Richard Russell: “A hard rain lies ahead”

Love him or hate him, 85-year old Richard Russell is the doyen of investment letter writers – having been at it for more than half a century – and his views as expressed in his daily Dow Theory Letters always make for stimulating reading. The paragraphs below summarize the R man’s “big picture” view of the U.S. stock market.

“I want to say that I have a number of reasons for being convinced we have been in an upward correction [referring to the rally that commenced in March 2009] in an ongoing primary bear market. Some of this is based on my interpretation of the 50% Principle, plus my analysis of the very poor action of the “internal market” [i.e. market breadth] over recent weeks.

“I envision the Dow dropping to test, and possibly violate, the 6,547 level. I don’t know whether this will take place this year, but I wouldn’t be shocked if it does. It would not surprise me if the Dow tests the 6,547 level. And if that happens, I can almost guarantee the US will have sunk into the much-feared “double-dip” recession.

“If the US begins to shrink into a double-dip recession, I expect the Obama administration to go ‘wild’ with new stimuli and ‘make-work’ programs, all of which will be financed with higher taxes (‘soak the rich’) and a further major expansion of the Federal Reserve balance sheet. I would also expect every central bank in the world to simultaneously open their money-printing spigots wide, wide, wide.

“Conclusion in a nutshell: the secret of the forthcoming picture lies with the action of the U.S. stock market. Again I’ll remind my subscribers that the function of the stock market is to discount the future, not to mirror the present. All news is history. Or as Wall Street puts it, “news known is news discounted”.

“One of the biggest mistakes amateurs make is to think something they know is unknown and not already discounted by the market. Despite this, the media insist on describing every move of the stock market as being a reaction to some current event or some new government statistic. They couldn’t be further off the mark. As I read it, the poor action of the current stock market is telling us that the future for the U.S. is bearish and a hard rain lies ahead.

“At this juncture, sophisticated, wealthy people are not concerned with increasing their fortunes, rather they are searching for ways to conserve what wealth they have.”

Source: Dow Theory Letters, July 19, 2010 & http://www.investmentpostcards.com/2010/07/21/richard-russell-%E2%80%9Ca-hard-rain-lies-ahead%E2%80%9D/

Doug Kass: Stocks Have Hit Bottom For the Year

New York City is in the midst of a serious heat wave, but on Wall Street the stock market is on a major cold streak. Stocks are down 9 of the past 11 sessions. Even Tuesday’s higher close was still well off the highs of the day.

Doug Kass of Seabreeze Partners, famous for calling the market bottom in March 2009, isn’t worried. In fact, he’s bullish. “I think we’ve seen the lows of the year,” he tells Tech Ticker guest host Jon Najarian of OptionMonster.com. “The market’s are traveling on a path of fear and share prices have significantly disconnected from fundamentals,” he says.

Kass predicts stocks will rise 10%-12% by year’s end on the back of strong earnings and a better-than-expected economic recovery. He says positive trends in the ISM manufacturing and non-manufacturing index and improved labor market conditions point to “moderate domestic economic expansion, not a double dip.”

Trading at around 11 times earnings, stocks are fairly inexpensive, says Kass. He notes stocks generally trade at around 15 times future earnings, and even higher in periods of tame inflation and low interest rates, as we’re currently experiencing.

It may not be a V-shaped rally like that of 2009, but Kass says we’ve just started building a base, which could lead to a fundamentally stronger and longer-lasting rally in the future.

Source: http://finance.yahoo.com/tech-ticker/doug-kass-stocks-have-hit-bottom-for-the-year-517083.html

Bump and Run Reversal (Reversal)

As the name implies, the Bump and Run Reversal (BARR) is a reversal pattern that forms after excessive speculation drives prices up too far, too fast.

