March 2010 Newsletter

The Market:

Since mid December 2009 the overall market has inched up gradually within a nearly flat trend. A few days ago the S&P 500 Index made a new 52 week high on March 23 at 1174. Volume continues to be thin for the most part so there is still a lot of money on the sidelines. There is also a large amount of money that has gone into and is going into Treasury bills even though interest rates paid are miniscule. Most likely this is out of fear and uncertainty about where the market is headed and how recent governmental actions will impact stocks.

PWA

With the chart parameters for the S&P set at defaults, we found a buying opportunity between 1056 and 1070 on, and just after, the 1056 interim low date of 2/8/10. We are currently in a selling opportunity in the range of 1165 to the 1174 rally high which occurred on 3/23/10.

It is interesting to review the MACD signal readings for recent days:

	3/12	diverge	1149
	3/15	flat	1150
	3/16	diverge	1159
	3/17	flat	1156
	3/18	flat	1165
	3/19	flat	1159
	3/22	flat	1165
	3/23	flat	1174
	3/24	converg	1167

We have seen six days of selling opportunities if we had used the "flattening two or more days" signal, and if we had used the "first converging MACD step" guide. Assuming we had responded to the February buy indicators our gain for seven weeks would have been 11% if our decisions happened to be perfect (unlikely but it does happen) or about 9% if less than perfect.

Recession Watch:

Unemployment levels are down a bit recently but then no state in the country has shown a net increase in jobs. Housing starts are up a little, but there are very large inventories of unsold house with more foreclosures happening every day. Banks are still overleveraged and aren't lending much money, probably awaiting some clarity about new proposed banking regulations.

One positive sign is that there is more activity in the trucking industry, a leading indicator of recovery. Businesses are shipping more, probably to replenish inventories reduced over the last year buy "belt tightening." The chart below show that after a dismal 2009 freight is moving again with increased trucking volume, and the recovery should look brighter in about six months.

 

Another positive is that the bottom hasn't dropped out of the stock market on bad news that will have a long term negative effect on the economy, for example the passage of the health car bill and it's added weight of debt and prospect of significantly increased taxes for American business and consumers alike.

Opinion

It may be that in regard to national debt and increased taxes investors see these as coming about in the future but not currently being significant enough to bring about another leg of the recession soon. However, while the spending will happen later the tax increases will happen soon, perhaps including a "Value Added Tax" (VAT) that will in effect be a national sales tax on every single purchase made by any person or business in the country. This is one huge untapped source of money to fund the current spending spree Mr. Obama and Congress are enjoying.

Personally I would love to see a national sales tax as a replacement for our current income tax, but that's not what is likely to happen. The VAT will be on top of the current income taxes we all pay, but the Administration can present it as something other than an income tax increase. Whatever label it bears, more money will come from your pocket and mine, and before very long we will be paying out more than fifty percent of income for taxes of all kinds including state and local.

This is not a plan designed to grow the economy and create jobs.

Other PWA News:

There have been a number of new charts added recently:

• Short Small Cap ProSh (SBB)
• Rydex S&P Equal Weight (RSP)
• US Dollar (USD_INDEX)
• Rydex 2x S&P 500 (RSU)
• Rydex Inverse 2x S&P (RSW)
• Petrohawk Energy (HK)
• 30 Year Treasury Yield (^TYX)

 

Of these there are two sets of EFTs that bear an inverse relationship to each other. RSU and RSW comprise one set and RSP and SBB is the second set. When graphed together, these funds show crests and troughs occurring at the same time but inversely related. That is to say when one of the set reaches a crest the other is in the bottom of a trough. These sets then offer the possibility increasing return by simply moving from one to the other using PWA indicators.

There are several things to be aware of as you experiment with the inverse relationship sets:

• The RSU/RSW set is "2x" meaning that the fund managers buy and sell so as to try and maintain a doubling of the S&P moves on both the long and short sides.  Therefore, they are more volatile and if/when you use them it will be a good idea to use the stop-loss feature available on all our charts.
• The RSP/SBB set is "1x" and will be less volatile.
• Also, with the 2x funds, not all brokerage houses will permit their staff to do the transactions because of the volatility but I believe most discount and online brokers do not present that issue.
• Further, the inverse ETFs are relatively new and the trade volume on any given day is light. That means when it's time to sell the pool of buyers is smaller than one might hope for.

 

So these two sets of ETFs can produce some excellent gains, but as always I would encourage you to study them by doing a back study for about two years so you catch both a major market down turn and a recovery. And, as mentioned above, I would encourage you to use stops with volatile equities and also to be sure to check the charts you are working with every day.

Final Word

These are interesting times for investors. Many investors and mutual fund managers are sitting on cash and some have not participated in the rallies since March 2009. Many will see fit to enter the market later when it is clear that the market is rising and has done so for a while just as they tend to sell after the market has fallen for a while.

The objective of our service is to enable small investors to avoid, in so far as is possible, the emotional component of the above pattern so they can watch their money grow rapidly in relative safety.

 

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