Update: Week Ending January 11, 2014

 |  Includes: DIA, GERN, GLD, GS, IEF, JPM, QQQ, SPY, TMF, WFC
by: Nasser Khraishi

The indices, and in particular DJIA, showed some signs of topping, though not significant. The shorter term charts are indicating a consolidation for the DJIA but much less so for the NASDAQ Composite and the S&P 500. Bond rates were dented, while Gold (NYSEARCA:GLD) continued its attempt to stage a reversal.

The week as a whole looked more schizophrenic than one would like. First, the released Fed meeting notes seem to suggest that the governors did see the need to taper, but at the same time extend the short term commitment; in essence deferring to next Fed meeting (January 28-29) any tangible clues.

After all, factory orders for November were less than consensus, but the ISM for December was better. Then, the private sector hiring was well above expectations, and the weekly jobless numbers were better than expected. Yet, the monthly jobs report was much lousier than expected, but the unemployment number was better than expected.

In some sense, this may be good for the markets. You see, mean-reversion can happen because market prices consolidate, correct or crash to approach the mean, or such prices can hold within a range for a while giving the averages time to catch up in a gentle, non-volatile way.

This brings an issue that I touched upon the last two weekly updates, which is the possibility of a correction. Even though at the face of it I made both arguments sound like typical "technical analysis," which has its believers and disbelievers, in reality both arguments are correct mathematical and financial arguments.

You see, my first mention was centered around the excessive separation between current market pricing and the monthly moving averages. This chart captures the issue.

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I should refer to this argument as the "George Soros" argument. You see, in his book "The Alchemy of Finance," this is the type of argument that Soros used to suggest impending reversal. It is a solid financial argument, not because Soros said it, but because in John Hull's book "Options, Futures & Other Derivatives" it is asserted that market prices follow a random path described by the following stochastic process:

dP(t) = μ(t) P(t) dt + σ(t) P(t) dz


  • P(t) is the market price as a function of time
  • μ(t) is the expected rate of return for this equity or commodity
  • σ(t) is the volatility of standard-deviation of this equity or commodity
  • and, dz is the normally distributed random element (called Wiener process) that affects market prices

The above is what I keep on referring to as a "mean-reverting, log-normal random process."

Now the second argument I made relating to expecting an impending correction was related to the ratio of the combined market cap of the S&P 500 stocks to the overall GDP. This is actually Mr. Warren Buffett's argument - mind you, this is a 2001 interview. Let me repeat the chart one more time.

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Line 1 is similar to what Mr. Buffett was talking about in that interview, with B and C representing the NASDAQ, and then general market crashes.

Incidentally, the Fed statement did sound concerned about the lack of inflation and the need to watch that. This goes back to my repeated assertion that the Fed is more concerned about deflation than inflation. Hence, as long as you see that or similar language in future statements, you can be assured that short term interest rates will remain low.

My regular table for the indices follows.

Index/ETF Symbol and Name Daily 3-EMA-7 Weekly 3-EMA-7 Perceived Trend
SPX S&P 500 Index Up Up Positive
DJIA Dow Jones Industrial Average Up Up Positive
COMP NASDAQ Composite Index Up Up Positive
GLD SPDR Gold Trust ETF Neutral Down Positive
VIX CBOE Volatility Index Down Down Negative
FVX CBOE 5 Year Treasury Note Yield Index Up Up Negative
TNX CBOE 10 Year Treasury Note Yield Index Neutral Up Negative
TYX CBOE 30 Year Treasury Bond Yield Index Neutral Up Negative
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As usual, the reminder is that the movement of the treasury yields is negatively correlated with the price of the underlying instrument.

As for my trading set, my short term "Perceived Trend Oscillator" stood at a "neutral" +25%. This is in contrast to the "bought "reading of 38% in the previous week. Here it is worth mentioning that it actually bottomed at +3% on the 8th. As you can see from the table below, I am more vested in the market this week than last, even though there were not many fresh signals during the week, but I attempted to take as many as I can.

I did write an article on why I dropped JC Penney (NYSE:JCP) from my trading set, and gave brief reasons for choosing Target (NYSE:TGT). On this note, ironically, TGT made it back to the news, just as they announced better than expected holiday sales. The issue was again the security breach of customer data. As it turns out, at the time of this writing, more retailers are coming forward and admitting similar problems. I have not quantified the impact on the retail sector yet, and most probably that will take time till more is known on the scale and impact of the issue. Clearly it did not affect my choice of target - the first retailer to admit. Further, as I only gave brief reasons for choosing TGT in the above mentioned article, remember that Target gives back 5% of its profits to communities, and hence the amount of community goodwill should - theoretically - be much higher for them than for others with no such programs.

The full trading set table is as follows.

Symbol and Company Name Daily 3-EMA-7 Weekly 3-EMA-7 Perceived Trend Is a Current Holding?
GERN Geron Corporation Neutral Up Positive Yes
JPM JPMorgan Chase & Co. Up Up Positive
GS The Goldman Sachs Group, Inc. Up Up Positive
WFC Wells Fargo & Co. Up Up Positive
NLY Annaly Capital Management, Inc. Neutral Down Positive Yes
MO Altria Group, Inc. Down Up Negative
T AT&T Inc. Down Down Negative Yes
VZ Verizon Communications Inc. Down Down Negative Yes
GPS The Gap, Inc. Neutral Down Positive Yes
ANF Abercrombie and Fitch Co. Up Down Positive Yes
JWN Nordstrom, Inc. Down Up Negative Yes
TGT Target Corporation Neutral Down Neutral Yes
DIS The Walt Disney Company Up UP Positive
MCD McDonald's Corp. Down Down Negative Yes
MDLZ Mondelez International, Inc. Up Up Positive Yes
BA The Boeing Company Up Up Positive Yes
LMT Lockheed Martin Corporation Up Up Positive
CAT Caterpillar Inc. Up Up Positive
DE Deere & Company Up Up Neutral
EMR Emerson Electric Co. Neutral Up Negative
DOW Dow Chemical Co. Neutral Up Negative
ADM Archer, Daniels, Midland, Co. Neutral Up Negative
MON Monsanto, Co. Neutral Up Negative
POT Potash Corp. of Saskatchewan Inc. Up Neutral Positive
PFE Pfizer Inc. Neutral Up Positive Yes
BMY Bristol-Myers Squibb Company Up Up Positive
ABC AmerisourceBergen Corporation Up Up Positive Yes
AAPL Apple, Inc. Down Up Negative
INTC Intel Corporation Up Up Neutral
CSCO Cisco Systems, Inc. Up Down Positive Yes
HPQ Hewlett-Packard Company Up Up Negative
CVX Chevron Corporation Neutral Up Negative
BP BP plc Up Up Positive
NGG National Grid plc Up Up Neutral
NI NiSource, Inc. Up Up Positive Yes
WMB Williams Companies, Inc. Up Up Positive
WM Waste Management, Inc. Down Up Negative Yes
CNW Con-way Inc. Neutral Neutral Positive Yes
CSX CSX Corp. Up Up Positive
NSC Norfolk Southern Corp. Up Up Positive Yes
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Disclosure: It is important that you understand and agree that all information provided in this newsletter rely on publicly available data and tools with no guarantees of quality or suitability for any purpose, and that I can be long or short in any of my trading-set equities, at any time, with or without regard to indicated trends and described analytics, and that I do not give buy or sell or any other financial recommendations, and that any and all actions based on this commentary are solely the responsibility of the reader.