CTS Spotlight for the week of October 29th, 2010

Hello and welcome back to CRI's CTS Spotlight

10/29/10: We have finally made it to the US mid-term congressional elections (to be held this coming Tues. Nov. 2nd). The market has priced in a Rep. party victory in the House, the question now remains will they take the Senate too. Stocks are generally happy (with the notable exception of Japan) and look to continue their recent rally. Commodities in general are strong and until we see a discernible bottom in the dollar, that trend has no reason to abate. It has been quite a run since Aug. (for example, CRI's OnlyDoubles has had 3 doubles in the month of October alone!) but there are early warning signs of the end of this Euphoria. CRI's DI index is looking very toppy and bond markets in Europe have started to break down (please refer to this week's CTS Spotlight). Should the US Fed's 'shock & awe' quantitative easing indeed work, then one might expect to see serious deterioration in bond prices which will then ultimately lead to a deterioration in equities. We are not at that stage yet, so enjoy the top of the market while it lasts.

European Interest Rates:

While growth within the US is still in question, there are clear signs that the bond market is starting to price growth back into the equation in other parts of the world. Specifically today, we look at two big European issuers of debt - Germany and Britan. Both bond markets are clearly in long term bull markets (lower charts) but there are signs of the bears taking control in the short/medium term (upper charts). 50% retracements will bring both markets back into long term support areas so those fixed income investors out there, be patient and wait for yields to raise a little more before locking in.

Historically low 10 year US treasuries?

 

Every once is a while I like to look at really long term charts just to put where we currently are in historical context. Here then is a 200 year chart of US Treasury yields from back in 2002. The most recent chart hasn't changed that much other than yields are still falling. 

 

While one can draw many different conclusions about government yields and the development of a country, there are some basic ideas we can take away from the long term trends.

1. The combination of the 'baby-boomer' generational influences coupled with a peak in world socialism pushed inflationary pressures and thus yields to historically anomalous levels. 

2. The simultaneous unwinding of both of these significant market forces may bring the market right back to where it started. Baby-boomers's demand for hard/fixed-income assets shall dominate while current 'emerging market' politics/economics have all but crushed the gains of the international socialist movement. Trade union, what trade union?

The more things change....the more they stay exactly the same....

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com 

CTS Spotlight for the week of October 22nd, 2010

Hello and welcome back to CRI's CTS Spotlight

10/22/10: In a week that saw the US dollar bounce, many if not most commodities took a breather from the torrid pace that has been set over the past few weeks. Considering the significant fundamental event on the horizon, it should be of no surprise to see a proverbial 'calm before the storm'. Interestingly, only the Nikkie still remains bearishly pointing. My hunch, once Japan's stock market starts pointing higher (and thus making every stock index followed bullish) we will know that the equity rally has almost come to an end. That hasn't happened yet so enjoy the mini-bull in your neck of the woods while it lasts. Of particular note this week, Live Cattle and Wheat are starting to show signs of reversing, is this the beginning of the end for the grain rally? 

Wheat & Live Cattle

The late summer saw a dramatic rise in the price of grains. Wheat for example, moved from a low of $4.5/bushel to almost $8/bushel in less than three months. But that bullishness seems to have evaporated for the time being. Indeed, Wheat prices began to break down three weeks ago when prices traded back below 647. CTS now has a short trading pattern working (where one ought to be short from that 646 area with corresponding stops just above the recent highs at or near 7.535). The 50% level for wheat currently sits near 607 for a profit potential of 40 points ($2000/contract). While CRI doesn't have a position here, CRI still expects this market to continue to correct into the harvest. Once the 50% level has been reached the next technical objective shall be to gap at $4.9 area; but we will cross that bridge when we come to it.


Live Cattle


Quit conversely, Cattle prices spent the summer going sideways and have only now started to break out in earnest. The move this past week through the significant resistance at 1.00 has cleared the way for Live Cattle prices to move into the $1.10 area if not higher. This is a classic bull flag formation and one of the easiest patterns to trade. One should be long from the breakout (at or near 100.2) with corresponding stops below recent support (in this case I would be thinking 94.50 area). The target is straight forward in that one takes the flag pole distance (in this case 100.2 minus 78.7) and adds that number to the bottom of the consolidation (in this case 87.9). One could even have an open order to sell (once you have been confirmed on your buy!) sitting at $109.3. These price patterns can move very quickly so if you missed it...don't chase it!


Summary


The fact that Wheat and Cattle have price inverse price patterns working suggests to me there is money moving in the market. Considering the time of year (specifically the seasonal tendency for farmers to bring their harvested crops to market) I think there is validity to these breakouts. 

At all times one must ask, 'is the trade worth doing?' And unfortunately in both cases, there just isn't enough of a profit margin to justify taking the risk. In wheat's case there is 40 points of profit for over 100 points of risk. In Live Cattle's case the original trade [long from 100.2, with stops just below 94.5] would have had 9 points of profit for 5 points of risk but now that the market is at 102, this trade now has 7 points of profit for 7 points of risk. 


Here then is a case of understanding where the market is going but not doing the trade. Since we have a limited amount of capital to work with (and we really don't want to loose too much if we are wrong) we have to be constantly deciding if a trade is worth the risk. One simple formula CRI uses to judge if a trade is worth taking the risk on:

Option eligible: 
If a six month option's strike price - your target price is twice the current offer for that option
Non-option eligible stock:
If your target price is twice the current market price AND your risk is less than 50%.
penny stock note: CRI tries to buy stocks that have been recently rolled back (please refer to CRI's Venture Cap Inv Model for more on this) and take a 100% risk on the trade.  This approach could only be contemplated understanding that any single trade NEVER represents more than 5% of total assets of a portfolio.

