Wednesday, January 30, 2008
Positive Technical Signs
by David Yu
I've just watched perhaps the best coached and executed NBA game of the season between the number one team in the Western Conference, the Orlando Hornets, and the Golden State Warriors. I'm enthralled to see these teams exploring every possible match-up advantages and disadvantages against each other. The Warriors prevailed 116-103 in a convincing fashion. Anyway, I couldn't help but noticed the resemblance between young Sylvester Stallone and the Warriors Italian rookie, Marco Belinelli (see photos below).
Enough of sports... In response to your emails about the MoneyGram trade, MGI shareholders might've been rattled by Fitch Ratings' downgrade of bond insurer FGIC. This might set off the domino effect that could force fund managers to sell their debt paper and banks to take more losses. And, the news of deepening subprime mess from Swiss banking giant UBS and French bank BNP Paribas today sure didn't help either. My MGI position got stopped out at $5.11 for a small loss of 5%. I'm still intrigued by this company, and I'm looking for a new entry point whenever the opportunity presents itself. It may happen as soon as tomorrow or the next day due to MGI's short ratio of just about 4 (only 4 days to cover short positions).
On the market action today... If the market could talk, he or she's probably screaming: "Leave me alone, and let me deal with my own problems." Since we only receive "written" communications from the market in its own language, we can get a good idea of how the market must feel about the Fed's rate-cut intervention today. After the volatile 2% swing within the final 100 minutes of the session, the Nasdaq 100 ETF, QQQQ, settled at just about the same place as it had ended yesterday (see Chart 1 below).
Since the Fed's monetary manipulation hadn't worked before (remember the Surgical Strike termed by the Wall Street cheerleading squad in September?), and it's not likely to work now or in the future, perhaps it's best to let this economic contraction run its full course, like we should've done way back in 2001. The more we're postponing the inevitable, the worse it gets.
Chart 1
In the short run, however, the market did reach an interim bottom on Wednesday, 1/23/2008. From the money flow analysis perspective, the uptick trade value to the downtick trade value ratio of the Wilshire 5000 Index, the broadest U.S. stock market index, confirms this bottom; it had also hit the trough on 1/23/2008 (see Chart 2 below).
Chart 2
From the market breadth analysis perspective, the Nasdaq's intraday breadth performance also confirms this bottom. The 20-day SMA (Simple Moving Average) of my Intraday Market Breadth Performance Index crossed above the 50-day SMA (blue curve on Chart 3 below) on 1/22/2008. Previous crossover of these SMA's occurred on 12/5/2007, when the 20-day SMA fell below the 50-day SMA. 3 days later, the Nasdaq topped out.
Chart 3
The Tech Sector ETF, XLK, chart (Chart 4) below concurs with the tech-heavy Nasdaq's January 22 bottom. XLK, however, is not in accord with the tech sector's money flow. The Up/Down Value Ratio formed a positive divergence, which means that the money flow disagrees with the market's downtrend.
Chart 4
By the time XLK reached the January 22 trough, Technology's money flow had already started trending higher (see Chart 5 below); it went on to make higher highs and higher lows while XLK moved sideways last week.
Chart 5
These are positive technical signs contradicting media's portrayal of all the gloom and doom scenarios.
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