A Technical Update

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The election is over; the fiscal cliff looms; corporate profits are slowing; and Europe remains in disarray.  All are reasons that stock prices could be falling.  At the same time, the Federal Reserve continues its attempts to boost stock prices. Just this week it intimated that even more monetary support will be forthcoming when the current iteration of quantitative easing (QE) expires.  We’ve stated for the past few years that the stock market’s ultimate success will depend on whether or not investors retain confidence that Fed money printing will succeed in overcoming deteriorating fundamentals.  This week I want to look at the markets themselves to see what technical conditions can tell us about the prospects for stocks in the months and quarters ahead.

Over the past six weeks, stock prices have fallen quite aggressively with the Dow Jones Industrials down almost 1200 points from its September highs.  Almost all major stock market indexes have broken below their respective 200-day moving averages, a line of demarcation for a lot of technicians between bull and bear markets.  Many technicians look for further confirmation of a changing trend by looking at the juxtaposition of moving averages of varying lengths.  So far, the current downtrend has pulled 20-day below 50-day moving averages, which is indicative of at least a moderate correction.  Far more important in the eyes of most technical analysts is a crossing of 50-day and 200-day moving averages.  To date, that important crossing has not taken place for the major averages.  Should that occur in the weeks ahead, a good number of analysts will turn from bulls to bears.

Many technicians pay close attention to trend lines.  All major indexes except the New York Stock Exchange Composite have broken below the 14-month trend line from October 2011.  At the same time, however, the trend line from the March 2009 beginning of the current cyclical bull market remains intact.

Several other factors point toward a likely continuation of recent market weakness.  Chart patterns show a series of lower highs and lower lows since September–never a positive sign.  Volume in declining issues clearly exceeds that going into advancing issues, demonstrating weak demand.  And volume generally has been in decline for the past few years, contrary to the pattern categorizing lasting bull markets.

Buying has become increasingly selective, with 52-week highs contracting and 52-week lows expanding.  Advancing issues are diminishing and declining issues are becoming more numerous, especially among operating companies, the study of which eliminates the distorting effect of interest rate-sensitive issues.

It is worth noting that over the past two years, as prices have risen, momentum oscillators have diverged, a pattern that often foretells a major change of trend, although with little timing precision.

Some technicians prefer to examine investor sentiment for clues to coming price action.  Ironically, at extremes, strongly positive market outlooks usually precede market declines and vice versa.  Currently the CBOE Volatility Index (VIX) shows remarkable complacency, despite the persistent price downturn.  Major market bottoms typically don’t materialize until fear levels have risen significantly.  Similarly, there is no sign of panic in Put/Call ratios–not what you would expect to see at major market bottoms.

Notwithstanding VIX and Put/Call readings that have longer-term implications, many short-term sentiment readings have turned very gloomy.  While they have not yet descended to levels normally seen at important price bottoms, they are certainly in a neighborhood from which rallies can start.  Prices have also descended to levels not far above the May-June lows, which should provide some support.  Add to that positive seasonality from before Thanksgiving into January, and the proverbial Santa Claus rally becomes likely.

To put all these considerations in context, it is important to view where we are over a longer time frame.  Of the 18 major international markets that I review daily, only the Philippines is higher today than it was five years ago.  Most are also below where they were two and three years ago as well.  In such a context, it is easy to view the rally from 2009 as a cyclical bull market within a larger secular bear market.  As such, the longer-term risks remain to the downside.

In the short-term, stocks are significantly oversold and are overdue for at least a relief rally.  As long-term market pros know well, however, when rallies from oversold conditions fail to occur, major waterfall declines can appear.  Such an occurrence would put huge pressure on the Fed to step up and try to pull another rabbit out of its hat to keep stock prices rising.


It’s with great professional and personal pride that I highlight two recent awards given to Mission’s CEO and, more importantly, my wife, Carmen Bermúdez.  This morning she was honored as one of Tucson’s Women of Influence for reasons outlined in the following Inside Tucson Business profile.

Earlier this year Carmen was named one of Arizona’s 48 Most Intriguing Women, in such august company as former Supreme Court Justice Sandra Day O’Connor, former Arizona governor and current U.S. Secretary of Homeland Security Janet Napolitano, two other former governors and arguably the world’s best female basketball player Diana Taurasi.

Women of Influence 2012 from Inside Tucson Business

Carmen Bermúdez wants to help others ride the elevator of success.  She’s not afraid of heights regardless of how scary the journey.  As founder and CEO of Mission Management and Trust, the nation’s first independent trust company run by a minority woman, Bermúdez manages $300 million in assets.

As Honorary Consul for her native Costa Rica, she lobbies for free trade and promotes using seasonal migrant workers.  As a former competitive tri¬athlete she regularly finished in the top five of her age class.  And, as a bull¬fighter she headlined in both Costa Rican and Mexico City bullrings.

What motivates Bermúdez isn’t fame or money or the number of boards she’s on.  It’s reaching out.

At Mission, a company she started in 1994, Bermúdez developed an internship program to train students.  So far, 25 students from the University of Arizona’s Eller School of Management have worked in the program and four have landed jobs with Mission.  Tucson “must find a way to keep our talent and not lose students to Los Angeles, Chicago or New York,” she says.

Bermúdez also works with those not as fortunate as her interns.  Mission’s philanthropy program reaches minorities and women, providing educational scholarships, supporting nuns who work in slums in Central America and underwriting programs which better the lives of underprivileged children.

“I want to help others rise to the top of their chosen career, whether they get off at the first floor or step into the penthouse,” she says.

Bermúdez started her own ride in the subbasement.  “I grew up in the jungle.  There weren’t any roads or telephones or shoes to wear.  I didn’t feel deprived because nobody had anything.”  Her mother, a single parent of four, struggled to put food on the table.  “But she always managed to,” Bermúdez said.  “My mother told me I was special and I believed her.”

In Costa Rica, one way out of poverty was bullfighting.  In 1950, at age seven, Bermúdez decided to fight.  By the time she turned 18 she was one of Costa Rica’s leading bullfighters.  “I loved the thrill and danger.  Once I en¬tered the ring there was no way to go but forward.”

Bermúdez took that lesson to heart.  The only way to succeed was to keep reaching out to others. Perhaps she should add “elevator operator” to her long list of accomplishments.

What keeps you in Tucson?

“Tucson has been my home for 18 years.  Our friends are here.  Tucson has a great potential for growth, yet it retains a small community feel.”

If you had the power, what one thing would you most like to see happen in Tucson?

“I would demand that the City Council get their act together and stop stalling the progress toward a productive downtown.  We need a bigger convention center, more hotel rooms to house large groups for the gem show, rodeo and future events we could attract.  We need a downtown stadium and/or arena for soccer, baseball, football, even U of A basketball.  I would also like for Tucson to be foresighted and start doing more business with northern Mexico. Commerce between Arizona and the northern cities of Mexico could be a gold mine.”

Outside of home or what you do, where are you most likely to be found in Tucson?

“One of my great enjoyments away from home and business is to play golf.  I also swim and, with my husband, attend as many U of A games as I can.”