A Market Timing Report based on the 1-11-2013 Close published Sunday January 13th, 2012

UPDATE 1-14-2012 @ Close: The SP500 Index pulled back a bit before the President’s speech and then recovered to about flat.  The overhead resistance shown in this week’s chart remains a challenge.  Big tech was weaker, because Apple was selling off due to lower part orders, which are tracked by the analysts to get any clue they can to guess at Apple sales numbers.  Apple dropped below 500 today and then closed just above it.

In his news conference today, the President seemed to imply that he would not default on the debt, but rather would shut down parts of the government including defense if his hand is forced.  Even though we all know this must be fixed before the debt ceiling deadline, the market may become nervous again and give us another buying opportunity.  I have begun some selling already and will do more selling to protect profits as needed. 

Tech (QQQ, NDX) is one market that is looking like a double top and is in danger of filling the post-fiscal cliff gap as I called it today on Twitter.  The gap is shown within the white circle on the chart. One of the reasons Big Tech may sell off now is that government spending cuts are going to bring down tech company earnings as a general trend.  Some companies will escape the knife of course.  The chart is just below:

Big tech (QQQ, NDX) starting to form a top?

Now for this week’s issue….

We’ll get to that first question in a second, but first, let’s talk about what looks strong going into this New Year.  This issue took me longer than usual to write, because I had to look through all the charts yet another time to pick out my “2013 favorites.”

First there is biotech (BTK) that is staging a brand new breakout.  It was a favorite of mine last year and it panned out to the tune of 50.1%.  The overall market is a bit stretched, so this may not be the best buying point; however, the fundamentals behind it continue to be the need of drug companies to buy the new products that are coming repeatedly from biotech firms.  Big drugs (DRG) are also breaking out again and could head to the 2000 highs under the momentum of the “legal drug business.”

The banks were another favorite of mine last year and there is still room for a run up this year as balance sheets get better and better based on your savings and mine (BXK, XLF). 

And then there was housing also among the living dead last year.  Although the current run up looks like it’s just about the same length as the last one, so this leg could end soon, the market is still technically a Bull as the chart shows below.

Another point is that although there is still plenty of room for housing to run to the upside it would appear, but remember that housing was overdone in 2007 and the excesses are still not entirely out of the various markets across the country.   For this reason, I expect the housing index (HGX) to have some trouble getting above 186.82 which was the low in July 2006.  Here is the chart:

Housing was extremely strong in 2012 as predicted, but it’s no longer among the “Living Dead” as I called it a year ago.

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

Gold (GLD) and gold stocks (HUI, GDX) have been correcting since October and September, respectively.  They have held recent support, so it’s possible that a rally could start from about here.  The challenge for the Bulls has been that there have been 5 mini-rallies during the decline, all of which have failed to date.  That is true even for the last blip up last week.   Be sure to see the update on the gold miners on the main website posted 1-15-2013 (click one of the links via the link above and then see the button on blue bar which says “Gold Miners”).

Oil stocks (XOI) have been rallying and could easily run to the Sept. high.

Emerging markets (VWO) are still strong and both Australia (EWA) and Canada (EWC) are looking better.  Because China (FXI) is in correction at the moment, VWO may pull back a bit, so we may have to average out and re-enter.  That is, those of us that don’t like to watch our gains dissolve away in the waves.  I expect China to resume its up trend in a bit and emerging markets to outperform the US markets this coming year.

Remember Australia and Canada have stronger fiscal policies and somewhat stronger currencies than the United States (except in times of extreme panic), so that could give them an edge.  I’ll share a critical insight.  Don’t bother buying VWO, EWA and EWC all at the same time.  They are all highly correlated and have been so since 2005.  There is no big laggard here, but EWA and EWC are lagging a bit and would be a better buy.  They will pull back with the U.S. market if U.S. earnings are poorly received.  Keep that in mind.  I also keep an eye on the currencies to make sure there is no negative move developing.  You can see my trades on Twitter.

Earnings reports are starting to trickle in, but soon they’ll be pouring in.   So far there are mixed results and a muted response either way.  This is shows vividly on the SP500 Index market timing chart this week.

Market Timing Charts (opens separate window so you can access all the charts at once)

That green line is your “market tell” for the week and you may see more of a battle around that line on Monday.  The market is going to make a thumbs up or down decision soon.  Watch the current tops.  If they hold the current rallies in check, it’s a negative sign.

More on gold now.  The number one secret to successful gold investing is to understand that it’s not the degree of inflation that matters, but rather the spread or difference between the inflation rate and prevailing interest rates like the 10 year Treasury Note yield shown in the Bonus Chart of the Week you can access at the link above.

When real interest rates are negative as they are now, gold does well.  We have ridiculously low interest rates in the face of greater inflation than can be covered by that interest.  The fact that gold has been weak while the central banks worldwide are going crazy still with their printing presses may be because the world is expecting a gradual but steady rate of economic healing as well as the fiscal healing of outrageous government debt levels; hence, the weakness shown in the chart (please access chart via the link above).

When the world understands that there is far more damage to be unwound that is being hidden beneath the surface by the banking system as well as by the Fed in taking on a massively inflated Fed balance sheet of bad mortgages, gold will resume its up trend.  The Fed has taken on weighty bad debt and the risk that goes with it from the banks and placed it on your shoulders and mine.

As mentioned last week, the VIX needs to move definitively below the August low of 13.30 and finished Friday at 13.36, so there this would be the time for a new VIX low.   Without an immediate fall in the VIX, a top will be in place for the SP500 Index.

Finally, investor sentiment, namely the AAII survey of Individual Investor Sentiment says to me that there are too many Bulls at the moment, not at a huge extreme, but meeting the same state as on 12-20-2012, so sentiment predicts a correction from here to around 1430ish by my reading of the chart.  The Bull Bear spread is 19.5% this week up from 2.5% in just one week.  That’s too much too fast.  No number is a perfect predictor, so follow the charts and see if the current highs hold or if there is a feeling conveyed by the stock market action implying “blue skies ahead for 2013.”

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

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