Oil Prices is the Key to Stock Market Recovery (Part 2)

In short, I was wrong to some extent in my last post to some extent that the housing market is the key to your growth mutual funds rising from the ashes. It is only one component of the recovery. Still, the health of real estate will have a direct impact on the financial sector. On that note, real estate is very illiquid. As a result, things will take a...very...long...time (at least until 2009, if not 2010) to play out from the perspective of establishing support levels and even being bullish once again. Let's not get ahead of ourselves for now.

The more immediate imaginary key to the recovery in the stock market is the price of oil. As I had maintained in several of my entries, oil prices have been correcting. Unfortunately, oil only has about an additional -12% to the downside before it either finds support or trades lower. That means that the rally we are about to see might be short-lived.

I really don't like short-term trading, despite analyzing technical charts for short-term profits. My style is still buy and hold, and hold forever, but in today's market, the weak global economic health and weak stocks would mean that the sophisticated investor ought to participate in shorter-term trades to enhance returns.

Is a Housing Recovery the Key to Stock Market Recovery?

This week, sales figures were released illustrating that the the U.S. housing market was continuing its slump: June 2008 home sales declined 2.6%, and median prices fell 6.1%. In addition, US unemployment rose to 3.1M. These two measures are the only numbers I am looking at. It justifies to me that any rally in the stock market will be short-lived, until each of the following occurs:

1) There is evidence that home sales and home prices bottom 

2) That the government rescue plan for Fannie Mae and Freddie Mac creates a sentiment that effectively loosens the loan/credit market

These two items are acting as a positive feedback loop to each other, and until there is a catalyst to break this downward trend, it is best not to build a long position in stocks.

Incidentally, there was an article in Business Week suggesting that every $1 loss in the credit market was worth $30 to the economy. That is why investors really need to pay close attention to the health of both banks and housing.

In short, the stock market always trades well ahead of the curve. Read up on both economic and fundamental figures. Monitor positive action in economic policy taken by the government. Monitor the VIX. This index alone will help traders identify the moment of over-selling and panic. 

More articles on the housing market, below:

[1] http://seekingalpha.com/article/86973-the-worst-u-s-housing-market-in-a-generation-could-mean-1-trillion-in-writedowns

[2] http://seekingalpha.com/article/86870-why-the-housing-bill-won-t-help-the-housing-market

Calling it a Day with My Tech Favorites

Two of my favorite high-beta companies I have been tracking for some time are Sandisk and VMWare. Both belong to different sub-sectors of tech (Sandisk makes flash memory for cameras and peripherals, VMWare makes software), but both had the luxury of suffering a near-collapse in stock price.

The charts have not really been helpful in predicting today's massive sell-off. With Sandisk, the only red-flag was that every rally was met with a sell-off:



The same can be said for VMWare. As I stated in a previous entry, VMWare is going to face significant competition from Microsoft. Microsoft's latest operating system (which is slated for release November 2008) will include comparable virtualization software at a much lower price.

What's next for these guys? Well, I might guess a support price of $22-25 for VMW. SNDK has already violated its lower support channel. So in short, the bottom for both stocks is unknown.

Are Health Care Stocks Back in Vogue?

There have been quiet whispers that pharmaceutical stocks are on the rise, after prolonged negative pressure over the past several quarters. This is a result of patent expires, lack of new drug development in the pipeline, increased R&D costs, and pressure from politicians to reduce drug costs. Generics have also pushed down margins significantly for many pharmaceutical stocks.

So, is it time to buy?

Let's look at the Health Care Select Sector SPDR:


Since March, the sector has traded down while diverging from the rising MACD. For over two years, strength has been negative relative to the S&P500. The above ETF has broken both the latter trend, and is forming a 'Buy' signal. However, the ETF must trade above $33 - $33.84 before it can be seriously considered a longer-term hold.

US Bank Stocks: From Bust to Boom to ...
The financial sector virtually collapsed, then recovered, this week. Is the recovery for real? From a trading standpoint, most banks have traded back to their previously broken support line. With Citigroup, for example, the stock is in the $19-20 range. If the stock price holds in the next few days, then that will be an intermediate support price. If not, it will act as a level of resistance.

Tech Strength?
Not for RIM. Rim's sell-off was very apparent from the charts. Note MACD divergence to stock price:

A likely target prices for RIMM is $89.71. If that is broken, then the next level of support is $65.92.

Two forward-indicating stocks for the health of the economy I like to look at are FedEx and UPS. Why? Internet sales are done through these companies (profit). The company is affected directly by the cost of oil/energy. From mid-2006 to present, the MACD was already suggesting weakness for FedEx. The stock tried, but failed, three times to break the $118-120.70. The stock finally traded down to $75. It will be a stock to monitor in the next while to determine when the US economy is improving.

