June 2010 Newsletter

The Market:

During the month of May the market turned down after a long up trend. In the first few days of the month the S&P 500 Index dropped from 1202 to 1110 in a matter of four days, and then rebounded to 1171 before falling again to a short term low of 1027 on May 26.  

PWA

For the 500 Timer, the price of the S&P entered a buy band on May 20 and remained so through the end of the month.

With the default settings, the Online Analyzer dipped briefly into a buy band on May 7 before bouncing up to 1171 on May 12. It returned to a buy on May 19 and stayed for the rest of the month. There was one MACD convergence signal on May 28 at 1089. Acting on that signal may turn out to be a good buy, but it's too early to tell.

One cautionary point would be that the down trend for the S&P was becoming steeper by the day. An encouraging bit of information is that the week before the number of stocks and funds we follow showed 63 in a buy band and only 5 in a sell band. These two items might have justifiably caused us to wait until the dust settles before looking to buy shares.

During the first days of June, the trend for a number of our stocks turned steeply down, and for those we would want to wait until the trend eases before buying. When the trend is steep, trend takes precedent over the MACD.

Stars and Dogs of May:

For the Stars of May, we have one expected stock and another we would not have predicted. As to Dogs, well-we have many from which to choose and that is to be expected given that most stocks fell during the month. Gravity has taken hold of a few including one of last month Stars, MGM.

Stars:

• RSW wins the Big Star this month with a gain of 28%, rising from $47.07 to $58.23.
• A lesser Star, but brighter than any other, is BBBY moving from 42.91 to 47.19 for a 9% gain.

Dogs:

• STP gets the booby prize having fallen 33% during May.
• MGM, last month's Oscar winner, fell miserably by 28%.
• MR was close behind... or above, I guess... losing only 26%

 

Recession Watch:

Nothing much has changed in terms of the recession outlook, although it looks like employment in the manufacturing sector has increased by about 120,000 new hires. Otherwise banks still are not lending to small business, more bail outs and another stimulus package are being discussed, which is interesting in light of how well the original stimulus package didn't work.

The cost of stimulus #1 = $787,000,000,000. The number of jobs created or saved is estimated at between 1.7 and 2.0 million. $787,000,000,000 divided by 2,000,000 (the high estimate) works out to be $393,500 per job created or saved. Do we want to go down that road a second time?

Opinion:

We are currently seeing a pull back in the stock market. The question arises as to whether we are in a normal, healthy market correction or part way down the second leg of a double dip recession. The answer isn't clear yet, and certainly there has been enough bad news to warrant thinking about a double dip, including oil spills and whole countries being in serious financial straits because of excessively high levels of debt.

I think this is a correction, but as they say, hope for the best (just a correction) and plan for the worst (use stop levels to guard against disaster.)

Other PWA News:

Next I want to talk about looking at trends using the PWA charts. Because the charts are drawn using approximately the same horizontal screen space, the trend will look differently depending on which chart you check. The one month chart (fig 1) is the least squished so the trend on it looks pretty gentle. The one year chart (fig. 3) is the most squished so the trend there looks pretty steep. Our default six month chart is somewhere between.

Fig. 1

Fig. 2

Fig. 3

When the trend is flat or gentle to mild, it does not make much difference which one you work with. However, when the trend begins to get steeper, I'd suggest consulting the yearly chart. When a down trend is increasing to near forty five degrees it is time to let the trend override any MACD buy signal until the dust clears and the trend eases.

On the other hand, we love forty five degree up side trends!

 

Final Word:

Currently the PWA Online Analyzer is showing many stocks as buying opportunities. For those showing steep band trends it will be well to watch for the trend to ease before committing to buy. And in a down trending market it is always wise to use stop levels.

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