One of the most valuable tools that we have as market participants is in taking the sum of the parts to help come up with a final conclusion. While we all talk about what the Dow did yesterday or what it’s done year-to-date, it is easy to forget that there are 30 companies driving this popular U.S. stock market benchmark. By going through each of these 30 stocks, we can get a better feel for the market itself rather than just analyzing the performance of the index. To me, it’s the combination of the two that seems to be the best approach.
I think at this point I’ve exhausted my thesis about there being too much overhead supply across the stock market. But yesterday I was doing my weekly Dow 30 review, and I couldn’t help but notice how many examples I found where prices were now holding below a ton of former support, which of course, turns into overhead supply. The old saying is, “Don’t fight Papa Dow”, meaning that if you can take the weight-of-the-evidence you’re seeing from the Dow 30 stocks, you’re going to get a very good idea of which direction the major averages are headed. Say what you want about price-weighted indexes, but the correlations the Dow has with the other large-cap averages is through the roof. Whether you agree with how a price-weighted index is constructed or not, the Dow moves with the S&P500 and your other favorite cap-weighted indexes. So we like to track it because the fact that there are only 30 stocks in it makes it simple for us to do.
Here are a few examples of overhead supply throughout the Dow 30. All of these broken support levels become resistance on any rebounds. We’re talking about either the bag holders that didn’t sell when they had the opportunity or the ones who bought too late. The overhead supply consists of the excessively large, “just please get me back to break even” crowd that is sitting there
waiting hoping for a bounce back in order to sell it to you.
Johnson & Johnson:
Procter & Gamble:
There are more examples but I think you get the point. A lot of these stocks are stuck below a ton of overhead supply. It is very difficult for prices to just rip right through that without first absorbing all of that supply. At the very best it’s going to take some time. At the very worst, things will get uglier before they get better. Either way, it is more of a sell strength environment than a buy weakness. That’s how I see it.
Sure, there are exceptions to this overhead supply phenomenon like Nike, United Health and Home Depot that are sitting right near their all time highs and not below overhead supply like so many others. But these are the few exceptions, not the majority. It’s no wonder the Dow Jones Industrial Average itself is stuck below so much overhead supply:
This is a big theme right now and an ongoing problem. I don’t care about China or interest rates or whatever the “problem” du jeur is being advertised by the media. I’m worried about the overhead supply. If there are more sellers than buyers, it’s hard for prices to rise. That’s just supply and demand 101. We will keep reevaluating, but I don’t see this problem going away any time soon.
Click Here to receive weekly updates on each of these charts looking at both daily and weekly timeframes. These reports also include the rest of the Dow 30 components.
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This week we hosted a live event where we took a look at stock markets around the world along with other non-correlated asset classes to find the most optimal risk/reward opportunities. There was a lot of intermarket work done comparing international stock markets, to commodities, to sectors here in the United States and down to individual stocks and pair trades. Rather than going over my process, like in previous webinars, this video focuses more on the results of the process. There are some nice trends already in place, and other situations that are setting up nicely for potential positioning in the future.
This is how I approach the marketplace. I hope the video can add some value to your process:
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In case you missed the first part of the interview, I had honor last week of chatting with one of the most legendary Technical Analysts that you’ll ever meet. Ralph Acampora is a pioneer that helped open doors for the next generation of technicians like myself. I’m not really sure where technicians as a group would be today without guys like him. And for that we are grateful.
In part 2 of the series, Ralph shares his thoughts on today’s stock market, bonds, commodities, and a little bit about how the Market Technicians Association first got started.
JC – Okay let’s get into it Ralph: We’re sitting right near all time highs in the S&P 500 the Dow Jones Industrial average. We’re essentially at the highest levels that we’ve ever seen ever but you turn on the TV and you read the news and it’s just brutal. This is the most hated rally I know I’ve ever seen. Do you want to talk a little bit about how you’re feeling?
Ralph – I’m glad you started that way because I wanted to start that way, exactly like that, and I’m not just saying that because you started it that way. I’ll rephrase what you just said, because you had that little lift in your voice which is true because these are all time highs. Said another way, these stocks and these indices have never been this high in their entire history.
You know I did a little survey; remember I told you that I like Papa Dow? Listen to this, there are four Dow stocks currently at all time new highs: Chevron, Travelers, Wal-Mart, and Disney. That’s 13% of the Dow. Here, I’m going to give you a list of another 8 stocks in the Dow that are within 10% of all time new highs: Triple M, American Express, Coca Cola, Exxon Mobil, IBM, Johnson and Johnson, McDonalds, and Procter and Gamble. And then I have another three that I think will make all time new highs at some point; Home Depot, United Health, and United Technologies. That’s 50% of the Dow stocks, as I interpret it, are either at the door step or are about to make all time new highs, that’s half of the Dow. Then go back to 2007, the last time we were up at this level. Just stop for a second and ask yourself; what was the feeling around the street? What were the public’s thoughts? #1 the public was fully invested in the market. The street was bullish the last time we were up at this level. It was exciting. Now, the public is in bonds or cash. They’re not buying. In fact we lost a generation. The only people you have today are some portfolio managers and hedge funds and they’re not doing very well, the average hedge fund is up like 3.5% for the year, they’re not doing well. And listening to the commentary on TV every time you turn around they’re talking about Greece, India, or China and everything else.
