Global Glance: Sell in May….Buy in September? (Fixed)

****Sorry Folks.  I just realized that the charts weren’t fully showing before.  I’ve fixed it now.*******

****All charts and text, however, are unchanged and still reflect the original date of publishing, 8/23/08.****

Most of us are familiar with the saying, “Sell in May and go away.” Apparently it is also referred to as the “Halloween indicator“. The idea, according to the Wikipedia writeup in the link is to start buying again after October. We spoke some meetings back about the Stock Trader’s Almanac and the various patterns seen over the years that can be helpful to be aware of. Even though there is no certainty to such cycles, there is clearly reason enough to pay attention to seasonal or yearly patterns just as we look for price patterns on charts. Check out this story on the Almanac from BusinessWeek TV.

As always, whatever the conventional wisdom, theory or superstition, the charts tell the story and give the signals. It’s interesting to look at the last five years with this particular pattern in mind. In particular, I began thinking about this when I put together a comparison chart of the SPY versus the ETFs representing the other major markets around the world. Using the old “eyeballing it” method, it actually looks like the world markets did have pullbacks of varying degrees in the past five years beginning around May. More importantly, I looked to see when these may end and turn to rallies. With hopes of September being a time for rallying, I’ve highlighted the beginning of each September with the vertical orange oval. It’s kind of remarkable to see that in most of the markets, rallies have taken place with pretty good consistency each year around this time.

Not surprisingly, there is strong performance from the countries known as BRIC, Brazil, Russia, India, China.

Unfortunately, the only ETF I know for Russia, RSX, only goes back to sometime in ’07, so it is not included here. Also, the China ETF, FXI, begins in late ’04.

So here’s a look from the beginning of ’05 to better include China.

What is most interesting to me is that we hear the talking heads on TV most often focused on China and India as if a mantra of some sort, though Brazil has been the clear leader. I’m sure their ethanol fuel program has had a profound affect on their economy and I imagine its progression and effects are still to unfolding. According to this Wikipedia article on the subject:

• The Brazilian ethanol program provided nearly one million jobs in 2007, and cut 1975–2002 oil imports by a cumulative undiscounted total of US$50 billion.

• In 2006 Brazil produced 16.3 billion litres (4.3 billion U.S. liquid gallons), which represents 33.3% of the world’s total ethanol production and 42% of the world’s ethanol used as fuel. Total production is predicted to reach at least 26.4 billion litres (6.97 billion U.S. liquid gallons) for 2008

• There are no longer light vehicles in Brazil running on pure gasoline. Since 1977 the government made it mandatory to blend 20% of ethanol (E20) with gasoline (gasohol), requiring just a minor adjustment on regular gasoline motors.

• Today the mandatory blend is allowed to vary nationwide between 20% to 25% ethanol (E25) and it is used by all regular gasoline vehicles, plus 3 million cars running on 100% hydrous ethanol, and 6 million dual or flexible-fuel vehicles

• The comparison between Brazil’s sugar cane based and the U.S.A.’s corn based ethanol industries show that their corn based industry blows ours away in most metrics.
  

Here’s a look at the long term chart for Brazil. A multi year, beautiful uptrending channel was broken this year, but there seems to be support around the 68-70 area. After three months of quite orderly but consistent downward movement, we see an “inside” week or maybe we could call it a bullish harami candlestick pattern. Either way, this indicates the potential for a trend reversal. For long term investors, this area could be a very nice entry for a return to the former high. It could also make for a good vehicle for consistent covered calls as it noodles its way around from here.

On a closer look, we can see a bullish divergence with the MACD histogram showing higher lows while price shows lower lows. A break of the downtrending resistance line could be a nice entry with a stop just below the recent intraday low of 67.66. As an intermediate to long term trade and an initial target of the former high around 100 or better, this could be a 1 to 2.5 risk/reward ratio or better.

One might also use the much discussed C pattern entry, buying on a move above the 30 MA or the 50 MA and setting a stop somewhere below the 30.

India has a much longer and well defined downtrend in place making it less appealing for a bullish entry. Nevertheless, the break of the downtrending resistance line would be the first signal to look for. Until then, playing to the downside would make the most sense.

