Weekly Commentary Excerpts

Daily Commentary - Close Tuesday March 8, 2011

The financials led the way in today's rally. That was duly noted, but knocked by a MarketWatch pundit today on Twitter, because the volume was lacking, or better said was less than on the down days.

He is right of course about the lesser volume on the up day, but wrong that it should be more than the down volume days. Generally, at bottoms, people are clueless about volume patterns. At the very bottom volume is always very high to the down side and less as it starts to go up. Thus, to me, today's volume was just fine.

The heavy down volume on the initial break is normal - lots of longs taking profits. Then the XLE had a bounce and then another high volume down leg (the "C") of a simple a-b-c correction. That gave us a chart with broken trend lines and a close under the 50 day, all bad signs. Except the next day (March 3) the XLF bounced back hard. Yesterday that bottom was tested and today again the XFL bobbed back up.

So now we have a triple bottom, wash out and the XLF appears to want higher. Will it? The more volatile, the harder it is to say, but I for one think the odds favor the longs and the best acting of financials in my opinion are BAC, COF and JPM. And by the way, BAC the leader was up the best on VERY heavy volume.

Right now at least, financials are what I am keying on, as to near term market direction. That appears up. We see...

Good Trading,

Russ

The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails. In these troubled waters, I try to steer our trading to make the best use of the tailwinds and be cognizant of the dreaded headwinds and stay out of harms way in storms and squalls.

Daily Commentary - Close Friday March 4, 2011

It was an interesting and volatile week, and at the 4PM close on Friday it might be surprising to read that the S&P was actually up 0.1% for the week. We had a good week despite the volatility. My take is that despite the MENA (Middle East, North Africa) turmoil and rising oil and gold prices, the market does not want to go down. Further to that argument, bonds and the US dollar, both flights to quality and safety, are not reacting like MENA is a very big deal.

Technically, it's a mixed bag. Instead of a one day hiccup like Egypt was (Feb.25), it is possible it was only a 3 day hiccup this time, or it could be we are going down to at least test the 50 day on the S&P500. Technicals are positive, but we know sudden and/or sharp changes in fundamentals trump technicals.

Friday was an ugly day, until the last minute when a sharp rally ensued. My read was that buyers were reluctant to buy before the weekend, and when that became obvious, shorting and hedging drove the trend lower during the day. But when they had the chance to really roll the market over and could not, huge short covering came in during the last 30 minutes, erasing about half of the day's losses, all on very heavy volume.

Financials were one of the worst performing groups this week, as banks were downgrading other banks, with C and MS getting hammered on Friday. BAC, which also caught a downgrade, actually performed well enough to hit up as the finny to buy on Monday. While you do not like to see weakness, I am not overly concerned about the XLF, unless 16.32 is taken out. The fact that XLF did break the 50 day, then bounced back could be a very good sign. Some the best trades come off so-called broken support, then, when with no one home for follow through, the stock moves higher.

Let's go from worst to best - SMH.

SMH, the semiconductor ETF made a new high on Thursday on three waves, implying there is at least one more wave to come. If that last wave does happen, it very well could go into an extended 5 sub waves, as the first and third waves were simple waves. Net, net, it's worth a buy on strength, day trade or swing trade, tough call. I'd make a decision based on overall market performance on an absolute basis, as well as relative to reaction to geopolitical events. I'll post on Twitter.

Bottom line, volatility is increasing, but I'm an not looking to be short right now. Hedged at times yes, like Friday, but based on closing action Friday, I took mine off, but also took off a lot of long positions, leaving just JDSU. It may sound stupid to say, as it seems this way almost all the time, but the next day or two could be very important for market direction.

What corrections do, regardless of size is point out the stocks with real strength that refuse to buckle. Instead of increasing beta (read greater losses) on a down market day or week(s), they hold much better or go up. The above three charts are a good example. That being said, there is a wide list of 14 RTT buy signals for Monday. I'd be very cautious though about any elected in the first 20 minutes.

Good Trading,

Russ

The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails. In these troubled waters, I try to steer our trading to make the best use of the tailwinds and be cognizant of the dreaded headwinds and stay out of harms way in storms and squalls.

Daily Commentary - Close Friday February 25, 2011

From what I see the two groups that have held relatively well though last weeks turmoil were the oil patch and REITs. Could the "correction" be over? Similar, but a couple of days longer than the one day Egypt hiccup. Could be. Or will we in retrospect look back and say Fridays rally was a sucker's bet?

My tact has been to stay with leadership, play small, and anything that does not very well exit whether stop is hit or not. In other works, minimize risk as the first and second priority. Utilizing this strategy since the Libyan flare up saved me from any real losses, and making only modest profits Friday put me at all time new highs once again,

"Normally," and that is the key word, normally, we would not be thinking of buying until the correction had played out. But according to what's been happening the past 6 months, these are not "normal" times. I know sentiment has changed somewhat. The perma bears, whose voices faded into the background of green flashing prices, were back last week, yelping about a new recession. The facts remain though that consumer and business confidence is the highest it's been since before the crash and the macro worldwide growth story is still VERY much intact. Remember, we are not being pushed up by GDP, but being pulled up by GNP, which is why corporate profits are growing at 3x GNP. That's very powerful.

Therefore, if the market wants to work higher I want to be a player, albeit a lightweight right now with geopolitical risk so high (read: speed bump.)

That being said you will note that the first four trade signals are in the energy patch. Be mindful that they will, to a certain degree, trade in tandem, in line with tidal pull of the XLE, the energy ETF. Therefore, decide your total energy risk exposure to your total equity you wish to have, then spit that between at least two of the energy plays.

Should be an interesting week and could very well set the tone for the month.

Good Trading,

Russ

The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails. In these troubled waters, I try to steer our trading to make the best use of the tailwinds and be cognizant of the dreaded headwinds and stay out of harms way in storms and squalls.

Daily Commentary - Close Friday February 18, 2011

Weak market openings, or morning dips after a strong open, have been bought each time this past week, all month and basically all year, except for the January 28 hard day down due to the Egyptian flare up. Earning's season has been robust and the expansion of the middle class worldwide continues to drive growth. Our premise that this macro trend bodes well for stocks in 2011 and way beyond seemingly is reinforced by very good worldwide economic data week after week. Because growth here in the US in GNP and not GDP, the jobs situation remain structurally weak, while corporate profits are strong, growing at about three times the GDP rate.

Despite having a strong underpinning and rising baseline, I want to point out the obvious once again that nothing goes up in a straight line and there are always bumps along the way. Inflation was an obvious one to project as we started the new decade, but what is happening in Africa and the Middle East was not so obvious.

The Middle East and North Africa, where the average population of just about every country is under 30 years old, and many closer to 25, is seeing an awakening due to frustration over higher food prices and a general lack of hope for a better future. Add the power of the social network, by computer and phone, all this is having a revolutionary impact. Egypt and Tunisia despots fell quietly with very little blood shed, but that is not the case with places like Libya and others right now. What will happen, who will seize power if and when the old, rich despots fall, and what will happen to not only the price of oil but to its supply are all questions with very ambiguous outcomes right now. A good synopsis of what's happening in the Middle East & northern Africa as of Monday morning can be read here.

The food problem is not just a Middle Eastern problem. As the demand grows and the supply is static or diminishing due to weather conditions deteriorating, or the absurdity of the US letting 40% of it corn supplies used for ethanol because of the power of a couple of senators is a national disgrace. Corn production in the US feeds about 50% of the world, but 40% of our corn crop is now going to make ethanol, which accounts for only ca 8% of American gasoline demand. So what we are looking at is the perfect storm of a commodity bull market, both increasing demand, and a shrinking, or at best static supply. We are also looking at the world getting frustrated and angrier.

Everyone is paying higher food prices. In the US food is ca. 12% of a typical average monthly budget and that includes a large percent of Americans eating out over a third of their meals. So, like any necessity increasing in price, it is more of a lifestyle annoyance right now than a hindrance in the US. The percentage of the budget for eating doubles for most other countries of the world. But the real problem is when eating to survive, takes almost all ones resources. The cost of food keeps going up, and with the world's poor having no options for increased earnings, a sense of helplessness sets in. But the information age, and the social network age in particular, are energizing people to rise up. Food riots that we see now are only a beginning.

Those that dismissed social networking as only a fad are being proven wrong. We are now witnessing the birth of Web 3.0, social networks as way of informing, energizing and organizing the poor and oppressed, in essence giving them hope -a very powerful motivator. Web 2.0, a term coined by Tim O'Reilly in 2003 was the second stage of internet evolution, where user created content was shared in a virtual community - think UTube, Wikipedia, blogs.

We are witnessing the simultaneous evolution of technology and changing of political history from a bottoms up approach, through social media. While remarkable, these events have the very real potential to derail the stock market rally. Despite only a one day market hiccup over the Egypt demonstrations, lets not be naive. It was only last Spring and Summer the markets turned wildly volatile and can easily do so again.

The lesson we have learned currently is that the stock market is very strong and you ride the trend as long it wants to go. However, despite a good market so far in 2011, and expected to do well down the line, there will be numerous bumps, perhaps severe, along the way. Bottom line, I'm feeling rather cautious right now. We see...

Good Trading,

Russ

The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails. In these troubled waters, I try to steer our trading to make the best use of the tailwinds and be cognizant of the dreaded headwinds and stay out of harms way in storms and squalls.

Daily Commentary - Close Friday February 4, 2011

The markets had another good week, as did we. Best take I saw on it was from old friend Brian Shannon of Alphatrends, a great trader, who said: "Trying to short this market is like throwing rocks at a tank, you are outgunned and crazy!"

I was checking out some Super Bowl stats and other interesting stuff on Macrmon, one of the blogs I frequent when there is time, and saw this very interesting graphic.

We've discussed inflation from time to time, and how "excluding the volatile food and energy components" from the "official" government stats is really a joke. We could throw in health care costs too... but I digress. Obviously the poor, and those living on low fixed income, have a major problem with rising food and energy costs.

However, what got me to thinking was how do we get a similar graph (anyone?) of the worldwide population, or by region. I recall when I often traveled to Europe (in a past life) that the costs of gasoline, food, alcohol and cigarettes were far higher than in the US, and as a percent of income were much higher than ours.

Now we have major unrest in Egypt, Tunisia and other countries, and the cost of living is squeezing the people and when you add that in the context of a hopelessness of a better future, it is easy to see why there is civil unrest.

It is a no brainer that the demand for better and more food is a huge worldwide macro trend, but lack of available food, and/or the ability to pay for it, is a huge problem that will create civil unrest. A shot has been fired across the bow. Even though the stock market deemed that Egypt was not a serious event, after it hiccupped, we do indeed have a new variable thrown into the mix of potential negatives for the markets.

Coming back full circle to the government lie of no inflation, the Fed now controls the markets, flooding them with money. So long as the markets remain in a sweet spot, it remains time to play. When the Fed either stops its QEII, or the market forces render the Fed impotent, overwhelming their operations with rising interest rates, it's a new ball game. No predictions, just saying ... the markets will tell us what they want to do - it never works the other way.

Have a great weekend everyone!

Good Trading,

Russ

Daily Commentary - Close Friday January 28, 2011

What a week. The technical picture is very interesting, but never ignore the fact that fundamental changing variables trump technicals. Thus, we have to be very careful and if we are to play from the long side, until we get more clarity, we play small. Patience.

First earnings - some were great and rewarded (NFLX), some very good and punished (AMZN) and some flat out disappointing and crushed (F.)

Ford (F) is a classic example of why we never hold through earnings and also debunks the myth that how a stock acts the week and day before going into earnings "points the direction" of the earnings report. Actually AMZN had the same type chart pointing up strongly the day before earnings.

The markets were slammed on Friday on news that Egypt was in turmoil and coming apart. Oil, which had been falling last week, rose 4% on Friday with the potential shut down of the Suez Canal. Gold was very strong, bouncing from its recent sharp down trend.

The big triple top in GLD is quite obvious - some call it a head and shoulders pattern - I won't quibble. Certainly the volume fits the pattern.

Let me digress. a moment about a wave traders point of view. Elliot Wave theory has a bad rep, and rightfully so, because most of it does not work as there are always alternate counts. Practitioners only focus on the count they want to see because of confirmational bias of their expectation. Some only look at bearish counts as they pander to fear, which sells, and unlike selling performance, selling fear does not get judged on results, after all "its just a matter of time" before calamity hits and the sheep always believe.

However, there are very valuable aspects of wave theory, the primary one we use is the a-b-c correction from a new high or new low that sets up high probability, short term counter trend swing trades, as well as new entry levels of the primary trend after the completed a-b-c pullbacks. When these a-b-c corrections occur on the 20 day or 50 day moving averages, the odds of a successful trade increase. Not mentioned in the hundreds of pages in EW books is one potentially very valuable piece of information from a wave point of view that I discovered a long time ago. When a head & shoulders pattern fails, that is when the neckline is broken and then the stock rallies to a new high over the top of the head (defining the head as the top of wave 3), you know the exact beginning of wave 5 and thus can count to the top. Currently, if 127.80 marks the bottom in GLD (not saying it will) but IF, then it is the begriming of wave 5 and a new high.

As you know I do not use trend lines or support and resistance levels in my work, preferring to let the market find and tell me its support levels. To those who use them, GLD is obviously broken (see above.) Looking at GLD on a weekly basis it does not look so broken by any measure.

Breaks below the 20 week ma are common in this bull trend and the high volume to the downside is good - a washout of longs.

Now lets look at gold miners on the same weekly time frame.

GDX has completed an EW correction on the weekly, bouncing off the 50 week moving average. Very constructive.

I am going to suggest to you if you are relatively new to the technical analysis (TA) game, that the oft repeated "all the information that you need to know is in, and reflected by, the chart" is nonsense. Fundamentals (geopolitical, earnings, Fed action etc etc) do change market sentiment and what investors and traders do, i.e. trump the charts.

We really do not know why gold fell out of bed. The dollar was sinking, a very bullish if not supportive factor for gold, but that linkage came apart this month. I suspect what ails gold was the so-called "crowded trade." So many large players (hedge funds) were long gold (and oil) that profit taking and/or attacks from other big players caused an unwind, and that large size that wanted out took time to get out. Keep in mind the same thing could happen to stocks if we get a correction and it picks up steam.

So lets look at what going driving the markets. The market has been in a sweet spot and despite the inevitable ups and downs, twists and turns, there is a firm baseline for 2011 as I laid out in my year end letter. That being said, we have been short term over bought and needed a catalyst - any catalyst, to break the buy the dip mentality. We saw that on Friday with Egypt as bids dried up. The markets and stocks ratcheted down, with perhaps the exception being in the energy patch. Our buy signals for Monday are largely in the oil patch.

It is still not clear whether this will be a short lived dip or the beginning of true correction (ca. 5% of more on the SPY and QQQQ.) The events unfolding in Egypt and the Middle East very well may determine market direction in the short term. The trigger that set off the uprising in Egypt was unemployment hovering around 12%, poverty rates at approximately 25% and rapidly rising inflation. The fact that there seemed to be no hope is what finally let the genie out of the bottle. Contagion in the Middle East is a real and serious possibility, especially is the peoples of Iran are re energized in their thirst for democracy and change.

Bottom line is that we must be very cautious near term as the first pot hole of 2011 unfolds and plays out.

Good Trading,

Russ

The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails. In these troubled waters, I try to steer our trading to make the best use of the tailwinds and be cognizant of the dreaded headwinds and stay out of harms way in storms and squalls.

Daily Commentary - Close Friday January 21, 2011

Being cautious paid dividends this week. As I have said many times decreasing beta is a good tool that increases alpha. As the markets pulled back, our exposure was low.

That being said I'm ambivalent short term going forward. AAPL and GOOD were taken down despite great earnings. We all know how that goes, and at this point at least, that means nothing. However, next to the small cap RUT, the pair made QQQQ the worst of the three major market averages this week, coming to rest smack right on its 20 day.

The S&P looks a bit better and the Dow actually moved up on the strength of GE and IBM. however many other stocks in the Dow, for example DIS, look just fine.

As we saw back in November a fast 8 day, 5% correction and then another 8 days of consolidation was enough to take off the over-bought readings, shake out the weak longs and get all the over anxious bears short. Then the market rallied strongly until where we are today.

All the SPY has really done is bounce off the 20 day moving average. In other words, it could go either way. A trip to the 50 day, should it find support there, could be a very good buying opportunity. Of course we could still grind higher from here.

I took a lot of exposure off this past week in terms of percentage of equity exposed to the market and shortened my time frame significantly on trades. However, if the markets want to work higher I'll play, but starting slow at first.

Gold and silver sank last week, as did the dollar. Since those metals are priced in dollars, that is a sign of strong selling pressure- not a good sign, nor are the charts, which are a mess right now. However there is one gold stock on our buy signal list that is defying the reality of the rest of the group. Not sure why, but I'll play if the signal is elected.

Should be an interesting week.

Good trading,

Russ

Daily Commentary - Close Friday January 14, 2011

The market remains in a sweet spot - we won't fight it, but we will be wary.

We all know about the risks with the European debt situation. We are also constantly hearing about the risk of inflation in China. Sure, increasing consumption and demand for food, real estate, energy, as well as other goods and services are certainly going to cause inflation, not only in China but across the globe. Much of what is in demand is limited in production. They, and we, will have get used to higher prices - the price of world progress. Then we hear the bears say China is a bubble, as if it is going to collapse. Yeah, right, as if a very smart people and a very industrious people are going to fall back to their much poorer beginnings 10 years ago.