I have to add to your question. Now that we’re at all time highs, the next question is how many times does the market discount negative news? And the answer to that is ONE. So all that we’re getting is regurgitated news. How many times do I have to hear about Greece? Come on, give me a break. And another thing, they talk about how China is going to have a hard landing. Go back and see when the Chinese market peaked. The Chinese market peaked in August of 2009 and it’s been going down ever since. At that time the Dow Jones Industrial Average was selling at 9600 so the Dow has been going up for the last couple of years and china is going down. So as far as that’s concerned, all of this news out there, I wouldn’t say it’s totally baked into the pie, that would be naive, but most of it is. I’m not saying that US is the best place in the world to be invested, but it is. The next one right be behind us is the bellwether of Europe, the DAX, Germany. The DAX is 1% away from making all time new highs and no one is talking about that. That to me is the most bullish thing I’ve ever heard in my life. The classic bull market JC, does fear and blue chip. That’s exactly what we have. I think we’re in a secular bull market.
JC – Really?
Ralph – Oh yeah…Oh yes…
JC – Can you compare what we’re in right now to anything in the past?
Ralph – I can compare it to the early 80’s because I was there. When we went through the sideways market all through the 60s and 70s and no one believed it when that market took of in Aug of 1982. Everyone was shell-shocked including myself. I was with a firm called Kidder Peabody, we climbed a wall of worry. That was the beginning of it; I am totally convinced this is the secular bull market. We should all be long. Buy/Hold market. This is what it is – my kind of market
JC – That’s great stuff. So we talk a lot about cyclical markets and secular markets and how long they typically last. The consensus out there seems to be that secular bear markets typically last longer than the 12 years that we’ve been in. So you don’t think that’s right? You think that we’re already in the next secular bull?
Ralph – We had 12 years, what do you want another five?
JC- Well, I’m asking.
Ralph – Give me a break. I think it’s over. The bottom was made in 2009. That was it
JC – The generational bottom huh?
Ralph – You got it
JC – That’s great Ralph. So you mentioned Murphy earlier and intermarket analysis. I’m a huge intermarket guy so obviously I enjoy and value the information that we get from bonds, commodities, and other currency crosses. How do you incorporate that stuff into your analysis? What is the current intermarket landscape telling you and does it agree with what you’re talking about in equities?
Ralph – Yeah well first it would be bonds. I think they’re over owned. I’m not saying they’re topping out today. But the odds are they’re closer to making a major top than they are to making a major bottom. I think at some point in time, and I hate to say it but it’s true, I think the public is in the wrong place. The higher the equity market goes when we start trading at all-time new highs….there’s nothing like rising stock prices to bring money back into the stock market. And I think that’s what we’re going to start seeing, that shift away from bonds into equities. That will be a tsunami of money, talk about cash on the side lines. Whether it’s sovereign wealth funds, I deal with many of them in the mid east with our company. I got to tell you, they’re in gems, they’re in gold, and cash. To get them to buy equities is like trying to break their arm. They’re not there. I think we’re going to see a major shift from fixed income specifically.
JC – So you briefly mentioned precious metals? What are you thinking there as the fiat currencies around the world are being diluted and money has been flowing in that direction. Do you think that’s going to continue?
Ralph – I’m not in the camp that gold goes to $5,000/oz. But I think you can easily make all-time highs in Gold. I don’t think there’s any problem with that. But when I say that, people say, “well if you like gold you can’t like equities”. That’s not true, go overlay a gold chart on top of the Dow; you’ll see there are quite a few periods of time where they both go up at the same time. The last couple of year’s equities are up 100%+ and gold is gone up dramatically. Yeah. So I think gold and silver as a currency should definitely be a portion of ones portfolio.
JC – This is something that’s personal to me. One of my favorite long term charts out there has been the Dow Jones industrial Average relative to gold. The Dow/gold chart. I know you love your Papa Dow, so when you talk about that ratio, in the early 80s gold and the Dow were at the same price (1:1 ratio) and over the next 20 years that ratio got up to 44 to 1. Ever since 2000 that ratio has been declining 30 to 1, 20 to 1, 10 to 1, and in August last year we went under 6 to 1. You want to talk about trends? That seems to be a pretty strong ongoing trend. How do you feel about that?
