The ETF-Letter Blog

The Dow rolled down as much as 42, and then rebounded to close up 35. Most of the rise was in the last hour of trading, suggesting bargain hunting. Our Tracking Table was about 2/3 green. Real estate, regional banks, financial companies, Japan, Australia, and the Internet were up over 2%. We had a good but not great Chicago PMI report that the market ignored, confirming bearish sentiment, at least at the open.

Although the news on Dubai is murky, investors seem to be losing their fear that it will bring down major banks. HSBC (HBC) the most-exposed British bank, gapped down and gained a little in the last hour. In our judgment, there is still risk out there, but the market seems to want to ignore it.

The last-hour rally may have  been a statement from China saying they would continue stimulus.

From a technical perspective, we may have seen a bounce off new support. As we have been emphasizing the last few weeks, the IWM is the weakest pattern, yet it rose 0.89% on the day, and a sharp 2.27% from its intraday low. IWM is at 58 and will break out of its wedge at 60. There is new weak support at 56.9.

Many other ETF’s are in a wedge formation, with falling highs and rising lows. We are maintaining put protection (or simply trailing down buy stops), for now, but will go long if they break above the wedge, which should happen in a few days–or tomorrow.

This just in:

The National Retail Federation said the average shopper spent $343.31 in stores and online over the Thanksgiving holiday weekend, less than the $372.57 spent during the same period last year. The group is sticking to a forecast for a 1 percent drop in spending this holiday season.

Tomorrow we have store sales that could go either way, based on the above comment, before the open. There’s a lot of news coming at 10:00 AM EST: ISM manufacturing, Construction Spending and Pending home sales. If all are good on the heels of yesterday’s sharp rally, we could have a bigger rally tomorrow.  

To obtain a free copy of our weekly analysis, go to www.etfdiscipline.com.

Update on November 29

There is progress on the Dubai crisis. The UAE, which includes wealthy Abu Dhabi,  is apparently setting up a “liquidity facility” for Dubai banks. Whether this resolves the exposure of British banks was not stated. There still remains a potential reaction of investors to fears that other countries will default.Our guess is that these announcements lessen the probability of a huge downward gap on Monday’s open.

Bloomberg had an early positive report on retail sales, but we are cautious until more date comes in. Stay Tuned.

 http://www.nytimes.com/2009/11/30/business/global/30dubai.html?_r=1&hp

 http://www.bloomberg.com/apps/news?pid=20601087&sid=aYwTewBzcmMY

For our complete analysis on Dubai, obtain a FREE COPY of this weeks’ ETF-Letter on our website: www.etfdiscipline.com.

 November 28 Post:

Last week’s action and what to do about it:

With perfect timing when no one was trading, we got an innocuous news item that Dubai World could not make a loan payment. This event became a classic black swan, ripping through the Asian and European markets to greet Friday’s short session opening with a 200 point Dow gap.

Dubai is likely to dominate the markets until its resolution. There are worries that other sovereign debt might default, affecting EU banks. Greece, in particular, is having problems.

However, Dubai itself is small potatoes, and Abu Dhabi has the capital to fix the problem. If the Emirates keep the problem to themselves the issue will blow over. I’m guessing that Dubai will be resolved as a discrete news event on Monday or Tuesday, and the market will resume its normal gyrations.

The news last week was more negative due to projected lower 4^th quarter performance. Competing with the resulting negative sentiment is a possible good holiday season opening; however, any forecast available now is likely to be unreliable. We have no guess until we see spending reports.

Once shopping reports have come out, the market will drift through will drift in late December and focus attention toward earnings in January.

Most Asian ETF’s are looking weak. Healthcare (XLV) is the strongest ETF we follow.

There is no way to tell what might happen on Monday. Protect your portfolio and wait for news from Dubai and holiday spending.

Regards,

Paul Accampo

While most people were enjoying turkey, the supersized city called Dubai World asked for an extension on several billion of debt. The stated debt is $59 billion, total exposure could be as high as $80 billion. This news immediately ripped through European banks and sent the asian markets and overnight futures down the equivalent of 260 Dow points. With the recovery of 140 of that number today, the markets obviously discounted some of the negative news.  The VIX popped from 20 to almost 26, and back to 24, but rose again as traders bought protective puts toward the end of the session.

