Wednesday, April 29, 2009

Technical indications of a market recovery

With all the green on my screen and the strong scent of bullishness wafting through the air, I've decided it's only prudent to cut my losses and cover all my short positions in the Channeling Stocks Portfolio. Is this wise or is this rash?

That's the $64,000 question everyone seems to be asking. To answer it, let's look at some technicals.

On the plus side
The VIX (volatility index) has been in a steady down-trend since the middle of January (see chart below). The Dow Transports, widely regarded as being a leading market indicator, has managed to stay above the 300 key resistance level. Financials and banks, given by the XLF and the RKH, have both broken out of their inverse head and shoulders pattern. They haven't exactly zoomed out of the gate, however, and may continue in a sideways pattern for a while until the economy finds its legs. Heck, even some of the homebuilders have broken above their channeling patterns. Take a look at the charts of Meritage (MTH) and KB Homes (KBH) and see for yourself. (The chart of MTH is shown below.)

And contrary to popular belief, the consumer is not completely dead. Consumer Discretionary (XLY) has been following the Retail Holder (RTH), climbing steadily since their March lows (although they do appear to be running out of steam). Because of the threat of the swine flu and recent mergers, the biotech sector has been on fire but that, too, looks like it's poised for a breather. Tech, too, has been rallying. The Broadband Holders (BDH) and the Internet Holders (HHH) are up 25% and 33% respectively since the beginning of March. Really, the only sectors that have been underperforming are the precious metals-- both gold (GLD) and silver (SLV) are down roughly 10% over the last several months.

A couple of negatives
One negative is that the S&P 500 is having a problem closing above 875, a key resistance level. It's traded above that on an intraday basis and I think it's only a matter of days before it closes above it. The real question is: Is this rally for real or is it the response to massive short-covering?

The answer is that I don't know for sure--perhaps it's a bit of both. One non-technical indication that a recovery is in the works is that the number of For Rent signs in my neighborhood seems to be decreasing. Hey, it's not exactly the lipstick indicator, but I think there is something to it.

Click on images to enlarge.

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