Stock Market Analysis

Thursday, January 29, 2009

Investors Cracking Up a Bit...

Investors' resolution cracked a little today as both Durable Goods Order and Jobless Claims turned in much worse than expected (I knew consensus was way too optimistic on that). Total equities Put Call Ratio also surged today after 6 consecutive down days as options traders rushed for put options. In fact, the US market took off negative right off the line and then ended with the Dow down 226 points. Investors were obviously also uncertain about the way the GDP number is going to turn out tomorrow (see economic calendar) and most importantly, how will the market react.

On the technical front, the Dow continued its short and intermediate term neutral trend today without surprise, trading within the neutral channel that I pointed out yesterday. Today's drop also happened on lesser than average volume, which did not threaten the short term bullish momentum, yet.

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Wednesday, January 28, 2009

Change You Can Believe In...

Yes, that's the slogan for the now US President Mr Obama and we can all see by now that he's a man of his words. The moment he took office, we saw a huge change in political resolve and action and we saw it once again today as Mr Obama pushed through yet another huge stimulus bill this evening. Obviously the Republicans still don't know what's going on and are persisting in their old ways by voting against the bill unanimously. It seems like the new President is going to have a hard time with these people going forward. Hope he wins their heart as well. Stocks surged today off the line as the US government could actually create banks to buy all the toxic waste from the good banks in something known as a Bad Bank. Indeed, this Bad Bank idea is something that no economists or financiers have ever heard of and is yet another change effected by the Obama administration. Obama is demonstrating resolve to end the crisis once and for all against all political and theoretical resistance... in fact, he is taking actions so harsh that we are convinced that consequences ain't that important to him at this moment. The language from the Fed today was less than encouraging and actually stalled today's rally. Well, now that Uncle Ben can do little more to help, it is time for fiscal policies to take over.

Tomorrow, investors will focus on the Durable goods order and jobless claims (see economic calendar) for more signs of stabilization. If these numbers beat expectation like the numbers on Monday, investors could be convinced into the stabilization scenario and spurs more buying. Beating expectations on the Jobless Claims number could be a tall call as consensus is calling for a lower number of 575k vs 589k of last month. We have continuously seen reports of companies scaling down these 2 months, putting the odds in favor of yet another higher number. So, what if the number is higher? The situation is really quite complex now, typical of market and economic bottoms, where there are a ton of promising measures along with mixed economic numbers. It really boils down to what news investors choose to focus on and act upon.

The Dow rallied 200 points today and established a short term neutral trend within an intermediate neutral trend. The same situation the Dow has been in the whole of last month but on a lower plane. The short term neutral channel is bounded by 8500 - 8000. Short term bullish momentum is still rising and still have way to go before getting into the short term overbought region, which could provide some energy to break above the 8500 level this week.

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Tuesday, January 27, 2009

Bracing For Ben's Text...

Trading volume was light today as the Dow continued to move sideways, closing upwards by 58.7 points. Investors were obviously bracing for what Uncle Ben is going to say about the economy tomorrow afternoon. Some investors also headed for safety as long term bond yields drop a little. In fact, the Dow is going to form a short term neutral trend right there on the 8000 points level if this goes on for a few days more but I do not think that is going to happen with the Durable Goods Order coming up on Thursday and GDP on Friday (see economic calendar). Oddly, the CBOE total equities put call ratio (see economic calendar) has also gone 7 straight days without going up, suggesting increasing trading in call options.

On the macro level, there are also signs of bottoming all over the world as economic numbers started beating expectations. Please don't get me wrong, the cloud of recession is going to affect all our lives all of 2009, no doubts about that. But from the way things are going and the way things had gone, I expect to see the NUMBERS start to recover in 2009 along with the stock market.

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Monday, January 26, 2009

First Signs of Recovery...

The Dow gained marginally by 38 points today, retreating from an almost 150 points intraday advance, on the first signs of economic recovery from leading indicators and existing home sales. Leading indicators, which is an index on a set of forward looking economic indicators, beat analyst expectations (-0.3%) by a mile for December, turning in an actual figure of positive 0.3%! Even though leading indicators has not shown a very strong correlation to stock market turning points, it sure does tell us that something is changing in the economy right now, that things aren't quite the same as it was when this crisis started anymore. Existing home sales also turned in one of the best numbers ever had for years! This shows that investments and purchasing are returning to the housing sector once again, which is a bullish sign for the economy. Even though these 2 numbers may not indicate a turning point in the economy nor the stock market, it does tell us that the economy may be at a point where it can begin to find some stabilization. The beginning of stabilization is marked by yet more closing down of non-competitive firms and more lay-offs but certain business fundamentals are beginning to attract investments and purchases. Investors will now look forward to what the Fed could possibly cook up on Wednesday's FOMC announcement (see economic calendar). Consensus is for leaving rates at the present level of 0 to 0.25% (we all know that, don't we?) so investors will probably be focusing on what Uncle Ben says about the economy for some forward looking guidance.