The pattern was originally named the Bump and Run Formation, or BARF. Bulkowski decided that Wall Street was not ready for such an acronym and changed the name to Bump and Run Reversal. Bulkowski identified three main phases to the pattern: lead-in, bump and run. We will examine these phases and also look at volume and pattern validation.

1. Lead-in Phase: The first part of the pattern is a lead-in phase that can last 1 month or longer and forms the basis from which to draw the trend line. During this phase, prices advance in an orderly manner, and there is no excess speculation. The trend line should be moderately steep. If it is too steep, then the ensuing bump is unlikely to be significant enough. If the trend line is not steep enough, then the subsequent trend line break will occur too late. Bulkowski advises that an angle of 30 to 45 degrees is preferable. The size of the angle will depend on the scaling (semi-log or arithmetic) and the size of the chart. It is probably easier to judge the soundness of the trend line with a visual assessment.
2. Bump Phase: The bump forms with a sharp advance, and prices move further away from the lead-in trend line. Ideally, the angle of the trend line from the bump’s advance should be about 50% greater than the angle of the trend line extending up from the lead-in phase. Roughly speaking, this would call for an angle between 45 and 60 degrees. If it is not possible to measure the angles, then a visual assessment will suffice.
3. Bump Validity: It is important that the bump represent a speculative advance that cannot be sustained for a long time. Bulkowski developed what he calls an “arbitrary” measuring technique to validate the level of speculation in the bump. The distance from the highest high of the bump to the lead-in trend line should be at least twice the distance from the highest high in the lead-in phase to the lead-in trend line. These distances can be measured by drawing a vertical line from the highest highs to the lead-in trend line. An example is provided below.
4. Bump Rollover: After speculation dies down, prices begin to peak and a top forms. Sometimes, a small double top or a series of descending peaks forms. Prices begin to decline towards the lead-in trend line, and the right side of the bump forms.
5. Volume: As the stock advances during the lead-in phase, volume is usually average and sometimes low. When the speculative advance begins to form the left side of the bump, volume expands as the advance accelerates.
6. Run Phase: The run phase begins when the pattern breaks support from the lead-in trend line. Prices will sometimes hesitate or bounce off the trend line before breaking through. Once the break occurs, the run phase takes over, and the decline continues.
7. Support Turns Resistance: After the trend line is broken, there is sometimes a retracement that tests the newfound resistance level. Potential support-turned-resistance levels can also be identified from the reaction lows within the bump.

The Bump and Run Reversal pattern can be applied to daily, weekly or monthly charts. As stated above, the pattern is designed to identify speculative advances that are unsustainable for a long period. Because prices rise very fast to form the left side of the bump, the subsequent decline can be just as ferocious.

Level Three Communications (LVLT) formed a Bump and Run Reversal pattern after prices advanced in a speculative frenzy at the beginning of 2000. Prices advanced from 72 to 132 in 2 months and this advance ultimately proved unsustainable.

• The lead-in phase formed over a 3 month period from early Oct-99 to early Jan-00. Volume during this phase was relatively subdued, and actually declined during the November and December advance.
• The trend line extending up from the lead-in phase lows formed a 34 degree angle. A visual assessment also reveals that this trend line is neither too steep nor too flat.
• The bump phase began in early January when the advance accelerated with a large increase in volume. A conservatively drawn trend line formed a 51 degree angle that was exactly 50% larger than the angle from the lead-in trend line.
• The distance from the lead-in phase’s highest high to the trend line. was 13. The distance from the Bump Phase’s highest high to the trend line was 38. This is almost three times larger, and validates the speculative excesses in the bump.
• After reaching a high around 132, prices declined sharply, and bounced off the lead-in trend line. A lower high formed around 115 (red arrow), and the trend line was soon broken.
• The decline continued after the trend line break, and reached 67 before a reaction rally began. The reaction rally advanced to around 95, but fell just short of the horizontal support line before falling back to new lows.

David Fuller (Fullermoney): Will stock markets stay above March lows

“The important question is whether or not Wall Street continues to range above its March lows? The answer will have significant implications for other stock markets.

