Michael Kahn joined our investment team earlier this year, and has already made significant contributions to our portfolio management and strategy efforts. Michael has written the "Getting Technical" column for Barron's Online for the past seven years, and we consider him one of the premier chartists in the United States. Michael also writes a daily e-newsletter, Quick Takes Pro, which I have subscribed to for several years.
Michael's writing over the past couple of months echoes a common theme, and that will be obvious as you read the series of highlights I have selected from his Barron's columns here. Enjoy this first installment of "Kahnversations," and remember that we at Emerald continue to focus on where the bull markets are, even if they are not in the usual or obvious places. Michael's work is one of many important inputs to that portfolio management process.
From "Getting Technical", WEDNESDAY, MAY 29, 2008
Without fancy indicators, we know from common sense that rising energy costs are going to hurt the economy at some point. We are also schooled in the idea that falling bonds and rising interest rates are also bad, and these economic impacts are reflected in charts of the stock market.
Given the background conditions, it makes sense that now is not the time to expect stocks to head back to new highs.
This week did indeed see a major change in conditions. The 30-year Treasury yield has been moving higher all week and broke through a rather important resistance level Thursday while bond prices fell through support. With this week's gains they have finally emerged from what most chart watchers must agree to be a clean bottoming pattern or base.
As for crude oil, there is no need to look at a chart as anyone with a newspaper or iPhone knows that energy prices have been hitting record highs in recent weeks. Combined with the new rising trend in interest rates, this presents a powerful argument against the stock market doing anything major to the upside.
The S&P 500 was in a bull market through 2006, entered a transition phase in 2007 and then broke down in 2008. And now with record oil and a new breakout in interest rates, stock investors should be extra careful now, even with a nice gain over the past few days.
From "Getting Technical", WEDNESDAY, JUNE 4, 2008
So now what? Does the market go back down to its January and March lows? While my inner bear thinks so, there is a nagging contrary indicator to consider. Investors are suddenly very bearish as a group.
According to an American Association of Individual Investors survey released last week, the percentage of investors considering themselves bears has risen to 45%, an usually high number. When sentiment readings such as this move to extreme levels, the market often reacts by moving in the opposite direction. In other words, bearishness can be a buy signal for contrarians.
But sentiment analysis is a tough game and any indicator can signal an extreme condition long before the market actually makes a move. Take this latest indicator of bearish sentiment as something to temper bearish views rather than a precursor of bullishness.
From "Getting Technical", WEDNESDAY, JUNE 11, 2008
The question for investors is how far down the market can move, now that it is finally moving in unison once again (that is, many different types of stocks are moving down together). It is difficult to forecast too far out for several reasons, not the least of which is strong support at the January and March lows -- 645-650 for the Russell 2000 (Small Cap Index) and 1270-1275 for the S&P 500. We don't know if these levels will hold or not so we'll have to wait to see how the market reacts, if and when it reaches them.
For now, all we know is that the short-term trend is down, the intermediate-term trend is flat and the long-term rising trend -- aka the bull market -- is no longer intact, if not heading lower. The latter was broken to the downside in January and tested last month.
However, even if the January and March lows do provide a decent bottom, the market is not out of the woods. Rather, it can look forward to weeks if not months of choppy sideways action, thanks to the happenings in other markets. Inflationary forces have started to push long-term interest rates up, and even though rates are still relatively low the trend has changed for the worse. Stocks do not like it when interest rates rise.
Technical analysis can be compared to a court of law where there is not one definitive proof that the trend has changed but a preponderance of evidence to say so. No bell has rung, but there is also no denying what is happening before our eyes. And until the evidence starts to pile up on the other side of the battle, we will act as if this is a bear market.
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Emerald Asset Advisors is a registered investment advisor. Emerald's ADV Part 2 and Privacy Policy are available upon request. Comments contained herein are not a complete analysis and are subject to change based on market changes and conditions. No Chart or graph may be used to determine which securities to buy or sell, or when to buy or sell them. These comments should not be considered predictive of future performance of either the market or any specific security.
