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Stock Market Technical Analysis – Bulls Concede After Several Months

May 19, 2012 at 8:23 am No comments

Stock Market Technical Analysis – Tech It Easy (thru May 18, 2012)

Stock market technical analysis is all you need to know, complete hogwash or somewhere in between.  It depends on who you ask.  If you find it interesting, you’ll probably like reading this weekly feature.

This is my standard intro to stock market technical analysis – you can skip down to the table (or click “continue reading”) if you read this feature regularly:

Many people who trade in the markets believe that there are patterns that can generally lead to profitable trades.  By analyzing stock charts that show the change in price along with the volume (how many shares were traded), “technical analysts” believe they have an edge and can time their trades profitably.  There is significant controversy over this subject, however.  Others say that, unless you have some information that no one else does, basically you can never beat “the market” because everything is already baked into the current price of a stock.

Nevertheless, supporters of stock market technical analysis are everywhere, and the tools for their trade can be found throughout bookstores and the Internet.  I like to follow some websites that do some of the work automatically and provide a snapshot opinion of whether a particular stock is considered “bullish” (going to go up in price), “bearish” (going to go down in price) or “neutral” (stay about the same price).

For simplicity, I’d like to start by showing you a snapshot of what several stock market technical analysis websites suggest about the exchange traded fund (ETF) with the ticker symbol of SPY.  This fund is supposed to go up and down the same as the S&P 500 index does.  And many people consider the S&P 500 index (a measure of the price of the 500 largest companies that trade in the U.S.) to be an accurate gauge of where “the market” stands.

For each of the sources below, where I have a choice, I will use a measure that attempts to predict the future direction of SPY or S&P 500 in the next 3 months.

S&P 500 Technical Analysis Summary

Source: Barchart.com   |   BEARISH   (downgrade)

Quick ‘n Easy

Barchart.com says that SPY is positioned to fall over the next three months.  One of the three signals is bullish, but it’s not a strong signal.  Fortunately, that one bullish signal happens to be the most predictive of the three, but it also happens to be moving toward a more bearish direction.  Thus, the overall analysis is bearish.
Stock Market Technical Analysis - Barchart SPY Long Term Opinion May 18 2012

Source: BarChart.com

Easy Notes: BarChart.com says that SPY is positioned to fall over the next three months.  This is the first non-bullish assessment after 23 consecutive weeks at a “bullish” level.  Two of the three signals are in the “sell” position, and the only that is considered a strong signal (at maximum strength actually and getting more so) is one of those two sell signals.  The one “buy” signal does happen to be the most predictive of the three signals, however.  But it is only average strength and moving toward a bearish direction.

continue reading…

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Markets, Technical Analysis , , , , , , , , , , , , , , , , ,

ECRI Index – Mixed View Depends on How You Slice It

May 18, 2012 at 5:04 pm No comments

ECRI Index – Weekly Leading Index (WLI) and Year-Over-Year Change (thru Week Ending May 11, 2012)

ECRI Index (also known as the ECRI Weekly Leading Index) is published weekly.  It is designed to predict the direction of economic growth in the next 6-9 months.  On this page, I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

NOTE: I have decided to stop looking at the weekly index level for trends.  Instead, I will look at a 4-week moving average of the index level.  I am making this change because the weekly readings have too many ups and downs for which to detect meaningful trends, so this will smooth it out better.  The second component I analyze will continue to be the year-over-year change in that 4-week moving average.

Quick ‘n Easy

The ECRI Weekly Leading Index is a weekly indicator that is designed to tell us how the economy will look 2-3 quarters (6-9 months) down the road.  We will use two ways of examining the index: 1) the weekly level of the index and 2) a smoothed version of how much the index has changed over the last year.

The Economic Cycle Research Institute (ECRI) does something very similar to the Leading Economic Index from The Conference Board, but they are not at all transparent about how they do their calculations.  We can only wait to see what they publish as their index level and see where it leaves us.  But many people believe this is a good leading indicator for the economy.

Specifically, we will focus on two components of the indicator:

  • Weekly Leading Index (WLI) 4-Week Moving Average – This is average of the four most recent values of the index released each week.  I prefer to look at this “smoothed” rate because the individual weekly readings have too many ups and downs for which to discover any meaningful trends.
  • Weekly Leading Index Year-Over-Year Change in 4-Week Moving Average – Rather than using the ECRI’s complicated calculation for an annualized growth rate, which ECRI admits doesn’t do a great job of adjusting for seasonal patterns, it is easier to compare the level of the index to its level one year prior.  To smooth things out, we will do this using a four-week moving average.  So, it will be like asking, “What’s the difference between the average of the 1st four weeks of the index in 2012 versus the 1st four weeks of 2011?”
There are numerous other indicators that the ECRI uses to assess the future of the economy.  They have a paid client base for whom they reserve their most up-to-date forecasts, but the WLI is publicly available data that can provide some hints at the overall picture they are assessing.

