Today's Market Observation 08.06.2009 Mon Tue Wed Thu Fri Tatro Archive
Where to Look Next
by quint tatro | august 6, 2009
When I had the honor of appearing on Financial Sense NewsHour with Jim Puplava the S&P 500 was sitting at the critical level of 870 and my comment was rather Swiss in nature in that I was truly unbiased and ready for anything. The push lower, breaking the now famous ‘neckline’ seemed almost too easy, however a jolt higher off a bearish pattern also didn’t seem prudent to anticipate. Rather than become biased towards any one side I chose to sit it out and wait. Now that the move has been resolved, I am ready to attack and position accordingly. I truly believe that this unbiased and flexible nature of trading is the individual’s strongest suit, however at this juncture I see far too many people still fighting a move that has already happened. They refuse to embrace what is, and are ultimately imposing their beliefs on a tape that could truly care less. The sooner individuals stop thinking about the bear side or the bull side and start focusing on the right side, the better off they will be.
Now that we’ve run over 15% in just a few short weeks it’s important to take a look at where we are and where we could go. As you can see in the S&P weekly chart noted below. The index is distancing itself from the 50 period moving average. This has been a key level historically and worth keeping an eye on. I would prefer to see a kiss of this area on a retracement, which would give investors a buying opportunity should this moving average be broken to the downside. It would be a cue to start taking steps back towards the cash bunker.
When Jim asked me point blank if there was any area I thought worthy of our attention, I did not hesitate when I mentioned the Semiconductors. The group had put in a higher low in March when everyone believed the world was ending, indicating a stronger demand for the sector above others. Since our discussion, the group has had an incredible run, and are now clearly extended in the short term. With that being said, it is an area worth looking at for investors wanting to add to the market leaders on healthy pullbacks toward the 50 period moving average. Investors can note how the ETF hugged the 50 period moving average for a few weeks before ultimately breaking free and adding a quick 25%. Similar to the S&P 500, should this group falter and give back this moving average, I would become rather concerned and much more cautious.
The problem that many are pointing to in this tape is a lack of credible earnings. Let’s face it, expectations are unbelievably low and after cutting costs down to the bare essentials, it hasn’t been tough for companies to post what on the surface look to be exceptional numbers. A sustained uptrend in a market is not led by massaged earnings and whether I rely on technicals as my primary guide or not, I must at least be aware of the fundamental issues at hand.
There is a group however that is posting exceptional revenue and earnings numbers that seems to be overlooked. Furthermore, this is a group that must eventually take front and center stage if we’re going to embark on a new economy and actually create new jobs. Solar stocks, as noted by the Claymore Global Solar Energy ETF (TAN) charted below have seen a similar reversal to that of other sectors off the March lows, but may still present decent risk reward for a longer term swing. Investors will note the double bottom from late 2008 and early 2009 followed by the ETF’s significant higher low in July. This pattern is quite constructive and may suggest a sustained bottom is in. For the bullish trend to remain in tact the July lows must hold.
The problem with TAN is its illiquidity, which is a hurdle for most, however Market Vectors has a Global Alternative Energy ETF (GEX) charted below that offers much better daily liquidity with a similar structure. Unlike TAN which is focused solely on Solar Companies, GEX possess exposure to other areas of the alternative energy game with a similar attractive technical set up. As traders, one of the biggest concerns we should have is our risk reward. In a market that has gone straight up, it has been tough to find prudent entries, however I am looking at this area as one that just may still be in the decent risk reward camp.
Alternative energy bears will point to First Solar (FSLR) as the potential fly in the ointment after the stock’s dismal reaction to their most recent quarter just one week ago. While the company posted a solid top and bottom line report, beating expectations, the stock quickly gave back the ten point pop and another Jackson ($20.00) to boot when the company discussed price competition in one of their key markets, Germany. While the reaction to the earnings report was not good and immediately sucked the momentum out of the name, a glance at the weekly chart below shows that this stock may just be consolidating before another big run if it can get this price competition deal under control. Since the stock came public, it hasn’t had any meaningful correction until the most recent one starting after the early 2008 pop. If this is a real future winner, it is merely consolidating the incredible 10 fold run off the IPO price before another leg higher. The technical picture would improve with a trend line break, on the other hand if the $130's are taken out more weakness is likely in store.
Another group that is a favorite topic among cocktail parties but in my opinion is under owned at this juncture, are the mining stocks. It seems hip to talk about the coming inflation and I think just about everyone out there has contemplated buying actual Bullion to accompany their SPAM but lately it seems the mining stocks have taken a back seat to the more hip technology names. Quietly the sector as noted by the Market Vectors Gold Miners ETF (GDX) below has repaired its death plunge and moved back into an initial channel that has been a critical point for the last 3 years. In late 2007 the sector followed the commodity run, breaking out of this multi-month channel to the upside, however subsequently plunging back down notching a failed break and a push straight through the underlying support levels. Since the late 2008 lows, GDX has moved steadily higher recapturing the channel once again. Many underlying gold charts are confirming the action and I am curious if finally the miners will have their day in the sun.
Whether you believe the market is destined to fail or that we’re on our way to a new bull run, I strongly encourage you to start thinking about the action in front of you, rather than where it will ultimately lead to. Stops are placed for a reason and investors should never be afraid to take a loss and step aside. I realize that is a strange concept for most to accept, but it is one that should serve you very well.
Quint Tatro
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