolved to the downside and, thereby, signaling one of the shortest bull markets in history?

Right now, only the very clairvoyant or foolish know the answer to this question. For the rest of us mere mortals, it does seem advisable to exploit the trading range in a prudent manner (expand and contract equity exposure at each end of the trading range with an 80 to 90% equity exposure at the bottom end and a 40 to 50% exposure at the upper end) and wait for a resolution to then shift the equity exposure to bullish (>90%) or bearish (<40%).

Bottom Line:

1 - Big moves within trading ranges rarely have sustainable meaning for the major trend in stocks.
2 - Eventually a resolution will emerge. Nothing is forever, especially not trading ranges.

Short term, given the weak momentum and MACD starting points, the risk that the Mega Trend is about to turn bearish, and all that lies ahead on the fundamental and geo political realm, today's rally looks like yet another mid range big bounce. Longer term (which is far more important), my bias is toward the distributional range scenario and its eventual downside break. That said and knowing how much this will frustrate many (who insist on certitude in just about everything), stocks can defy logic and gravity for long periods of time. Therefore, staying flexible and not forcing the issue seems the most prudent path to follow.

I may believe in something but when it comes to the social sciences insisting that it must be so is the sure path to poor absolute and relative performance, which is, after all, the name of the game.