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How Watching Market Psychology Can Help You Time the Market

Elliott wave patterns in price charts reflect the struggle between the bulls and bears
By Elliott Wave International

 

Two economic reports hit the newswires Thursday morning (March 6). Both were important, yet each one had the opposite implication for the trend. The market chose one report over the other, and the question is, why — and what can we learn from that? Read more.

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Every Little Helps, Revisited

 

In our “Every Little Helps…But £250m?” post of late September 2014 we commented on the 12% share price collapse, following the Tesco PLC’s revelation that it had overstated its half-year profits by £250m, over-stating its profits by 25%, going on to analyse the share price via technical analysis to see IF there were any clues to an expected share price collapse, regardless of the perceived eventual news catalyst blamed for the fall.

The conclusion was that while the “bottom line” may not be very good for Tesco, an opportunity appears to be shaping up for a decent bounce in its share-price, perhaps back towards the 265 to 300 pence range from the then 228p, going on to state that, “personally though I would prefer to await a change in the panel indicator to green, or at least to neutral before buying.”

So what happened since that date? (high-lighted by the vertical red line.)

 22 April 2015 Blog 1

As of the close of business yesterday, the Tesco share price, having continued its fall to 156p by earlyDecember, duly bounced to 253p by early April 2015, despite a scrapping of the annual dividend, to just above the 38.2% Fibonacci re-tracement level shown on the updated chart above. Note also that the neutral panel was signalled within days of the low, changing to a green buy about a month later.

Further note, that whilst Tesco has only announced further dreadful trading results this morning, our T/A signal had changed back from buy to neutral in mid-February and to sell a couple of days ago, before the results.

So now where?

Tesco has reported a worse than expected full-year loss of £6.4bn, after £7bn in one-off charges arising from a very difficult 2014, far worse than analysts’ forecasts for the UK’s largest retailer for the year to end-February. The £7bn in impairments included a £4.7bn fixed asset charge, as the group wrote down the value of its property portfolio and trading conditions remain very tough.

 However, as with the September 2014 post we leave the fundamentals to those analysts, preferring to study the charts for guidance:

22 April 2015 Blog 2

Note the following please:

  • After falling out of the black dashed-line trend channel, the share price rose to “kiss” the underside of the channel, before falling away into the sell panel. (See red arrow.)
  • The three momentum indicators have rolled-over, confirming a possible trend change, albeit that as of yesterday the 50-day moving average was still above the 200-day, which is bullish.

In the very short term the price could go either way, but we remind of the potential downside target given last September.

 

 

 

Investment Markets Overview — W/E 17th April 2015

There was further evidence of a slowing US economy this week plus “unintended consequences” in respect of the ECB’s negative interest rate policy which is discussed in further detail below. It was also a disappointing week for economic news out of China, which included a -14.6% annualised slump in exports for March, partially due to the stronger Yuan but more to do with a lacklustre recovery in its major trading partners, the US and Europe. Retail sales also eased in March, as did industrial production, whilst the all important real estate sector continues to contract, increasing non-performing loans within the banking sector as negative equity grows. Talking of growth, China’s Q115 GDP figures were released this week and although the headline 7% year-on-year was in line with Premier Li’s target, on a quarter on quarter basis it slowed to 5.3% versus the 6.1% tallied for Q414. The one area that continues to grow is the financial sector, buoyed by ever increasing outstanding credit, now reported at 204% of GDP according to Bloomberg, a large part of which appears to have been channelled towards the bubbly stock-market.

17 April 2015

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Additional Commentaries:
•US economic data . . .
•Euro-Zone . . .
•The UK . . .
•Out East . . .
•The $US index . . .
•Within the commodities complex . . .
•Economic data due next week includes . . .

As stated above, the ECB left its “Deposit Facility Rate,” on hold, at -0.2% and its President “Super Mario,” was quick to claim ……

Charts:
1.  Indices Weekly
2. US Consumer Confidence V US Retail Sales
3. UK Private Sector Wages V UK Composite Wage Growth
4. China Retail Sales V China GDP
5. Commodity YTD  Moves

Table:

13 Indices, 11 columns of detailed information, for accurate analysis

“Panicky Policies often Return to Bite.

Click Here to view Details of the full version of this Newsletter which includes full text and detailed

“Twin Peaks?”

Two recent posts, “Oiling the Wheels for China” and Shanghai Socionomics,”expressed concerns over its main stock-index, the Shanghai Composite, observing that it was looking somewhat stretched against its 200-day moving average, whilst noting an interesting negative-correlation between the SH Comp and the Crude Oil price, going onto to suggest that if the oil price was ready for a bounce, it would likely be accompanied by a correction for the SH Comp.