How to Make Money from a Falling Market

North American markets are currently in free-fall. This is being lead by the financial sector. As such, bear funds that trade inversely to the direction of the stock markets are doing well. HXD, a bear ETF I recommended on July 2, is currently $19.50, fairly close to my $19.90 target. If reached, that would mark a 9.5% return in just under two weeks.

The next logical question is to assess whether the TSX has further to fall. If it does, I think that HXD.TO will reach $23.50.

There continues to be tremendous pressures on financial stocks due to the Fannie and Freddie problems in the U.S.  Declining bank shares will add to negative pressure on the TSX index. Conversely, energy prices refuse to fall significantly, so the TSX might not fall as rapidly as the DJIA or S&P500. Why are energy prices not falling as I predicted from a technical analysis point of view?

Growth in Europe, China, and India all remain strong, and US consumers have not really cut back on personal spending. It remains to be seen whether OIH will reach my target. When trading patterns change, I will re-visit this sector.

More Trouble with US Banks

There are no charts to assess today because none provide any divergent indicators.

My initial thesis for avoiding American banks and real estate stocks remains to be proven correct. Lehman Brothers has hit another 52wk low, and both Fannie Mae and Freddie Mac are rumored to require a government bailout. This would mean the latter two companies have a stock value of zero. Since these stocks are in free-fall, there is no technical chart that may be used to predict any support prices (or entry point). In fundamental terms, this sector has not yet found a bottom, and unless one likes to gamble, the aforementioned stocks most obviously must be avoided.

North of the border, Canadian banks are being caught in the negative downdraft. In the last while, it was often said that these banks would still hold up because their exposure to the sub-prime mess was limited. But if we think about where banks derive their business, one must wonder how Canadian banks will grow in this environment.

It is unfortunate that Canadian Equity mutual funds for the most part have a large exposure to banks and insurance companies. If it were not the continued advance in oil prices, Canadian indices would not be holding up very well.

Despite the depressing bearish news we are seeing and reading every day in the news, it is still surprising to see that American consumers continue to spend. For example, Walmart still reported strong sales figures. This would lead me to believe that there are still sectors that investors might want to go long. Electronics, consumer discretionary, and semiconductors come to mind.

Canadian Telecom: Post iPhone (July 11)
Have a read on the most recent entry on Daily Tech Talk about Rogers Communication first.

Rogers will be the only telecom with the capability to offer the iPhone, because currently, there are no other companies in Canada that is on the GSM network. Despite negative media surrounding higher data rate plans for the iPhone, I believe that fundamentally, Rogers will perform better than Telus and BCE (trading about 9% lower than the takeover price of $42.75). Yesterday, it was reported that BCE and Telus will also be charging customers $0.15 per incoming text message.

This sort of pricing policy does not make BCE and Telus attractive, as it might serve to alienate customers who already provide a high ARPU (Average Revenue Per User) for telecom companies.

My choice would be to invest in Rogers.


The above chart was generated from Yahoo! Finance

Is the Energy "Bubble" Ready to Burst?

ETFs are a tricky for assessing technical analysis, because the trading volume does not necessarily reflect that of the underlying index. Buy and sell signals should therefore be used with caution. If there is any validity in analyzing an ETF, it is that the ETF might indicate general hedging strategies for a portfolio.

Since my entry on June 25, 2008 that suggested taking a bear position on the TSX60, I came across a bear oil ETF Horizons BetaPro S&P/TSX Capped Energy Bear Plus ETF. In short, an investor will profit much better should oil prices correct.

Currently, the HED.TO is trading near the top of a downward resistance line. Should the stock surpass $14, consider taking a position to hedge against the potential impending correction in the energy sector.

Nvidia 'fessed up by reporting its revenues for 2Q/08 would not meet previous forecasts. It is taking a $200M charge and reducing its revenue to $875-950M (from $1.1B).

As recently as last week, I found out that AMD-ATi was releasing an HD4870 and HD4850 graphics card at prices ($299US, $199US respectively) that would not only compete against Nvidia's mainstream 8800GT/9600GT/8800GTS cards, but also against its high-end GTX 260 and GTX 280 cards (priced at $380Cdn and $660 Cdn, respectively). With AMD stock trading for $5 and change, it might be worthwhile to consider taking a position on this underdog.

Updated Chart for Nvidia Here.

Stock selection is only one factor in successfully profiting from the equity market. The more significant weight for a portfolio performance is sector allocation. For those who don't like to play the short-selling side of trading, I would recommend a small allocation on bear funds. In Canada, I like HXD.TO It has a beta of 2, meaning it is twice as volatile as the TSX Index. It's counterpart is HXU.TO.

Since I remain bearish on both the energy and the financial sector, I favor investors consider having no more than 5% of their portfolio on HXD.TO. It's better to profit in a falling market than to watch 100% of it exposed to the bear.

My target is for this hedge is $19.90, a 9.50% on top of today's gains.