Weekend Strategy Review October 27, 2013

Posted by OMS  at October 27th, 2013

The Dow rose 61 points on Friday, closing the week at 15,570.  It was up 172 points for the week.  The NASDAQ was up only 14 points on Friday, closing the week at 3,943.  But it was only up 29 points on the week.  So the NASDAQ, which had been outrunning the Dow for the past month, took a breather.

If you recall, several weeks ago, the Dean was telling us that the NASDAQ was a LOT stronger than the Dow.  He had QQQ and QLD near the top of his List, when the DIA and DDM were notably absent.  Back then I made several comments about how NASDAQ stocks were likely to outperform the more traditional Dow stocks and lead the market higher once the next rally wave began.  And this is exactly what happened. 

I also mentioned that the NASDAQ would likely benefit from Apple, AAPL, once it started to move up from its Hockey Stick after the TLB Pattern.  This is also what happened, as we saw Apple hitting its short-term targets near 530.  AAPL closed at 525.95, down 5.96 points after hitting an intraday high of 533.27.  Again, stocks go to targets, not to heaven.

All in all, it was an interesting week to be a trader.  We saw some of the larger technology companies on the NASDAQ like Amazon, AMZN, and Sandisk, SNDK, make some really nice gains.  On the other hand, some of the old stand-by stocks like IBM and CAT got clobbered.  BTW, can you see the nice HS Pattern in both AMZN and SNDK?

There was another small change in the A-D oscillator on Friday.  This makes for two small changes from the A-D oscillator in as many days, and sets up the possibility of a Big Move within the next 1-2 days.

Royal Caribbean had a nice day on Friday, moving up another 1.2 points after a gain of 2.6 points on Thursday.  It appears that RCL is reflecting the benefits of lower crude prices.  Here’s the Deal with Royal.  The stock made a low in late June of 31.37.  From there it rallied into mid August reaching a high of 39.90.  So the stock had an 8-point stick.  I started buying it just above the 38 level, and took profit for a cruise when it moved over 40.  If you add the 8 points of the stick to the low of 36 made on 8 October, it put the target near 44.  On Friday, RCL got as high as 43.57.  Close enough.  Again, we see that another stock hit its target.

That’s my point this weekend.  A LOT of the stocks that I have mentioned during the past two months are now at their targets.  We started to see stocks like Schlumberger, SLB, hit its targets this past week.  Same for stocks like GILD and BIDU.  They all hit their projected targets.

OK, so where do we go from here?  What’s our Big Picture Strategy now that a lot of the stocks we have been trading the past two months have hit their targets?  Hmmm?

Let’s think about a few things before we try to answer that question.  Firstly, I want you to think about this old adage on Wall Street.  Bulls make money; Bears make money, but Hogs get slaughtered.  So given that most of my stocks have either hit or exceeded their targets, this is the first thing that comes to mind.

The second is what I talked about in my Update Class last Thursday night.  It had to do with end of year planning.  In the Class, I talked about how the recent ‘agreement’ on the debt ceiling did NOT solve anything.  It only pushed things off until early next year.  So we know that at the minimum, another ‘cloud’ is coming.  And its not the like government is not giving us a warning.  They actually gave us a date.  It’s February 7, 2014.  We saw what happened last December when the government fought over the fiscal crisis.  It happened again in May with the sequester.  Then more recently, the fight took us to the brink with the government shutdown and bills associated with the debt ceiling.  Heck, given what we’ve seen from these three events, we’d have to be from another planet not to know what’s coming.  This information is not a secret.    Everybody knows this is coming.  Write it down: 7 February!

But this time, the events surrounding the debt ceiling debate could get even more complicated.  That’s because one of the credit agencies, like Moody’s, could actually downgrade US debt instead of just issuing a warning.  I believe Moody’s was under intense pressure from the White House not to do anything this time.  But what they do in January-February, when it becomes apparent that the President is a Lame Duck and Congress is gearing up for the 2014 elections, may be another matter.

We also saw a similar warning from China, telling Congress to quit playing games with their money!  BTW, did you notice how fast that an agreement was reached after the Chinese issued their warning?  Hmmm?

Hey, we might think that the guys in Washington are dummies.  But they know who REALLY pays their salaries.  With the government spending about $300 Billion a month, and only taking in about $200B, Washington needs about $100 B per month just to keep the lights on.   Right now that $100 Billion is being funded by the sale of Treasury Bonds.  If the Chinese start to taper or worse, if they stop buying our Bonds, the house of cards could come crashing down.  It won’t matter how much paper Janet Yellen and the Fed prints; somebody still has to buy that paper.  And if the bond buyers start to believe that there’s increased risk in holding that paper, even if they continue to buy, they will likely demand higher interest rates to compensate them for the increased risk.  This will put pressure on equity prices.

On the other hand, IF the Chinese make a significant reduction in their bond purchases, or stop buying completely, you won’t have to worry about rising interest rates.  The U.S. will immediately fall into recession, likely depression.  The equity markets will crash as money flows out of equities and into bonds, with interest rates falling to zero.

So keep your eye on TMF and TLT in the weeks ahead.  These ETFs should give us plenty of visibility into what’s gonna happen with the debt issue.  BTW, my chart for Bonds still shows a possibility of the long bond falling to 126, before rising to 150+.

On top of this there’s Obamacare, with its job killing effect on the economy.  You might want to watch the public’s reaction to the implementation of the new law during the next few months.  The problems are much deeper than the computer ‘glitch’ being talked about on the news networks.  If the people in this country start to turn against Obamacare, which appears to be happening now, it will embolden Republican lawmakers in Washington to fight even harder for changes or delays in February, when the debt ceiling debates resume.  The next time they fight, things could get ugly!

Bottom Line:  Expect more clouds into early next year.  Actually, I need to say it much stronger.  Look for severe storms into early next year.  But in the interim, I’m still looking for a small pullback to relieve the current overbought conditions, and then a rally into year’s end.  I would not be surprised to see the Dow pullback to the 15,000 level with the S&P approaching 1680-1690.

One thing to keep in mind along those lines.  Note how silent Emeritus has been lately.  The last time he highlighted a stock for the Honor Roll was Apple.  Hmmm?

Have a great weekend.  That’s what I’m doing,

h

BTW, three new stocks were added to the Member’s Watch List this weekend at the request of subscribers.  The stocks are Interactive Brokers, IBKR; Guggenheimer Solar, TAN; and CME Group, CME.

FAQ

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