 The “Socionomics” comment showed a close correlation between the stock-index and new share accounts opened, observing that investors’ do not buy low and sell high, as per the popular myth, but subconsciously herd, selling as prices fall and buying as prices rise.

The Shanghai Comp has added a further 13% since warning of an overvalued market and to this we can add another:

Step forward Hong Kong’s Hang Seng stock-index (HS):

 16 April 2015 Blog 1

A 10-year chart of the HS, showing monthly data points, reminds that it collapsed by 67% through the 2007-09 financial crisis, slightly worse than the US S&P 500 fall of 55% but better than the SH Comp’s 73% slump. Since then it has recouped about 2/3rd’s of the loss, as seen by the Fibonacci retracement toll and within the six-year parallel channel shown. The 12-month moving average is still rising, which is a positive, although you may note that the index has become stretched against it, just as highlighted with the SH Comp. Furthermore the RSI and Stochastic momentum indicators, at a respective 69 and 83, are starting to look toppy.

Despite maintaining some autonomy since being ceded to China in 1997, there has been an uncanny resemblance between the two stock-indices, as can be seen within the second chart:

16 April 2015 Blog 2

Both indices are up by 11% month to date, the same as year to date for the HS, whilst the SH Comp has jumped by 29% YTD, which appears to be more about catch-up with the HS looking at the chart above.

The Shanghai Composite has a price-to-earnings ratio of 20 versus the 12X accorded to the HS, but digging a little deeper reveals that the wider CSI 500 index is at 50 times reported earnings, with the pure smaller cap indices within both “areas” somewhat higher.

The Oil price is now 25% above its recent low, whilst the Chinese authorities have today launched index futures for the large-cap SSE 50 and the small-cap CSI 500 Index, making it far easier to short China. The HS will likely move with the SH Comp.

We may be seeing twin peaks.

 

 

 

 

 

Investment Markets Overview — W/E 10th April 2015

Nigel Farage, the charismatic leader of the relatively new but increasingly important UK political party called UKIP, continues to polarise the electorate, albeit that the traditional two major parties are doing a pretty good job of it themselves during what is descending into one of the nastiest and petty election campaigns with still the best part of a month to go. Defence was the topic of dispute this week and we have more on the Brit “debate” later, focussing first on a non-politician who has polarised America, the former US National Security Agency contractor Edward Snowden, who in 2013 raised public concerns about just how much information is held by the NSA and more to the point how it is used. Snowden popped up twice last week, once as a 4ft high bust, sculptured and then erected, in Brooklyn’s Fort Greene Park by three artists who see Snowden as a libertarian hero with major concerns over growing surveillance and authoritarianism from big government. The bust only remained there for a day before removal by the authorities who view Snowden as a traitor for disclosing NSA information to the public. His second appearance was on comedian John Oliver’s “Last Week Tonight” TV show in an interview completed in Moscow where Snowden is holed-up. It was a “tongue- in –cheek” exchange but did include a serious point raised by Oliver. On the 1st June 2015 the controversial “Patriot Act” comes up for reauthorisation, particularly section 215 which requires businesses to hand over “any tangible item to a secret intelligence court IF the NSA suspect that it would assist in their security concerns, such as the demanding of phone records and any other information that they deem to be useful, such as staff and client profiles, financial records, conversations etc.

10 April 2015

Subscribe to the Full Investment Markets Overview Newsletter which contains the following:-

Additional Commentaries:
•US economic data . . .
•Euro-Zone . . .
•The UK . . .
•Out East . . .
•The $US index . . .
•Within the commodities complex . . .
•Economic data due next week includes . . .

The UK Defence Secretary, 62 year old Michael Fallon, , lowered the tone of an already fractious general election campaign this week ……

Charts:
1.  Indices Weekly
2. US Manufacturing V US Non-Manufacturing
3. UK Trade Deficit V UK Trade Deficit Ex EU
4. Japan Bank Lending V Japan CPI
5. Commodity YTD  Moves

Table:

13 Indices, 11 columns of detailed information, for accurate analysis

“Be Careful What You Wish For, Particularly With Politicians.

Click Here to view Details of the full version of this Newsletter which includes full text and detailed

If it Looks Like a Bubble?

A recent chart by Michael Lebowitz at 720 Global has caught my eye, which is shown as follows:

 

10 April 2015 Blog 1

He shows five popular gauges of valuation, including those used by the Federal Reserve and the investing “guru” Warren Buffett. The coloured circles, which represent good historical valuation measures for the S&P 500, are placed where this stock-index would be if investors valued earnings today as they did historically. Based on these, he states that the S&P 500 is adding a 20% to 50% premium over what decades of history suggests is fair value.