Here is a graph of the ECRI Index (WLI) for the past year from ECRI:

ECRI Index - ECRI Weekly Leading Index Level May 11 2012

Source: BusinessCycle.com

ECRI Index Trends and Projections

Below, I will discuss whether the ECRI Index is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released. continue reading…

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Easy Trends, Economy, Indicators , , , ,

Unemployment Claims – Reassuring Return to Downtrend

May 17, 2012 at 7:19 am No comments

Initial Weekly Unemployment Claims (4-Week Moving Average) thru Week Ending May 12, 2012 – Easy Trends

In this article, I’ll take do an “Easy Trends” analysis of the initial weekly unemployment claims data.  ”Easy Trends” is a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

Quick ‘n Easy

By tracking the number of people who are filing for unemployment benefits for the first time each week, we get a quick insight into the latest status of the economy’s health.  Fewer claims equals more jobs, which equals more income, which usually equals more consumer spending (70% of the economy!) that supports company profits, which in turn can lead to more hiring.

First, a nice summary about Initial Weekly Unemployment Claims and why they matter, from Econoday: (note: “jobless claims” are the same as unemployment claims)

Jobless claims are an easy way to gauge the strength of the job market.  The fewer people filing for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy.  Nearly every job comes with an income that gives a household spending power.  Spending greases the wheels of the economy and keeps it growing, so a stronger job market generates a healthier economy.

Here’s a chart of the four-week moving average for weekly jobless claims from Calculated Risk:

Unemployment Claims - Initial Weekly Unemployment Claims Week Ending May 12 2012 Calculated Risk

Courtesy: CalculatedRiskBlog.com

Unemployment Claims Trends and Projections

Below, I will discuss whether unemployment claims data is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released. continue reading…

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Housing and Real Estate – Still Bad But Signs of Hope

May 17, 2012 at 5:00 am No comments

Housing and Real Estate – Easy Pod (May 17, 2012)

Housing and real estate were at the center of the most recent financial crisis, so it should be obvious why it is an important part of our economy …

For a “Quick ‘n Easy” read, just review the labeled white boxes, then skip to my “Easy Take” summary at the end.  You can review any charts/graphs afterward.  I want to make sure no one is intimidated by the length of my posts, even though I’m trying to making them easy …

I’m continuing with a feature called “Easy Pod” – a collection of indicators that help portray the current status of something.  In this post, that something is housing and real estate. Let’s first review a few key concepts that are important to know about housing and real estate: (you can skip to below the first horizontal line if you’ve read this Easy Pod in the past)

  • There are two basic kinds of real estate, residential and non-residential.  Residential refers to places where people live.  Non-residential includes things like businesses, office buildings or warehouses.
  • For residential real estate (this is what we’ll refer to as “housing”) there are new homes and existing homes.  The difference should be fairly obvious.  New homes are looking for their first owner, while existing homes already have an owner.
  • “Inventory” is how many of something you have available to sell.  When we talk about the current inventory of new homes, we are talking about how many new homes are available to be sold.  When inventory is high, that makes it more likely that prices will be lower.  Remember, it’s the “supply and demand” basics here.  If you have too much of something, people will pay less for it.  The way we try to measure inventory in housing is by comparing how many unsold homes there are versus how fast homes are selling.  That’s why you’ll see things like “8 months inventory.”  It means that, at the current rate of home sales, it would take 8 months to get rid of the extra inventory.
  • Sales levels and prices are definitely related to one another.  If you see home sales slowing down, it means that homes are not in as much demand, so chances are good that prices will go down.  You have to look at the combination of housing prices, sales and inventory to get a good feel for what’s going on.

There are a number of indicators that describe what’s going on in housing and real estate, and there are even some people who combine these indicators into one number (an index) to give a summary.  In this “Easy Pod” I will show you indicators and indices that I like to follow.  Check back regularly for updates.

Special note:  You’ll notice a bunch of my charts shown below come from Calculated Risk.  This is a must-see for information on the economy.  I visit this site multiple times every day.  Bill McBride does a fantastic job of analyzing the most important economic data and events, putting them in context.