Technically, lets put China into a little perspective. They already had their bubble and it burst, coincidently, and I do not say that sarcastically, October 2007 when our stock market topped. In Oct. 2007 the Shanghai stock index (SSEC) stood at 6124 after a massive run up, then falling to 1664 in October 2008. Think the 38% drop for the S&P in 2008 was rough for US investors, top to bottom, the SSEC lost a whopping 72.8%

The SSEC then rallied in 2009, but slumped in 2010, and never rallied very much the last quarter of 2010 like the S&P did.

There are always very volatile stock markets as nations emerge, as did we. I submit that like any great growth stock, the market will overdo it to the upside, then fall back, often severely, then move sideways, before resuming its advance. All very normal in the so-called digestive phase while the economy/earnings catch up to the over done market run. Sound familiar? Techies, see the 50 day moving average? So to those who see China as a bubble, it should be obvious that it did indeed have stock market bubble, and it burst and now is searching for a new price level/range as it inevitably will move higher. Whether that be from here or lower levels remains to be seen.

As for our market, we are short term over bought. An RSI that is well over 90 may go up to 95, but clearly is unsustainable for very long.

Therefore, although bullish, my tact is to short term rent stocks for now. The fishing analogy is "catch and release," but as we have seen in 2010 the HFT and the huge prop desks can keep it all going for much longer with the absence of any sizable mutual fund or institutional buying/selling. Still, I'm waiting for all the inevitable profit taking to occur, before reestablishing longs, with the ideal trade time frame moving from days to weeks - many weeks if we catch it right.

Gold got hammered this week, even on Thursday when the dollar got slammed also. Made "no sense" in the way the correlations have been, after all gold is priced in dollars. Gold was also being sold in Euro's.

Technically, gold appears to be in trouble falling below the 50 day moving average, rallying back to it, then failing again. If the run is over, they will be talking about the "obvious" triple top for years. Still, to a wave counter until the a-b-c (in c wave now) fails, it is still in bull mode. Silver too is working on an EW a-b-c correction but looks a lot better than gold. If you just have to own metals, silver is the one, buying here risking that the bottom is in. Me, I'd rather be buying what is going up like the commodity plays on our buy signal list.

DBC is much different than DBA, which we own and which is pure agricultural play. DBC is comprised of ca. 50% crude and gasoline, 5% natty gas, 10% gold and silver, 16% aluminum, copper and zinc and 20% grains and sugar. Thus DBC gives broad exposure if you don't want to pick and choose.

The message going into the 3rd week of January is to continue to play until given proof otherwise. If not comfortable, step aside or hedge. Do not try to short the market - yet. On the open positions table I'm moving stops up. We will take so long as they give. There is a long list of buy signals for Tuesday.

Good trading,

Russ

Commentary - Close 2010

All our risk control was great through September when the S&P was down for the year when it bottomed and we were up. As the S&P came off the bottom, there was no indication or rational that is was any different than what had happened previously in 2010. For a lot more perspective, scroll down here to the September 17 weekend commentary for an in depth analysis and chart. From that point I continued to play the market the same, and it was the last months of 2010 that our relative performance suffered, although we ended the year at all time new highs.

Worldwide Macro Trend to Drive Stock Prices in 2011 and Beyond

Megatrends are powerful technological, economic and social forces that are the tailwind of growth opportunities for companies, industries, entire economies and stocks

What is happening is that a megatrend of the worldwide developing countries is creating a move to middle class status economically and socially. As people's economic status grows, so does their consumption of goods and services. This is not just about China's 1.3 billion people. The world is close to 7 billion people, and other than the US and Europe, there are about 4-5 billion people in the so-called emerging economies of the world.

I have no idea of the approximate number of people moving into the middle class, but it's large. What has become evident is that they want our stuff, whether that be hamburgers, ipods, autos, pop culture, technology and all the rest. It is why the earnings growth of the S&P500 companies is three times the rate of growth of total GDP and accelerating. Earnings drive stock prices.

2010 saw this emerging megatrend develop from a groundswell and move into the mainstream, setting up the very real probability of a secular boom in global equity and commodity markets for years to come.

Let me give you a couple of examples. Huge, staid, Dow Industrial Average component 3M reported earnings for 3Q2010 which said “3M Achieves Record Sales of $6.9 Billion on 11 Percent Organic Volume Growth.” Click the link for the full report.

Here’s the take away: Sales in emerging markets grew by 25 percent in the third quarter and now comprise 34 percent of 3M’s worldwide sales. Their sales grew by 48 percent in Korea, 39 percent in India, 32 percent in Russia, 31 percent in the China/Hong Kong region and 25 percent in Brazil. The overall geographic breakdown: sales rose 28 percent in Asia Pacific, 14 percent in Latin America/Canada and 6 percent in the United States. In Europe, organic volumes rose 4 percent, but sales in total declined 1 percent as currency effects more than offset volume gains.

This is a perfect example of how the macro trend of worldwide growth is driving profits of US Corporations despite the poor economies of the US and Europe.

Another example is L’Oreal, the world’s largest cosmetics maker, who is chasing growth in emerging nations, where demand for beauty products has surged as people earn more money. “Regions such as Asia and Latin America should represent 50 percent to 60 percent of L’Oreal’s business in 10 years,” said Chief Executive Officer Jean-Paul Agon.

The earnings from corporate America, quarter after quarter tell the story. Weak or anemic growth in the US and Europe, double digit growth in the rest of the world. This is not a fluke. If anything, 2010 has shown that that the self destruction of the US and Europe, did not and could not stop the inevitable - the resounding growth in the rest of the world. .

Did we get lucky?

How convenient! Just as we slip into a nasty recession and our strapped economic middle and lower class are forced to cut back, there are people around the world clamoring to buy our goods and services. The only answer to our problems is to grow out of them – there is no other choice, and on the tailwinds of this macro megatrend is how it appears we will do it.

The US and Europe were devastated in 2008. Greed ruled the day, the politicians got paid off, and as we all are acutely aware, the economic system almost imploded. Some fear it still might. The Fed prevented a total collapse from the bursting of the housing bubble and the consequential damage to the financial system and credit markets.
All the subsequent Fed programs, essentially creating money and pumping it into the system, could be debated endlessly, and is by politicians and economists, and I’ll leave it at that. The take away is that we have bought time – much needed time, to heal and grow. As is becoming painfully obvious to those directly affected and the politicians, it is going to take a long time to recover from the devastating blow our economy took.

Fortunately for us, the rest of the peoples of the world were not hurt like we were in 2008-2009 and only paused in their economic evolution, which has reached the critical mass to have profound effects. In essence, this emergence of the world into a better relative place economically will be the engine of growth that "pulls" us upward, and that will slowly bring back jobs, as well as stabilization and real growth to our banking and financial sectors. But that is going to take a lot of time.

Now the big BUT …

A friend said to me - BUT all that stuff we are selling is not made here in the US, and thus the impact on jobs and GDP growth is minimal and does not solve the problems of unemployment, housing and debt. All that is correct, at least in the short run, BUT the focus among economists and analysts is on GDP and comparisons to past recessions, which is why they are missing the obvious.

The middle class is really hurting. The US consumer used to account for ca. 70% of GDP and now that number is ca. 50%. Do not expect that to change very much for a long time. In addition, the sad reality is that the gulf between the strapped middle class and the upper class will grow wider as the rich get richer.

GDP vs. GNP

From Wikipedia - The gross domestic product (GDP) is the amount of goods and services produced in a year, in a country. It is the market value of all final goods and services made within the borders of a country in a year

GDP can be contrasted with gross national product (GNP.) The difference is that GDP defines its scope according to location, while GNP defines its scope according to ownership. GDP is product produced within a country's borders; To take the United States as an example, the U.S.'s GNP is the value of output produced by American-owned firms, regardless of where the firms are located.

Thus, the answer why S&P500 earnings are growing three times GDP.

The economists are still focused on GDP comparisons to past recessions, where the fundamental change is not in GDP but in GNP. In the past GNP vs. GDP was trivial to assessing our economic growth. Today it is the key and why the corporations are getting richer and sitting on so much cash. That is also why the stock market has been and should continue to be strong, even despite slow growth at home and with some bumps along the way .

Growth, the only way out

Some say that history repeats, others say it rhymes. Our human experience of learning often comes by our own history, i.e. by making mistakes. That’s why we get smarter as we age and often become very knowledgeable long after it’s most useful. We know we should learn from our mistakes, and better yet, ideally from the mistakes of others without committing them ourselves. But I digress…

As investors or traders, whatever name you care to label yourselves, make no mistake, the past does not repeat, and rarely does it rhyme. Every economic pot hole, as well as both political and geopolitical pot holes, along the way of progress and the evolution of our own and worldwide growth and prosperity is different, to one degree or the other. That is why when they occur, no one sees them coming (or the few who do see them coming are ignored, basically because they always see something awful happening.)

What’s the point you ask? Setting the table, so that the following adage (normally expressed as a counter point to one’s own bad personal times) can be put in perspective of this commentary, namely “You cannot move forward if you are always looking back.” And that is exactly what all the economists and pundits are doing – trying to glean the future from past recessions. Looking back at past problems and projecting that data as a guideline to follow for the future, not only does not make any sense in what is termed the “new normal,” but actually is counterproductive, in that it blinds them to what is developing right before their eyes.

That is why all the gloom and doom over where the engine of growth will come from to drive our economy and stock prices has no answer to those who just look to the past. Right there in that sentence is the first flaw of the implied failed logic, namely, our own economic health drives growth, and growth drives stock prices. The bears say the stock market is irrational. They do not see that the stock market and the domestic economy are not nearly as linked as they used to be. For that reason, they do not see the 800 pound gorilla in the room – the macro megatrend of what I speak, and thus can only be pessimistic.

Just as investors fled the stock market in 2010 taking out billions of dollars, they should have been doing the reverse. Just as investors poured money into bond funds, led like sheep by the brokerage firms, they should have been running the other way.

Thoughts on the changing face of trading and HFT

Markets historically go through different ways that they trade, mostly in concert with whether they are trending up or down. My analogy has always been like a tide that cannot be predicted. If you are a fisherman, you can look up the exact tide change for any day you care to fish, anywhere you care to fish. Presuming a targeted fish bites better on certain tides, you can plan accordingly to optimize your catch. With the stock market you never know when the tide will change or for how long. The problem is that it is very hard to swim against the tide. So, as traders, like longer term investors, we (used) to play through all tides.

But the crash and incredible volatility of 2008 changed all that. Being risk adverse, the number one trait of being successful in this game, we learned how to play while at the same time hedging, or (partially) mitigating risk. That was a major evolutionary step for The RTT.

Then came High Frequency Trading (HFT) and the so called Flash Crash of May 6, 2010, all of which not only increased volatility but scared the hell out of investors, as for the rest of 2010 billions poured out of stock funds. It was also a time when many traders got crushed, not only by the volatility but by the changing dynamic of how HFT changed the patterns of how the markets trade.

Looking at the numbers bandied about regarding HFT and algorithm trading from Bloomberg and other sources, the average time a stock is held is 11-20 seconds and an estimated 70% of daily trade volume on the NYSE is from HFT. The rather ubiquitous liquidity belies the fact that these HFT firms, with the blessing of the exchanges who earn per share fees, control the way the market’s price action flows, as opposed to when investors and traders, individuals and professional alike, traded based on the ebb and flow of human decision and emotion. In other words, even though the HFT are in and out all the time, they do control the direction and how that direction evolves and flows, and that is different than the way markets used to trade.

I am a pattern trader, and what I found was that certain breakout patterns, instead of drawing attention and more bids and rising prices, now were being faded (sold) by the HFT algos, reducing their profit potential. I also found that other patterns, centered around bottom basing corrections of trends, tended to act more quickly with less basing action.

If you are a trader, I highly recommend you read the following article. http://www.sfomag.com/ArticlePrint.aspx?ID=1448 My experience does not necessarily jibe with everything said, but the article does cover the bases pretty well as to the real life problems HFT presents to traders.

Perhaps there is some hope. The SEC recently voted unanimously to adopt a proposal it made in January requiring brokers to put in place risk controls and supervisory procedures relating to how they access the market. The requirements would apply to all brokers and also to alternative trading systems that offer market access to entities that aren’t brokers. The rules effectively ban naked access because they require traders to funnel their orders through the brokers risk controls.
Bottom line take away - so long as HFT trading is with us, it is a real and dangerous force, as evidenced by the so called Flash Crash of May 6, and anyone involved in the markets must adjust and evolve in their trading.

(For a copy of the full report detailing caveats & risks including politics, fiscal policy, monetary policy, debt, inflation, Europe, housing and major trends to watch within the macro megatrend I see, please email me.)

Daily Commentary - Close Thursday December 23, 2010

Hope you all had a great holiday season, and it's not over yet as we wind down to New Years Day. I eat so much stuff (home made Christmas and chocolate chip cookies, etc) that I never eat during the year. What a treat!

As we wind down, the market is acting well and in looking at charts the one I pondered the most and the one that could very well hold the key to short term direction this week, and perhaps beyond is the US dollar chart, as shown by the ETF.

Besides the direction Monday, the key levels are breaking 23.52 (trouble) and 22.80 (good news for commodities in particular and stocks in general.) You can count a-b-c waves between those two levels both down and up. Pure ambivalence. Watch the dollar premarket Monday morning.

Volatility has collapsed - good for risk adverse traders. GOOG with a $5 stop is remarkable. Remember it is not about the dollar amount but the percentage gain/lost on the dollars invested that counts. Would you buy a 1000 shares of a $6 stock if the risk was only 5 cents (risk $50)? Guess here is that you would jump at it. But 10 shares of GOOG at ca. $600 and risk $5 is the exactly same thing. Markets will be open Friday New Years Eve and then Monday January 3.

Good trading,

Russ

Daily Commentary - Close Friday December 17, 2010

The markets traded well on Friday after a wishy washy start. The SPY went ex-dividend Friday and thus the $0.72 was priced in at the open and why the SPY finished down 65 cents while the S&P500 finished slightly green.

GLD (gold ETF) completed an EW a-b-c correction as it bounced off roughly the 50 day moving average.

Looks good - right? Yes, and indeed I did buy some SLV, (silver the stronger of the pair) as it bounced off the 20 day moving average on Thursday, as reported on Twitter at the time. However, IF (and I do not place the odds very high) if gold should sell off and take out Thursday's lows, then I want to be short. And since GLD has somewhat of a positive correlation to stocks these days, should the dollar be exceptionally strong Monday, I'd expect gold and stocks in general to go down. Therefore, beyond just a short of gold for a trade, look to that trade also to be be hedge against general market decline. Thus our trade signal in DZZ, and the position size should be calculated to hedge your overall present market risk. Not predicting, just being prepared, and let's also hope that is all turns out to be just a mental exercise and the market, as well as gold, moves higher.

So we go with the flow, whatever direction that might be. And if you want a lot of market exposure, there is ample opportunity with names like GOOG, IBM and AAPL, since all have tight ranges and thus low percentage dollar risk per trade, i.e. higher equity exposure per trade keeping the same total risk percentage to equity that you set for the trade (you know the drill, or see the links at the left.)

Good trading,

Russ

Daily Commentary - Close Friday December 3, 2010

The market opened lower Friday after the 8:30 nonfarm payrolls data for November increased by only 39,000 a huge disappointment from the economists' consensus estimate of 150,000 and pushing the unemployment rate to 9.8%.April.

Yet after the poor open, the market was bid upwards all day. That is the real story. While the politicians fret and try to deal with the impossible employment situation, you, I and the market know it is not going to get better any time soon. As we have discussed over and over, as the worldwide growth macro story has evolved into a full blown driving force of future corporate profits, despite a static US employment picture, and all that means increasing stock prices.

That, and last weekend's commentary, about sums it up. This is the time to be long.

It's a short and simple message this week.

Good trading,

Russ

Daily Commentary - Close Friday November 26, 2010

John Mauldin, a widely read economist writes "And the data out over the last few weeks tells us it is getting better. Does this take us out of the double-dip woods, even as the Fed is lowering its forecast? And what is a recession? Yes, we all know it's when the economy doesn't grow, but we are in a rather unique economic environment, this time. Maybe things are getting better, but is it enough to get us back on the road to full employment?" John also points out how bad the housing sector remains and states "The cure for low prices is low prices. While it may be well into 2012 before we work through the excess inventory and the aftermath of the housing bubble."

Let's accept that employment and housing are going to take a long time to stabilize and begin modest growth in the "new normal."

It used to be economic growth could not exist and/or sustain itself without robust consumer spending, and that was dependant on strong employment and a good housing market. Where consumer spending used to be 68% of GDP (they always rounded it up to 70%) it is now down close to 50%. So lets acknowledge that this is not going to change over night and this is reality of the 2009-2010 evolution of the "new normal."

But the total economic picture is the sum of all the parts, not just the bad parts. So, the logical question is where is the growth going to come from? What we are witnessing on a macro, worldwide basis that is very obvious, but seemingly ignored, missed or dismissed (as a so-called bubble) is that the emerging countries, literally the entire world outside of the US and Europe are taking up all that slack in spending and buying our stuff, whether its made here or abroad. That is also part of the new normal. And we are beneficiaries as we begin our shift from the world's largest consumers to a more balanced producing/consuming nation. That does not come without dislocations, as always has been the case as we advanced.

I am not making all this up - just look at the bottom line of corporate America, which now sits on one trillion dollars in cash. You guys know I have been pounding the table all year as this has been developing. Well, its not a theory any more. It has arrived, despite all our and Europe's debt problems. This basic shift in the consumption/production ratio is the macro trend of the next decade. US corporation's recognize this and are taking part in, and advantage of, the peoples of the world gaining in economic stature. For example, take MCD or YUM. How many more hamburgers can we Americans eat? So where is all that growth coming from? It's obvious, right? If not, go read their 3Q earnings reports.

The world is changing, we are a big part of that change and the benefits will serve investors and traders well.