On the technical front, those good news merely provided the reason why the Dow had found such support near the 8000 points level and today's market action merely added another sideways candle along this level. What worries me a little here is the fact that bond yields (see bond yield curve) have been rising all month long, which is a sign of bond traders exiting the bond market and probably reallocating assets into equities, but that did nothing to bring the equities market up. This shows that there are still significant selling pressure out there, probably from disappointed "January Effect Betters".

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Sunday, January 25, 2009


Today marks the first day of the Chinese year of the Bull (some call it ox but my associates and me prefer Bull for obvious reasons). Last year was the year of the rat which was exactly as it represents... disgusting. Yes, the year of the rat has been awful for the stock market and world economy, so, will the year of the Bull usher in a bullish year for the stock market and world economy? Seriously, I am optimistic that 2009 is the year of the bottom and the beginning of the recovery and I believe a lot of people out there do not think so, especially cab drivers. Yes, there is a saying in wallstreet that when cab drivers are starting to tell you how bad things are and that you should wait a few more years before investing, then it is where the bottom is. Yes, I just heard that from a few cabbies over the last few days.

This is going to be a heavyweight week for the stock market with the leading indicators on Monday, FOMC announcement on Tuesday and GDP numbers on Friday (see economic calendar). Obviously, the jobless claims and Durable goods orders will also be in focus on Thursday as investors look for advanced signs of a recovery. Not surprisingly, the consensus for all these numbers are for the worse and I am not expecting any turnaround numbers as well. However, worse numbers doesn't mean that the stock market cannot rebound. In fact, the stock market has rebounded on the worst numbers of each previous crisis, particularly on peak unemployment.

The Dow ended slightly lower for the final week of the year of the rat, finding significant support around the 8000 level. With the Dow in short term overbought and bullish momentum rising, this could be a bullish week as the Dow pulls back up into its short term neutral channel (yes, no bullish breakout yet). However, this is on condition that the 8000 points support level holds as this week is definitely going to be an extremely volatile week with all that heavy weight economic numbers all converging in a single week.

Finally, to all chinese folks and all of you celebrating as well, HAVE A PROSPEROUS CHINESE NEW YEAR! GONG HAI FATT CHOY!!!

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Thursday, January 22, 2009

No Stabilization in Jobless Claims...

Investors looking for some signs of stabilization in the jobless claims numbers today were deeply disappointed by yet another larger than expected number. This caused the Dow to open deep in the red and closed the day lower by 105 points. In fact, there were significant signs of buying into the bad news as the Dow closed the day way off the bottom. Looking into the Bond Yield Curve (see bond yield curve), we can see that much of that support probably came from investors rebalancing their portfolio from bonds into stocks as long term bond yields rose. Make no mistakes, the economic data's going to get much worse before the stock market can get better.

On the technical point of view, today's market action merely formed a sideways day as the trading was very much contained within yesterday's trading range and closed near yesterday's close. This means that the market is still in the danger zone I mentioned yesterday.

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Wednesday, January 21, 2009

The Bulls Fight Back...

The Dow rebounded 279 points today as Obama demonstrates resolve and new political direction during his first full day in office as well as a united fight back by various bank CEOs in buying the shares of their own banks.

In a way, it seems like everyone's rallying behind Obama in the effort to stem the economic crisis. Such resolve and commitment was what was missing in the last administration.

So, what does the rally today mean? Nothing much on itself own actually. Like I said yesterday, a pull up after a sudden sell off is totally to be expected. What is going to give it meaning is what it does the next day. If the rally continues tomorrow with the Dow breaking above the high of yesterday's ditch, the effects of that ditch will be erased and the Dow would go back into a short term neutral trend. Today, the Dow didn't go up high enough to break yesterday's high, which means that it is still in the danger zone.

Tomorrow's jobless claims (see economic calendar) would be the focus as investors look for stabilization (yes, nobody's expecting a reversal yet).

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Tuesday, January 20, 2009

No Vote of Confidence...

Obama took office as the new President of the United States today after an overwhelming vote of confidence by the people but he did not seem to get the same vote of confidence today with investors as they sold off heavily on the financial sector, taking the Dow down over 300 points. In fact, Citigroup has also failed to keep itself together and has announced a split up into two companies, making investors wonder how much of those toxic waste still remain. Despite this single day lack of confidence, the State Street Investor Confidence Index (yes, State Street is doing poorly as well, wonder if it affects the quality of the reports it make) registered a surge in investor confidence in January (see economic calendar).

