Blog Post On: 11/13/2009
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Ford Equity Research - November 2009 Newsletter
After moving into new high territory for 2009, equity indexes sold off in the later part of October. The Dow Jones Industrial Average finished flat while other major indexes were lower for the month. As earnings season got under way, there were a number of strong reports from widely followed companies that helped spur the markets higher. However, equity averages were not able to hold the price gains. Gold prices continued to rise and oil prices were also on the ascent as the dollar continued its decline before rebounding slightly toward the end of the month.
Large cap stocks had the best performance as indicated by the relative performance of the large cap indexes relative to the small cap indexes. After a strong August, reported auto sales for September were down. Housing starts showed a moderate advance while home prices continued to rise. The GDP report came in at a better than expected 3.5% annualized rate for the September quarter. Investors gravitated toward higher quality stocks during the month as seen in the better than average performance in factors such as Ford's quality rating, dividend yield and large capitalization. Likewise, they favored companies with lower beta and tended to avoid the companies that had the highest price gains over the past 3 and 6 month periods. In a month when few of the industry groups had average price gains, the consumer discretionary category did fairly well.
S&P 500 Index (Comments by Ford Equity, Chart by MTRIG. The FER chart was hard to read)
The big news for the SPX last week was its decisive break below its 7-month up-trend line, labeled A. The drama began on Wednesday as the index made its first dip below this important trend-line but then quickly reversed on Thursday, setting things up for a key upside reversal. Many short-term traders had been looking for potential support around the secondary trend-line drawn from the mid-August lows. Labeled B and Thursday’s upside reversal had many thinking that this was the completion of yet another minor dip within a perpetual up-trend. The one telling indication however, was that Thursday’s volume that accompanied the bounce was materially less than that accompanying Wednesday’s down-move, making for net downside thrust. Friday clinched the breakdown, as the index moved below Wednesday’s low and broke below secondary trend-line B, which sent short-term bulls who bought into Thursday’s bounce under water. So the 7-month trend-line break became decisive with Friday’s downward follow-through on heavy volume.
This trend-line break is an important negative development in the chart pattern but without an intermediate-term topping formation in place, we cannot make a strong argument that the chart pattern is in the midst of an intermediate-term decline just yet. Without that topping formation in place, the first meaningful indication that an intermediate-term down-trend is unfolding will be a break below the last swing low in the chart progression, which was the early-October low at 1020 and is marked by the line labeled C. Strategy now would be to ease up on short exposure as the index approaches the 1020 level because this would be logical support from which a secondary bounce, as part of a topping formation, could develop. The bigger downside move will likely come with either a break below 1020 or from the completion of a more orthodox topping formation, if one develops, where we expect an intermediate-term decline to take the index down toward the July lows around the 870 area.
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