The issue now is whether the Dubai news is “discrete” or “continuous.” If this disclosure was expected, and banks have sufficient reserves, it could blow away; if it reveals more bank risk and regulatory problems, it could ripple around the world in another wave.

Separately, it looks like Black Friday may be good for the market; Monday’s tension will be between retail results if good and Dubai. If they both turn out badly, watch out.

 We are working on this week’s ETF-Letter and will go into detail there.

For a free copy, go to www.etfdiscipline.com

Today we had mixed news: good jobs and bad durables. The market was mixed, moving up .29% or 31 points on the Dow. There were some strong performances in gold, Australia, Commodities in general, energy, and Asia. Just when we were begining to write off Asia, it rebounded. 

Gold is in an unsustainable climb. Ready for a correction.

We’ll call sentiment neutral.

We bought XLV, and will probably add more. Healthcare is shooting up.

Happy Thanksgiving!

Regards, Paul

Today we got more news that was good, but less so than in previous months. Consumer confidence sagged to 49.5 vs. 54.5 in August. This is about what we’ve been expecting, given a number of forecasts that indicated a slower 4th quarter economy. It looks like Cash for Klunkers moved through the numbers like a mouse through a snake.

The market reacted by selling off as much as 70 Dow points, and clawing back to -17. The strongest ETF’s were IHI, OIH, EOD, XLV, IHF, EWZ, SMH, TLT, PJP, VOX, above 0.5%.

What’s notable in this list is the strong health care sector, as represented by IHI, XLV, IHF, and PJP. We will buy XLV tomorrow if it continues up.  

Weak areas are oil, Australia, real estate, nuclear energy, Japan, and Asia-pacific. We may reduce our exposure to foreign ETF’s by dumping Australia (EWA) or Asia-Pacific (EPP), however the total foreign fund group is constantly shifting leadership among members of the group.

Tomorrow is another heavy news day with Durables, Personal Income, and Claims before the open, Consumer sentiment at 9:55 EST, and New home sales at 10:00 EST. If the durables are ok and jobs improve, the housing might give the market a nice kick upward at 10:00AM.

Have a great trading day,

Paul Accampo

Before the opening today, the president of the Chicago Fed said that U.S. interest rates may stay near zero until “late 2010, perhaps later.” This revelation tanked the dollar, raised Dow futures up 100 points and on the open sent stocks and commodities, particularly gold, sharply higher.  The Dow moved as high as 175, after good housing news. New home sales were up 10% vs. September.

The Fed comment is a classic example of “discrete” news. It moved the market, but has no lasting value. From its peak, the Dow fell .5% as of 1:05PM EST. We suspect the market will continue moving sideways and lower as it waits for some heavier news items tomorrow. 

Unless the tone becomes positive, we expect downward drift and volatility spikes. The current head-and-shoulders formations are likely to fall somewhat before a new rally begins. Pre-Thanksgiving volume may be light. The most stimulating news will arrive on Cyber Monday, November 30, when internet holiday sales and Black Friday numbers are reported.

GDP, store sales, and Case-Schiller home prices,report before the open tomorrow. Consmer confidence arrives at 10:00 AM EST. 

Go to www.etf-discipline.com for information on our newsletter and an explanation of our methodology.

Regards,

Paul Accampo

We have been expecting a roll-over because the market had pulled away from resistance, the news was soft, and the pattern setting up is a head-and-shoulders. Today’s news was positive, but not very. The market reacted negatively immediately and the Dow fell 168 before recovering. With commentary on a “double dip” in housing and banks coming under more pressure, we don’t see a reason for the market to turn up. Semi’s, oil services, and brokers, all fliers recently, led the way down.

 Thursday was a broad sell-off that emphasized small caps and was not reflected in the Dow, which lost .9%. The SPY lost 1.3%, COMPQ 1.7%, and IWM lost 2.49%.  In the sectors, oil services and semiconductors lost almost 3.5%.