The reason the pundits and economists and all miss this is because they are always looking back comparing to past recessions in terms of job growth, capacity utilization and it goes on and on. We are part of the evolving world economy. We are not self-sustaining any more. By looking backward, they can not see the future, nor the profound changes that define the present. As for the perma bears, they will never see sun light, as there always has and always will be reasons to live under the dark clouds of fear. They do not understand how the markets work, even on an empirical basis, let alone risk control on any level. They find comfort and confirmational bias among their own, and there are plenty of bloggers and advisors who play to their fears, despite woefully underperforming the markets.

Yet, as always we have to be realistic. We are not in a sweet spot right now. The stock market is not just about consuming/production, supply/demand. Fear is a big motivator, whether well founded or not. Debt troubles in Europe and here are going to affect the economy and stock market to varying degrees and at varying times. Geopolitical risk, like the latest North Korean antics are always a concern. We saw how these factors had a negative effect on stocks last week. All of which is a reminder that job #1 always is controlling risk.

We have just a tad over one month left to the end of the year and decade. I will have a lot more to say about these growing macro trends going forward in my year end letter to clients. If you are not a member of the fold, and wish a copy email me and I'll see that you receive it. If you are looking for predictions, those I do not make, but plenty of others do, for whatever they are worth.

What this week will bring is unknown. What I do know is that there are many, many stocks that very begrudgingly pulled back, some even have bucked the headwinds recently. We have had a rash of buy signals lately and have 19 more for Monday, and that involved whittling down the list quite a bit. That to me helps define a strong market, and one I want to play - if Mr. Market accommodates us. We see...

Good trading,

Russ

Daily Commentary - Close Friday November 19, 2010

Thursday's wishy washy closing last hour portended the weaker opening we got on Friday. However, not unsurprising, there was a good bid under the weak first hour and the markets finished the day slightly in the green. The European debt problems caused the market to hiccup, but by Friday Ireland had it's bailout. We needed a catalyst for the long awaited correction. My large buy signal list tells me the odds are good, the correction is over. I want to take you through how I see some of the puzzle pieces that are generating these RTT trade signals.

The gold chart is a very good illustration of what we have been looking for. First, there is a correction on high volume down to the 50day moving average, where it found support. All that is good. Then the bounce, and on Friday morning's weakness, the gap was filled. As posted on Twitter, I took the opportunity to take another starter position in gold on that gap fill. I want to add on the buy signals for $GDX or $DGP.

Also positive is that the stochastic oscillator is beginning to turn on the 20 line. But the thing I like most is that we had a simple Elliot Wave a-b-c correction down to the 50 day, the support held and GLD now has a little consolidation off that low, with a positive closing bias. Putting it all together, that is an ideal RTT trade signal, and I have a lot of those for Monday in the table below.

The chart of the SPY shows a clear a-b-c correction and Friday's early morning weakness did not even get close to closing the gap. That is also a good sign, as this could mean we have put in a so-called "breakaway gap," and are headed higher.

Our trusted friend $BPSPX has lost some of its power after getting some relief from the most extreme over bought condition seen in years.

We can see that the index turned down and has crossed its 10 day moving average - cause for concern and tempering a bullish view. However, the slope has turned back up and it did not pierce the 20 day moving average, nor has the 10day crossed the 20 day, both of these signals would be bearish.

If you look closely at the next chart, monthly, that goes back 3 years, you will see that our present scenario of the index crossing the 10 day but not the 20 day, is somewhat common, and that many times there was 1-2 months more of the rally before a more meaningful correction.

To sum up, I have been waiting for the over bought stock market to get some relief and to use that as an opportunity to get more aggressively long. This could be it.

There are three likely scenarios for Monday. Market strong, market weak and finishes weak, or market acts like Friday's, which then postpones most of the breakouts to Tuesday/Wednesday. Ideally, the market opens flat, goes up and our stocks trade through our buy stops and we don't have to deal with seeing them gap higher near or beyond the buy stops.

Good trading,

Russ

Daily Commentary - Close Friday November 12, 2010

It's complicated, so I will try to keep it simple. If you are bearish this is the time to be short, hedged or out of the market.

You will note that Friday was the fourth time the SPY visited its 20 day moving average, and if Friday's low holds, that is the green light to be buying again. Also, if Monday finishes positive, that completes a simple EW a-b-c correction, albeit a very shallow one. Should that scenario play out, then if short, you want to cover on a positive close.

So what happens if indeed we do get a positive day on Monday, but then market continues down taking out the recent low? Every complex deep correction or the start of a bear market by definition always has a failed simple EW a-b-c correction. Thus, go short (again) or step aside.

We will then be looking for support on the 50 day moving average, and failing that, the 50% retrace of the August to November move, ca. 113.34. Look for potential bottoms at those points. Even with a 50% retrace, the market remains in bull mode. Sure, one can make money on the downside correction, but just do not let "confirmational bias" of bad news reinforce your bearish views and ignore the chart. The market is bullish until proven otherwise.

The SPY is not the only index or stock looking to make a simple a-b-c correction. There are also the REITS, financials, gold and silver.

This could be quite the week.

Good trading,

Russ

Daily Commentary - Close Friday November 5, 2010

They were calling it the most important week of the year for the stock market. If indeed that is true, both traders and investors got the green light this week.

Barry Ritholz in his Big Picture blog summed it up thusly:

Positives

1)Oct payrolls surprise big to the upside 2)Fed lights another fire under asset prices but are we really wealthier as a result? 3)Emerging markets continue to rally as investors seek non $ assets 4)Oct auto sales rise to best since Sept ’08 ex clunkers 5)ISM services and mfr’g indices both above forecasts 6)RBA and RBI raise rates to cool inflation pressures 7)Fed to allow healthy banks pay dividends.

Negatives

1)Huge printing of money has turned our central bank into a 3rd world one 2)Asset priced induced wealth effect is an illusion if a debased currency and higher inflation is the side effect 3)Deeper the Fed gets, the more difficult it will be to reverse 4)Commodity inflation as measured by CRB index rises to 2 year high 5)Ireland, Portugal and Greece financial concerns continue to grow 6)German Sept factory orders fall sharply 7)Sept Pending Home Sales unexpectedly fall.

I might add that from a technical perspective, the one real caveat and negative, is that the markets are so over bought, which is a near term negative. Perhaps Barry's negatives 5&6 will be what is needed to spook the market into a week or so pullback. At that point, the green light will be truly be on, and the time to get more aggressive.

The financials are cooking. 24WaLL Street on Twitter wrote the financials need to move the market higher. Actually, all they needed to do was get out of their lethargy and join the party, and indeed they have, after a massive 6 month bottoming process.

Good trading,

Russ

Daily Commentary - Close Friday October 22, 2010

We have a deluge of earnings this week, including more steel and aluminum, and early reads on energy and REITs. Up to this point 86% of companies reporting have handily beat estimates and expectations. The transports are making new highs. Retail is strong. The take away - despite the headwinds and risks, the economy is percolating along just fine.

Against this backdrop, the market wants higher, or at the very least appears not to want to go down. Any new catalyst can, of course, change that in an instant. You will also note our "current open positions" table has only three stocks, and all stocks in that table carry RTT signal type stops, which has not changed. (I have been using discretion to take off positions that are not working immediately, dampening equity volatility - a very conservative, personal approach.)

Normally, if there is such a thing as normal market action, as we proceed into a very strong bull run like we are having, we would have 30-40 open positions. We have three. That is real proof of how much the markets have changed and how tough the markets have been to trade. (We'll beat up on the HFT another time.)

We've been watching the financials, and with good reason, as they have been the drag on the market's sentiment. They obviously do not know which way to go. But they will make up their mind soon (possibly), or eventually.

Two of the strongest sectors have been gold and solar stocks. Both have had a sharp pullbacks. Gold sits in never never land between the 20 and 50 day moving averages.

Certainly, the over bought condition has been relieved. Now the question is whether this is the end of the correction, or is the next stop down to the 50 day? The problem with trading gold of course are the gaps from overnight trade in Asia and then London. Increasingly, gold has traded in a very light range overnight, but when the futures pits open here (before the stock market and GLD) gold moves rapidly. That also creates gaps. To attempt to maintain risk control during this time, you have to be at the computer and trade pre-market (only limit orders, no stops, no market orders allowed.)

All that being said, using 128.71 as a stop (if one could get that) I bought gold on Friday's close. I know it might be early, but with a $1 risk on $129 to catch the bottom of a correction (as opposed to trying to catch the bottom of a bear market trend chart) I thought it was a good trade. In my largest account 1000 shares of GLD is ca. 10% of equity with only a $1000 risk (<0.1% equity) and if a bad open (gold down $20, GLD down $2) that's a $2000 loss (<0.2% equity.)

The gold miner's index chart has a better look to it, but carries far more risk per dollar of equity traded than does GLD. It is the same principle for the gold stock on our buy signal list. For those waiting for an early entry in metals, also look at SLV, SSRI, SLV, as well as PAL.

The idea here is to get a starter position, defined as a very small loss to your total equity if it does not work out. You know the drill, or if you are new, read the links on trade modeling at the left.

The trade signals for the solars are the same principle. If the correction is just a pause in a greater run, they are worth (in my opinion) a trade, especially since the defined risk is pretty small. The very low VIX certainly is helping to contract spreads in our buy stops minus sell stops, which is especially beneficial on very high beta stocks, like we saw on the REE signal last week.

Good trading,

Russ

Daily Commentary - Close Friday October 15, 2010

The finacials were volatile last week with all the talk that a moratorium on bank home foreclosures.

For those of you not on David Kotoc and John Mauldin's email letters, Barry Ritholz reprinted Kotoc's great analysis and Mauldin's take here. Forget the first part about the housing recovery that's not happening - the market knows that and does not especially care (i.e. it is priced in), but does like the fact the NEW home sales are picking up. That's an entirely separate part of the housing market, esp. for upper middle class stepping up and first time home buyers, who want to start their life with new, not "used." When you open the link skip down to The Foreclosure Mess where Kotoc will explain the problem and discuss the potential ramifications. As Mauldin goes on to point out something needs to be done. One of the options not mentioned, but one that struck me is that perhaps the Fed will bail the banks out their predicament. I say that because of the curious timing of the QEII speech last Wednesday, when the market was not looking for anything definitive on QEII from him until the Fed meeting on November 3rd.

Sure, the world is percolating along very nicely and big corporate America is making huge profits on this macro shift, but, as I have been saying, trouble in financial land can put a hurting on the market, and fast. Therefore, and I know it seems like a broken record, we watch closely the XLF.

The techies will tell you that XLF breaking 14.20 is big trouble,as there is no support all the way down to the 13.26 bottom. Breaking that, puts the XLF in bear mode with a series of lower highs and lower lows. Regardless of which direction the financials trade, expect volatility.

Those that have been here through market rallies know our current positions table tends to grow quite large, but as you notice, it has been held in check this past month by the very choppy intraday trade. That not only is a caution signal, but also another "tell" that the way the market trades has changed. Therefore, although the system stops remain the same as always, I would take partial profits after a good pop and/or set your stops to break even.

Let's say the finacials cooperate with a rally or even just chop around in a neutral posture. That leaves the market room to continue its rally.

Our friend, $BPSPX, the percent of S&P stocks in bull mode, is in a powerful rally. When the 10 day moving average crosses the 20 day, that is the last and most potent of the 3 buy signals. You will note on all rallies when this happens the stochastics at the bottom of the chart moves to the maximum high until the rally begins to run out of steam. This can be as long as 8-10 weeks. We are 5 weeks in. You will also note that the RSI at the top of the chart is at 90, which historically is the maximum at rally tops. If you look at $BPCOMP (on stockcharts.com) you will see that it is at it's maximum RSI of 95. Because BPCOMP measures the Nasdaq which is very heavily weighted in tech stocks, its max is 5 points higher that BPSPY, as the S&P500 is a much more diverse group of stocks.

The final take away - don't be afraid to trade, but be very careful, nimble and keep position size smallish and be ruthless about not giving back.

Good trading,

Russ

Daily Commentary - Close Friday October 8, 2010

An interesting week that proved difficult to trade until Friday. We started with a nasty shake Monday, which smacked of a near term top, but Tuesday the markets shook it off and broke to new highs on strong volume. Then two more wishy washy days ahead of the jobs data, and a strong day again on Friday. A good week, despite 3 down days and only 2 up.

I continue to focus closely on financials which had a positive, albeit anemic week, but apparently it was enough not to rain on the stock market's rally parade.

The SPY continues to be over bought as shown by stochastics although clearly with more room to the upside looking at the RSI. Techies will point to Monday's low forming a trend line (if you like those kinds of things) from the end of August low. That would imply plenty more room to the upside, perhaps as far as the April high, which also is the high for the year, and it could happen without a pull back. Not predicting, just saying...

Retail remains strong, especially high end retail. We keep hearing the old refrain that the consumer is 70% of our GDP, but that is wrong, with some best analyst's guesstimates I've seen now at 50-55%. We'll get a better handle on it by the end of the year, but that trend reinforces the changing dynamic of what's powering the world economies, as the emerging countries increase their demand for our goods and services. The problem I have with many analyses, whether they be fundamental or technical, are the compare to past charts or past "recession/recovery data," but fail to recognize the changing dynamic of the inter relations of the worlds economies and trade.

What is clear is that the stock market wants to go up, and absent any game changing news, pullbacks will be looked at as buying opportunities.

Basic materials, base metals, gold, REITS, retail, solar, casinos have all been leading groups. We are seeing more momo players, as evidenced by the piling onto moves of small caps, especially biotech and China on no apparent news or economic data reasons.

This week started the earnings season with Alcoa (AA) who not only beat but raised guidance based on demand from emerging countries, as well well as for various industry groups, especially autos (worldwide.)

This week we get our first important indication of 3Q2010 earnings with big guns INTC and CSX reporting Tuesday, JPM Wednesday, GOOG Thursday and GE Friday.

Good trading,

Russ

Daily Commentary - Close Friday October 1, 2010

A rather ambivalent day for the markets to start the new month. The markets "seem" to be running out of gas, but remain high and have been fairly well bid on pullbacks intraday. So how long can the over bought condition go on - there is no telling. It is what it is, until it changes.

I am still intently watching the financials as a "tell." They did not take out the August high of 15.06, and they broke back lower to their 50 day while the S&P marched higher. That looked precarious, and why I was expecting the markets to correct. But the support the XLF found last week was quite strong, so they could be headed higher, which would be a good underpinning for the S&P's continued advance. XLF also could break down through that support, which would be troublesome. So, we wait, watch and see and get our cues accordingly.

The S&P is up 2+% this year through three quarters, but the monthly volatility has been incredible, with the past five months having +/- swings of 5 to 9% each month.

There so many unresolved variables as we enter the last quarter of 2010. A double dip in our future? Continued record outflows from stock mutual funds, record inflows to bond funds, the next catastrophe to the IRA/401K retirement aspirations of the baby boomers. HFT out of control and dealing with the flash crash.

We also are contending with the debasement of the dollar, the Fed "put" with the next round of QEII, elections, earnings season and the fate of the Bush tax cuts.

In my 3Q2010 letter to our partners, I expanded on all the above points. If anyone wants a copy, email me. Bottom line, the thinking here is that it will take until the end of the year to know whether we have built a house of cards that will fall apart, or we will maintain slow, yet welcome, economic growth for the rest of 2010 and into 2011. We make no bets in advance, letting the market tell us which way to go as we attempt to stay out in front of the the waves, up and down.

Accordingly, we have buy signals as well as short ETF signals for Monday.

Good trading,

Russ

Daily Commentary - Close Friday September 24, 2010

A combination of the reiteration of the Fed "put," so-called because, and this is important, even if it means a little inflation, the Fed said in no uncertain terms it will not fight deflation, but will see to it that growth continues at a "healthy pace" (that description mine) even it means a little inflation.

Couple that with good economic data, especially durable goods orders, which Friday morning were announced as very strong, all set the stage for Friday's sharp rally to cap a good week for the markets. Yes, the employment and housing pictures are not good, but at these levels appear to have stabilized - read: the market does not care, and expects down the line gradual improvement.

In contrast to a few weeks ago, when everything looked so bleak, when the perma bears hijacked and overran blogdom with all the talk of double dip recession and reasons for market crashes, all driving bullish sentiment into the cellar, now it has all reversed. The large wire houses and analytical firms are now reversing their calls for slower growth and now falling over themselves raising 3Q GDP estimates, as the markets have soared.

So much for all the people so unnerved by the "fact" September is a bad month for the markets. If you are so inclined look back at the last 10 years and see how many up vs. down Septembers we've had. Surprise, surprise its 7plus, 2 negative. That includes the crash of 2008 of course, but if you and/or your broker/advisor held through the crash, there is a major problem in your approach, putting it kindly. Unless 2010 sharply reverses this last week, make that 8up/2down years.

Despite this week's rally, the fly stuck in the ointment is the action of the financials, our tell. The drag on the group were the banks. At weeks end, the reality was the XLF told us nothing.

Technically, the financials are still trapped in their trading range, while so many other strong groups have broken out, dragging all the major market averages through all that resistance we have been documenting in these weekly commentaries.

Magic Twitching Hour (MTH)

The acronym MTH (Magic Transition Hour) somehow has also evolved to the Magic Twitching Hour. Not sure how or why. TMI? Anyhow ....

Many years ago in the 80's when I first started to trade stocks, in our office building, there was a little boutique broker's office down the hall from our company's office, and in the reception area was a pit with screens and real time quotes. (There was no computer trading back then, you wrote trading tickets.) There was a very smart fellow who came in about 10:15am, never before, checked some charts, and sat and watched. He called it the Magic Switching Hour, when the markets would reach their top or bottom from the directional trade the first hour. He was looking to take the other side, as the markets either topped or bottomed.

