BigTrends

This morning I was reading through my roll of financial websites and blogs when I came across two great pieces about seasonality trends.  As many of you know, I am a strong believer that sentiment changes throughout the year can have a profound effect on the markets.  These often play out in cycles that produce different trends for different months or seasons of the year. 

Terrible timing for bad news hitting the market today with the announcement of fraud charges being filed against Goldman Sachs.  The market was just starting to appear safe to many investors with a weekly close above 1200 on the SPX clearly in sight.  People were being told that investing in stocks was acceptable again, and they were beginning to believe those words and then BAM...

Then the SEC drops the bombshell this morning, and rightfully so, that Goldman Sachs deceived investors when creating and selling CDOs. 

Once again, the contrarian investor could have been tipped off by the most common sell signal: The major cover story for a business magazine.  In this case, BusinessWeek in their April 12th issue printed a cover story about how Goldman Executives claim that they didn't sell America short.  People had questioned the validity of Goldman's profits while the other banks were hemorrhaging money, but few could put a finger on any true wrong doing.

The news of this civil lawsuit will linger over the weekend, and most expect that the reaction to this news Monday morning from markets around the world will not look good.  Continue to watch the VIX 15 minute chart as your clue to if or when the selling stops.  This VIX rally is similar to what we saw in late January, where swift selling pressure took the markets down for a few days before the bull trend kicked back into gear.  The follow through on Monday will be the key to determining where this market is headed over the coming weeks.

Finally, from an options perspective, the Goldman Sachs (GS) trade today is a very interesting one, because of the fact that this news hit on expiration Friday.  Many people were short Goldman puts, in particular the the April 160s and 165s.  It's not clear whether they were naked short these options or if they had some protection, but regardless, they sold them with the expectation that they would expire worthless today.  The news obviously turned this trade upside-down, so don't be surprised if GS gets pinned at the close today around an options strike of 155 or 160.

 

First of all, Google spent years perfecting Android, their mobile operating system (OS) for smart phones.  In a very smart product development move, Google tested many versions of the Android OS on other phones such as the much hyped DROID by Motorola in an attempt to perfect it before they rolled out their own phone.

And it appears that strategy has worked very well.  The graphic below shows the increasing popularity of the Android OS compared to its competition.  As you can see, the survey of future smart phone buyers has shown a meteoric rise in the popularity of the Android OS, scoring even higher than RIMM's Blackberry OS.



It will be very interesting to see where this surge in popularity takes the Nexus One over the coming months.  Many people question if the luster of Google's newest creation will tarnish with time.  Apple's iPhone and RIM's Blackberry are available on multiple networks, while the Nexus One will only launch with T-Mobile initially.

I expect the other carriers to pick up the Google phone when the iPhone makes the jump to Verizon or T-Mobile in the coming months, giving it the opportunity to grow market share.  In the meantime, check with your carrier to see when your current contract expires, because if you are in the market for a new smart phone, the Nexus One appears to be the Next Big Thing.

Now that the markets managed to handle a weak December jobs number last Friday, the focus now turns to earnings season.



As is the custom, ALCOA, Inc. will be the first DOW component to report Q4 earnings after the close on Monday.  This sets into motion the stream of earnings that will last the next 4-6 week.  Technology stocks and financials are likely to be the keys to this earnings cycle yet again, because when those industries are healthy and growing, they tend to bring a lot of other sectors along for the ride.

Year over year earnings are expected to increase, but many will argue that the increased earnings are not from a growing economy, but rather the poor numbers from December 2008.  The fact is that earnings expectations are still relatively modest, allowing companies to meet or exceed those expectations.  We have seen earnings come in better than expected the last three earnings cycles, and there has been virtually nothing to suggest that this trend will be broken starting tomorrow.

Where you need to be focused is not necessarily the actual earnings numbers from last quarter, because after a day or so, that is old news.  Stocks are always priced looking forward, so earnings guidance and forecasts will be key for companies.  What do major executives at many of the Fortune 500 companies see for their businesses going forward?  Do they anticipate increased growth or do they see potentially hiring more employees in 2010?



