Bullish 4th Quarter revisited

Check the previous posts on this topic here.

Financing a corporation can be done with debt or equity. In most cases, both will be used. If equity is used exclusively, it may dilute the owner's share unnecessarily, but it will not endanger the firm. If debt is used excessively, the stability of the firm could be endangered. Similarly, if the equity portion of the balance sheet declines too much relative to debt, management's ability to raise capital might be affected, threatening the firm. Especially for financial firms which could be overwhelmed by debt and unable to raise new equity due to the depressed share price.

Looking at the S&P 500, the current debt/equity ratio is 0.8 using the value of 1025 or so from August. If SPX rises to 1175, then the debt/equity ratio would be below 0.7. A healthy ratio would be 0.5 or less. If it fell back to 700 then the ratio would be around 1.2. Higher than healthy and more likely to create problems with raising capital. Debt levels would be too high for lenders to feel comfortable and equity levels may be too low for many companies to make raising sufficient capital practical without extreme dilution. So SPX 1175 is not a hard limit, but it is a reasonable level that would allow the SPX companies to lower their debt/equity ratio to a more healthy 0.5 by only suffering a reasonable 30% dilution in equity. The next two months will be very interesting to watch.

More Reversals

Last week, I posted a number of potential reversals. It appears that not only have those reversals been confirmed, but new, potentially ominous reversals have occurred. Like this one in the monthly SPX:

Or how about the Transports:


Tech bellweather Microsoft:

Market and tech leader Apple on a MONTHLY chart:


as well as the weekly timeframe:


and even one of the markets biggest leaders of late, Amazon:



and the daily view of Amazon:

RIMM Collapse Imminent

Ever wondered what a stock that is about to collapse looks like? Well, here is a good example.
First the daily picture:


And here is the hourly look:

NDX Reversal

It appears that the NASDAQ 100 has put in a daily reversal.

It also may be working on a weekly reversal. We will need to see a close below about 1750 for that to take place.

INTC Pop and Drop

Look at these charts of Intel. If these do not indicate a false breakout, I don't know what one is.
First, the daily. Notice also the potential triple divergence. While it hasn't completed, it seems highly likely, especially since it seems unlikely that INTC will be able to regain the highs of only two days ago quickly enough to prevent the MACD from rolling over.


And now the weekly. This is a pretty clear reversal. Volume seems to confirm as this week's volume was double the average. It is fairly early so it is possible and quite likely that a marginal new high will be made, but it will likely take weeks to make it. During that time a lot of stock can move from strong to weak hands.

Feb 2009 Upside Down

Late in February 2009, I posted charts of some big losers that were showing signs of reversal. BAC, C and WFC. I want to revisit these losers, because over the last 6 months they have been big winners. Some have done fantastically, some merely great. BAC has more quintupled. C has more than doubled and WFC has tripled. That is one way to juice up the performance of your portfolio. I am early here, but I am beginning to see signs of similar formations, only in reverse. To visit the February post, navigate here. The weekly BAC chart shows a significant reversal. Some of the caveats are that quite often (as happened at the Feb-Mar bottom) these reversal patterns will occur back to back at lower lows or higher highs, with the second occurrence indicating the exhaustive move. We may be seeing the first of these moves here with BAC.

Also, note the momentum divergence. Some of the problems with this interpretation is that although volume was slightly higher than average, it was not excessive, say double normal. So it may pay to look for another reversal at higher levels, above 19.10.

C is a less impressive picture and I will let the charts speak for themselves.

WFC displays a stronger picture, but the daily is showing a potential "triple" momentum divergence along with a potential false breakout, while the weekly shows a potential reversal pattern on higher volume. Again, the volume was big, but not huge.

Some things to watch over the next few weeks and see if more signals develop.

