Archive for August, 2010

S&P 500 Source: www.dailygraphs.com

The market correction which began in late April continues.  Last week the major indexes pulled back slightly creating a short term inverse head and shoulders pattern.    This is a bullish technical chart pattern but until the correction has run its course and moves above the upper red line (see chart) the market will likely continue its consolidation.    This rest period is normal after a strong move off of the March 2009 low and giving long term investors a good buying opportunity.  I suspect the trading volume to drop off as professional investors take their last minute vacations.

Yes, the mainstream news on the surface is pessimistic as the media is focused on all that can go wrong but I continue to see strong stocks building bases, earnings reports beating expectations and emerging stocks / indexes near new highs.    Stay the course and invest in the pessimism because blue skies will appear once the black clouds disappear.   You will likely be reward in the next 12-24 months for doing so.

The market sits in the middle of its three month trading range.  Last week the trading volume was light as the market pulled slightly back after the three week rally.  This is normal market behavior especially during the summer months.  Earnings reports last week continue to come in strong.  This market correction will eventually sort itself out but until it does we remain range bound on light volume.  Under the surface, I continue to observe healthy action in stocks and emerging market sectors.  For instance, the Malaysian, Thailand, and Indonesian ETFs hit new highs last week.   A sign of strength. As long as earning reports continue to come in better than expected I suspect by year end the upper range of the consolidation will be exceeded.  Let’s see what August brings.

Expatriates who invest in offshore mutual funds are likely paying high 12b-1 fees.  These fees are very confusing and erode investor returns.  Exchange Traded Funds DO NOT have 12b-1 fees, another reason I prefer ETFs to traditional mutual funds.   For expatriates, ETFs bought in an offshore brokerage account would eliminate these unnecessary fees.

USA Today article:  The Securities and Exchange Commission on Wednesday voted to revamp fees that most mutual funds charge to cover sales and distribution costs, and that have become a source of confusion for investors and industry insiders alike.

Revenue from so-called “12b-1″ fees can be used for a wide range of fund services beyond upfront sales costs, and an investor can pay the fees for years after they’ve gotten into a fund, eroding returns. Even industry pros find 12b-1s confusing, because funds can use the fee revenue in so many different ways.

Read more at: http://www.usatoday.com/money/perfi/funds/2010-07-21-mutual-fund-fees_N.htm

July 25,2010

Weekly Stats: S&P 500 +3.6%, Nasdaq + 4.1%

The market posted strong gains last week. The Nasdaq, shown above, has now moved above its 50 and 200 day moving averages for the first time in 12 weeks. All indexes are now trading above their 50 day averages, which is a first step in returning to a healthy bull market. Two weeks ago (red arrow) we saw support areas violated and investor pessimism (fear) skyrocket to levels recorded at the March 2009 bear market bottom. Since then individual stocks and ETFs have turned up and rallied strong. The sector the market needs most to pull us out of this correction is technology. Several important technology related stocks last week blasted upward out of base formations. This technical confirmation is one additional positive sign the low of the correction may have been formed during the past several weeks. I have been using the prior weakness and volatility to get new accounts invested according to their target allocations.

One technology stock hitting a new high last week is Informatica. It also gained 150% off the March 2009 low, traded sideways for the past six months and yesterday gapped up over 10% to a new high (see arrow above). This is a classic short term breakout from a sound base pattern. This is normal stock behavior and is a sign the bull market is alive and well and a double dip recession is unlikely. It is becoming clear the worst of the correction may be over.

Emerging market ETFs are also moving above their downtrend lines. EEM, see above chart, last week moved above its 50 and 200 day moving averages and is trying to break above its three month down trend line. This emerging market ETF gained over 100% since the bull market began and now has consolidated for several months. I will be watching this index in the weeks ahead to see if it can hold these levels and move back to new highs. It currently trades only 11.8% off the April high.

Conclusion:
Positives for the stock market going forward:
• Monetary Policy: the Federal Reserve is going to maintain its easy-money stance, this will encourage risk taking.
• Valuations are attractive.
• Investor sentiment three weeks ago reached panic extremes, usually only seen at bear market bottoms.
• Technical chart patterns: growth stocks, especially technology, are forming the right sides of their bases and are beginning to break to new highs. Stocks are forward looking and tell us the economy will likely be improving in the near future.
• Corporate profits have been growing during the most recent earnings releases.
In the short term, the market is overbought. I expect more volatility and a possible retest of the June and July lows. I will be watching if the market can hold above the 50 and 200 day moving averages. It would not surprise me to see the major market indexes surpass the April highs in the months ahead. I will continue to use weakness in this correction as a buying opportunity for new accounts. Currently the potential gains in the next 1-3 years outweigh the downside risks. Thank you for reading.