MTH is that period from roughly 10:30-11:30 (sometimes as early as 10:20,
very rarely before, or as late as 12:00, not to be trusted or traded.) The MTH top or bottom often turns out to be THE top or bottom for the day in a day
that is either a) not directional or b) a reversal day. On a directional day, last Friday for example, the MTH high was ca. 11:15, the pull back shallow and then the market went on to make new highs for the day.

Even if a day turns out to be a directional day, a lot of day traders take all or
some of a position off, and a lot prop desks and pros short tops in that time
frame. Watch the market for a couple weeks with the 1 min. charts of the SPY all this will become clear. You could of course go back in time and look at 1 and 5 min charts, but if you are seriously interested, watching them evolve in real time will be much more educational. One more thing of note, bottoms often come on a very heavy volume spike. This volume pattern is sometimes the same on tops, but not nearly as common.

If you are a wave trader, like I am, then also look at 5 min charts, as 5 waves to a top or bottom are much easier to see. Also, an uncompleted 5 wave pattern in the MTH means wait, as the top (or bottom) you have been waiting for probably has not been completed, i.e. you will get stopped out. A trade with only a 10-15c risk, or less, on the SPY or QQQQ is the objective.

There are a lot of ways to incorporate this into a trading strategy besides day trading. For example this week I hedged long positions (check my posts on Twitter) as the markets went down, and on the MTH took the hedge off. Therefore, when I say refer to MTH on Twitter, hopefully you now know of what I speak.

Good trading,

Russ

Daily Commentary - Close Friday September 17, 2010

The good news is that the markets had another positive week, with the S&P getting through important resistance, although it did not exactly power through. This is because it is over bought and thus encouraging traders to take profits and for shorts to get a bit more active in trying to reestablish positions.

Stochastics at the bottom of the chart clearly shows the short term over bought condition, but the RSI at the top is still only about 65, and clearly not a over bought on a longer time frame. As we saw in the powerful February-April rally, an over bought market can go a long time without a pullback. But the net of where are today is that if you are a very risk controlled trader, you have to be playing small and be nimble right now. As we discussed this week, as far as a longer view of the market, the real tell will be the action of the correction from this rally, when it comes. Accordingly, we are tightening stops once again and showing little tolerance for any new position that does not act well right away.

The financials (XLF) have not performed as well as the general overall market.

They need to catch up, and if they do, in that process the SPY should also rise. If they falter here, I'd expect the SPY to correct. So my tell technically this week will be the XLF. Fundamentally, we keep an eye on Europe. CDS spreads seem to widen before every bond auction there, but the auctions have been good, not in the sense of high rates demanded by investors, but in terms of them running smoothly with enough bidding. However, the debt rollover calendar remains high through October.

Speaking of rates...

You are looking at the short EFT of 20 year Treasury bonds, which technically, especially from the volume pattern appears to have a good chance of having made a major market bottom. As you can see, it is extremely choppy and with a lot of gaps, primarily caused by overnight news from Europe Thus, it is hard to trade. We will be watching and buying if TBT clears the resistance at the 50 day moving average. If Europe gets clocked hard once again, expect bonds here to soar in price and TBT could test the August bottom and/or take it out.

Good trading,

Russ

Daily Commentary - Close Friday September 10, 2010

Unlike most weekends, there is really not much that happened this week, other than the markets had a good week.

All eyes obviously are on getting through 113.20 and seeing if that acts as support for a rally that would define the last four months action as a major bottom. But not to be blinded by "confirmation bias," which we have discussed on occasion , the fact is that we are in a trading range until the bottom is complete, and until then anything can happen, and whatever happens in the trading range does not solidify the bull or bear case. You will see from the stochastics that short term the market is over bought.

All things being equal, the market is behaving well, based on what it already "knows." The major variable now appears to be Europe once again, as demonstrated by Tuesday's drop when European CDS spreads widened, but those fears were alleviated with successful bond auctions by Greece and Spain. However, bear in mind the CDS spreads are the proverbial "canary in coal mine," so we not only have to watch them, but also respect them when they widen. As you may recall when the Euro crisis first came to the fore, the majority of the European debt that needed to be rolled forward was concentrated in the period from May to October. So far so good, but any break down could be a game changer.

Be cautious and play small until these technical and fundamental hurdles are cleared.

Good trading,

Russ

Daily Commentary - Close Friday September 3, 2010

Friday capped off a very good week for the major market indexes. The economic data was good, or some would say "not as bad as expected." In either case the glass this week was perceived as half full, not half or almost empty as the bearish sentiment was reflecting. The week's data suggest that the largely believed, so-called double dip recession, is not only still just fiction, but the odds of it becoming reality are quite low. That view is reinforced by reiteration by the Fed of their policy to fend off any slow down with more "quantitative easing (QE.)" No sense rehashing the data that was posted on Twitter as it came out and discussed in our daily commentary. However, I want to also point out that the global picture remains robust, with data suggesting China will maintain a strong growth profile, even while fighting a bout of inflation. Quarterly GDP data released this past week was strong from India +8.6%, to Australia +4.5% and Canada +3.5%.

What I want to focus on is the market's reaction to the week's data, that is the technicals. If you have been following along my daily and weekly commentary, reprinted and archived at at http://tinyurl.com/luhxuh, you know I have been favoring the long side to trade and have done well despite last month's terrible market slide. Well it appears the first part of the premise has proven correct, that a test bottom in August has indeed held, and we are heading higher with a sharp rally this week.

I am looking at the triple bottom scenario of May-June, then July and August (head and shoulders pattern.) I know our rally this week looks powerful, but so did the rally off the July lows, which rolled over 5 weeks later. The reason for these sharp spikes upward are that shorts are taking the heat getting stopped out and/or taking profits, or for the poor guys shorting near the bottom on the much written impending market crash, taking their big losses.

The last couple of weeks we have been focusing on the bottoming. Now our focus is on the rally, and precluding any new catalysts to push sentiment sharply negative, presume dips will be looking to be bought, with rallies powered by new longs and more short liquidation. Obviously all eyes will be on SPY 113.20 and what happens at that inflection point.

Our friend $BPSPX is also showing signs of a strong turn up.

My other major premises has been based on the performance of $TBT, the 2x inverse ETF of 20 year treasury bonds. Volume and price action smacks of a major bottom (i.e. a top in bond prices and a low in bond yields.) If true, expect the yield curve to get steeper.

A huge amount of money has flowed into bonds, and worse yet into bond funds, during 2010 as the stock market struggled the first 8 months of the year.) I say worse because unlike a bond which can be held to maturity, in this case 20 years, in a bond fund there is no maturity, i.e. the fund's NAV moves like a stock does. So, we are looking at a massive bubble that has the potential to blow up in the face of many billions of dollars of investor's capital. A rout for bonds in 2010-11 could be as bad the rout in stocks in 2008. Not many get that.

Unfortunately, I was stopped out of TBT last Tuesday. Shoulda, woulda, coulda, placed my stop below the very bottom at 29.76, but early in the week there was no data driver to presuppose the market was not going lower, and I cut my loss too short/quick. Happens, but on balance keeps us from getting under water.

Practically speaking the trade in TBT has a very long ways to go (assuming the bottom is in) so we will be looking for RTT entry signals, as well as EW a-b-c low risk entries as the TBT trade progresses.

One last point on the markets. There are a lot of comparisons made between 2004, the digestion/correction year after the 2003 lift off, and to 2010. The talk of the no new jobs is the same, but against seemingly impossible odds, the 2004 jobs situation did eventually get resolved. The talk of a double dip is different this time, with talk of that scenario being the rage in the early Spring of 2004, while it has been late Summer in 2010. Also, in 2010 world growth is much stronger. In 2004 the markets rallied sharply in Nov-Dec to finish the year positive. Do not expect the same this year. If we can not get a sustained rally now, the timing and market dynamic are wrong for a late drive to green in 2010. Could happen - anything can happen in the markets as we all know, but the odds are low.

Thoughts on the added risks in POT and now potentially in the proposed MOS trade.

MOS, a fertilizer company, is back on the buy signal list, with the idea that it possibly it could also be in play as a takeover candidate. Although I do not delve into fundamentals per se, I certainly do respect market reactions to earnings and such things as takeovers. Today, more than ever in the past 3-4 years, M&A action is a high probability. Corporate America is stuffed with cash and companies with assets and future earnings potential that are perceived as cheap could be targets. To understand the risk associated with playing MOS, I need to discus POT first.

POT, the largest fertilizer (potash) company is in play. On August 21, BPH offered $4billion or $130 for the company. That was a 16% premium to the market price (ca $113/share) , but on August 22 the stock traded to $144, a 28% premium, the market effectively saying that the BHP offer was too low, and betting there would be a higher bid. POT rejected the BPH offer, and last week circulated a 33p circular explaining why the offer was too low and should be rejected. Part of their rationale was the market pricing.

Not to belabor the 17 pages of argument against BHP's offer, their ... (lenghty analysis for paid subscribers only.)

... The POT and MOS trades all comes down to your risk tolerance balanced agaisnt your desire for a large gain.

Good trading,

Russ

Daily Commentary - Close Friday August 27, 2010

Thursday 8/26: We are in a pretty volatile time, so the guess here is that tomorrow sets the trend for next week. Bulls took control Friday on strong volume, completing a classic bottom pattern. One has to be playing long and out of short positions, at least in the very short run."Ambivalence" is gone - this pattern fails, get short and look out below.

We bought $TBT, the short 20year treasury bond ETF we've been talking about. Could it be this is THE real bottom (top in bonds, low in yield?) The volume and chart pattern certainly suggest that is a very real possibility. A trade worth holding until proven wrong. If the yield curve get to steepening and there is a rush out of bond funds, longer term treasuries yields could really spike (bond prices fall, TBT goes up.)

At worst, If even for a swing trade to 20 day or gap fill at 34, or possibly the 50 day around 35.5, it looks like a good trade. Right or wrong, I really like this trade.

I am in Seattle, working a limited schedule, seeing family, friends and a good client, and of course picking their famous (to me at least) blackberries - they are everywhere, grow like weeds, and very few people pick them. I love berries, and WA state blackberries are the best berry I have ever tasted. So I've got to go do my daily picking - and will keep this weeks commentary short and to the point.

Good trading,

Russ

Daily Commentary - Close Friday August 20, 2010

This was an interesting week for the markets. First they take a run at the shorts, then they reverse and punish the bulls.

As you can see, the market has gone nowhere in the past 3 months. But after challenging it's June high earlier this month, the S&P has faltered, surrendering its 50 day moving average twice recently. The fundamentals of the economy are apparently weakening. Whether it's just a slow patch or a prelude to a double dip recession, no one knows. However,the last two weeks the markets have become fixated on the possibility (read: increasingly sensitive to bad news.) The markets are also closely watching the developing Iran/nuclear developments.

Technically $BPSPX has rolled back, and could go either way, which is going to be the theme of today's missive. I have been using the word "ambivalence" a lot these past couple of months and nothing has changed that. Every time it looks like we may get a short term trending market - and we've redefined the word "short term trend" from from 3-6 weeks to 1-2 weeks, we get a reversal after a few days.

I'll get to the good part of the analysis, but first the so-called Hindenberg Omen, a technical signal that seems to have a high correlation to market swoons and crashes. I never really heard of it until recently, but it keeps popping up these days. I went to Wikipedia's definition, as they generally are unbiased in their presentations. I did not explore all the components of the so called "omen," but it is worth a read, especially since the correlation to market swoons is strong. I'll let you make your own opinion, but from what I read it is to be respected.

OK, now the good stuff from an EW wave trader's perspective. Keep in mind that I only look at waves that typically define wave counts to a bottom or top and the subsequent counter trend a-b-c corrections of those waves. The rest of EW I find useless.

Looking at the weekly SPY chart:

One sees a clearly defined 5 waves up pattern, indicative of a bull run with more to go, even if the 5 waves are sub waves of an "a-b-c" correction. Now, if you scroll back up and look at the daily chart of the SPY, you will see that the first up day completes an a-b-c correction down from 113.18. That in a nutshell is what makes me favor the long side for Monday, but if the market continues down, I'll try to catch that also with VXX or QID. Ambivalence.

Good trading,

Russ

Daily Commentary - Close Friday August 13, 2010

If you go by fundamentals, I'd say it's pretty mixed. Sure, all you hear is bad stuff, but in reality the balance of good to bad is only slightly skewed to the bad side, but the perception is that good could be unraveling and we could be slip sliding away. Certainly, last week the markets bought into that. The question still remains is that true or not.

Technically, it is much easier to be bull or a bear, but not necessarily right.

One could argue that despite last week's 4% loss, the S&P found some support around its 50 day moving average (which has to hold, or it could get very ugly very fast.) If this level does become support, then it bodes well for the right shoulder of a head and shoulder's bottom. If indeed this bottom formation does successfully complete, we should be looking for a 2-3 month rally.

Taking the other side of the argument, a long basing process by definition puts a lot of people, both value buyers and technical buyers "in." If they are right, they do very well and look real smart. HOWEVER, should 101.13, the current bottom, get taken out, that would in all probability set off huge stop loss selling, and we could be looking at another 10-20% or greater decline from there. Thus, it is all very dicey.

Friday got quiet, and I'd expect Monday to pick up in volatility. We are prepared for any eventuality with buy and short signals. In a correction one looks to buy the strongest stocks that have held up well, and sell short the weaker relative strength stocks. Which way I will play depends on the overall market direction.

Keep you eyes on the finacials, which now are on the bearish side of the ledger. Commercial real estate (REITS) and solar are very good relative strength sectors right now.

Oil and gas, as well as gold, could very well tip either direction and we have trade set ups in both directions with ETFs.

I am also giving you a few outright stock shorts, all of which appear weak, with the exception of NFLX, which has been a perfect wave trader, both up and down. NFLX just ran 30+% in 5 waves to a new high. Aggressive traders might look at NFLX, as just having put in at least a short term top. From that perspective, short term odds are it goes down, especially if the market is weak Monday.

Good trading,

Russ

Daily Commentary - Close Friday August 6, 2010

The July jobs data came in at +79,000 private jobs, vs. 90K expected. However, government payrolls fell <202K> with the end of the census program . The unemployment rate remained at 9.5% vs 9.6% expected.

None of this was much of a surprise. Initially, the markets did not like it, and, in their normal fashion of late, took out a lot of technical level stops. Then they stabilized and some real buying came in Friday afternoon, which was encouraging despite ending down slightly on the day.

So, do we take the half empty view, i.e. the jobs report was not strong enough to signal a continuing recovering economy and thus is headed for a double dip, or do we take the half full view that the jobs data was not weak enough to derail the bottoming effort to the correction of last year's rally, for all the world macro reasons we have been talking about these past few weeks?

Nothing has changed on a macro level since last week nor on a technical level either. Ambivalence. Bull case, short term market positive, but a bit over bought. Bear case, the relief rally has completed and the bear trend down will now continue. I am still playing from the long side.

I am still watching financials, as a key. Sectors that are gaining strength include coal, solar, and energy, although the latter a very mixed bag. If financials roll over, Visa (V) looks vulnerable and a possible short.

I am also closely watching TBT, the -2x short 20 year Treasury bond ETF for indications it is bottoming. The commodity CRB index is advancing with it's components across many sectors in bull trends.

However, the deflationary forces are still strong, which is keeping the cap on rates. There are two real problems. The largest is real estate. The talk these days from Washington is all about Fannie and Freddie who hold ca. 80% of the mortgages in foreclosure and/or under water and delinquent. (Don't hold me to that exact number, as I cannot find my source from my recollection in reading it.) This Tuesday, Aug.10 we get the Fed's interest rate decision, and no one expects any change, let alone a bump up in rates. However, the real focus will be on the August 17 Fed meeting, when they are slatted to discus what to do with Fannie, Freddie and by implication the housing mess. That could be a blockbuster event if they decide to restructure and forgive billions in mortgage debt. And that has the potential of putting in a bottom for rates for a long time. Not predicting, just saying... be aware.

Of course, the other deflationary factor economically is the jobs situation. Do not expect much. Corporate America has learned to do better with less. The rich are getting richer, the middle class struggles and shrinks. That is what has happened and is continuing to happen, and no one seems to know how and/or have the will to stop it. When you go to the hospital for surgery to get something fixed, it is always painful. Politicians always leave the blood letting and pain for the next guy. See, they are not the ones that need the surgery.

Last year, and even as late as a couple months ago, letting the Bush tax cuts expire in 2011 was touted as a partial solution, but now an extension for some or all of them seems likely, which is what Washington is wrangling with. That decision too could be a blockbuster event for the stock market. Some analysts say that the big tax increase coming in 2011 was beginning to be priced in the stock market as part of the 2010 retreat. Now that dynamic could possibly be changing.

Sentiment, the dynamic of the market's focus, is shifting, and could change rapidly as these events unfold. Pick your poison, but whatever direction you lean, keep your stops tight and your dollar risk low.

Good trading,

Russ

Daily Commentary - Close Friday July 30, 2010

Markets can become fixated on one factor to the extent that nothing else seems to matter. Then that seems to wane, regardless of whether the original driving force has materially changed or not. Some say it is because it then becomes "priced in the market." The current example is European debt, which as we theorized back when our markets were getting rocked, that the collaboration with the IMF backstopping all that debt with trillions of Euros, the equivalent of our style of QI (quantitative easing) seemingly "kicked the can down the road," exactly as we have done. However, that also left open the door for the bulls to rally the market, which they did, both here and abroad, not that I was able to take to much advantage of it with my extremely tight risk controls that go me put in and taken out a lot in July.