Bullish 4th Quarter? Part 2

Last time I mentioned that 1175 or so is necessary by Dec. 31 2009. This is for both technical and fundamental reasons. But what about if the market simply goes up, but not by that much? Let's look at the technicals for that instance. Here is a quarterly chart with a hypothetical closing of 1075 for the S&P 500.
This would represent a gain over the 3rd quarter close. But it would not be strong enough to generate clear technical signals that all is well. Notice momentum would remain negative and declining. Prices would remain well below the long-term MA. The point we are at today is comparable to April 1974 if the 1973-1974 analogy is to hold. The market vaulted more than 10% higher in that quarter ending in June 1974. There was no rush to buy though as prices tested the April '74 levels in Q1 1978. This may not have been possible to sit out for professional traders, but that is one of the advantages of individual investors being able to wait on the sidelines.

But there are the parameters for the S%P 500 in bookend fashion. If Q4 2009 sees 1175 then the bull is alive, 1075 or lower and the bear is still in control. What about the fundamentals? Could they provide clues to where we are today? I will look at that in the next post.

Bullish 4th Quarter?

Despite the negative headlines, I wanted to take a look at the bull case in real terms. That is, "What does the bullish case look like on a chart of the S&P 500?" Below is a QUARTERLY chart of the S&P 500 with hypothetical data added for the last quarter of 2009. The required level for the bullish case is 1175. This would return the average above its long-term MA.


How would it happen? Would inflation break out? Would gold break out? Would employment start to pick up? Would housing move back up?
Who knows? The market will tell us in time, if we are patient. I actually think that the bearish start to the quarter gives the bulls the edge. Typically, the market gets marked down at the beginning of any period only to be marked up at the end. That is the nature of the market, especially on the shorter term time frames. Does it hold up on a quarterly basis? I'm not sure, but we will see soon enough. Meanwhile, keep 1175 in the back of your mind. That is where we need to be by Dec. 31st. If not, even if we are higher than now (which we may very well be), then 2010 could bring trouble.

S&P Quarterly Review

It seems that we are faced with two overarching possibilities:
1) The economy is going to bounce back like 1974 and we will see some inflation with a choppy market limited by fairly high valuations, but we have seen the lows in the market. (Maybe not some or even most individual stocks, but the averages, yes.)
2) The economy is really going to fall off of a cliff and the market is headed for a downturn unlike any seen since the 1930's, or possible longer.


The chart above displays the S&P 500 for the last 50 years. It shows the key breaks in the market advance over those years and the resulting support/resistance levels. What we have seen since the market peak in 2000 is arguably the worst market since the Great Depression. First of all, I am of the opinion that public psychology and poor fundamentals caused the Great Depression, not the stock market crash of 1929 through 1932. Secondly, over the 9 year period ending at the end of Q1 2009, the market had lost more than half of its value. Even after this "massive" rally, investors have lost 1/3 of their portfolio. "Buy and hold" has become, "Buy and mold". The only comparable periods are 1973-1974 and the 1930's. So what now?

The 4th quarter will be key to answering that question. If the market cannot retake its 5 year moving average, we will be in for some serious downdrafts. If reflation takes hold, then the market will likely regain its footing and exceed it long term MA. If it does not do so by January, the odds will have shifted decisively, say 2:1, in favor of deflation. In that case, first stop would be SP500 480. Below that 320 is possible. Beyond that, if society collapses, SPX could equal 120. This would correct the entire 30 plus year advance from the 70's. I am not putting my money on seeing SPX with a 1 handle, but I put the possibility out there, as it is not inconsequential (say 10%). (Let's round out the probabilities with 20% for 320, 50% 480 and the remainder higher from here.

Here is what it looked like in 1974. If you think that consumer demand is going to rebound, the housing market will recover and unemployment will start to fall in the next year or so, that is the way to play. It is possible. But if the economy is likely to remain weak, then a test of the March lows is likely. And if they are broken, then 480 would be the first stop. Next time I want to extrapolate what a decline of that proportion may look like. A waterfall decline that would cut the averages in half. But for now ponder two facts: market momentum is negative in the long run, even with two big bullish quarters and the averages are trading BELOW there long term averages. And yet stocks are still not considered cheap. Notice the 1975 and 2003 recoveries both left the averages ABOVE their long term averages. If that does not happen this time, maybe something really is different.