“At Fullermoney, we maintain that the S&P 500 Index will most likely hold above its March low, as it continues to develop a base formation. The main reason, previously stated, is that we are witnessing the greatest attempt at asset reflation in human history. In comparison, it makes Greenspan look, well … almost Austrian and the USA is certainly not the only country engaged in a record reflation. The secondary reason is the record levels of cash held by institutional investors.

“Let us now consider three scripts for Wall Street and its implications for other stock markets: 1) the S&P keeps on rallying, surprising even the bulls; 2) the S&P ranges in extended base formation development for many more months; 3) the S&P rolls over and resumes its bear market by moving well beneath the March low.

1) In this event, the stock markets and sectors that are already considerably outperforming the S&P – mainly Fullermoney themes, including China-led emerging Asia, South American-led resources markets and technology – will continue to do much better than the S&P. Other OECD stock markets, (tech & telecom weighted Sweden excepted), will track the S&P, albeit usually with a slightly higher beta.

2) The Fullermoney themes in (1) above outperform, extending their ranging upward trends. Most OECD stock markets track Wall Street.

3) Fullermoney themes fall back and extend their base formations. Most OECD stock markets track Wall Street, with Sweden being the most likely exception.

“What do I expect? I think it will be (2) above, although possibly in combination with (1). I will not worry too much about (3), provided the S&P can maintain approximately half of its gains from the March low during the next reaction phase.”

Source: David Fuller,Fullermoney

Sell in May, Go Away?

We just took a close look at the “Sell in May, Go Away” strategy that Wall Street usually advises this time of year at Bespoke Premium, but below we provide the returns for the Dow over the last 20 years.  The average return for the Dow from the start of May to the end of October over the last 20 years has been 0.44%, while the average return from the start of November to the end of April has been 6.86%.  The median return for the May-October period is much better at 4.29%, while the median return for the November-April period is also better at 7.18%.  And even though the saying advises to sell, the market has been up during the Summer 60% of the time since 1989.  While the returns aren’t nearly as good in the Summer as they are during the Winter, they are still positive.

Source: Bespoken Research

Tricom Today ASX Stock Market Report 31-3-09

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The SFE Futures suggested a 57 point fall this morning. BHP and RIO both down in ADR form, 6.2% and 5.7% respectively. Metals all down overnight – Copper down 3.4%, Zinc down 2.5% and Aluminium 1.83%. Nickel down 1.29%. Oil price down 7.5% to $48.49. Gold down $7.70 to $915.50. Bonds up with the 10 year yield down to 2.71%. A$/US$ down to 68.13c. Biggest fall in 3 weeks US Government rejects recovery plans from GM and Chrysler. Financials struggled on concerns that banks will need another capital injection. Realization that the recent bounce was good but the economy can’t recover overnight.

Oz Minerals (OZL) announces it has received an incomplete alternative bid from Minmetals that would result in them acquiring most of its assets apart from Prominent Hill mine. They say, “OZ Minerals has received an alternative incomplete proposal from Minmetals which, when completed, will result in Minmetals acquiring all of OZ Minerals’ assets except for Prominent Hill, Martabe and the company’s portfolio of listed assets. It also said it will make an announcement on refinancing negotiations before the start of trading tomorrow and will try to make a definitive announcement the new Minmetals deal. OZL still in a trading halt.

The market is surprisingly doing OK – down only 22 compared to the 57 point fall the SFE futures predicted this morning following heavy falls on Wall Street overnight. It seems we soaked up most of the damage yesterday. Aussie banks doing well despite their US counterparts getting smashed overnight, Resources down. Except gold stocks.

ASX closes higher after Wall St surge

The Australian share market closed higher on Tuesday but nowhere near the near seven per cent surge on Wall Street as local bank stocks wound back the earlier gains from the big miners and energy stocks.

