July 2010 Newsletter

The Market:

The market in July was considerably better than in June, starting the month with the S&P at 1027 on July first and closing at 1101 on the thirtieth for a 7% gain. In some respects this market has been unusual because the positive moves are being made on low volume as a result of the big players staying on the side lines. July marks the 14th consecutive month of money outflow from stocks to interest bearing instruments, which a long stretch without change.

PWA

The PWA 500 Timer chart gave a buy signal on July second with the S&P at 1022, then the price rose without reaching a sell band and in the last few days has reentered a buy band.

The PWA Online Analyzer chart for the S&P delivered a buying opportunity between June 29 and July 7 with the price between 1022 and 1041. In this instance the MACD did not confirm a buy until July 8 at 1070. There was a short one day selling opportunity on July 26 at 1115 but without a confirming MACD signal, which did come into play on August 3 with the price at 1120.

When the price line drops or rises quickly sometimes the MACD graph doesn't have time to catch up and is therefore late in giving a signal as happened here. It's a judgment call, as are all buying and selling decisions, but in this instance a person might have made a buy on the basis of the price having fallen into the dark green band a little further than when it was in the same band a month earlier.

Stars and Dogs of July:

Since July was an up month for the market we had more almost-but-not-quite stars and fewer canines among the stocks and funds we follow.

The Stars in order of "star-ness" were:

• Mosaic Company (MOS) with a 22.4% gain.
• Freept Copper & Gold (FCX) growing at 22.2% for the month.
• And Cameco Corp (CCJ) with a 19.5% increase.

FCX and CCJ are both metals companies and MOS deals in agricultural chemicals.

The Dogs were:

• Rydex Inverse 2x S&P (RSW), down 14.2%.
• Short Small Cap ProSh (SBB), with a 7.3% loss.
• And Petrohawk Energy (HK) coming in a minus 6.7%.

The first two are "Inverse" funds so we would expect them to be down when the market rises.

Recession Watch:

The recession continues unabated, and there are more immediate negative signs than positive ones.

• Retail sales are low and slow with some recent improved activity in the automobile industry; which, historically has led America out of recession. The problem is that many Americans simply do not have enough free money to do much shopping and are more inclined to hold on to what they have then they have been in recent years.
  
• A major reason Americans don't have money to spend is that the job market is dismal, and per the majority of 53 economists polled by the Wall Street Journal the expectation is that the unemployment rate will stay above 9% for the next year.
  
• Jobs in the private sector are not growing and people with temporary government census-taking part time jobs have finished their work and many are now unemployed. The graph below shows the level of private sector payrolls continuing low and flat.

 

 

Because business involves moving raw materials and finished product, trucking tonnage tends to be a leading indicator for the beginning and the end of recessions.  As we can see, the trend has been up for the last year, but has turned down again in the last three months.

 

In the next graph we see that new housing permits and starts have declined in the last three months as well. In addition, foreclosures are still running high on existing homes.

Wells Fargo uses an index to measure the near term future expectations of home builders and the number released just today is 13 on a scale where any number under 50 is considered to be bad. So we can’t expect the housing industry to lead us out of recession either.

In my view, and I'm certainly not alone, the economy will not start to turn in any significant way until the private sector can begin to move and create jobs. I have a hard time understanding how a "jobless recovery", touted by some in the Administration, can possibly happen or even be anything more than a fantasy.

PWA Notes:

We have one new addition to our list of companies and funds, and that is Direxion Daily FB 3x (FAZ), a "Bear Market" category ETF and the "3x" tells you it will be volatile. We have ordered Volatility S&P 500 (^VIX) which is an indicator of fear among investors who use puts and calls to hedge their stock investments. It measures expected volatility on a scale where 20 or below indicates tranquility in the minds of investors and anything above 30 indicates rising fear. We expect to have the chart up in about a week, and its purpose from our perspective is to give PWA subscribers another tool to check in order to confirm market direction. There's an old, and valid, saying that says "don't fight the trend." One way PWA subscribers can check the longer term trend when considering a move is to set the centered moving average to longer time spans, check the trend, and then reset to your original MA time span. The longest possible with PWA is 252 days (one year). Currently the 252 day MA trend has been flat since April. In the last ten years changes in direction for this setting are as follows:

• Flat on the high side April 2000.
• Turned down January of 2003.
• Turned up in July of 2004.
• Flattened on the high side in June of 2007.
• Turned down December of 2007 through June of 2009
• Turned up from June 2009 until April when it began to flatten again on the high side.

 

Opinion:

The specter of a double dip recession remains hovering on the horizon and the rapidity with which the Administration and Congress are binding the hands of business—especially small business and banks—isn't helping matters in the least. And there really is no way America can spend its way out of the recession. So, I would expect the best case to be a slow recovery involving fits and starts, and a lot of volatility in the stock market. We won't see the economy recover until people can find jobs, and we won't see a sustained bull market until heavy hitter money managers begin filtering money back into the market and volume increases.

Meanwhile, be sure to use stop-loss levels when ever you buy into the market.

 

Final Word:

Change is the watch-word of the universe. Change is the only constant, and "this too shall pass."

Wishing you well,

Arley Loeffler, CEO
Investment Timing Software, LLC
arley@itspage.com