Earnings reports have been overwhelmingly positive, and that was particularly true as the oil patch started with their reports last week and which will continue heavily this week. Yet crude oil continues to languish, while copper had had quite the run recently, while the results for iron ore and coal names have been mixed. Banks, the sector with perhaps the most overall "disappointing" reports, although not bad by any stretch, have also been trying to rally. REITS, which have been the so-called next "shoe to drop" for close to two years now are showing real signs of strength again- seemingly impossible with slack consumer demand. They are a good example of trade what you see, not what you read, hear or rationalize.

The double dip recession crowd is gaining strength as the large firms like Goldman and Morgan Stanley are revising down their growth estimates of GDP going forward, not in the 1-2% range.

So both fundamentally and technically we are left at an ambiguous place and time. Earning reports are basically old news now that we have a large enough sample to project this quarters outcome, while the markets have not been particularly impressed - so far. The Euro has strengthened to $1.30 and indeed the European problems have seemingly been kicked down the road. So what's left for market sentiment to focus on, absent any major new driver? It appears the focus this past week has swung to the expiring Bush tax cuts, and whether they will be extended. The economy and the market needs them to stay in place, while the government needs them to expire as major way to start reducing debt. But is it too early to let them expire? That is what has become the debate. I would expect the market to react very dramatically in either direction to whatever is decided.

Technically, we have talked about the various targets for a corrective rally bounce top, or the start of a rally off the bottom.

As you can see from the daily SPY chart, we are in neutral territory, with bull and bear tech arguments that we have been discussing the past month all valid. Not much help there.

The weekly SPY chart shows a clear 3 wave a-b-c correction off the bottom, range bound between the 20 and 50 period moving averages. Taking out last week's low would not necessarily be meaningful, but taking out last week's high would, especially if also getting through 113.20 and closing well for the week. Again, neutral but perhaps leaning to the bulls, if only because the reward/risk appears greater for the bull case. However we could simply chop around in the 113-101 range for some time , which would not be good for traders, regardless of which side they played.

Saving the best for last, BPSPX clearly shows a bottom is in place and particularly telling is that the 10 day moving average has crossed with 20 day with some gusto. Historically, that means 3-6 weeks of a rally. We did get an exception to that in June when the 10 day did cross the 20, but marginally and rolled back down. However, his time the slope of the moving averages is strong. As a side note the S&P continues to lead tech in this rally.

Good trading,

Russ

Daily Commentary - Close Friday July 23, 2010

Good day Friday and a good week for the markets, despite a very nasty Wednesday. Last week, all eyes were on earnings season, and except for mediocre results from the banks, earning have been very strong so far. European economic growth data was all better than expected and most importantly the European bank stress tests went quite well. The Eurodollar, whose demise was so widely predicted, has jumped all the way back up to $1.29-30 area.

The worldwide growth story remains intact and is accelerating. Brazil raised interest rates to 10.75% and their stock market cheered, presumably because inflation issues were being addressed.

Raw material and commodity stocks, which had been beaten down very hard in this correction(?) had a fine week to. We've heard very strong earnings reports from Alcoa, and this week we get the reports on a lot of the steels and coals.

I am not a fundamental analyst at all. However, I do look at market sentiment quite closely, i.e. how the market reacts to fundamental news, and, at least for now, the last few weeks, on balance, the bulls have been in control. If that turns out to continue to be true, so long as financials do not get in trouble, after we complete carving out a nice bottom, we could be looking at a very good Summer rally.

There has been a huge disconnect with the economic press, blogdom and economists who are overwhelmingly bearish, screamingly so. Bears rationalize that all the bad things that could happen surely will happen, justified because there is no job growth and housing sucks (as it should, asset bubbles take many years to play out, classic example being gold and tangible assets bubbles of the early 1980s.) What they are missing completely, because they are in denial, quarter after quarter the earnings reports are very strong from corporate America. Also, it is not a foregone conclusion that the Bush tax cuts will not be extended, from a very interesting article on fiscal and monetary policy on Bloomberg.

The macro dynamic of the world's economic symbiotic relationships are changing. Emerging economies are reaching the tipping point where internal consumption balances, and in some countries now is exceeding, exports as the driver of growth. We in the US are just the opposite, as our consumption here moderates, our exports are growing stronger. China has now surpassed the US as the world's number one importer of oil. On these bases, with the earnings/growth data from not only this country, but from around the world, it quite possible that a bottom is in with our stock market, or close to being in - markets can be quite perverse in that respect, as we know.

Take a look at a weekly chart of 2003-2004.

2003-2004 marked the recovery from the dot com bubble, and another so called "jobless" recovery. For traders, The great rally year of 2003 was a piece of cake, and 2004 was a nasty year to trade. Those traders who did not get hurt during the year, were made whole and green by year's end. Those two years set up the great years of 2005 through June 2007. And while we are at it, when I hear the oft repeated bears point that from 1999-2009 the S&P was negative, the "wasted decade," I say what crap. Like all market periods there are great times and difficult times, but if one did not make a lot of money in that decade, or did but lost it all, I say: idiots! If you are going to play the game, understand how the game is played and listen to the market itself.

Back on point, after a long market run up, there always is a correction, or period of time where the earnings have to catch up. That is how the markets work - they are inefficient, over shooting not only at bottoms but at tops.

Looking at our ongoing daily analysis of the SPY

Thursday night we said "It will be very important for the bulls to get the SPY through the 110.09 level, and even it pulls back a bit, to follow through to new highs for the July rally. Then, we will also look for the proverbial 'follow through day' on strong volume." First objective made with Friday's close.

My order of influence technical analysis in my trading is the following order: waves ahead of fibonacci levels, and on short term tops I use market sentiment as the determining factor to short or to wait for a pullback to buy. Right now I am in the bulls camp. That being said I am watching waves, as we are in a "c" wave off the bottom with Friday's close. Next resistance on the weekly is ca 112.20 and of course 113.20 looms. Between now and then, the next down day is a completion of a simple EW a-b-c bounce off the bottom, that's all. Bears will want to initiate their shorts. Longs will hold, perhaps hedge or step aside if the down day is hard, waiting for the pullback to end in a day or more and buy. Unless there is a shift in sentiment (the qualitative way I gauge it, not quantitative TA stuff) I will maintain my long bias.

I will keep keep you posted here on a daily basis and on an intraday basis on Twitter.

As you will see, although there is an interesting group of buy signals for Monday, there is a heavy concentration in the energy patch. Gold is on another short signal. Should be a very interesting week.

Good trading,

Russ

Daily Commentary - Close Friday July 16, 2010

Thursday the market came roaring back late in the afternoon on the heels of the Goldman (GS) settlement with the SEC, as well as BP apparently getting the Gulf oil spill capped. But disappointing bank earnings sent the markets back down first thing Friday morning. After 108, Thursday's low on the SPY, was breached selling accelerated with volume picking up.

So much for the Summer doldrums and the early Friday exit for traders to get to the beach, despite the 95-100 degree weather here on the East Coast. It appears now that SPY resistance at the 50 day of 110 has held. I am still suspicious after only only one day, as the run up was so strong and literally straight up, but no question that the ball is back in the bear's court until proven otherwise.

Despite the choppy trade of the stock market, the bond market, as shown with TLT, the 20 yr ETF, has really taken off in a strong bull run since the April S&P highs. Higher bond prices equals lower interest rates. This run could go for quite some time, but when it's over it will be a blood bath, as investors who are pouring huge sums into bond funds get trapped and their principal sinks. There are no maturity dates to hold to get total principal back. We could be a quite a ways off from that, but rest assured it will happen.

Prior to April, the bond market was just chopping around with a bearish bias, although each time a new low was made, it was met with a strong bid. The rational of the trade has been the bearish Euro and European stock trade. However, with the apparent near term "solution" the European currency and stocks had been rising sharply. However the bond market has disconnected from that story, and although quite volatile, has held a stead up trend. That too is near term bearish for stocks.

Putting it all together, with the falling dollar and neutral to falling gold price,it seems simply to be a rotation out of stocks into Treasuries. From a correlation and value perspective, all these prices moves of all the asset classes appears to make no sense. As traders, over thinking it all is counterproductive. We just try to go with what is happening now, and that is not always an easy task.

If you are bearish, you look to be short stocks. If bullish, you presume Friday's action is corrective to the first leg up from the bottom and wait for the correction to prove itself and the market to begin to go back up.

Gold remains an enigma. There are so many cross currents driving price, and it trades almost around the clock around the world, that in terms of price discovery, the Comex futures pricing, although the largest part of the gold market, still is little consolation to gold traders waking up in the morning and seeing they are "against it." Yesterday I wrote gold 'looks like a bear flag to me under the 50 day"

Gold was flat in very early morning electronic trade, but when futures opened in the US, gold immediately began to sell off, and by the time the stock market opened GLD, the gold ETF gapped way down. We wanted DZZ, the 2x short ETF, but that gapped away from us. With no meaningful pullback I pulled my DZZ bids and did not buy. In watching GLD trade it appeared that when it became evident that the stock market was in big trouble later Friday, some good buying did come into the gold trade. For right now, best to avoid it, if you are not already short.

All in all, a very difficult week for the markets, as well as for traders and investors. Friday I came in and went home flat.

Good trading,

Russ

Daily Commentary - Close Friday July 9, 2010

The 2Q2010 earnings season kicks off Monday with Alcoa(AA) reporting after the close. Other big names this week are CSX Corp. (NYSE: CSX), Intel Corp. (NASDAQ: INTC), YUM! Brands Inc. (NYSE: YUM), J.P. Morgan Chase & Co. (NYSE: JPM), Google Inc. (NASDAQ: GOOG), Advanced Micro Devices Inc. (NYSE: AMD), Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C), and General Electric Co. (NYSE: GE).

By weeks end, with 5 of the 30 large cap Dow stocks reporting, we should get the first indications of how well earnings did in the 2nd quarter. For a preview and more detail check the report from 24/7WallSt.

Besides impacting the stock price of each company's stock, this earning season is very important for the "easy way out" solution to our economic woes, i.e. to grow our way out. I recall when Pres. Bush senior inherited the Reagan deficits and was asked how we would get out from under them, he replied we would grow out. That statement was met with snickers and a few laughs by the pundits as the economic press had a field day with it. But he was right. That seems to be the same prescription today, but from a much more difficult set of statistics.

The IMF this week kicked up their forecasts for international growth this year. There are two major trends in the world's economy. First is growth. That is the positive side. The emerging economies are very strong and after living off exports are now "rich" enough to be creating good demand for goods and services at home. The industrialized G-10 countries have learned to grow through efficiencies gained mainly from technology, thus producing good earnings without jobs growth. That means that the roughly top 15% of the richest now control ca 70% of all the assets and that figure is growing, i.e. the rich get richer and the the middle class gets poorer. In the US, the lowest 40% now own just 1% of the assets. Politically, if for no other reason, that growing disparity is not sustainable.

The negative world wide trend is that debt expansion has reached mind boggling levels and is still increasing, although countries like Canada and Australia have started to reign their's in a bit. However, it appears that in order for many countries in Europe to not default on their sovereign debt more "quantitative easing (QE)" or money printing may be necessary. Although we have apparently stabilized on the surface, how bad is the debt issue? ZeroHedge gives 50 factiods in their stock market Wall of Worry and they paint an ugly picture.

Besides the push -pull of world economic growth/debt and there are problems specific to this country. What the Fed is trying to do now it successfully ended the threat of total economic collapse is a) try to make sure it does not happen again. Some would argue that the very way the Fed has tried to prevent this insures it will happen again. The second part is avoiding the painfully ways of correcting the massive debt and excess cash sloshing around in the system, by kicking the pain down the road. Problem with taking that "easy path," we all know it does not lead to the promised land to but to a deep dark hole, because of the looming social security and medicare soaring responsibilities as the population ages rapidly. Demographic trends take lifetimes to change, even if the will and means are there to steer the path.

So it seems in a debate the bears have the most ammunition and win. But there is the intangible things that have always has us overcome all setbacks even at our darkest hour and be/remain a world leader- American ingenuity and entrepreneurship.

Practically speaking from the viewpoint of the stock market, and the way it works despite all the negatives, last year we saw a massive rally that lasted 13 months. Keeping in mind that our job is to stay ahead of the curve regardless of what the future brings, being there for rallies, large or small, is what we do. When the market swoons, what we do quite successfully is not lose money.

In that context, let's look at the S&P500 in technical terms.

Looking at the weekly chart, the first thing I don't like is that the SPY completed 5 waves down, implying that after a rally, there is more downside to go. Last week started that rally phase which could end right here, or go much higher. Turning to the daily chart

We have a rally in place, which leads to the questions. Is this a true bottom or just a trading bounce, and if the latter where does it end? If this is a true bottom, and I would not and could not play it that way at this point, the following discussion will be moot, as 101.13 will hold and all of the resistance levels discussed will get taken out.

Looking at the rally itself we see it has met its first resistance at the 20 day moving average at 108. The next level is roughly 110 or the 50 day moving average. There is also the 50% retracement of the entire move down from the April high of 121.54 to 101.13, roughly 20 points, so adding 10 to 101, the 50% retracement back up is in at the 111 area.

If you are of the mind set to want to get short, then the first down day after a completed a-b-c off the bottom (we are now only in "a") is the way to initiate the trade with a stop just above the high of the "c" wave. That would be my preferred scenario. From the other resistance levels, the first down day at the 20 day, 50 day or the 50% retrace would be the time.

Right now, I am of the mind set to play from the long side and perhaps hedge at the resistance levels. I'll keep you posted as I go. I will be keeping a close eye on market tone during earnings season, especially the financials, large caps (DOW), energy, tech leadership, as well as the situation in Europe, and especially the Euro and gold.

On the buy signal list is ... (subscribers only)

Good trading,

Russ

Daily Commentary - Close Friday July 2, 2010

The S&P broke the all important support of 103.66 last week, as seen on the weekly chart.

That in itself is not such a bad thing IF the markets can find more buyers than sellers. Breaking support and/or trend lines and then rallying can set up a very high percentage winning trades. That is why this coming week could be so important to the near term, as well as intermediate term, trend. The markets are quite oversold and due for a bounce. The QQQQ has been down the last 10 trading days in a row - typical of an often seen momo 5th wave. That is not to say it has to go up from here. If they can not rally from here there is a good probability of a severe waterfall decline.

The same general analysis applies to gold ($GLD), which appears to be in trouble, slicing through its 50 day moving average. For that reason DZZ (-2x gold ETF) is on the buy signals list for those who did not follow me in the trade last week. If like me, you only took a small position, adding using the trade signal for Tuesday, if elected, gives your first leg of the trade a profit when you move your stop up on the ENTIRE position, which would, when combined, make the entire trade very low risk for high reward.

Technicians have a simple solution to the dilemma of analyzing information - they simply so not do it. They look at charts only. That would work if charts somehow predicted the future, like proponents say they do. Reality is that charts are only two dimensional (price and time - throw in volume if wish as a subset of price) and are in past tense. But the market is a multidimensional animal, which is more reactive at times than predictive. Market direction is like a strong running tide. Swimming against it is near impossible. That is what makes trading while controlling risk so tough, and investing near impossible, if you want to maintain an alpha greater than a percent or so above the S&P benchmark.

The jobs data Friday was about as expected and did not give new ammunition to either the bulls or bears. Non-farm payrolls were 125K, and were close to the consensus of 130k. Glad I decided to do nothing Friday, as the markets drifted lower ahead of the 3 day weekend.

The S&P is down ca. <8%> so far for the year, but if you own/invest in stocks you are scratching your head reading that figure, with the average stock down 2-3x that. Market leader AAPL is off 11.5% from it's high. Blogdom is full of negativity day after day after day. Small fry sentiment is terrible.

Pragmatic. That is what I try to be, as I sift through all the different data and opinion that bounces off my screen, like a fast action pin ball game. You have to respect what is happening in the moment, yet keep your eye on the larger picture. Gauging market sentiment the way I (try to) do is not easy, as opinion - a function of basic human nature to draw conclusions in weighing what one sees and hears - easily get in the way of perspective. It happened to most on the way up, as bears were besides themselves as the markets ignored all the bad. Now it seems to be happening on the way down, as the markets ignore all the positives.

Putting it all together, I would not be surprised to see either a rally from here, or a severe decline. We are ready for either with short ETFs or long some stocks showing leadership.

It promises to be another interesting week.

Good trading,

Russ

Daily Commentary - Close Friday June 25, 2010

Ambivalence - edge to the bears for the week closing Friday. The only bullish sectors continue to be gold and bonds. The markets certainly have their work cut out for them. Europe continues to deteriorate, with Spanish debt being the next hurdle this coming week. Also, with the defeat of legislation to extend benefits to the unemployed will see , 1.3 million stop receiving checks this week and that number will balloon to 2 million in July. A very good summary can be read at ZeroHedge

The bears are out in force, all proponents of what they see as the inevitable double dip recession that they say we will be in by the end of the year. And if it does not happen by then, the expiring Bush tax cuts will knock 2-3% off GDP entering 2011, making the recession calls a forgone conclusion they claim.

The financial reform legislation passed Thursday. Although there were some positive issues addressed, it was a very wimpy bill in terms of addressing all the issues of what got in this mess in the first place. Mostly business as usual for the banks and large trading firms - thus financials rallied Friday.

There are always two sides to every economic debate, but right now no one is talking about the positives of the economy, which, in the perverse way markets operate, is a positive. For that reason as well as the market seemingly sold out the past couple of weeks has made me bullish short term, BUT extremely cautious.

Looking at the S&P on a weekly basis, we see it has been quite a choppy first half of 2010, with the popular benchmark down <3.2%> YTD. 121.54 marked the top of the long bull run from the March 2009 recession bottom. Now we are focusing on the reaction lows of 103.66 in February and 103.89 of May. Last week was ugly. From a wave perspective, we are in what I call a trader's Elliot Wave Hell. We have an a-b-c correction from the April top, and then a bounce back up to a top, in a-b-c fashion, ending last week. Bull argument is that so long as support at the lows of May and February holding, all 2010 action is just corrective. Bear argument is that this months relief rally has ended with last weeks reversal, and we are not only heading lower, but breaking support it could get real ugly fast.