On the technical front, the Dow totally erased the short term turn around and continued its short term bear trend towards the bottom of its intermediate term neutral trend. However, the Dow is only halfway down its intermediate neutral trend channel and is already in grossly oversold condition, casting doubt to the sustainability of its short term bear trend. In fact, after such a huge dip, it won't be surprising to see the Dow actually pull back up tomorrow.

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Monday, January 19, 2009

Obama's Inauguration

The new US President will be inaugurated tomorrow, ushering in the Obama era (see economic calendar). From what he has done so far, the Obama era is going to be one of economic building and social improvement. No doubt, Mr Obama is going to go down in history as the President that took the US (and the world?) out of the 2008 market crash. In fact, he has already started on it before inauguration by releasing the balance of the stimulus package (that was never meant to be released?). Whether or not it is a correct thing to do in the economic sense is a topic for economists but what it does is clearly signal a change in political direction... indeed, fulfilling his tagline of "Change you can believe in". Lets look forward to its effects on the stock market.

The Dow took a slight pull up last week and with the balance of economic stimulus package being approved for release, we could certainly look forward to a follow up on this pull up tomorrow. In fact, the Dow is also turning around from a short term oversold condition, which could reduce last week's short term bearish breakout into nothing more than a bear trap.

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Sunday, January 18, 2009

Martin Luther King Day

Monday's Martin Luther King day, which is a US market holiday, and Tuesday's the Inauguration day of the new President. The President's inauguration ceremony takes place on 20th January of every new term. Let's hope the new President well and may he go down in history as the President that takes the US out of this economic crisis.

Thursday, January 15, 2009

"Until Something Significant Happens..."

I mentioned before that the market is likely to behave the way it has until something significant happens. Today, that significant thing happened as US President-elect Mr Obama won for the economy the second half of the economic stimulus plan. Mr Obama PERSONALLY lobbied for and won the $350 billion in bailout fund, including a slew of other plans that pushes the whole package to above $900 billion. The Obama administration will no doubt be one of action and focus on the well being of the US and will no doubt be a confidence booster for the economy and the stock market.

In fact, the Dow reflected this confidence ahead of the news by forming a dragon tail formation, which is a reversal signal consisting of a long tailed candle forming at the base of a significant retreat. This, along with the volume spike, makes it an extremely credible reversal signal. Tomorrow's options expiration day will certainly add to the volatility. We need to see a strong follow up in the form of a significant up day tomorrow to confirm the dragon tail formation.

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Wednesday, January 14, 2009

Short Term Down Trend Starts...

The Dow broke its short term neutral trend to downside by 248 points as the bulls failed to make a decisive win after being in a 1 month stalemate. Investors are coming to the realization that the January Effect is not going to happen after all. What I like about this channel break is the way the volume is rising into the break steadily and not in a panic kind of surge and bond yields are also depressing gradually into the break as investors move for quality. Such a sensible retreat makes pretty strong bearish trends, which means that the bottom of the intermediate neutral trend channel of 7500 would be the next target and support level. 7500 was the November 2007 low and the lowest point the 2008 crash has reached so far. I still do not see the dynamics needed to break this strong intermediate trend and personally think that the 9500 - 7500 intermediate neutral trend channel will hold until something really changes in the economy.

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Tuesday, January 13, 2009

Neutral Trend Continues...

The market closed mixed with the Nasdaq composite and the S&P500 ending positive and the Dow ending negative by a marginal 25 points.

Corporate earnings continue to be extremely weak but nothing out of the expectation of investors so far. Selling pressure in the market has also subdued tremendously compared to last year as the Dow went from short term overbought to short term oversold going down just slightly over 560 points when a similar overbought to oversold move back in November last year took the Dow down over 2000 points. In fact, the Dow continues to trade within its short term neutral channel of about 9000 to 8500 and from the way the after market futures are pointing towards, the Dow could turn back up continuing its short term and intermediate term neutral trend. In fact, this is the longest neutral trend since the 2008 crash began, demonstrating strong investor support. On the flip side, if these investors whom has held up for so long should be disappointed with a bearish breakout, the market could still go significantly lower as these guardians bailout as well. For now, the Dow continues to be in an intermediate and short term neutral trend within a primary bear trend with excellent long term support on its monthly 200MA.

Investors would focus on signs of economic recovery (although not very possible yet) in the retail sales and business inventories numbers tomorrow (see economic calendar). So how might investors react to a worse than expected retail sales number? I don't think there will be a strong effect or any at all. Historically, retail sales isn't one of those heavyweight market moving indicators such as ISM index especially with such a strong support in the market now. Investors hoping to gain no matter which way the market breaks out could explore Delta Neutral Trading.

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Monday, January 12, 2009

Weak Corporate Earnings...

The Dow contracted another 125 points today on the bad earnings season so far. Even the continued drop in oil price could not provide some upwards pressure.