Mexico looks more stable than most and in a pretty well defined sideways range. How about a play from support to resistance? Could be nice to leg into covered calls, selling the 60 or 65 strike price if it gets up there.

Looking at China, it has come down significantly from the high back in late ’07. My uptrend line here may not be very clean with the fudge back in late ’05, but otherwise it has 4 points of contact for support including the last two weeks. Besides, as they say, “Beauty is in the eye of the beholder.” In any case, the horizontal line here just above 40 makes for a very clean entry and defined stop for a bullish entry here. Likewise, a break of that line, would be a nice and clean entry to the downside with, again, a clearly defined line to set a stop with.

The US market, notable at the bottom of global performers in the comparison above, doesn’t look too pretty. Downward moment seems to be waning, but still the rally of late looks more like a bear flag than anything, and more likely to break to the downside. One promising detail, however, is that the recent lows around 120-125 looks to be a potential capitulation with extreme volatility and high volume reacting to the level. A return to that level and successful bounce off support would set a much more stable footing for the market to move up from.

The U.K. doesn’t look very pretty. Here’s an article on their perilous dependance on oil.

Finally, Germany, the world’s third largest economy in US Dollar Exchange rate terms and the largest in Europe, could be in trouble. Though the exact placement of the neckline could be debatable, it looks to have broken below a 16 month head and shoulders pattern. A retest and bounce down from the 28 area would make for a clean bearish entry. The height of the pattern makes for a downside target prediction of about 21.5.

So after all that, I’m not all that convinced that it’s quite time to buy with respect to the “Halloween Indicator,” but there do seem to be some good setups to watch for in the global markets, both to the up and the downside. For those less inclined to be in and out of stocks and uninterested in short term trading, this would be a great batch of ETFs to look to for long term plays.

Patterns and Candleticks in their time, Opera too

I thought I’d make a quick point about candlesticks and patterns in the context of a time frame. I know that candlesticks have been somewhat of a focus lately and we’ve talked about double tops and bottoms recently, so I thought I’d point out an observation I made this week.
Candlesticks, like chart patterns, are applicable to all time frames and have increasing signficance the larger the time frame. Take a look at this double top formation on the SPX this week. This chart of the SPY shows each candle representing 15 minutes. There is a Double Top reversal pattern that would have worked out nicely as a clear and clean entry point for a bearish intra day trade. There is even a confirmed Hanging Man candle pattern on the second top. One might even consider playing a downward break of the symmetrical triangle in the most recent day for a bearish continuation on an intraday basis.
(Click the image to see it larger)

But would this bearish entry make sense for an intermediate or long term entry? Looking at the daily chart, probably not. Of course, there are plenty of signs that the chart is weakening. My uptrending support line from March was broken and then acted as resistance. The incline of the trend is becoming less steep. This week shows three days with topside shadows followed by a big red candle on Thursday. One could look at this cluster like an evening star formation. It’s not textbook, but it tells the same story. With the Investools study set, you will even find that the chart now shows 2 red arrows on the MACD and Stochastic. Nevertheless, the SPX is still in an uptrend and has now found support for the second time in recent weeks at the 20 MA. Though many things may be pointing us to look for a reversal, it is a bit early to call it a top here, particularly when the recent months have repeatedly shown us drastic down days followed by days and weeks of upward movement.

Finally, the weekly chart shows just how the candlesticks and patterns can be used to simplify everything in the bigger picture. It is really quite amazing when you think about the amount of information, news and action that is represented in that one simple candle. This image shows the SPX, DJX, Nasdaq composote, and Russel 2000. The SPX and Dow show very strong weekly candles with the most recent week resulting in a harami, which is a potential reversal. According to Steve Nisson, the Japanese will say that with a harmai the market is “losing its breath.” I would say, though, before seriously worrying about a drastic bearish move, we should like to at least see this weekly pattern confirmed with a lower close at the end of this week. For now we must look at these markets in a strong uptrend as taking a very natural breather and perhaps a very healthy pullback.
The Russel and Nasdaq, on the other hand, are looking a bit more ominous. Neither have participated in the strength of the SPX and Dow in the last month and look to be more setup to roll over. The Russell small caps, in particular, have barely found life above the resistance level from late February. Of the “Gravestone Doji” which is seen on the Nasdaq, Nisson says that the Japanese call it this because it “represents the gravestone of the bulls that have died defending their territory.”