Taking a look at market internals with our good friend, $BPSPX, the index has turned up sharply, crossing both the 10 and 20 day moving averages, with the 10 day barely crossing the 20 day - normally a very strong marker for a rally. As with all moving average crossovers, they are always subject to signal whip saws, but are arguably quite scarce after such a dramatic rise in the index. A positive for bulls, but who need to take control early this week.

$BPCOMP on the other hand tells us tech is weaker than the market as a whole, the 10 day is still far from the 20 day and most troubling the index has reversed and crossed back under the 10 day moving average. That is bearish, although a few good days of market action this coming week could right all of that quickly.

FSLR is a good example of what so many individual charts look like. Again, EW Hell, with the a-b-c off the bottom, followed by an a-b-c pull back. The good thing is that the completed "c" wave on Friday was on strong(er) volume and finished near its highs. These EW corrections are not RTT signals in themselves - we wait for some follow through for confirmation, a consolidation, then enter on a break out. We always wait for confirmation that the stock is actually moving in the direction we want to trade, not jumping the gun that we "think it will move" in the direction we seek to enter. Patience my friends. So I will be watching very closely.

Our system open positions table remains overwhelmingly silver and gold miners. There are a few interesting picks for Monday, including a Chinese stock. The blogs are having a field day with China imploding stories, but their stock markets both at home ($SSEC and $HSI) and in their US index ADR's (FXI, HAO, CAF) are acting well this month. I would not be afraid to trade Chinese stocks. The last two picks are ETFs, if the markets deteriorate, to hedge or essentially be/go short.

As I started this missive - Ambivalence, edge to the bulls, but only if they can follow through Monday/Tuesday and hold those gains. Stay tuned - should be a very interesting and telling week.

Good trading,

Russ

Daily Commentary - Close Friday June 4, 2010

Pretty portent day to the downside. It appears it still is all about Europe and the Euro, which cracked the 1.20 level. Thursday I had gone short the Euro (EUO) as a hedge against my fledgling long positions (as posted on Twitter), and Friday's gain on the EUO breakout made up for my long losses and kept me even for the first week of June.

For the week the S&P was down <2.33%>, the Naz <1.12%> and the Dow <2.0%>. The small cap RUT fared the worst <4.06%> followed by crude oil <4%. and the financials <3.6%>. Not a pretty picture.

As you can see on the weekly S&P chart it completed an a-b-c off the 50 period moving average but the market needs that low to hold. Breaching that and continuing down, there is not any real technical support for quite a ways.

So it is the tail (euro) wagging the big dog (global stock markets) until it isn't anymore. We just have to wait and see how it plays. Keep it tight if you trade!

Good trading,

Russ

Daily Commentary - Close Friday May 28, 2010

The market ended the day on a sour note, the S&P ending the day down <1.3%>, the month <7.96%> and YTD <1.86%.>

What is really important to you and I is what happens from here. As you know I want to probe the long side, as we could be bottoming. On the other hand from a wave perspective, we could have just completed the proverbial "dead cat bounce."

I am referring to the Elliot Wave a-b-c correction of Tuesday/Friday. The path of least resistance right now could very well be down. However, if indeed the market is etching out a bottom, then taking out last weeks high, from a wave perspective, puts us in short term bullish mode.

Right now it's all about market sentiment, as the pattern we see on the S&P is the same that we see on so many stock and sector charts, most Dow stocks (AA, IBM, INTC etc.) as well as sector ETFs (SMH, XLF, KBE, KIE, XLE, etc.)

Gold, of course, has it's own chart and look all of its own.

After gapping up on Wednesday, gold has been consolidating and looks like it wants to break higher. We've got signals for that. The 20 day acted as support and you will note the gap did not fill - a good thing when traders front run a gap and it hold and closes on its high...

... Of course a lot depends on overseas trade, espcially Asia which will have traded gold for two days before we get a crack at it on tuesday morning. We see..

... There are a lot of buy signals for stocks that do not look like the S&P, but have performed much better than the May market swoon. That is what corrections do, separate the strong from the rest of the pack....

... Now the fishing report! We had a great weekend, striper fishing Friday night and drum fishing Sunday night. Both are hard fighting fish and taste great. The stripers were the largest we caught this year, ca. 25 pound average. I gut hooked one and in getting the hook out with long pliers I yanked it out and promptly into my index finger. Hit the knuckle and slid up along side the bone. Fortunately, not much flesh between the skin and bone there, so popping it back out was not too painful, but it swelled up, bruised and was tender. By Sunday it was still pretty sore but much of the swelling had gone down. I was concerned about being able to use my hand, but after a 6 hours wait, when I hooked it a 50 lb drum fish, for the 15 minute fight (do they ever "have shoulders") I never felt it. :) A little ice was all I needed. Fine to type. My wife loves fishing as much, if not more if that is possible, than I do.

This shortened 4 day trade week promises to be a very interesting one!

Now, to put this website up live and start the prep work for grilling some drum fish!

Good trading,

Russ

Daily Commentary Close Friday May 21, 2010

The markets fell sharply last week, despite Friday's rally, with the S&P down 4% for the week and the Naz down 5%. Stock indexes are down ca. 9% from their April highs with higher beta stocks, especially commodity related, commonly off 15-20%. The Euro improved along with European stocks. As is our custom, once again we sidestepped the fall.

US economic data was mixed this week, but the Fed made clear interest rates will stay low for a long time, probably into 2012 and with inflation low and benign, this should be friendly to stocks. Asian data on growth this past week was still is quite strong and strengthening from Singapore to Japan, coming on the heels of strong growth from China the previous week.

I know there is a lot of talk about China tightening as their housing market is overheating. A bubble about to burst? People get crazy about so called bubbles way to far in advance. Often times, like the housing market in the US 2004, identifying rapid growth is just the start of a large, long lasting trend. In our case it lasted 4 years. The bears were ultimately right, but the bulls made a lot of money riding the major trend until it stopped. In the end its all about how much money we make at the game, not about ultimately being proven right, the ego boost from that not being able to buy the proverbial cup of coffee.

Just as happened here in America post civil war, China is a country growing rapidly, and as it passes from being a kid to an adult expect it to go through some crazy times, i.e. sharp boom and bust periods. But China is not only forever changing the life for its 1.3 billion people, but also for the rest of the world. They are very smart and enterprising. My take with their markets being down 20% is that this is not the time to look to sell them short, but rather look there for opportunity. Chinese ADR charts currently are a complete mess, so like so many other groups it will take some time for proper RTT entries.

Wells Fargo reminds us in their weekly missive that "Production, financial capital and labor markets have become truly globalized, setting up interdependence between countries that has been emphasized with a vengeance with the Greek problem and the fallout for the Euro." Thus, we need to be aware and respect that at best the "readjustment" going on in Europe, or at worst the unraveling of the EU and the demise of the Euro are events that will affect and alter what happens to economies and markets all over the globe, as we have seen recently.

That being said, if my ongoing premise that European sovereign debt issue, and the systemic risk from it, has been averted at least in the short term (3mo. to a year) means that our markets could rally. Whether it will play that way is another thing, but as traders, couple that possibility with the deeply over sold condition of the markets, we have the potential for another bottoming formation of a good rally attempt, like the set-up from the sell off in February. I am not predicting, you know I don't do that, but I am looking to probe the long side. I certainly think the value guys and the fundamental analysts who truly believe they have it right with specific companies and sectors, will also be doing some buying. I'd like to see volatility settle down, which would make the job of risk control a lot easier.

The RSI of $BPSPY is at a remarkable low of 8.7, lower than at the March 2009 bottom, arguing for a relief rally. Presuming it plays that way this week, whether in a day or a week after one or more hiccups. And when it comes, one never knows if it is a true bottom or just a bounce, until long after the fact. You get no clue from the news or blogs, which of course, as always, are all negative at readings like these.

So we enter the week looking to be long, very mindful of the sharp edge that volatility can cut. Be careful out there!

Good trading

Russ

Daily Commentary Close Friday May 14, 2010

<snip> ...

Friday was an ugly day, but there was some short covering/profit taking toward the end of the session. Early in the week, we advanced a premise that if the European systemic risk was taken off the table, at least in the short run, then the previous week's swoon could be a buying opportunity. Wednesday, it seemed the plan was working and we got long a bunch and made good money. The second part of the scenario, a follow through day on Thursday, did not materialize, so I took just about everything off the table and hedged or got short, which paid off in Friday's trade.

With market volatility so great, being nimble is important, and even at that, like Friday's gold reversal pointed out, one can be right in general and quickly lose money in trades with the high market volatility. We have no position in gold right now, which could be a mistake if it continues its upward flight, without a pullback to let us on. Gold is at all time new highs and was up 1.7% for the week and 12.2% YTD. Meanwhile, other commodities priced in dollars (except silver) are going down, with crude oil the glaring example, down <5.8%> for the week and <15.8%> YTD.

After the announced bail out of Greece and the announcement of the huge $1 trillion quantitative easing (inflation be damned) by the European Central Bank, markets around the world jumped 3 to 6% last Monday, but in what looks like a classic a-b-c correction off the bottom, failed to advance toward the end of the week, placing it clearly in the bearish camp, until proven otherwise.

European stocks continued to fall and the Euro accelerated it's decline, as shown on EUO, the -2x Euro ETF, despite the massive intervention, .

In the end, the question we have is that despite the continuing weakening of europe and their common currency, the Euro, will we here in the US disconnect and find a new rally leg. Or will our market fall apart in lock step with Europe. That all remains to be seen. It promises to be another very interesting week ahead.

What market pull backs do is expose the weakest stocks and lets the strongest stand out. From the strong we find buy signals, of which I have 6 for you for Monday. I would not take on too much exposure while the S&P trades under 117.68.

<.. snip>

Daily Commentary Close Tuesday May 11, 2010

Today does not surprise off the tight range from yesterday's trade and the persistent strength of the dollar. The only thing that worked well was gold, exploding to new all time record highs, and also jumping over the buy stop I wanted.

The premise for buying tomorrow is the following: despite the seemingly conflicting statements coming out of Germany and Europe, as well as continued weakness in the Euro, systemic risk has been averted, or at least kicked down the road. Thus, if true, US stocks have made a bottom in a very wicked correction and can be bought. I am not sure that I am fully behind the premise, but it never seems clear cut, and not easy to jump in at bottoms.

Tonight I looked at a lot of charts and it was sort of a toss up between a weak finish on the day after yesterday's sharp rally, while other looked like they had just a light pullback. to my eye, one chart looks bearish, the next bullish. Additionally, whether this is a bottom or not, volatility is still very high, so the risk of getting stopped out is higher, so what is especially important is not only risk per trade but the total risk to your total account value. Keep that in mind in terms of how many stocks to buy, as there are a lot of buy signals that could get elected on a strong day.

The following is an interesting graphic and one that has had me puzzled the past week.

You will note the Baltic Dry Index of freight shipping rates has been going up, while the markets have been roiled and down. Also, we hear so many reports of China struggling - until today when their economic data were very strong, despite some fiscal tightening to prevent inflation. Dry shippers carry mostly iron ore and coal, but also copper and other raw materials. For that reason, of all the buy signals, I plan to take 1-2 from these groups (the last 4 signals in the table) if the buy stops are elected.

Good trading,

Russ

Daily Commentary Close Friday May 7, 2010

If you believed that Thursday's market swoon was all a big mistake and/or strictly the manifestation of computers gone wild, then you probably were surprised at Friday's poor market action and another 1.5% loss in the major averages. In just one week the S&P lost <6.35%>, the Dow <5.74%>, the Naz <7.78%> and crude oil a whopping <12.2%>. Gold was up +2.5% even as the dollar soared and the Euro sank. In just one week the markets have not only wiped out all their gains for 2010, but are now negative on the year, except for the small cap Russell 2000. The SPY chart paints the dramatic picture.

I always point out that "when they come for you, they come hard." And we want none of it. Market corrections, swoons, black swans, gray swans - none of them come in a vacuum, i.e. out of the blue. With one exception, there are always signs of increasing and impending down side market risk. In other words the great losses, like this week are always telegraphed in advance by price action as well as market sentiment. We all know the reasons for this weeks swoon, but go back to any other time there was similar action, as seen on price charts, and you will see it was proceeded by the market going down, regardless of the cause. The only exception to this statement regards market risk caused by a terrorist attack, which can come at any time without price action warning.

Reading my definition of market sentiment - the market's reaction to new variables or its changing action to the same variables can be difficult to impossible for many due to being blinded by "confirmation bias." So that leaves charts, and there exists a simple method for letting them tell you increasing impending risk. Last weekend we laid out those rules shown in the charts of $BPSPY and $BPCOMPQ which you will find below this commentary in the one from last weekend.

Let me try put market sentiment into some perspective, as I see it and having nothing to do with technical analysis. Markets around the world are selling off, currencies are all falling against the dollar, the world's safe haven. Bond's are soaring, as yield's fall - another safe haven. Gold is going up against all currencies, a third perceived safe haven and a new dynamic for gold after a very long absence. All of this because of the massive European debt problems and the worldwide systemic financial risk that it entails. I've posted my favorite graphic of the debt problems many times, but here it is again The European Crisis In Eight Simple Charts, courtesy of ZeroHedge.

Our financial system came apart because of the housing bubble and all the financial instruments created as part of that bubble. The bubble got so out of hand because the so called rating agencies rubber stamped as AAA all the garbage mortgages that were packaged (securitized.) Not only did US banks and financial institutions gobble up this dressed up junk chasing yield, so did the Europeans.

However, at the same time European banks were not only buying our financial garbage, they were also lending huge amounts of money to bad credit risks, such as the Eastern European countries. So when the world financial system came crashing down, and economies came to a screeching halt, in terms of debt, Europe was in doubly deep trouble. The PIIGS to the tune of $2 trillion. Debt got rolled forward, but that could not help the weak sisters for very long, and to get relief they could not devalue their currency, being part of the 16 country Euro zone. As confidence in their debt waned, investors demanded increasing interest rates, precipitating the current crisis. That left the strongest, led by Germany, to bail out the weak. But "no" says Germany in a bold bluff to force the IMF to step in and be the major bailout player. That means, since the US pays ca. 40% of the IMF's funding, we are now bailing out Greece too. So are the Chinese, another guarantor of the IMF. So the world is inextricably interconnected in this growing crisis. We all compete economically, but at the same time we are all stronger for the trade between the countries. So Europe's problems are, to one degree or another, every countries problems.

So where do we stand here in the US? The bears point out that our economic recovery is all a house of cards based on massive amounts of money created to liquefy the system and once the so-called quantitative easing of the Fed stops and the 0% interest rates start going up, it will all fall apart. Additionally, we are also looking down the road at the possibility of inflation raring its ugly head. So what's the answer? Sustained growth over many years. Impossible? I remember when George Bush took over the presidency from Ronald Reagan and inherited huge deficits. Asked how he would reduce those deficits, he replied we would grow out of them. People laughed. But in retrospect he was right, entrepreneurial America did just that. Whether you think it is far fetched or not, that could happen again, if, and it is a big IF, there can be some solution to the EU debt problems. But, at least right now, the odds seem slim at best.

Investors have to wait and see basically how it unfolds. If Europe can be stabilized, even if it is kicking the problem down the road so to speak, the US markets could rally to new highs, as without the systemic risk from the European debt problem, we are doing quite well economically, as we come out of the recession. In other words, this could be just a correction, albeit a violent one. If the bears are correct, then we are in the beginning of a major leg down in a bear market.

But, regardless of how it plays there will be many events to roil the markets, and volatility in the true sense, both up and down, will run a lot higher than we experienced the past 4 months.

Our job is not to predict, but to play it as it unfolds, finding opportunities to profit and minimizing downside risk. Safety of capital should be the number one priority! Since, we, as individuals, have no control over what happens in the marketplace, regardless of whatever comes to pass, the overriding objective is that we stay (well) ahead of the curve. To that end, we have done well, Thursday at all time new high in all accounts.

OK, so what happens Monday? A lot will depend on all the weekend goings on behind the scenes in Europe. Here is an update on this weekends Euro Zone meetings from Goldman Sachs. We could open up or down a 100 or 200 Dow points. And either way, after the first hour of emotional trade, whatever direction, it could all reverse the other way. If you must play in the storm, be very careful out there!

Happy Mother's Day to all the moms reading this!

Good trading,

Russ

Daily Commentary Close Friday April 30, 2010

We had a very good week and month, ending with all time new highs in all accounts. The analysis I have been laying out over the last month has been on the mark as it has evolved. The two premises, which we will continue to explore today, are that the market has/will top and correct, and that gold (GLD) is in a bull market, has broken out and should challenge and look to pass it's December 2009 high. Generally, that's how I will continue to look to play, unless circumstances/price action suggest that I should change my plan. The following weekly chart shows GLD's recent breakout.

Gold miners (GDX) did some catching up this week (+4.8%) on GLD's breakout over 114.13 (+1.9%) and well as with the juniors (GDXJ, +2.2%.) Last January in my year end letter I opened that gold had to become "it's own man" and not priced simply by the inverse relationship with the dollar (or any one currency) in order to be in a true sector bull market. Well, Prieur du Plessis’s international investment blog clearly shows, with data and graph's, gold's appreciation to each of the major currencies, as well as against a basket of emerging market currencies.

