Archive for March, 2015

Street Signs

Saturday, March 21st, 2015

Street Signs

Is the market poised for a correction?

It’s been March Madness for Mr. Market–one week the trend is down, the next week it’s up. So, where’s it heading now?

Judging by the bullish movement in the major averages, it appears as if we’re entering a new leg up. The fact that the small-cap Russell 2000 and the tech laden Nasdaq popped to new highs on Friday reflects the fact that it’s been precisely those stocks which have advanced the most. The problem is that this advance hasn’t been mirrored in the larger-cap indices. Sure, the S&P and the Dow are close to retesting their recent highs and the market-leading Dow Transports is trying its best to rise above its quadruple top at 920 (9200 on some charts). If this doesn’t happen very soon, we could be in for a sharp sell-off.

Why? Today, a couple of technical signs indicate that a correction may be in the cards. The first involves volatility. The Volatility Index (VIX) has dropped precipitously over the last four trading sessions and is now nearing contrarian levels. It closed Friday at the 13 mark. Should it fall to 12 (or beneath it especially), that would be a strong sign that there’s too much complacency and that a market reversal is in the cards.

The next sign is the fact that soft (agricultural) and hard (oil and metal) commodities reversed their extended downtrends and abruptly moved up. One big standout in the softs was the Wheat etf (WEAT). The stock popped out of a one month base rising above $11 resistance. It ended the day up 3% on heavier than normal volume.

In metals, the Copper etf (JJC) jumped nearly 4% out of a two month base. This is a big deal considering that copper is associated with being the metal of choice for countries expanding their infrastructures, most notably China. And if copper is rising, could Chinese stocks also be poised for gains?

Looking globally, most country and foreign currency exchange-traded funds rallied on Friday in direct contrast to the fall in the greenback. The Long US dollar fund (UUP) has been in strong rally mode since its September breakout and was overdue for consolidation.

Going global

However, many Wall Street analysts believe that the dollar will be strong for the next several years. What this means is that foreign companies will become more attractive to investors at the expense of large-cap US stocks (hence the reason why the S&P and the Dow Industrials are lagging). Many feel that China, Japan, and Europe in particular will be the biggest beneficiaries of a strong dollar.

One way to play the global market is through the International Small-cap etf (GWX, $29.11). This fund covers a broad spectrum of industry groups and is a "market capitalization weighted index designed to define and measure the investable universe of publicly traded small-cap companies domiciled in developed countries outside the United States." The fund has been trending up since it’s December 19th ex-dividend date (of $3.56) and broke resistance at $29 on Friday. One way to buy the stock would be to sell a cash-secured put at $29. The drawback is that open interest is virtually nil but it could be feasible using a limit order.

If you’re more interested in building your own basket of international stocks, take a look under the hood of the following which all broke out of bases on Friday:
1. Indesit (IDEXY, $16.39): Note that Whirlpool owns the majority of voting stock in this Italian appliance maker.
2. CSL (CSLLY, $37.39): This Australian bio-pharma specializes in vaccines and plasma products.
3. Marks & Spencer (MAKSY, $15.97): British apparel retailer affectionately known as Marks & Sparks popped out of a one year base on 28x normal volume on rumors that a Middle Eastern group will be making an offer for the company 30% above its current share price (around $19.50).
4. Julius Baer (JBAXY, $10.20): Shares of this Swiss investment bank broke out of a one year base on no news. Credit Suisse (CS, $26.47) also broke through resistance on twice normal volume (but it has a ways to go before testing its previous high at $33).
5. Canon (CAJ, $34.84): Technically, the stock of this Japanese camera maker broke out on Wednesday but it jumped again on Friday. Yes, the digital camera space is essentially dead but Canon is refocusing (no pun intended) on the surveillance camera market.