IWM was one of the weakest funds. Since it contains 2000 stocks, it is signalling a broad market weakness. The technical pattern is continuing to fill out a head-and-shoulders, and is probably going to bounce somewhere above the loose stop position, which has strong resistance. We are concerned about volatility and the modest recovery later in the day. There is no scheduled news on Friday, so we expect drift.

For our weekly Letter, go to www.etfdiscipline.com

Regards,

Paul Accampo

(To see how we track ETF’s go to www.etfdiscipline.com.)

After topping at 2205 yesterday, today’s COMPQ dropped back to 2185 on weak economic news, and then ground its way back to close .27% higher at 2203, corresponding to a 30-point gain on the Dow. We liked this action. The market shrugged off an initial mild reaction to the news (-25 Dow points) to recover. Half the sectors were in the green. Banks, the Internet, Gold, and insurers were the strongest. Among ETF’s XME, KOL, MOO, EWZ, and XLB were up over 1%.

We regard the action as a mild positive shift in sentiment, as the market works through historical resistance from the 2008 crash. Eventually, there will be no stock for sale at these prices and we’ll get a jnice move. The news may not cooperate near-term, however, as some analysts are forecasting a second dip in the economy.

In any case, we are fully invested. We even bought GLD. We don’t know where it’s going, but when it turns around, our put order will trigger and if it keeps going down, we’ll sell GLD and hold the put.

We have a new market concern: China floating the yuan. This probably won’t happen for a few months, and they probably will not go to a full float instantly. But when it happens, it will unhinge the falling dollar from rising stocks, and cause foreign ETF’s to take a hit. The announcement will probably come as a surprise.

Regards,

 Paul

The Nasdaq (COMP or COMPQ) broke 2191, our strong resistance level, but is stalled at 2195. Check a two-year weekly chart to see why this is a significant level. The Nasdaq has bounced off this level at least twice. Today’s news is generally good, but is there enough positive sentiment to get to the next area of resistance at 2300? We guess not for a while, at least until Black Friday. We are fully invested with tight stops.

The market got a roaring head start from political events in Asia. The  trigger was  the 21- member Asia-Pacific Economic Cooperation forum agreement. APEC, which represents 54 percent of the global economy, agreed to maintain stimulus measures. After opening on a gap, the market shot up and then drifted higher until it took a hit from some quite negative Bernanke comments. It recovered slightly to end up 1.38% on the Nasdaq and 136.49 (1.33%) on the Dow.

Reviewing the news, we didn’t see anything that would justify a continued rise. APEC was a discrete feel-good announcement that shouldn’t have any lasting effect. Retail sales were up slightlybut uneven across various categories, and the Empire State index fell back more than 11 points to 23.51 from 34.57 in October. Growth is still strong, but less so than October.

The COMPQ moved past our 2191 resistance level to 2197. This is only a breakout if we get follow-through tomorrow. There is heavy potential resistance here, so we are skeptical. The news tomorrow has more recent retail sales, the PPI (inflation) and the market-moving Industrial Production report. They will have to be very positive to push the market higher.

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The Nasdaq 3-month daily chart rose close to strong resistance and promptly gave ground, ending near the top if its 167-point channel between 2024 and 2191; volume was off, indicating limited enthusiasm for the rally. The chart appears to be forming the right shoulder of a head-and-shoulders pattern that could take the index back to 2024. With strong resistance above and below, we expect continued cycling in this range. 

Last week’s news stream was moderately positive, but the market behaved strangely. It sold off hard on Thursday on large build in crude inventory, and recovered on Friday, ignoring a negative Michigan sentiment survey. The sell-off could be an early warning of future instability from the low dollar.

The market will not go above the Nasdaq (COMPQ) 2191 without a big push from an important news item, and we don’t think next week’s announcements will provide it. The characteristic pattern is building the right shoulder of a head-and-shoulders, suggesting that we are going down from here. Small caps are leading the weakness, as is evident from the IWM chart. The next major event is Black Friday the day after Thanksgiving, and Cyber Monday, when first Christmas season numbers and internet sales come out.

For further analysis on how we reached these conclusions, go to www.etfdiscipline.com and request a free copy of this week’s ETF-Letter.