That being said, on Friday I sold all my gold miner stocks as well as GLDJ, keeping my core position in GLD. It can be argued that the sector has gotten a bit ahead of itself and, contrary to what most TA people think, the pros look to sell breakouts and a high percent of breakouts do pull back. Those two factors alone would not make me do any selling in the sector, but, as we will see, I believe there is a good chance a market top is in or very close to being in. That makes me want to be out gold stocks. The rule of thumb regarding the relationship between gold the commodity and the stocks are the following:

When gold (and or silver) are advancing, as is the stock market, gold stocks tend to appreciate faster than the metal.

When gold is advancing, and the stock stock market is not, gold stocks tend to underperform the metal.

When gold is or neutral or declining, and the stock market is going down, gold stocks tend to rapidly lose value relative to the metal.

Which segues me to the stock market. We have been looking at wave counts waiting for the final 5th wave of the SPY from the Feb. 104 low to be put in place on the weekly time frame, and this week, arguably, that has been completed.

The odds are quite good that indeed at least a short term top has been put in, not only from price action/volume alone, but the increase in volatility that happens at major turns. There is an old Wall Street adage that says do not short a quiet market, and that is what we have had all the way up since February, until the past two weeks, when volatility picked up. I had done some hedging, with mixed results, on the way up. I end the week and the month out of all stocks, except GLD, and short the S&P with just a modest "starter" position, as there is still the decent possibility being short is premature.

The reason for the ambivalence is that is that the Naz and the Dow have still not completed wave 5, but if this coming week is a down week for those two averages, they will "confirm" what I have been looking for and then it will time to get more aggressively short. However, on the flip side, the Naz and the Dow could continue to work higher, and the S&P could follow higher too. The other possibility is that the Naz and Dow make new highs but the S&P does not.

Leadership has been shifting away from the leading S&P groups; financials, insurance, retail and restaurants, all of which are showing volatile and troublesome charts. The key player of the group may very well be XLF, the ETF for the financials, holding it recent low of 15.92 which is just a tad above its 50 day at ca. 15.83.

The best and basically the only technical measuring tool of the market's internal strength that I find useful is the bullish percentage market charts from StockCharts.com. Today I want to explore both BPSPX (S&P 500) and BPCOMPQ (Nasdaq.)

The $BPSPX has been flashing a warning that a top was forming since 4/15. The 10 day moving average is topping or rounding down and the index itself has crossed the 10 day moving average, indicating accelerating selling/distribution.

On the other hand $BPCOMPQ is still bullish, despite RSI reading over 90 on any market average or composite not sustainable for very long.

You will notice that of the two BP charts that the COMPQ or the Nasdaq chart is a lot cleaner that the S&P500 chart with few whipsaws. One would expect that, as the S&P500 is made of many groups and within those groups there tends to be strong rotation as various new factors and variables affect general market sentiment. On the other hand The Nasdaq is primarily one group, tech, and thus the difference.

I use these as charts as tools in making an overall analysis of market sentiment and strength. Some people use them as tools for entering and exiting markets with the idea that the rules will get one in the markets for all good runs and out or short for all major declines. Conceptually, I like that, as CAGR and alpha are a lot more than just great stock picking. Over time great performance is determined first and foremost by not getting hurt in market declines. In other words decreasing beta, lessens drawdowns, thereby increasing alpha.

The following rules of thumb are applicable in reverse at bottoms.

When the average turns down it a caution signal.

When the 10 day moving average turns down which is generally preceded by the average crossing it's 10 day, cut market exposure 25-50%.

When the index crosses it's 20 day moving average, cut market exposure 50-75%

When the 10 day moving average crosses the 20 day be out of the market or short.

My plan for Monday is an aggressive one obviously going home short on Friday, which I intend to hold until I'm stopped out. However, I am willing to take buy signals should the market work higher, effectively putting on a hedge (to a varying degree that is yet to be determined.)

It should prove to be a very interesting week.

Good trading,

Russ

Daily Commentary Close Friday April 23, 2010

The market had a very good week, taking out its highs from last week and the technically important 121.50 on the SPY. On a weekly basis, we can clearly see that we are in sub wave 5 on the run since the February lows.

The next down week completes the wave count, and the odds are we then get the correction. There is always the possibility that wave 5 could extend like wave 3 ( July 09-Jan 10) did. However, that would be unusual since wave 1 (Mar 09-June 09) was a simple 5 wave pattern. Of the three up waves in an EW cycle, a great majority of the time only one wave of the three is complex, not two. So continue to trade, but be ever vigilant, nimble and take profits (and losses) quicker that usual.

The economic data as well as the price action in home builders, consumer staples, retail and commercial real estate all suggest that the economic expansion is strong. Once again we are also seeing that with the current earnings season. According to Bespoke the 1Q2010 beat rate so far, with 324 companies reporting, is that 234 beat earnings per share estimates, putting the current EPS beat rate for the quarter at 72.2%. It's important to note that the beat rate over the past couple of earnings seasons has started out high and trickled lower to settle in just below 70%. Over the past three earnings seasons, the beat rate has ended up right at 68%. There are still a few weeks left to the current earnings season, but for now, things look strong.

Gold had a very interesting week. After last Friday I reported that I was not too concerned with the sharp sell off in gold on the news of SEC suing GS, and it's implication for large hedge fund manager Paulson and his big stake in gold, all provided that the 20 day moving average held, as the next up day would be the completion of a simple EW a-b-c correction. That got us long GLD this week.

We endured Thursday's strong test, and was ready for Friday buying SWC. IVN did nothing Friday, so was not elected, but is still on the buy list for Monday.

Technically, the real key is GLD taking out 114.13, as clearly shown on the weekly chart.

We rarely buy from weekly charts, being quite risk adverse, as the weekly range is typically a lot wider than on a daily chart, but a weekly buy signal gives the trade more wiggle room to work. The buy stop is 114.14 and sell stop 110.75 from the daily or 110.54 from weekly. For an added 21c on $3.50 it does not make that much difference to use the weekly sell stop.

As for the rest of the market, I continue to be extremely wary of the extremely over bought conditions, esp. of the Naz, although the S&P has worked a little of that off. However, I have had no desire to have much patience to hold anything very long except for the metals sector. However, there is an interesting and eclectic group of trade signals for Monday.

Tuesday the FOMC is expected to hold the target fed funds rate unchanged in the 0 to 0.25 percent target range when it meets this week.

Good trading,

Russ

Daily Commentary Close Friday April 16, 2010

The market broke on Friday on very heavy volume. The big headliners were GOOG who lost 45 points or <7.6%> and GS down 23 points or <23%.>

By now I assume all have heard of the SEC suing Goldman Sachs (GS) for fraud, with regard to some of their created subprime mortgage CDOs. Goldman is more than the biggest fish in the pond, it is the whale in the financial sea, so the implications by the SEC taking on Goldman are that no one is immune. What or who is next? And it gets worse for GS, as the EU announced officially on Saturday that it has launched its own investigation of GS over it's role in creating credit default swaps for Greece.

First level of support for the SPY is the 20 day moving average ca 188.10, then 115.50ish, then at the 50 day ca. 114. Be surprised at nothing. They could buy any weaker dip Monday or we could get a bounce in the next few trading days. Not predicting, just saying.

However, let's not get overly pessimistic (if you are a bull) or too excited (if you are a bear.) On Friday, the Dow lost "only" 1.13%, the Naz 1.2% and the S&P 1.6%. Checking our good indicator friends, $BPCOMPQ has not turned down, while Friday did mark a slight turn down in $BPSPX. It is going to take a lot more downside action to turn down their 10 and 20 day moving averages, let alone have them cross (serious bear territory.)

Other than DBA, I'm out all longs. I left what were my short ETF hedges in place, essentially putting me net short and green for the day Friday, but with smallish positions in terms of percent of total equity committed . If a serious short trade becomes the odds-on way to play, then the market will tell us that in due course.

I intend to keep my shorts on until the SPY takes out 121.57. In the meantime, I will continue to trade any long set-ups, like the three posted for Monday.

It appears that quite possibly that the markets are entering a new, more volatile phase. We are prepared for whatever Mr. Market presents. Should be a very interesting week indeed!

Good trading,

Russ

Daily Commentary Close Thursday April 15, 2010

Bingo! The 121.50ish price target for the S&P we have been looking for was set just after 11AM today at 121.56. Now what? Lets take the cynical view first that this means nothing. There are so many technical traders that, as so often happens with so many people looking at the same price levels, enough traders act/react to the target that it becomes, at least initially, a sort of self-fulfilling prophecy.

Other technical factors to give weight to this being at least a short term top are that the SPY backed off, closing lower at 121.57, though still up a dime on the day. But the daily range was pretty narrow and the volume was not light. All that can be argued as a distribution day. Again, self-fulfilling? Our friends $BPCOMP and $BPSPX have clearly unsustainable RSI readings over 90, just as under 10 in March 2009 gave a low risk entry to the bulls.

Also financials closed down but still look like perhaps one more thrust higher? Real estate (IYR), a very strong market leader has had a reversal and today they piled into SRS, the 2x short ETF on huge volume. Just like the bulls in March 2009, this time the bears are looking for the entry for their next great trade. Is SRS a reflection of that?

As a trader, if the markets show weakness tomorrow I want to be either short (an aggressive posture) or at least hedged (I am partially hedged this evening.) You will notice in the table that I have also tightened up stops on open positions.

GOOG has been a fine trade this week, but I've been saying it was time to go before earnings were released. This evening it turns out that GOOG is another example of the risk associated with these earnings reports. Some people seem to think that how the stock reacts the days before earnings, "points the way" to how the stock will react to earnings. Wrong. I have not statistically looked at it in over 5 years, but have seen nothing to think that my earlier data is any different than my 2003-2005 study. After earnings, when a stock moved 5% or more in the after hours or pre-market trade (in other words you are trapped as stops at closer prices are no good) the study showed 51% against/49% for both the direction of the stock's trade the day and week before earnings. Thus, it is crap shoot to hold though earnings. The price of a commission is well worth the small price to keep any trade out of a large hole.

By the way, GOOG closed today at 595.30. After earnings, last trade this evening 566.20. I posted earnings report and a detailed analysis by Zach's on the forum. 'Nuf said.

Good trading,

Russ

Daily Commentary Close Friday April 9, 2010

The day and week ended with more of the same, now up 5 weeks in a row. Nothing has changed and it is becoming more of a possibility, that despite the over bought conditions. we may reach our target on the SPY of ca. 121.50 (mid way measuring gap created March 8) and Ric's Fibonacci target of 121.62, before a pullback.

We often look at BPCOMPQ, the bullish percent index of the Nasdaq as a technical measure of strength. Today, because the S&P is a much broader index than the tech heavy Nasdaq, I want you to look at $BPSPX. First thing I note is that the SPY has broader participation in this rally. However, the larger point is that the RSI is not only very near 90 ( a huge number for an index) but is also higher that at any point since the rally began in March 2009. That is clearly unsustainable, although another week or so at these levels is possible. Therefore, although in retrospect I have been too cautious too soon on the March-April rally, this is clearly no time to get more aggressive.

Earning season begins with Alcoa reporting after the close Monday. AA caught a downgrade Friday and sold off on very heavy volume. Good bad or indifferent, AA's post earnings trading is always volatile, often seemingly makes no sense, and typically has no basis for extrapolating what will follow in the earnings season. So, we will watch, but my advice is don't over think it.

Should be an interesting week.

Good trading,

Russ

Daily Commentary Close Thursday April 1, 2010

Short term it all boils down to one thing - how the markets react to the jobs numbers on Friday. March was the first month they have turned positive, netting 162,000 jobs. I know, there were 42K census workers hired, but still it was a decent number. Actually, after revisions, January was the first month jobs were up. Don't pooh pooh it - remember you have to crawl, before you walk, before you run.

Even better, Zachs Investment Research on the "Behind the Headline Number:" Both the February and the January numbers were revised significantly to the better, with only 14,000 jobs lost in February rather than the 36,000 originally reported, while January was revised to a gain of 14,000 jobs rather than the loss of 26,000 reported last month.

Excluding government hires, the private sector has now added jobs for three months in a row, 123,000 in March, 8,000 in February and 16,000 in January. This is a huge turnaround from a year ago when the economy lost a total of 753,000 jobs in a single month, including 744,000 from the private sector. (Data: Zachs Research.)

Additionally, on Thursday the Institute for Supply Management reported the U.S. manufacturing sector expanded for an eighth straight month in March, boosted by stronger orders and production. The ISM manufacturing diffusion index rose to 59.6% in March from 56.5% in February, the ISM said. It was the highest reading since July 2004.

All sounds great, and it is very good news. But that does not change anything in terms of where the market is going, it very well could be "there" now, or getting very close or still have a lot of push left. So, we take it as it plays. However, as traders we know markets turn before fundamentals, just like they did last March when everything looked so glum. Also, at the very least, they correct, so that is still somewhere in our future. When, we do not know. And speaking of last March, on April 12 (next week) we enter earnings season for 1Q2010, which is expected to be quite robust on it own merit, and with VERY easy relative comps to 1Q2009. We'll talk more about that as it approaches.

Bottom line, fundamentals are good and improving, but it is all about timing. Monday promises to be a very interesting day, indeed.

Good trading,

Russ

Daily Commentary Close Friday March 26, 2010

Greece (finally) got thrown a life preserver this week, after all the political posturing got done by France and Germany, as well as IMF officials. Hedge funds playing the short Euro game knew it as inevitable and had been taking some off the table in advance of the deal struck Thursday, but still have good sized bets on against the Euro. As Business Insider reported with a very clever graphic, March was just the beginning of a dramatic increase in PIIGS debt that is coming due over the next 7 months, with March's $33B being the lightest month and April's $62B the largest. For the sake of argument, let's presume the best case scenario and all the debt gets rolled over without crises nor systemic risk problems. Big ifs, but even if true, at the very least, one has to also presume that the credit markets will increasingly demand higher, more punishing yields for PIIGS debt. So there still are repercussions.

Which segues us to interest rates. Interest rates across all maturities are creeping up, with the 10-30 year bond yields accelerating more than at the shorter end of the curve. Bad for bond holders, but in a small part fueling a rotation into stocks. However, conservative money is scared money, so with an overextended stock market, the rotation of some of the bond money into stocks, right now at least, is small and not going to be very supportive of stock prices. Even though rates are rising slightly, this is not the time to "fight the Fed," especially in the shorter maturities. The bears "best case" of inflation is because of all the money printing the world is doing. Bears are arguing the seeds have been sewn and the trend is sprouting. Even if all true, it will not be a straight up climb, and until a trend is firmly entrenched, expect a very choppy trade. As with all "stories" that one wants to believe and make a bet on, it is always best to wait until the story actually becomes factual. If the rising interest rates "story" become a trend, then we want to be short bonds (TBT is the ETF for that.) Right now the TBT chart is a choppy mess and not one that this risk adverse trader wants any part of.

Gold continues its normal pattern of confounding the bulls and bears. Normally, I simply stay away from the sector, but with gold established in a longer term bull market, albeit a very choppy trade so far in 2010, I have been looking to play (and losing money) presuming that the trend remains intact. This weeks action was more of the same - very choppy action. The real divergence in terms of price as well as cleanliness of the chart is the GDXJ, the junior gold miner ETF. If we do get a buy signal this week in the sector, and presuming the positive pattern continues, GDXJ will probably be where the trade signal will come.

The stock market's recent action has conditioned traders and investors to "buy the dip" on a daily as well as weekly basis, and they have been rewarded to do so. Thus, the first day down, or the first few does not scare of them out. Additionally, those trying to short and pick the top have been handed loss after loss.

There is a correction in our future, that is a given, but when? In the meantime, as we chop higher, fewer and fewer stocks are participating in the rally, with most already in some corrective phase. Reversals come early and often, not only in the market averages but for individual stocks.

Deere is a good example.

DE broke out to a new high on heavy volume on Tuesday the 23rd. Normally, a trader would feel pretty comfortable being long DE on Tuesday's close. We actually bought DE on Monday on a buy signal (we try to catch them early,) but by Thursday's close DE was almost right back where we bought it. To keep profits as well as to have profits to offset losses, in this trading environment, when DE did not keep going we took profits pretty quick on Wednesday. DE is a good example of how difficult this market is to trade right now.

After the 15 day winning streak the S&P has now been down 5 out of the last 7 days, yet the price is essentially the same as when the winning streak ended.

This action is either a topping one, or the converse, a strong sideways time correction while holding price constant. The latter leaves open not only the possibility of another positive week, but one that could gain a lot of ground on our technical SPY target of 121.30ish. Although the odds still favor a pullback before we get there (if indeed we do get there), we have to be open to the real possibility that we get to 121.30ish before a meaningful pull back.

The weekly S&P chart above still clearly shows we are currently in wave 3 off the Feb. 104 bottom, and thus the analytical bias is that this bull run is not over until we complete a wave 5.

Bottom line, these are not easy times to trade, and we should be nimble, hopefully making a profit, but being ruthless in trying to avoid losses. When the easy stretches come, we want to be making new highs, not digging out of a whole. That, in a nut shell, is what successful trading is all about, controlling beta to gain alpha.

Lastly, we were just advised by Arborwood Forums that they are closing their doors the end of April. We are looking at other forum hosts with private forums for RTTraders and RTT Growth Partners. Anyone with any ideas/experience I'd like to hear from you. Thanks.

Good trading,

Russ

Daily Commentary Close Tuesday March 23, 2010

Greece was back in the news today. Seems like Germany is good guy, bad guy on alternate days. Beat on Greece one day, next day be accommodative in tone. Got the pundits making fools of themselves on daily basis, as they report not only the quotes, but then extend that to what will happen to Greece as well as the rest of the European Union (EU.) The dollar continues to work its way higher, and our stock market does not seem to mind. That's bullish.

