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Turbo Signal
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Turbo Model Returns (Long & Short Strategy)
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Nasdaq 100
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Russell 2000
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S&P 500
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Classic Signal
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Classic Model Returns (Long & Short Strategy)
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World
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Nasdaq 100
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Russell 2000
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S&P 500
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Europe fears weighed on markets to open the week with stocks dropping around 1% in Monday's trade. A couple of positive domestic economic reports combined with further progress on the formation of a new Italian government to give stocks a modest lift Tuesday, with the Nasdaq 100 substantially outperforming the other indexes. Of note, Italian bond yields again crossed the 7% "threshold of pain" that has caused market's serious heartburn in the past. For the day, at least, stock markets chose to look the other way. That positive sentiment carried over into Wednesday trade with U.S. indexes moving higher after a weak open. An improved jobless report and an increase in building activity both offered support. However, an afternoon report from rating firm Fitch undid the positive tone, reminding investors that European troubles can easily leak over to damage U.S. banks. Stocks cratered in the afternoon, sliding to >1.5% losses for the day. Another day, more Euro weakness on Thursday. Yields on bonds across the Eurozone rose with notable spikes in Spanish and French bonds to deliver a sour mood to Wall Street. Stocks closed the day off more than 1% with the Nasdaq leading to the downside this time. Shares tried to mount a recovery Friday as European markets stabilized. But investors were unable to find much spring, with technology shares continuing their underperforming ways and dealing a flat day of trade.
The S&P 500 (SPY) closed the week with a loss of -3.69%, only slightly worse than the -3.23% hit taken by the small-cap Russell 2000 (IWM). As noted above, tech shares (QQQ) were notably weaker, giving back -4.24% this week. The QQQ's slide was halted at the 200-day EMA, though the SPY and IWM now sit below that reference.
The top 5 World ETF portfolio, full of domestic index ETFs, showed
a similar -3.66% drop this week. The
portfolio holds the top 5 ETFs from the November 4th ranking.
Our Classic and Turbo Models remain on Buy
signals.
Triangle power
Technical analysts like to talk about triangles. Triangles
are created as a security or market weaves back and forth in an
ever-tightening zigzag pattern. The idea behind the triangle is
that it is like a spring coiling up, preparing to release and bust
out into a new trend. The longer the triangle takes to coil up,
the more powerful the resulting move when it breaks out. Triangles
are formed as bulls and bears engage in an increasingly pitched
battle. The bulls gain followers as buyers step in earlier and earlier,
thus creating a series of "higher lows". The bears gain
confidence as sellers also enter sooner and sooner to drive the
market back downward, creating a series of lower highs. The S&P
500 has been working its way toward the nose of a triangle for the
past month as shown in the charts below. You can see the clearly
defined upward slope built by the bulls and the downward slope built
by the bears. This behavior builds to a point, literally, where
only one can be the winner.
Chart 1 and 2: S&P 500 depicts pitched bull-bear "triangle"
battle
Improvement in U.S. economic reports encouraged investors in October
to return to markets fled during the "recession is coming!"
scare of August/September; that's been the bulls' fuel. The slow
death spiral of the Eurodebt crisis has kept bears in the game,
giving them reason to sell every rally. Thus, bulls buy the dips
and bears sell the rallies, with increasing conviction until one
side overwhelms the other. The idea being that once the triangle
breaks, one of the groups has run out of ammunition and/or confidence
in their argument. "Ammunition" comes from winning over
new followers to their argument; some of which can come simply from
gaining momentum in the trend.
This week, the S&P 500 broke out of the triangle to the downside - reflecting
the bearish predominance we have mentioned since this summer. Technicians will
expect further downside to come. Our Models have not yet changed their tune. But
they have definitely become more wary, eyeing the market with an increasing amount
of caution. Were the supercommittee to find some way to an agreement, maybe that
would spark investor hopes? To be sure, Europe and the ECB will take steps here
and there, as they have over the past year+, to give investors on the fence a
temporary reason to hope that their crisis will be averted. These flashes of hope
have been burning out with increasing rapidity in recent weeks. Thus, it's easy
to believe that all the bad news should already be priced into markets. Yet, this
week's break downward argues that sellers still ultimately remain heavier than
buyers. Until that dynamic changes, taking profits as we go and/or allocating
a little less money to our Buy trades
remains an attractive way to go.
Question: What is the magic of the 7% interest rate?
News outlets have trumpeted the impending doom of Italy's bonds rising
above an interest rate of 7% over the past couple of weeks. This week,
Spain's bonds joined their Italian neighbors in looking over the 7%
cliff. Is there something magic about this interest rate that causes
it to be the point of doom? The answer is "not really".
Paying a 7% interest rate on the mountains of debt that these countries
are carrying is certainly very expensive. Imagine that these bonds
were paying close to half this much interest on bonds not all that
long ago. If you had to suddenly pay twice as much interest, and do
so on a shrinking budget as your income declines, it leads to painful
cuts in other areas. That is the scenario faced by these nations.
It so happens that at 7%, prior participants in the Euro debt spiral
- remember when Ireland and Portugal were the eye of the Eurodebt
storm? - cried "uncle" and sought help from the global monetary
kingpins. Thus, it has become something of an emotional line in the
sand, this 7%; a point beyond which governments find they need more
intense emergency help. Last week, Italian bonds went above 7% and
stocks dropped sharply. They recovered that drop in the subsequent
days only to shrug off a return to that 7% line by Italy's debt this
week. Then, rating agency Fitch, saying nothing new, but perhaps reminding
investors that we are all interconnected in this debt mess, coupled
with Spain's entry on the near-7% interest rate scene (and weakness
spreading to French, Belgian, Dutch, etc. bonds) caused investors
a couple of bad days (which broke the triangle discussed above). It's
perfectly reasonable to expect that the ECB and the German-French
contingent will find another positive spin to trot out to buy more
time and improve the backstop on the southern European debt. Doing
so reduces the interest rate which eases pressure just a touch on
the governments as they remake themselves into more austere, financially
balanced institutions. Failure to bring the rate down, however, leads
investors to fear the same thing they feared in 2008 - that there
is no one big enough or willing enough to step in and prevent the
wildfire from spreading. It simply must burn itself out. An uncontrolled
wildfire causes unanticipated damage - creating a level of uncertainty
that investors of almost all stripes flee far away from.
Warm wishes and until next week.
The TimingCube
Staff
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