With tomorrow starting expiration week for January options, another layer of complexity is added to the pie.  Now that we are in the New Year, the rat-race for returns has kicked back into gear and money-managers will be chasing returns wherever they can find them.  A positive few weeks for earnings could mean another 3%-5% run in stocks by Valentines Day.

What does make us money, especially being technical analysts, is being able to filter out that noise and focus on the trends when they exist. To do this, let's look at the performance of his 4 largest sponsors Accenture (ACN), Nike (NKE), AT&T (T), Gillette (PG), Gatorade (PEP) against the S&P 500 Index (SPX).

The chart below shows the return for each of those individual stocks on a percentage basis since November 27th.  There are only two stocks that have manged gains during that time, ACN and NKE.  At first glance, ACN is the only company to drop their sponsor relationship with Tiger, so this news has been rather bullish for their stock.  But ACN didn't announce that they were dropping Tiger until December 12th.  During trading this week, ACN has actually fallen -1.75% while the SPX is lower by -0.93%.



The fact of the matter is that although the Tiger Woods story is good for the tabloids and newspapers, it doesn't have much of a direct effect on the stocks of those companies.  These stocks are all behaving independent of the overblown media saga that Tiger's life has become.  This is all the more reason to rely on your proven technical indicators and trade based upon logic rather than emotion.

 

Trading volume and activity is relatively light today, as was the case yesterday.  Many bulls are concerned that the S&P 500 is not making new closing highs now that we are in December.  Adding to those concerns is the relative weakness of financials compared to the broader market.  Financials typically out-perform in bull markets, but they are only up 3.35% since September 4th compared to 10.6% for the S&P 500.

Although there is some truth to this argument, the focus right now should not be on relative strength of financials, tech stocks, or anything else for that matter.  The jobs number and volatility is where you should focus your watchful eyes over the next 24 hours.

Since the last Non-Farm Payrolls and Unemployment numbers were released on November 6th, all three major indices are up over 4% (Dow 4.41%, S&P 4.04% & Nasdaq 4.15%).  That doesn't seem to make too much sense considering the unemployment rate on November 6th hit 10.2%, the highest level in over 26 years!

So even if the unemployment rate rises tomorrow, I think that the market is set for another rally from a technical perspective.  The chart below shows the S&P 500 Index at the top, with the CBOE Volatility Index (VIX) at the bottom with 20-Bar Bollinger Bands.  As you can see, the outer bands on the VIX currently sit at 25 and 20.  This is no coincidence, because those are two clearly defined support and resistance levels for the VIX on a daily chart.



Secondly, look how tight the bands have become around the VIX in the last week.  Even in the face of last Friday's panic about credit problems in Dubai, we still have seen the bands continue to tighten.  Even if we get a terrible jobs number and the market sells off hard tomorrow, the upper band is so close to where the VIX is now, we are likely to see a break of the upper band.  And the last four times we have seen a close outside the upper Bollinger Band, the market has put in a short term bottom.

At the end of the day, tomorrow's jobs number is the catalyst to get this market into a trending phase once again, and I believe that the trend will be bullish.  Buy any dips in the next few days, because that will be your best opportunity for profit.

Scott Downing
Director of Research
BigTrends.com

Today at the close, the S&P 500 (SPX) is showing a reading of 100 on the BigTrends Percent R indicator on three timframes:  Weekly, Daily and Hourly.  For this to happen, the market needed to have closed on the highest price of the last 30 bars.

S&P 500 (SPX) Weekly, Daily & Hourly Chart


For this to be happening all at the same time, it is rather rare.  So rare in fact that we have not seen a reading of 100 on Percent R on the close of an SPX daily bar since May 18, 2007!

It is worth noting that since this happened on a Thursday, the reading on the weekly bar isn't on the close because the trading week is not over.  None the less, this is a unique happening, one day after we saw 09-09-09 on our calendars. This is why the markets will always keep traders on the edge of their seat!

Since we reached an intra-day high on the SPY of 96.11 on June 11th, the market appears to have been in a smooth downtrend from there.  Yesterday's rally is starting to scare some of the bears away, but let's take emotion out of the picture for a second and focus on what the charts are saying.