Fundamentals, Valuations and Technicals Say Remain Patient

By: Chris Ciovacco | Wed, Feb 25, 2009
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02/25/2009 - Tuesday's Big Gains Lacked Upside Volume: Trends can help us understand the collective perceptions of investors, which ultimately drive asset prices (see charts below).

Fundamental Changes Not Behind Tuesday's Rally: What appeared to have sparked yesterday's rally?

The charts below put some context around yesterday's moves in both stocks and gold. How a long-term investor and a trader interpret yesterday's moves may be quite different. For investors, gold still looks attractive and stocks remain unattractive.

Volume can help us better understand investor's demand for or confidence in stocks. When investors are confident, stock market gains occur on strong volume.

If you scroll down to the section 2008 - Monday's Gains - The Bad News: Weak Volume in the October 13, 2008 article Bear Markets Tend To Retest Lows, you can see volume on SPY (S&P 500 ETF) at 2000-2002 bear market lows. Compare the chart of SPY (2000-2002) to the chart of SPY above focusing on trading volume.

Strong volume could still come, but it did not occur yesterday in a manner that is similar to lasting market turns. In the up/down volume figures above (see red box), we would like to see something in the 90% / 10% range rather than the 79% / 20% that we saw yesterday. Detailed research conducted by Lowery's Reports over the last 76 years of market history supports the 90% / 10% comment above. At a bear market bottom, we need to see powerful demand for stocks.

Gold Had A Bad Day: One day does not make a trend. Tuesday's pullback does nothing to damage the uptrend off the October 2008 low. Volume on GLD and GDX are somewhat high which is a little bit of a concern, but it is not surprising to see a sharp retracement after a good run. Investors should manage gold as we would any other investment, which includes monitoring gains and losses and protecting capital when needed.

AIG Back To Uncle Sam's Well - From Reuters:

NEW YORK - American International Group, rescued twice last year by the U.S. government, is asking for more aid and bracing for a fourth-quarter loss of roughly $60 billion, a source familiar with the matter said. It would be the biggest loss in a quarter in corporate history.

FDIC Sees More Trouble Ahead: Monday's Wall Street Journal reported FDIC officials are "pushing Congress to raise the amount of money the agency can borrow from Treasury to $100 billion, more than triple its current limit". If the FDIC thought we were on the cusp of an economic and housing turn, they would not be lobbying so hard for new funds. The FDIC knows banks have much more pain in their future.

Housing Prices and Banks Will Continue To Be Under Pressure: Stock futures are higher in Monday's premarket on more government bailout news - once again related to Citigroup. This bailout, as with many before it, does not directly address the fundamental problem with housing - too much inventory. As we have mentioned on numerous occasions, no government bailout or mortgage program can alter the natural laws of supply and demand. Using the pace of sales in December 2008, it would take 12.9 months to sell all the new homes currently in inventory. We need to get down to five or six months of inventory before we can expect to see prices stabilize. A glut of supply means home prices will remain under pressure. Falling home prices means more problems for banks. Mark Zandi, chief economist at Moody's Economy.com, estimates that even with the new Obama foreclosure reduction plan, the United States will see 3.1 million foreclosures in 2009. We had a record 2.7 million in 2008. Home prices will continue to be a problem. Foreclosures will continue to be a problem. Banks will continue to be a problem. Despite this morning's hope of another lifeline for comatose Citigroup, the fundamental problems with our economy remain.

Citigroup - Third Bailout A Charm? The Wall Street Journal reported on Sunday night the U.S. government is in talks with Citigroup to "substantially" expand its ownership of the poorly managed bank. The new deal could result in taxpayers owning up to 40% of Citigroup. With new government bailouts coming at dizzying rates, it is easy to lose track of how much the Feds have already committed to Citigroup. To refresh your memory:

The sum of the government's backing of Citigroup to date comes to roughly $346 billion. Has it worked? Below is a chart of Citigroup stock since October 1, 2008. The market has not been impressed.

More details on nationalization can be found in this Bloomberg article, Obama Bank Nationalization Is Focus of Speculation.

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

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