Quick Summary

Indicator (Click for details – only works if full article is open) Current Rating (change)
New Home Sales Negative
Housing Starts Negative
NMHC Quarterly Survey of Apartment Market Conditions Neutral   (downgrade)
NAHB Housing Market Index (HMI) Negative
Easynomics Real Estate Price Stability Index Positive



Indicator: New Home Sales   |   NEGATIVE
Easy Intro: None yet   |   Link to Source: Click here   |   Latest Date This Info Represents: March 2012

Quick ‘n Easy

Every new home that is built and sold adds to the Gross Domestic Product (GDP), helping our economy grow.  Unfortunately, in April 2012, new homes were selling at an extremely low rate.  Fortunately, not too many new homes are being built so that the ones in inventory (still on the market) can get cleared out at a normal pace.
Housing and Real Estate - New Home Sales March 2012 - Calculated Risk

Courtesy: CalculatedRiskBlog.com

Easy Description: Statistics that tell us how many new single-family homes (basically a building for one family, not apartments or condos) were sold.  It also tells us about the selling price of those homes and the unsold inventory of new homes (waiting to be sold).

Latest Reading: If sales in March 2012 were to continue at that rate for a whole year, there would be 328,000 new homes sold.  This “annualized” rate is 7.1 percent lower than last month’s rate, and it is 7.5 percent above the rate from the same month last year.  The median sales price (half of homes sold for less than this amount, the other half sold for more) was $234,500.  That is 6.3 percent higher than the median price one year ago.  There were 144,000 new homes still for sale (inventory), so at the current pace it would take about 5.3 months to sell the remainder.

Also, take a look at my latest new residential homes inventory months of supply trend analysis to see where the trends are headed.

Implications: The pace of new home sales has largely been moving sideways for some time but is giving us some hope since rising a bit in the 4th quarter of 2011.  The “5.3 months of inventory” part is key to understanding that home builders have done a pretty good job of adjusting to market conditions.  Because so few homes are being sold, they have been dropping the number of homes they build way down, which means that supply is decreasing and price isn’t decreasing as much.  (Quick refresher on “supply and demand” – when something has a bigger supply  than there is a demand for it, sellers are forced to lower the price so that buyers will have a greater willingness to buy it.)  We are at incredibly low levels of new home construction, which is why that inventory months of supply figure is not way above historical averages anymore.  Before the housing boom, the typical months of inventory level was around 6 months.  At the 6 months level, prices tend to be stable.

So, what happens if new homes start selling again?  Builders will start making more homes, which will push up supply just enough to keep up with the new demand so that prices don’t move too much in one direction or the other.  The kind of massive price increases we saw in the housing boom were unsustainable, just as massive price decreases from this point would have to be temporary, too.  Market forces will always push things toward a “healthy” equilibrium.

But regardless of the fact that the inventory number is looking pretty decent, this number of sales (328,000 annualized rate) is just awful.  And when fewer homes are being sold, that’s less economic growth.  The sale of a new home is just like the sale of a car, television or clothes – someone made something and sold it, which adds to the GDP.  What we’d like to see from here is a continued increase in new home sales numbers while keeping that months of inventory right around the 6 month mark.  That would mean the housing market is on its way to greater positive contributions to the GDP report without having any false imbalances in the system.

Easynomics Rating Methodology: The long term average is about 672,000 new homes sold per year.  I’d like to see numbers that are within 15 percent of that average.  Therefore, I will give this indicator a rating based on the average of the last three months’ annual selling pace: Above 772,000 is “positive”; below 571,000 is “negative”; anything between is “neutral.”

continue reading…

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Modified Ivy Portfolio: Mid-Month Reversal of EFA (Part 1)

May 16, 2012 at 11:46 am No comments

At the close of Tue May 15, the price of EFA had fallen so much that my rules for the hypothetical “Modified Ivy Portfolio” dictated that I begin exiting the long position on EFA early, as it was so much lower than the threshold value that it is extremely unlikely to be a “buy” by the end of the month.

Therefore, per the rules I laid out, here is what happened: continue reading…

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Simulated Portfolio ,

Modified Ivy Portfolio: Mid-Month Reversal of EEM (Part 1)

May 16, 2012 at 11:33 am No comments

At the close of Mon May 14, the price of EEM had fallen so much that my rules for the hypothetical “Modified Ivy Portfolio” dictated that I begin exiting the long position on EEM early, as it was so much lower than the threshold value that it is extremely unlikely to be a “buy” by the end of the month.

Therefore, per the rules I laid out, here is what happened: continue reading…

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Simulated Portfolio ,
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