Or, to put it another way, the S&P 500 is overvalued by 20% -50%!

Our own analysis, which includes the fundamental measures mentioned above, is combined with technical analysis tools and sentiment guides, including the Socionomic observations mentioned within these posts.

Last October, as the main US stock-indices started to swoon, we updated on “US Margin Debt,” which included a measure of it to US GDP (the light-blue dot above,) and went on to say, “it is taking ever-increasing levels of debt to push stocks higher, and GDP come to that.”

Here is an update of US Margin Debt / GDP:

10 April 2015 Blog 2

Margin debt to GDP actually peaked back in February 2014 at 27.3% (see the lower blue chart of the past two years) versus a respective 27.8% and 26.4% at the two other significant market tops of 2000 and 2007.

Whilst margin debt doesn’t always peak ahead of market tops, it did so at three of the most significant tops, highlighted in red within the larger chart.

So is it a bubble?…..What do you think?

 

 

 

Investment Markets Overview — W/E 3rd April 2015

Last week saw the 3rd and final reading of the US Q414 GDP number, which remained at 2.2% annualised, less than half of the Q314 number. Goldman Sachs have lowered their expectation for Q115 to 0.7% and frankly anyone with half an interest in economic data will expect a slowing US economy, looking at the Dollar strength of late and its effect on overseas earnings for US corporations, the continued personal income weakness in February and the slowing job creation. Obamacare, which is perhaps the largest American tax increase in history, is kicking-in and further hurting consumption, not forgetting of course the ever increasing burden of debt servicing costs also act as a “drag anchor” on the economy. As such, one shouldn’t be too surprised to hear Fed Vice-Chair Stanley Fischer announce this week that GDP data may be understating the health of the US economy, going on to say that he trusts the employment figures more. A look under the bonnet, however, reveals that whereas the figure of 5.5% may look impressive, the figures are fudged, at least according to Jim Clifton at Gallop.com, who observes, “anyone who is unemployed and has subsequently given up on finding a job–if you are so hopelessly out of work that you’ve stopped looking over the past four weeks–the Department of Labour doesn’t count you as unemployed,” suggesting that as many as 30 million Americans are either out of work or severely underemployed. Furthermore, he confirms that,” If you perform a minimum of one hour of work in a week and are paid at least $20–maybe someone pays you to mow their lawn–you’re not officially counted as unemployed in the much-reported 5.5%,” concluding that the official employment figures amount to a Big Lie.

3 April 2015

Subscribe to the Full Investment Markets Overview Newsletter which contains the following:-

Additional Commentaries:
•US economic data . . .
•Euro-Zone . . .
•The UK . . .
•Out East . . .
•The $US index . . .
•Within the commodities complex . . .
•Economic data due next week includes . . .

After debating it for two decades, the Chinese authorities are to introduce a deposit insurance scheme ……

Charts:
1.  Indices Weekly
2. US Labour Participation V US Non-Farm Payrolls
3. UK Consumer Credit V UK GDP
4. China House Prices V Shanghai Comp
5. Commodity YTD  Moves

Table:

13 Indices, 11 columns of detailed information, for accurate analysis

“There is the Truth and then the facts released by Government.

Click Here to view Details of the full version of this Newsletter which includes full text and detailed

“China Socionomics 2”

Last week we provided Socionomic evidence that that investors’ do not buy low and sell high, as per the popular myth, but subconsciously herd, selling as prices fall and buying as prices rise, showing the Shanghai Composite stock-index against new share accounts opened as an example, albeit that it would have shown the same picture for any other stock market around the globe.

This week we show that it’s the same for housing and we’ll stick with China, being as it’s been a roller-coaster ride for house prices over the past decade.

2 April 2015 Blog 1

House price inflation, shown by the black & red-bar chart, represents the average price of the main 70 China cities, whilst the blue line shows the change in loan demand, also annualised, which we have used as a “proxy” on home sales, being as the data is so limited.

You will note that loan growth has a close correlation with the rise and fall of house price inflation, so once again punctures the myth that humans buy low and sell high.

There is a reason for this. In matters non-financial, such as “buy one get one free,” in respect of everyday goods, it’s logical to stock up and to perhaps refrain from purchasing when prices rise, or the BOGOF offer ends

Financial decision making is fraught with uncertainty, particularly in respect of the price paid, be it for a security or for a property, hence sub-consciously humans tend to herd assuming that the crowd knows the correct price.

 

 

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