I hope this is of some use to you. I just want to reiterate that the use of candlesticks and patterns are fantastic but must be appropriately applied to the time frame you are looking at.
On the subject of watching for a reversal, it is worth noting that the VIX has established a very clear level to watch for. Remember, “When the VIX is low(and starts to rise), it’s time to go.” 14.50 or so seems to be the magic signal for the moment.

So in addition to the ideas from the last post on REITs, Retail may be a good place to look for potential bearish setups if the market does continue to show weakness. We know that our COH has been taking it a bit on the chin lately. But this weekly chart of the $RLX shows a symmetrical triangle that could have big potential to the downside. Having shown relative weakness to the Dow and SPX recently, and with consumers being pinched by the high costs of gas going into the summer season, it would make sense that this sector might take a hit. As is noted in “Week Ahead” found in the strategies tab on the Investools site, Dell, Costco and Sears report this Thursday.

And now for a shameless plug:

As you may know, I am an opera singer.

In case you are looking for a little culture in the coming months, I thought I’d share the information on my performances this summer.
I will be singing in three different operas in June and July. In June, I sing the role of Basil Howard in The Picture of Dorian Gray, a setting of the Oscar Wilde novel by composer Lowell Lieberman . The music is quite impressive and the cast is a very good group of singers. This is being done with Center City Opera at the Kimmel Center in Philadelphia.

There are four performances but it is double cast, so make sure you buy tickets for one of these two dates when I’ll be singing. For more info on the company and these performances, go to their website.

My performances:
Wednesday, June 6, 8 PM
Sunday, June 10, 2:30 PM

In July I will sing two roles with the New Jersey Opera Theater, performing at the Berlind Theater at McCarter in Princeton. In Mozart’s Die Zauberflöte (The Magic Flute) I will sing Sarastro, the high priest of the temple of Isis. In Gounod’s Romeo and Juliet, I will sing Frere Laurent, the provider of poison. For information on tickets, go to their web site.
This is one of my favorite pictures from past performances with that company.

The dates for those shows:

Die Zauberflöte (The Magic Flute), Sarastro

Friday, July 13,8pm
Sunday, July 15, 2pm
Saturday, July 21, 8pm
Saturday, July 28, 1pm

Roméo et Juliette, Frère Laurent

Friday, July 20, 8pm
Sunday, July 22, 2pm
Saturday, July 28, 8pm

Both of the theaters where these performances will take place are ideal for seeing and hearing opera in a more intimate environment. I think they seat somewhere around 600 people. The casts are all young, up and coming talent. So there will be no old, tired, park-and-bark singing here. So come on out to the opera!

For a few last laughs, here’s a picture of me as Sarastro in a children’s production of The Magic Flute in Zurich. The costume was all mirrors from head to tow. By far the heaviest costume I’ve ever worn. Not very mobile, but it made quite an affect under the lights on stage.

Here’s a picture of me as one of the waiters in Rosenkavalier. Baron Ochs refers to them as Maikäfer, a type of bug that comes out in Spring, so the designers decided to have us painted up as bugs in very nice, linen servant outfits. They do some crazy stuff in the German speaking countries. I won’t show you the picture of me as an “old servant” dressed in tight, white boxer briefs and a pink, silk ladies bathrobe with a choker around my neck!

The opera world is a strange and wondrous place.
I do recommend coming out to see any of the productions I’m involved with this summer, even if you’ve never been to the opera before. They’re all good shows, and seeing opera up close is quite impressive. And for those worried about language, they will all have super-titles projected above the stage. I would recommend buying tickets very soon. Almost all of the performances for New Jersey Opera Theater sold out last year and I would expect them to do the same this year. And don’t worry, there’s not a bad seat in the house, so just buy whatever is available. Ideally, I’d recommend somewhere in the middle of the house and no closer than the first 3 or 4 rows. That way, there’s a little room for the sound of the voices to come out and blend with that of the orchestra.