Speaking of playing a mind game of its own, the daily market gambit seems to be low volume, narrow range, temp the shorts to get in, then blow them off in an afternoon rally. Same pattern today, as the major market averages made new highs.

From a wave point of view, we are now in the wave 5 that I have been anticipating. On the SPY, you will note that wave three was the straight up winning streak of 15 days the beginning of this month. There are two ways this can play out. The next down day completes a simple wave 5 from the February low - time to get out, or sell at least 1/2 your positions. It is not time to short. Why? Because, since wave 3 was a straight up affair, it is improbable that wave 5 will be the same, even if of short duration. Thus, the odds are that wave 5 will be composed of 5 sub waves. If true, then one can always get back in, if you took positions off.

Also keep in mind that I am projecting when the wave we are discussing completes, it is only sub wave 3 in the larger wave 5 of the entire 2009-2010 bull run.

Good trading,

Russ

Daily Commentary Close Friday March 19, 2010

Friday is what is technically refereed to as an outside reversal day, higher opening to new highs, then closing lower and also below Thursday's low, all on very high volume. The action does not bode well for the short term, although we very well could chop back and forth too. Momentum is not always easy to kill, especially when it the grinding type and not the the explosive blow off top type.

Gold ran into a buzz saw on Friday, the apparent catalyst being the hike in interest rates announced by India, which crossed the wires at around 10:15 am ET. Initially I found it rather strange that gold had actually been up on Thursday when the dollar rally was even stronger than on Friday, but it appears at first blush that Friday's price action was significant. However, technically we know that in a lot of cases, when a bottom is put in the markets find some way to "test" that bottom before moving up. So until GLD takes out 107.46, the wave count still stands. Encouraging to the bulls it that GLD was down 0.2% less than gold futures, and GDX, the miners ETF was down 0.4% less than GLD. For now at least, the miners being stronger than gold is still operable. For now...

The dollar is a choppy range, and just when it looked like it was going to roll over and head lower, continuing Greece drama seemed to give some life in catching a bid the end of last week. Last week in my March 12 commentary (still posted here) we talked about the Euro and the dollar. "Open interest falling indicates a lot of dollar profit taking (and/or short covering of the Euro.)" That analysis was confirmed by the weekly CFTC data for the week ended Tuesday, open interest in the euro fell by 38% from last week’s record high and was reported at a 6 week low. Also interesting is that the number of crude oil contracts rose 14% and are just 12k contracts from a record high dating back to 1983. Natural gas, which continues to sink, had open interest reaching a record, the old high dating back to 1993.

The message, in lieu of price action since Tuesday, is not clear at all, other than the fact there are a lot of people betting both ways with strong opinions. (In futures, there has to be a long and a short to make a futures contract, so the open interest, or the total number of contracts open is what we are discussing.)

Bottom line, I really liked the set up in gold, as we have been discussing. Friday's price action seems to indicate a change in sentiment, but the trade has a chance to save itself and reverse early this coming week. Odds are not favorable though.

Speaking of odds, it is more likely than anytime in more than a month that the markets are entering some corrective phase. It appears to this writer that the SPY may have completed wave 3 from the February 104.15 low. Note the RSI that approached 80, a very high and non-sustainable reading for a large index with a lot of components (500 in this case.) We often see readings this high for individual stocks, and often we know they can go even higher for considerable amounts of time.

As an aside, what a RSI reading should tell traders is that after the over bought reading (>70) gets some relief, the odds are very high that the highs reached (presumably 117.29 on this leg up) will in the future be taken out by new highs. That is the main way I use RSI and why I watch it.

On a weekly basis, you will note on the chart below, this week, despite Friday's reversal, the SPY closed higher and is in wave three off the 104.15 low. If, as I suspect, next week is a down week and completes wave 3, then after a mild correction, one more push higher into a wave 5 top should be the trend.

Thus, the week is shaping up to be quite a dangerous one for traders. After being stung Friday on the gold trade, and still with a position, I am going to go very slow on Monday.

Good trading,

Russ

Daily Commentary Close Wednesday March 17, 2010

It was nice to see follow through to yesterday's well received news of no interest rate change from the Fed. However, after a good morning the markets turned choppy, with the good remaining strong, the weaklings of the day getting weaker and the S&P finishing mid range - now up a remarkable 14 straight trading days.

Not sure if the following is a good analogy, but at the very least it will be a lead in to the rest of my week's plans. The market's action kind of reminds me of when we were getting slammed with major snow storm after major snow storm. "Technicians" would say the record snows were "way over done." In the back of my mind I knew, and was quite aware, that Spring was only 4-6 weeks away. But here is where the Spring/stock market analogy breaks down. Spring is a part of a constant cycle although it may come a bit early or later, be hotter or colder, wetter or dryer, etc - but it comes for sure. Then I look at the stock market, remarkable not only for the 14 days straight up, but especially for a supposed economy dead and rotting, real estate down and out, commercial real estate a mess, the consumer dead. If one looks at these very same stock groups: home builders, retail, finacials and REITS are all booming and leading the market, with tech, especially semiconductors, not far behind.

But I digress. Like Winter gives way to Spring, stock market rallies give way to corrections. Being so "over done" on a short term basis, we "know" it has to come soon, as we have for a long time, which keeps us under invested. If you are like me, on occasion you have said "I am being too conservative, too small with position size, too tight with my stops," but then that little voice inside always says "but, you know you move in big time, and that will be the very time you should be getting out." Unlike the Spring, which with some variation is predictable, stock market corrections are a lot less so predictable, as we have seen. So, I stay the course, play small, waiting for the inevitable and suffering frustration a times. It's all a part of trading, which is a marathon. Trading smart, consistent and persistent always pays off in the end.

Speaking of weather: AccuWxPhillyPA Weather 4:15, 64F and mostly sunny. Tonight: Clear Low 40F Tomorrow: Sunshine and warm High 68F. If you don't know me that well, what that means is that for a guy who always get a bad case of "Spring fever," our first week of Spring, from snow to 68 degrees, means yesterday afternoon, I got out all my fishing gear, and today, noonish, I'm heading up the Delaware River to the power plant, which is the early season spot for the first shad of the run. I know they are in the Delaware Bay, where they are commercially netted, because they are at the fish store. Same plan for Friday afternoon - bass fishing on a private farm pond that me and my LMT bud have access.

Life is good, and hopefully gold will catch a bid too!

Good trading,

Russ

Daily Commentary Close Friday March 12, 2010

Unlike the rest of the week, the S&P and Naz could not rally back into the green to close the day on Friday. Some of the strongest stocks flat out look a bit winded. AAPL is a good example, and why we have placed a "sell" on it if has a down day on Monday. We have to be close to some sort of top, with the markets very over bought. The Russell 2000 has moved up 20 of the last 23 days. The S&P’s winning streak is 15 of the last 19. All this, despite by both my daily and weekly counts, we are only in wave 3 of the final run to a major top before a good correction. Thus, as far as stocks are concerned, being very beta conservative with our equity, we want to continue to play small and be nimble. After another minor, albeit quite possibly a small, correction, that is the time we want to get quite long for the final run to the top.

The US dollar sold off this week, as Greece default fears ebbed. Dollar futures had very high volume and look very toppy. Open interest falling indicates a lot of dollar profit taking (and/or short covering of the Euro.)

Hedge funds are short the Euro at record levels. These are the best traders on the planet, which is why they command the fees they do. But the markets are ruthless in their attempt to make every one lose, and at least in the short run can create havoc and volatility even to the big boys. Where the hedge funds are very vulnerable is that their collective positions are so large and essentially all built, so that any event or raid can force them to unwind. Goldman Sachs on Friday recommended going long the Euro, and perhaps we are seeing the first significant signs of unwinding the short Euro/long dollar trade. Good for stocks, presumably. Good for gold, presumably, but ...

But wait, gold also sold off as the dollar fell last week. We often talk about the inverse relationship in price between the dollar and gold. We also talk about it being a good "tell" for gold bulls when the inverse price relationship diverges, with gold going up when the dollar also is going up. Now we have a divergence in the other direction, dollar down and gold down, something uncommonly seen. A rout in short covering in the Euro and an unwinding of the large hedge fund position in gold at the same time could really roil the markets. Perhaps that was a hint of what last week's dollar down and gold down portends? On the other hand, as I have often said, one day, one week or any one data point does not make nor change a trend by itself, and knowing that much of market action is just noise, we have to wait and see how it all plays out. I'm just trying to alert you to the various possibilities, which are always to be considered when and how we trade.

From a wave perspective, gold (GLD) is in what I call Elliot Wave Hell, that is an abc of an abc.

From the December high, GLD corrected down to 105.31 (a), rallied back to 113.59 (b), then back down to the bottom in February of 102.28 (c.) A classic Elliot Wave (EW) correction, with some sub waves along the way. From the Feb. bottom, gold has rallied to a March high in an a-b-c manner to 112.18 with "a" off the bottom comprised of sub waves to 110.30. After the March 112.18 high, we are now left with an a-b-c working off that high. An abc of an abc - what I have dubbed Elliot Wave Hell. The next up day for GLD completes the abc. Regardless of what happens from there, all wave counts are "right."What to do?

With gold (GLD) we are seeing a classic example of clear wave analysis in a confirmed bull market (new highs) with the bull run having now gone into "congestion" (somewhere between under new highs and above meaningful new lows.) In my view, in a congestion phase EW is generally useless, as there are always alternate valid counts, and there is little to be gained in odds (other than luck) in adopting one of the possibilities to trade. I say this in the context of wanting to get the odds in your favor - what the buy part of trading is all about.

With that caveat let's look at the options. Gold the only asset class in a confirmed bull market, a fact until February's low of 102.28 is taken out. There are two ways to play it. If you think the bull market is done and want to be short, do nothing until 102.28 is taken out. If you want to be long, and you are not already holding long after the Feb. low, then you want to buy the first positive day's close, risking the low of this current dip.

As we discussed above, the dollar trade this week is not friendly to the bullish analysis. On a positive note, GDX, the gold miners index, has held much better than GLD, above both it's 20 day and 50 day moving averages and the junior gold miners GDXJ has reacted even better. Both reasons to be bullish. The rule of thumb is that commodity related stocks lead the commodity in bull runs and lag in bear trends.

Specific trade signals are given below, but I would prefer to play the ETFs. Many other stocks like our TGB, that have exposure to other metals besides gold and silver, are showing the best relative strength to the entire metals group.

This week should be an interesting one for gold, the dollar and the markets.

Good trading,

Russ

Daily Commentary Close Friday March 5, 2010

As we have been saying it sure looked like the markets wanted to go up, and indeed on the back of a "benign" <70K> jobs loss, the markets put in quite a day on Friday. We had some big winners in the mix, and except for the gold plays, which were so so (I took half off because of the lackluster action) I hope you guys caught some of them.

We had break away gaps in the major averages, and if they do not fill in the short run, they could prove to be mid point gaps for this leg up. Regarding gaps, I am not necessarily in agreement with many of the common theories bandied about, but the so-called mid point measuring gap very often is a very effective tool.

If you have followed me for any length of time, you know I do not us price targets, preferring to let the markets tell me when a move has run out of steam, often gauged with wave analysis, which is a lot more accurate than oscillators which tend to be a day or two late. . Price targets are set by fundamental analysts based on fair value, growth, P/E and other such metrics. Generally, they are worthless. Technicians use support and resistance, along with trend lines (none of which I find useful in my work) to establish price targets.

However in the case of mid point measuring gaps, they often are uncannily right. In theory, measuring gaps mark the midpoint of the move, so the middle of the SPY gap in the above chart is 112.95, from which we subtract the low point of the move, or 104.58, equaling 8.37 points. Now take 8.37 and add it to 112.85 and that comes to the projected top of 121.32 on the SPY. Additionally, Ric had posted on our forum, a few days prior to Friday's gap, that his fibonacci number analysis suggested 121.50 as a price target for the move. Time will tell... Barring any unforeseen fundamental or systemic events, it doubtful that the SPY's 115.14 January high will stand.

Additionally, the Russell 2000 (RUT) small cap index has broken through it 2010 high and is surging higher. Small caps leading the market is very bullish.

All the gloom and doom out there has not gone away nor dissipated last week. But the markets are telling us they don't particularly care right. Our suspicions of what the tape was telling us were confirmed Friday, so we have to look to be long. The old adage is not to fight the tape. Almost seems too simple and certainly is trite, but crepe hangers never seem to get it.

Good trading,

Russ

The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails. In these troubled waters, I try to steer our trading to make the best use of the tailwinds and be cognizant of the dreaded headwinds and stay out of harms way in storms and squalls.

These commentaries are general discussion and do not include specific stock discussions or trade signals nor stop placement given to subscribers on the members page. Please consider a trial subscription for 2 weeks which costs less than $1.00 a day. Come join us! Visit our Paid Subscribers page for further details.

Our subscribers get access to my commentary and daily trading signals each evening before the next days trade. I tell you exactly what stocks I am looking to buy, the exact price and the exact stop loss (or take profits) exit price! There is no use of margin or options in my trading.

In addition subscribers get exclusive access to the RTT private forum where we discuss the actual trades, intraday developments and news, list low volume stocks not part of the RTT service and where I also answer your questions. In addition you get an Excel spreadsheet that calculates your risk per trade, an archive of the entire daily commentary for 2004-2008 and much more!

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The "secret" besides good stock picks, is money management - controlling risk and downside!! That is what we teach on a daily basis on the RTT.

What our our loyal subscribers say from actual emails on file.

8/13/08 You know Russ, if it weren't for the trading philosophy you engrained in me there is no doubt that I'd be down a TON of money this year. Very happy to be mildly up and not down 10-20-25% like everyone else. I really appreciate the work you do especially during these choppy difficult times. Toby (posted on our private forum)

I've been burned trying to simply buy low and sell high for some time. A friend who is a hedge fund compliance officer recommended you highly and sent me to your site. After reading through it I think I understand that you are not trying to buy low and sell high in the conventional sense, but instead predicting potential breakouts and then using tools to position yourself to get in at the beginning of a breakout, if it happens, while aggressively mitigating your risk. Frankly, its been a epiphany. Tobin

"It is not always about making money, but rather about not losing it, so that when others are digging out of a hole we are making new highs in our accounts. That makes a huge difference in performance at the end of the year and over time. " (no date, always applicable) Russ (RTT)

It sure feels good to be sitting in cash while the market took a big dive. Your methodology and conservatism sure paid off. This is the second storm I have weathered successfully with you. Thanks. Barry.

The old adage goes "Those who know don't say, and those who say don't know." You're one of the exceptions. I wanted you to know that I appreciate the generous sharing of your knowledge and experience on your site. Be well. Jeff

First, let me thank you for the service and advice you’ve been providing (and I’m looking forward to your new Forum). This recent downturn/correction (whatever it is) would have, in times past, caught me as a ‘bagger’. Now, with your guidance, I am almost all in cash with most of my gains this year protected. Mark

I am really enjoying being a member of your group. I am learning a lot -- while making money. This is great! Regards, Barry

Must say I've enjoyed trading your "signals" while trying to learn and come up with a few on my own. I feel like I'm learning something I will be using the rest of my life. Thanks! Ric

I have been trying to trade stocks for quite a while, but not very successfully. I have never followed a trading system like yours. I am very pleased with my success here. Don

Now I just need your mentoring as I've decided to margin my account pretty soon and trade for a living!!! LOL Just kidding. MMMmmm, may be not! LOL Grazie amico mio e Buona notte. Corrado

Just wanted to send a quick note about how much my wife and I appreciate your service. We tried the trial a few weeks ago and now we are monthly. We started a Scottrade account with $29 K now it's up to $46 K. Small stuff for you, but we have just started trading. There is no way we would have done as well alone. We had tried various newsletters but were disappointed. Robert & Carol

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The System's Portfolio will show all open positions and their entry price and stop prices. I do not run a hypothetical profit and loss on all closed positions, as many of these stocks I may not have actually bought and sold. I will not insult your intelligence with hypothetical results. The results I report are my actual trades, always has been that way.

It is important to realize that the system I use generates many trading signals, and the composite of all open positions (the System Composite ) from the system can vary from just a few stocks to as many as 40, depending on market conditions.  You will see the system’s actual buy and sell prices when you become a paid subscriber.  What you will only see here is what the system’s price was to buy the stocks, on some previous trading day.  Many buy signals cannot be taken in my real time accounts because often I am fully invested and, therefore, there is not enough money in my accounts to buy all the stocks from the system.   (Read Building a Trading Model, for a full explanation of how I trade.)  As a paid subscriber if you choose to use the system’s buy signals, you will also find yourself in the same position.  Thus, your account will not necessarily exactly mirror my performance, or the total performance of the System Composite Portfolio.  This will, at times, be to your advantage or disadvantage, depending on what stocks you decide to buy and the number of shares.  I too outperform or under perform the System Composite Portfolio at various times. One more note, if the buy signal on XYZ is 6.50 and I actually buy it and get filled at 6.52, the actual fill price of 6.52 (and not the 6.50 buy stop) will be used in the System Composite portfolio. If I did not actually buy the stock, then the stop price is used in the System Composite Portfolio.

The following paragraph is part of the Disclaimer. It is very important that you read the entire disclaimer!

Subscriber’s who choose to trade the system’s posted signals should realize that there is a potential conflict of interest in that Russell Mascieri may also be trying to execute trades at prices that are advantageous to his account. There is a direct conflict of interest in double signals for the same stock. This occurs when the system gives a second buy signal on a stock and Russell Mascieri already owns the stock in one or more of his accounts from the first (earlier) buy signal. When the system gives another buy signal for the same stock at some subsequent later date, Russell Mascieri is placed in a direct conflict of interest in posting the new buy signal for a stock he already owns. This can have the effect of increasing the price of the stock and thus directly increasing the value of his position in the stock.