We traders spend a lot of our time just watching and here I think is a great example of just sitting patiently on the sidelines and enjoying the scenery...


That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com

CTS Spotlight for the week of October 15th, 2010

Hello and welcome back to CRI's CTS Spotlight



10/15/10: The British Pound has joined the bull camp as it too has begun to appreciate in earnest vs. The US dollar. Amid this orgy of dollar selling many commodity prices have hit upside objectives (please refer to this weeks CTS spotlight: Silver for more) so please take some profits and be careful. Having said that, there is still further to go to hit our US dollar bearish target and there doesn't seem to be any impetus to halt its decline until after the November elections and maybe even into early January. The Canadian stock market (an excellent barometer for commodity related stocks) has confirmed its bullish breakout of last week suggesting that commodities and commodity related stocks are still very much in the spotlight. Enjoy the rally, check out CRI's latest OnlyDoubles trading opportunities and again, please take some profits along the way...

Silver

Regular reader of CTS and CRI's other publications will recall how bullish we got of Silver last spring. Indeed, CTS has pointed out how the Silver market has been trending higher now for more than 21 weeks and most importantly, our upside target in the $24.00 area has been hit!

If you refer to the chart above you will see a very basic yet extremely powerful chart pattern explained. As the A-B-C-D pattern suggests, if the market can break the top of the flag pole formation (in this case it was just under $20 - Point B) one can feel quite confident that the market will move towards the upper channel line (in this case near $24 - Point D).

Readers will also remember CRI suggesting one ought to accumulate Silver Call options last May, when prices briefly broke through the previous high (at $19.50). Specifically, CRI suggested investors ought to take a good look at the January, 2011 $18 calls that at the time were trading at $1.75. Currently, those options are roughly $6.00 or 250% higher. Indeed, it seems quite logical for those that did participate in the trade to take some profits (smells like another OnlyDoubles trade to me).

For those that did not do the trade, forget about Silver for the time being!

Too often I find that people get most interested in a market AFTER THE MOVE. As the chart clearly demonstrates, buying now is just asking for trouble and yet it is now that the public is getting interested in investing again.....ugh!

Instead, maybe it would be a good idea to subscribe to CRI's OnlyDoubles Monthly subscription service and learn about what markets CRI expects to double going forward...

just a shameless plug......

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com

CTS Spotlight for the week of October 08th, 2010

Hello and welcome back to CRI's CTS Spotlight



10/08/10: As the US dollar works its way towards to latest downside target, almost every commodity price (which happen to be quoted in US dollars) has moved in earnest the other way. The notable exception being the meat market (which as a negatively correlated market to the grains is understandably weak). It is interesting to both see and literally feel the bullish euphoria in commodity land of late. Not surprisingly, The Canadian stock market as a whole look quite bullish (and is the focus of this week's CTS spotlight). My contrarian concern should not surprise regular readers - as I am quite convinced this is a mini-bubble in nature and shall reverse come late November if not into early 2011. Enjoy the ride while it lasts and lets all make some money!

Canadian Stock Market - TSX 60

With the dramatic increase in Canadian rich commodity prices of late, it should be of no surprise to see Canadian stocks in general on an upward trajectory. Since a good portion of the index is commodity related, prices for Canadian companies will trend in the direction of the underlying. I believe there is a unique opportunity of late in Canadian stocks because of our under performing currency from two perspectives.
1. Companies selling assets into the US commodity market are getting an artificially high commodity price (relive to their base currency) which may represent a windfall gain vs. farmer or miners in Australia for example.
2. Since we live in a truly global world, an international firm shopping for such assets may compare various companies across the globe in an effort to both maximize shareholder value and get a good deal. In short, Canadian companies are relatively cheap in comparison to other country's companies.

I believe its just a question of time until the Canadian dollar once again resumes its upward march vs. the US dollar. It may be because of exactly the reasons stated above, or something completely different. Regardless, the fundamentals do point higher for commodity rich Canada but lets look at the technicals to see if they confirm our underlying bullishness.

Above is the chart for the TSX-60 stock index (Canada's index for its largest 60 stocks and very similar to something like the OEX - S&P 100 in the US).

The Bullish case: Notice the higher highs and higher lows of late. This suggests that indeed this market is moving higher and one ought to expect higher prices generally going forward. Specifically, one ought to be long from 721.2 with your stop below recent support at 645.5. The 575 pivot point represents both the high from late '08 and the low of the spring '09. If we draw a flag pole formation off these points [(721.2-575)+645.5] we come up with a target of 791.7. Coincidentally, there exists a small gap on the weekly chart that will at some point be filled at 822. If I put these two numbers together I come up with a target window between 791-822 for this rally (or between 8-15% higher from here).

The Bearish case: Notice the bearish momentum divergence in the MACD. This latest rally is NOT on momentum and traders should be well aware that unless we move higher in earnest (so much so that we break the spring momentum peak) this may be the last gasp in an a classic bear market dead-cat-bounce. Currently yhe weekly 50% level is at 585.6 [(721.2+450)/2] (or 20% lower from here).

Conclusions: There is fundamental justification for higher Canadian corporate earnings due to rising commodity prices. As well, Canadian corporations are currently on discount for international shoppers due to an under performing currency. There are no sell signals working currently so one ought to be either long or flat. There is currently a buy pattern confirmed this past week from 721.2 with suggested stops just below 646.5. If long, understand we are getting very late in this rally and this latest move higher is not on higher momentum. Understand too that the public is often most euphoric at the end of moves not the beginning. Enjoy the rally and be sure to sell into your targets.

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com