A Market Timing Report based on the 12-28-2012 Close published Sunday December 30th, 2012

UPDATE 1-3-2013 @ 3:00 pm: GLD (see chart below) fell back due to the Fed news that several members believe QE3 will end in 2013.  That was revealed in the minutes.  The US dollar promptly rallied and gold fell.  Short term GLD will probably pull back more, but there is some support at the 200 day moving average. 

There is no way to entirely protect yourself against such “jerks” in the market that are due to the release of Fed notes and the like other than to be diversified and pay attention to sell signals when they arise. The prior reversal UP above the 11-02-2012 low has been reversed by a move to the downside. 

There was a hint in the trading yesterday that gold was not as strong as it could be.  I mentioned on Twitter yesterday that GLD had turned down from the daily down trend line (down sloping white line below).  That was negative, because it tells you that there were sellers just waiting to take a relatively small profit.  Today, you have the follow through to the downside based on the Fed minutes.  The downward sloping white line is the daily down trend line and the roughly horizontal white line is the 200 day moving average.  See below.

Gold market timing signal: White trend line stopped GLD’s climb yesterday.

UPDATE 1-02-2013 @ 9:04 am: This week you get to see the “before” and “after.”  I predicted that the Bears were at risk this week and positioned us to be in the market prior to the cliff resolution, which was a must do for our government.  The patch was done last night and the chart shows the jubilation.  The implied opening per CNBC’s fair value calculation from the market futures is 1452.85 (purple line on chart below) at this time which is above the last high shown on the chart, the 12-19-2012 high.

SP500 Market Futures are Celebrating the Fiscal Cliff Patch Today

Fundamentals don’t work, but technicals do when there is madness in Washington.

So what is the meaning behind that statement?  The meaning is that the way you trade or invest has to fit YOU and your willingness to take the actions that support a particular approach.  To Warren Buffett, it would not matter much if the markets temporarily felt that stocks were worth less than before.  He’d see that as a buying opportunity at a certain point.  In the near term, if the “fiscal cliff” is not resolved, there would be short term pain in the economy, which would screech to a near halt, damaging the fundamental outlook for stocks.

If you had gone strictly by the SP500 Index action this week using market timing, you would have sold promptly upon the break of the November high, perhaps waiting for the close.  But if you have a sense as I do that the fiscal cliff will be patched in time (no guarantee, but I’ll stand by my decision), then you would wait for the rebound and not sell this first sign of weakness (well, there are two signs of such weakness, as the link below explains).

The SP500 Index (SPX, SPY) futures as I type this are down to 1384, 0.91% below fair value as calculated by CNBC despite the “threat of resolution/patch of the cliff.”  This erosion has happened despite the presence of Congress at work on Sunday.  Now the media is reporting that a patch will be done, which is what I wrote last night.   They will not let the medical system collapse by cutting Medicare payments by 25% (100’s of thousands of support staff would be laid off), and they will not let the military fold.  If they do, they’ll all be out of Congress the next time they come to re-election.  Rich people will immediately be paying more.  There is no doubt of that.  Pres. Obama has won that fight.  The rich are easy prey as half our people pay no taxes.

Although technicals work in the face of any sort of madness, you have to trade the way I describe on the SP500Tracker™ page (via link below), which requires too much time for most of us:

Market Timing Charts for Sunday’s Issue are Here (opens separate window so you can access all the charts at once)

Madness means volatility.  The VIX has blasted up based on the indecision at the end of the week and was up 16.69% on Friday.  The VIX is stretched so much on the chart that the next move is more likely down.  The caveat is that there could be one or two more days, generally not more, of even higher volatility in the market.  If volatility falls to relieve the stretch and then the VIX makes a new high, that means more selling is to come.  Often there is a pullback in the VIX for several days after the “stretch is relieved.”

A few other key points this week…

The SP500 Index weekly chart no longer is supportive of a rally, because the week’s close was below the lows of the prior two weeks.

The US dollar is in a weak rally (UUP, USDX).  That is why gold is looking for strength for a reversal upward rather than breaking to new lows.

Emerging markets remain strong (VWO, EEM).

What about sentiment this week?  The AAII survey of individual investors shows that the Bulls dropped only slightly from 46.40% to 44.40% and the Bears rose to 30.2% from 24.8%, so the spread between Bulls and Bears is at 14.2% which is down from 21.6% last week.  To me, as explained on the main website on my AAII sentiment page, this would still allow for a rally soon, which could be followed in turn by a decline in early 2013.  That decline might be based on companies seeing so-so earnings in the fourth quarter.  In fact, retail growth was significantly under expectations.

This week I reveal the “Secret of Small Cap Performance” in gauging the risk of a rally vs. a further correction.   The two charts demonstrate small vs. large cap performance during declines and rallies (see the two charts via the “Bonus Chart of the Week”  link above).

Small caps are thought to behave this way during sell-offs, because they are harder to sell quickly without effecting prices due to lesser liquidity in comparison to large cap stocks.  The small cap outperformance over large caps is one Bull point for this market.

Another hidden silver lining in the market is the Dow Transport Index (DJT, IYT), which is weaker than last week, but slow to participate fully in the correction.  The ever important banking stocks are still holding up as well (BKX, XLF), another point for the Bulls.

Gold is NOT a buy yet this week, but I point out where it IS a buy in this week’s chart (see GLD chart via the link above).

I do not feel there is reason yet to sell long term GLD holdings, due to the state of real interest rates as mentioned previously.  We have no trading position in gold at the current time however.

In summary, the markets are now hostage to your elected government!  While some markets are tipped down, there are glimmers of hope as documented above.  Type in Senate.gov and House.gov into your browsers and call the bums that are responsible for this mess.  Tell them your thoughts, nicely of course!

Standard Disclaimer: It’s your money and your decision as to how to invest it.

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All Charts are courtesy of the Worden Brothers TC2000 Charting system, which I love and have used since April 19^th, 2001 and it’s continually improving: My Charting System

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