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I have been investing for over 40 years, evolving from investor to trader. The bear part comes from my degree from Cal: Go Bears! From 1982 to 2000, I managed a 17% return trading mutual funds on the basis of relative strength. This success was, of course, helped by an historic bull market, but... More
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  • ETF Blog For 8/17: Will The New Downtrend Continue? 0 comments
    Aug 16, 2013 9:06 PM | about stocks: IWM, XLV, XLK, EZU, IYR, PPA, BJK, DBA

    Market-moving Economic News Summary

    Spending continues to rise, but at a pace too slow to influence the markets. Annualized e-commerce sales are up 18%. Manufacturing was off somewhat in July, and capacity utilization is below expectations and last month's number. Output from utilities and mines is down. These data contribute to speculation that the Fed will delay tapering.

    Foreign accounts were net sellers of U.S. Securities, especially treasury bonds. Should this trend continue, interest rates could rise.

    The trade balance report was positive, with a slight gain in export prices and drop in imports, excluding petroleum, which ticked up slightly. The PPI was unchanged on lower energy costs, flat food prices and higher pharmaceuticals and autos. The consumer price index July decelerated to a 0.2 percent rise after surging 0.5 percent the month before. Low inflation gives the Fed time to leave rates low.

    Rates of new mortgages and refinancing are off, in spite of a drop in mortgage interest last week. Homebuilders however, are strong and activity is at 2005 levels.

    Employment is improving with job claims down to a new recovery low. Continuing claims are also at a recovery low. These numbers lead to speculation that the Fed will taper.

    Sentiment

    Small business optimism is up, at the fourth highest reading of the recovery, but the Consumer Comfort index is off, still at the second highest reading of the recovery. The consumer sentiment index is also off, with only speculation as to why. Naturally, tapering is a culprit.

    The Market

    (click to enlarge)

    Last week I pointed out the Bollinger squeeze as a fairly reliable indicator that the market will break out sharply from the current base, either up or down. Once again, the indicator worked, giving us time to get ready for what was likely to be a downward move, given the successively lower highs preceding the break.

    I use three criteria to define a confirmed trend reversal. Two have occurred: the uptrend break and the support level break at 168. The third would be a lower high--a rally that fails below 171.

    Notice the weak support at 165 and stronger support around 160. These levels could be tested next week. Volume is up on down-days, which supports continued selling.

    Core Relative Strength

    (click to enlarge)

    The slider is set to 21 days, which is when the rally slowed and the market went into a base and everything started drifting down. Real Estate (NYSEARCA:IYR) crashed and is continuing to do so, because of sensitivity (and probably irrational fear) of higher interest rates. Europe (NYSEARCA:EZU) is showing continuing signs of recovery and gained 6% over the period. The strongest domestic sector is technology (NYSEARCA:XLK). Emerging markets (NYSEARCA:EEM) beat small caps (NYSEARCA:IWM), as did healthcare (NYSEARCA:XLV). IWM is broadly based and serves as a reference. I buy ETF's with greater relative strength than IWM.

    Sector Relative Strength

    (click to enlarge)

    Many other sectors outperformed IWM, but some are very choppy. I am watching Internet (NASDAQ:PNQI) and Aerospace (NYSEARCA:PPA) for an early rebound. Other ETF's of interest (not shown) are gaming (NYSEARCA:BJK) and multi-sector agriculture (NYSEARCA:DBA)

    Actions this week

    As the indexes drifted down and then dropped on Thursday's no-reason selloff, everything in my portfolio hit stops and was sold. I established short positions in IWM, XLK, and held the one in INTC.

    I sold FDN, PNQI, RTN, TAN, DOW.

    I took the following from long to short positions: XLV, XLK.

    I hold the following short positions: INTC, IWM, IYR,

    Conclusion

    The Thursday sell-off was a classic case of the market using any excuse when it wants to make a move. The economic data didn't seem to precipitate the drop, and the only reason, beside taper jitters seemed to be weak earnings reports-but they rarely initiate a move that spans the entire market.

    I conclude that the market is in a technical correction coming down from the all-time highs caused by uncertainty (Congress, tapering) and fewer reasons to go higher (economic data, earnings). The correction will likely continue unless next week's earnings reports are uniformly strong, because the other three factors will remain negative. There is no resistance on the charts where buyers might appear.

    Taper speculation is rife to the point of obsession, but as with any highly anticipated market move, the effect of the actual event may be minimal, or if not, there will be a quick rebound. Here's why:

    1. The Fed doesn't want to tank the market and cut off the recovery.
    2. The Fed doesn't need to do anything drastic. We are not in the bad old days of runaway inflation, when Paul Volcker would surprise with a sudden sharp Fed funds rate spike. Then, such a move could set off a long-term downtrend, by drying up credit. Bernanke is trying to do the opposite. With inflation already low, raising rates too soon could create deflation.
    3. The Fed doesn't have to adhere to any schedule but its own. The market will get used to the schedule announcements and follow the economy, which is likely to be rising-or the tapering is likely to stop.

    Here is a reference to some tapering speculation: http://alturl.com/58fjy.

    Have a great week!

    Disclosure: I am short XLV, XLK, INTC, IWM, IYR.

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