Ralph – So you’re telling me you want to put all your money in gold and nothing in equities? Ok. If that’s what you want to do…
JC – No, I’m just talking about that particular ratio. Do you see any validity to it? How do you feel about that trend? Do you just ignore it?
Ralph – Sure, gold on a relative basis has beaten the heck out of equities. But I’m an equity guy. I’d like to own some Wall-Mart, go look at Pfizer and Merck, go look at GE on a monthly chart. These are awesome stocks. Look at the Dow by the way.
JC – Okay equities. They’ve been trending higher for three and half years, everything looks great, all time highs, this and that. But something that hasn’t been trending and goes through spurts and some sideways periods is crude oil. Do you think that as equities continue to rise and in theory economies improve, there will be more demand for oil? Will oil prices continues to rise with equities?
Ralph – Yes I think oil will rise. Oil has a problem because it’s a political football. It’s the signature in Iran and Israel and every time you turn around they jerk that thing around. I think technicals are very important in looking at crude. But to say I would rather be in crude over equities? No way.
JC – Alright. Getting back to something that I know is a little bit more near and dear to your heart is the Market Technician’s Association. Do you want to tell the readers a little bit about how it started?
Ralph – Sure, it’s wonderful. First of all the MTA next year is going to celebrate its 40th anniversary – it’s going to be in April. So you have to come to that. We’re going to have everyone there. All the old timers, we’re going to have Tom DeMark, and hopefully Andy Lo, the professor up at MIT and everyone that has worked so hard to raise the respect for technical analysis. It started actually 43 years ago with two guys. One from the Bronx and one from Brooklyn. I was from the Bronx and a young fellow by the name of John Brooks, unfortunately Johnny passed away a few years ago. Both of us were frustrated because we as junior technical analysts we were not considered part of the community of analysts in lower Manhattan, Wall Street. We would go to New York Society of Security Analysts, and to say we were in the back of bus…I don’t even think we were on the bus. We had absolutely no respected whatsoever. One day we looked at each other and said, “Why the heck don’t we get some analysts, and like-minded people together just to sit around talk?” That was the beginning of the MTA.
JC – And this was what year exactly?
Ralph – 1969-1970. The reason why the MTA is celebrating they’re 40th anniversary is because that’s when they were incorporated. It took a few years to get to that point. It was the desire just to sit down with professionals. Mr. Rotnem, we went to him and said, “Mr. Rotnem we’d like to create this organization”. He said “Young man, you can do it and you’ll get my blessing and support under one condition, only professional market letter writers from the sell side of the street are allowed to be members”. They wanted so badly to get the best that we could have. We had 18 original members. There were originally 18 of us that could say they sat down and wrote a market letter everyday for a brokerage firm. That’s how it started. As time went by, for example, John Murphy, wants to join the MTA. He didn’t write a market letter at that time. Well we said alright let him in. I have a friend of mine on the floor of the NYSE, Ralph Fogel. He was a specialist and a former student of mine and he would use technical analysis in his trading everyday but he didn’t write a market letter. So we had to change the constitution of the MTA. It kept changing and changing and growing as the organization and membership was growing. It’s a beautiful story. And one day at the New York Institute of Finance where I was teaching in 1975, they were moving from their address on Wall Street to 70 Pine Street. I said, “Can you give us a little space for a library?”. And they did. It was a little library with a phone in it. That was the first address the MTA had.
The most exciting thing that’s happened to the MTA was when the Sarbanes-Oxley law came out in 2004 and it said that all analysts on Wall Street are mandated to take two exams: series 86 and 87. The 87 was rules and regulation, fine everyone should take that. But 86 demanded that you had to have levels 1 and 2 of the CFA (to receive exemption). Well I stood up and I said to the MTA, “Take all the money in your treasury and throw it at this, we have to fight this because if we don’t win this battle we don’t deserve to be a professional organization speaking for our members”. So myself and handful of guys, one in particular David Krell, a wonderful person a past president of the MTA, David knew the bureaucracy and I knew the technical thought of the MTA, we went to the NYSE. We pleaded our case in early 2004, and in march of 2005, about a year later, the SEC changed the rule. Rule344 had been amended thanks to the MTA, So officially there are two analysts on Wall Street now. The first analyst is a fundamentalist, who follows companies and has a CFA. The second analyst is a technician who follows stocks and has a CMT. So we elevated, the MTA has elevated, the respectability of our craft and our profession to the level of the CFA. And for that I am so so proud.
We’ll continue our conversation with Ralph Acampora later this week. In the third, and last part of the series, Ralph takes questions from the Stocktwits community. In case you missed Part 1 of the interview, you can catch up here.
As a reminder, Ralph is teaching a one day Technical Analysis course in New York City on November 14th. To learn more, visit http://www.nyif.com/ralphisback.html.
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