The benchmark SP/ASX200 index was 29.7 points, or 0.84 per cent, higher at 3580, while the broader All Ordinaries gained 34.2 points, or 0.98 per cent to 3517.3.

At the close of day trading on the Sydney Futures Exchange, the June share price index contract was 51 points higher at 3604, on a volume of 29,599 contracts.

Austock Securities senior client adviser Michael Heffernan said Wall Street’s positive move prompted the gains on the local market, with oil-based stocks and the big miners the drivers.

‘We bolted out of the gate given the six per cent plus moves on Wall Street last night but it was very much a see-sawing day, certainly for some of the major bank stocks,’ Mr Heffernan told AAP.

‘The oil-based stocks along with BHP and Rio did the driving today, while the financials ran out of puff towards the end.’

Top Strategists Still Expecting a 46% Gain From Here

While two more Wall Street strategists lowered their year-end S&P 500 price targets recently, collectively they’re still looking for a 46% gain from the index’s current levels. As shown below, UBS, Goldman, and Credit Suisse have now lowered their year-end price targets since the start of the year. The UBS move from 1,300 to 1,100 makes Deutsche Bank the most bullish with a target of 1,140. Barclays has the lowest price target of 874, which would be a 27% increase from here.

US Dollar at Multi-Year High

Trillion dollar bailouts, trillion dollar deficits, and the largest spending bill in US history. These days, one would think that with all this spending, the US Dollar would be as popular as a Wall Street CEO. However, this morning, the US Dollar index hit its highest level since April 2006 even as news of another bailout for AIG hit the tapes. But when you’re competing against the likes of Europe, the dollar suddenly doesn’t look so bad. In a similar comparison, normally Lloyd Blankfein and Jamie Dimon would be worried about their jobs after GS and JPM have both declined by roughly 60%. But when your competition is Jimmy Cayne, Stan O’Neal, John Thain, Dick Fuld, etc… they look like superstars

Longer term, however, the US Dollar Index remains well off its highs of this decade, or even the last six years. As shown below, as recently as 2003, the index traded above 100, which is about 12.5% above current levels.

Tricom Today 28-1-09

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The market is up 40 points compared to the 43 point rise predicted by the SFE Futures.The Banks putting in a great performance. Financials up 2.8%. CBA up 7.2%. Property Trusts are underperforming after Westfield – the sectors biggest company – announced late last night it would writedown $3bn worth of assets. Building stocks are struggling on the back of a profit warning from Boral – down 15%. Resources down 0.4% – BHP up 0.4% and RIO down 2.8% saying it won’t rule out an equity raising to pay down debt later this year.The Dow Futures suggest an 87 point gain on Wall Street tonight.

Tricom Today 23-1-09

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The market is down 104 underperforming the 24 point fall predicted by the SFE Futures this morning. Resources and property taking it in the neck down 4.2% and 3.5%. BHP and RIO down 3.9% and 2.1% as China announced their 4Q GDP figure yesterday at 6.8% – in-line but the slowest pace in 7 years and down from 9% in the 3rd Q. Japan and China have already cut steel production by 28% and 5% respectively. Oz Minerals received a bridging facility for $140m to tide them over until the 27th Feb when their $1bn in debt needs to be rolled over.
Financials weak all the banks down about 3-4%. CBA reported funds under administration and management down about 11% each due to net retail outflows of about $749m. The Dow Futures suggest a 34 point fall on Wall Street tonight.

Tricom Today 22-1-09

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Our market is up 9 up 49 at best – a little disappointing considering Wall Street had a positive session overnight and the SFE Futures suggested a 46 point rise. Resources have managed to slip into negative territory but most of the other sectors are above water. The big news today is the extension of the shorting ban on financials by 6 weeks bringing relief to that sector and Wesfarmers going into a trading halt after announcing they will be raising $2.8bn in a 3 for 7 rights issue at 1350c.