Source: Earnings Whispers

Remain unemotional and disciplined. The Russell is up some 19 of the last 21 days! Does that seem sustainable? Of course not…but blindly shorting as a result of one statistic can lead to both financial pain and heartburn. My thesis for 2010 is that the indices are likely to end the year +- a few percentage points from where they started the year, and based on that I am looking to fade any major moves higher or lower. I am currently long IWM puts…and will increase exposure on an incremental scale.

The mid day dip we saw in the Es was triggered by a fall in both gold and crude oil futures. There were rumors floating around that China might have to raise rates as a result of their economic numbers coming in a bit hot. The potential H&S in the continuous crude oil contract is still intact and something I am watching carefully. I would have expected the oil service names to trade better in this latest surge on the SPX…and the fact that they are trading rather soft is something to pay close attention to.

The gold miners traded weak all day on Wednesday as the price of gold continued to slip…the sector is on my radar for shorts tomorrow. The dollar index continues to trade near its recovery highs. I would strongly suggest traders that favor the mining/oil/material sectors monitor the DX very closely. A sustained break above 81.40-81.50 would likely put a ton of pressure on the mining, oil, and materials sectors.

Since I am finding very few attractive setups, I thought I would run through a few stocks I am asked about on a very regular basis. Enjoy…

Unless otherwise noted, my standard protective stop will be the prior intermediate low (if long) or high (if short) on a five minute chart. Also, if stocks you are interested in gap up or down and “get away from you”…be careful about chasing price momentum.

Please left click on all charts to expand them.

GDX

GS

IR

RIG

X

Disclosure:  Long IWM Puts

Source: Earnings Whispers

Source: Earnings Whispers

Some life in the equity markets with the strong gains of last week pushed some of the weekly (and daily) indicators to new highs. Specifically the advance decline line and net advancing volume. While volume has remained very light (ongoing issue), the long string of advancing days has helped push the indicators into a recovery high. However, with every silver lining is a dark cloud, as many of our momentum indicators are now also showing a market that is strained and needs to take a breather (go down a bit) before embarking upon a renewed up trend. The rapid change in the momentum matched that of the initial blast-off in March ’09, however today’s market is nowhere near as decimated as it was a year ago. So, while the markets continued to rise into the summer last year, it may be harder for the markets to repeat that feat this year. So far, all the various asset classes (save for bonds) are in established up trends and have survived hits from Greece, real estate and an economy still losing jobs, so while we have been cautious, the markets continue to rumble higher. Unfortunately little has been done to deal with many of the issues that created 2008 and we may yet see a repeat, however for now – at least this week, it is not in the cards!

Signs of a stronger economy (or still less bad!) from the unemployment data forced bond prices lower and yields higher keeping our bond model in the “sell” camp – meaning keep maturities short. While that also means very low yields, it has been rewarding in that principal has been protected as longer-term interest rates rise. If inflation fears are on the rise, as telegraphed by commodity prices, than why haven’t the inflation-protected notes faired better this year? Set to yield just over 2%, the income adjusts based upon changes in inflation, which so far has actually been rising according to the recent CPI report (after actually falling on a year/year basis as recently as October. Something to keep an eye on.

As we highlighted last week, many of the asset classes are doing well. Even the industry groups are doing well, as many are ranked ahead of the SP500. With the exception of telecom and utilities (which have struggled for the past six months) all the remaining industry groups are near or ahead of the SP500 in our ranking system. The star continues to be basic materials, as they have been ahead of at least eight of the nine industry groups since May ’09. While precious metals have played a roll, many of the lesser-known sectors like coal, steel and chemicals have done very well. For example, US Steel (X) fell 30% at the end of January and is once again nearing the mid-January peaks. In the chemical group smaller stocks are leading the way like Schulman (SCHL) and Olin (OLN). In the coal group, Massey Energy (MEE) has been a steady climber since the markets bottomed last March. The basic materials group is one to keep an eye on since it has had a long run at the top of the rankings and given its “bullish” view toward economic growth, any sustained decline in the group may likely coincide with (or maybe lead) an economic downturn. We should see, at that time, an advance beginning in the left for dead sectors like the utility and telecom sectors.

The close on Friday pushed the S&P out of the recent narrow trading range, that if maintained through Monday, could signal another leg higher (2-3%) before a modest setback. Baring the unexpected, we will keep our investments as is in the equity markets. Bond investors may see better yields, but not right now, as yields are rising slightly due to better economic data. Keep maturities within a seven- year maximum maturity.

Paul Nolte, Managing Director at Dearborn Partners, provides portfolio management services to individual and institutional clients and is a member of the firm’s Investment Committee.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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The Stock Markets:

On the above daily S&P 500 Index chart, the index has indications of an attempt to test new highs but lacks conviction due to low volume levels as observed at the bottom of the chart. The unemployment report released this past Friday gave us no indications of an improving jobs outlook. On Friday, once the market moved to higher levels during the day, there was over a 3 hour period of a tight range of which we observed a strong bid in the S&P 500 Futures market that wouldn’t allow the market to swing down even with many attempts. This kind of unusual market activity has preceded a decline once the bid, whoever it may be, takes themselves out of the market or sells their long positions that have been accumulated. The McClellan Oscillator is reaching overbought territory of which we anticipate by may be a signal for the market to pause as it has experienced another multiple day run without a significant pull back. A drop below the trend channel as shown in green would confirm our anticipated downward move. As we enter the week before the quarterly expiration of options and futures, we suspect that a downdraft in the market may materialize going into Thursday and/or Friday. We continue to remain cautious and recommend selling into rallies, take profits, and hold cash.

On the above daily chart of the Dow Jones Industrial Average, the index continues to find resistance on the center line of an Andrews Pitchfork pattern even as it moves higher. We continue to believe that the above pattern could be the final stages of the recent rally. If the center line holds pressure, we are expecting a test for support on the lower purple trend line of which if breached, could bring the sellers into play. We continue to expect the Dow to top out in this area and move lower rather quickly once the real selling begins.

Our current target remains at approximately 9700 and we continue to anticipate that, in our opinion, the next large wave lower move is developing and could begin unexpectedly. We target the March 2009 lows somewhere in the future. Again, we state that we find the hourly and half hourly movements over the past few days have been quite unusual as the market has been spinning up as the indicators we follow are indicating to us quite a different story. This coming week will be critical for our diverging indicators to prove themselves as to our anticipated direction lower.

Please review the wave up to the 50% retracement level as classically illustrated on the next page.

We continue to present the Nikkei 225 Index chart and the Dow Jones Industrial Average chart from 1927-1934 as reference.

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The opinions and commentaries expressed in the Shaffer Market Report are those of Daniel S. Shaffer. The Shaffer Market Report is for informational purposes and educational purposes only and does not give investment recommendations. At no time may a reader rely on the opinions and commentaries as investment recommendations. Past performance is no guarantee of future results. Please consult with your broker or your advisor to explain all risks to you before making any trading or investing decisions.

Source: Earnings Whispers

Courtesy: econoday.com