The Dow is right at the bottom of its short term neutral channel bounded by 9000 - 8500 now. If the Dow ends significantly lower tomorrow, it would break the short term neutral trend and threaten the integrity of the intermediate term neutral term with a channel bounded by 9500 to 7500.

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Sunday, January 11, 2009

Jobless Rate In Focus...

The Dow netted down 143 points last week as the higher than expected unemployment number spurred more selling than buying into the unemployment peak reversal scenario. It was evident last Friday when the market started out strong after the Job Report and then succumbed to selling by the end of the day. Jobless claims would certainly be the focus of the week as PPI and CPI could offer nothing of interest to investors by now. Next in line would be the Empire state index on Thursday as well (see economic calendar) as investors expect to still see worse numbers. So far, the January Effect does not seem to have materialized at all, why is that so? As I have explained in my previous post, the January Effect is an anomaly which has been popularized and taught for way too long (I mean, I studied that in school!) and arbitrageurs would already have expected it, stepped in and taken it away. On top of that, the January Effect is most evident only in primary bull markets, which most months are up anyways. That is why I do not personally make an entry relying solely on this basis.

On the longer term technical perspective, the Dow continues trading atop its monthly 200MA in an intermediate neutral trend. In fact, the Dow has been right along that level for about 3 months already. This shows that investors are finding value along this level and have halted the bears for now. This neutral trend could continue until something significant happens to warrant a breakout. For now, the market definitely has more upside potential than downside potential.

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Thursday, January 08, 2009

Too Much Noise...

A lot of noise hit the wire today but that didn't stop the market from closing mixed near yesterday's close. The Dow was down marginally by 27.24 points at the end of the trading day.

All the bad news hitting the wire, including the highest jobless claim number since 1982 and a string of bad earnings expectations (see economic calendar), did not stop the market from continuing its short and intermediate term neutral trend. In fact, I suspect that much of the pessimism surrounding higher unemployment numbers have already been priced in yesterday. The Dow has been trading within an extremely tight short term neutral trend since early December 2008 bounded by 9000 - 8500 points and nothing has been able to break the stalemate despite all the news all month. However, as we all know, extremely tight neutral channels don't last forever. It will breakout soon enough and with the level of support in the market so far, I would say that the upside potential is now greater than the downside potential. It could be time to take a toe dip using some hedged bullish options strategies to limit the downside risk and open up the upside potential.

It would be interesting to see how the market react to tomorrow's unemployment number and I suspect we could see some more buying into higher unemployment numbers as investors continue to speculate on peak unemployment reversal.

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Wednesday, January 07, 2009

Neutral Trend Continues...

The Dow retreated from near the top of its neutral trading channel by 245 points today due to dismal job loss number, continuing its short term and intermediate term neutral trend. In fact, from the market action over the past 1 month, we could see a strong short term resistance level at around 9000 points. The Dow retreated from 9000 points twice before; On 9 Dec and 17 Dec. Short term support level is around the 8500 points level. From the market action today, it seems like investors are pricing in a worse than expected unemployment number for this Friday's Job Report already (see economic calendar), as such, I would not be surprised to see the Dow actually hold up above 8500 points even if unemployment rate turns out higher this Friday. Consensus is for unemployment rate to go as high as 7% to 7.1%. Personally, I would expect unemployment rate to go above 7% during this crisis due to continued job cuts in the private sector. When that happens, we could see a real bottom for the stock market.

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Monday, January 05, 2009

Profit Taking Day...

Investors took profit today bringing the Dow down 81.8 points, ending its 3 days run due to dismal numbers on the auto sales front. Such numbers bring back fears of major auto makers collapsing which will certainly impact the economy in terms of unemployment rate and GDP. Under such condition, nobody wants to be the hero.

On the technical front, the Dow is once again in short term overbought condition but has yet to break out of its current short term and intermediate term neutral trend. That makes it a lot less possible for the Dow to make a significant and sustainable bullish breakout this week. On the bright side, long term bond traders seem to be coming back into equities as long term bond yields rose significantly today.

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Sunday, January 04, 2009

Welcome To The First Full Trading Week of 2009!

Welcome to the first full trading week of 2009!

2009 is the traditional chinese year of the BULL, will we have a bullish year this year? :) Well, so far, things are shaping up quite nicely with stock markets across the global rallying to the new year beat. In fact, the Dow is once again on its way to the top of its neutral trend channel of about 9500. I expect 2009 to be a bullish year but will it start right away? I am skeptical that any real breakout will happen before peak unemployment numbers and we probably would never know where the peak is until unemployment figure make its first retreat. This Friday's unemployment rate (see economic calendar) would most probably show another yet higher number, which could spur another round of buying by speculators of peak unemployment rate.

The Dow remains in short and intermediate term neutral trend with a primary bear trend still intact.

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