The markets continued last week’s volatile ride into this week. Major U.S. indexes pulled back sharply at the end of last week, but they opened this week bouncing off of their recent lows.
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I believe we are seeing a classic case of a panic, followed by a bargain-hunting bounce, followed yet again by a re-test of the previous lows. It is typical to see a one to three-day rally right after a “crash” (or “mini-crash”), followed by a re-test of the recent lows.
The recent market action puts us on a “volatility trampoline” of sorts — bouncing between the 1,120 and 1,200 levels on the S&P 500 Index. We may bounce between these levels for some time. What we are watching out for is a breach of the Aug. 8 technical low of around 1,120. If this occurs, and holds for several days, then all bets are off. However, with yesterday’s bounce back up to the 1,162 level, we may have seen the lows for some time to come.
In addition to looking at the S&P 500 chart, there are plenty of other contrarian sentiment indicators signaling a positive intermediate outlook for the market. We have seen corporate insider buying vs. selling at or near record highs. We also have seen a rare display of price and breadth volatility, which is often followed by a strong bounce in the markets. Moreover, the Rydex Ratio, which estimates the amount of money committed to bull and bear funds, is at its third-lowest reading ever. Only the levels from early March 2009 and early July 2010 have been lower. In addition, the Equity Put/Call Ratio closed above 1 on Friday, and this often signals a turn in the markets. Lastly, a large number of nervous investors have pulled massive amounts of money out of equity mutual funds and ETFs.
These all add up to bullish prospects for the markets.
Your Alpha Investor Letter portfolio had an uneventful week — and in this environment, this is not a bad thing. Most of your positions remained flat, with Market Vectors Gold Miners ETF (GDX) chalking up a 2.01% gain, and Las Vegas Sands Corp. (LVS) and Market Vectors Indonesia (IDX) enduring slight losses.
As you know, we have plenty of positions on our Alpha Investor Letter “Watch List.” We will likely re-enter some of these positions over the coming weeks as market movements confirm their technical recovery. As of now, none of our “long” Watch List positions are above their 50-day moving averages.
Portfolio Update
WisdomTree Dreyfus Chinese Yuan Fund (CYB) ended the week flat with a 0.15% loss. CYB’s chart has been bullish since December 2010 and continues to show good relative strength. CYB is well above its 50-day moving average and is a BUY.
WisdomTree Japan SmallCap Dividend Fund (DFJ) took a small 0.61% loss for the week. With China strengthening its yuan, Japanese small cap exporters should continue to benefit since China is Japan’s largest trading partner. DFJ is below its 50-day moving average and remains a HOLD.
Las Vegas Sands Corp. (LVS) gave back 3.27% of last week’s large gain. Where industry leader Wynn Resorts LTD (WYNN) leads, LVS normally follows. WYNN just took a second large bounce off of its 200-day moving average in under three weeks. Both WYNN and LVS may be readying to resume upward runs. LVS closed just under its 50-day moving average yesterday and is a HOLD.
Market Vectors Gold Miners ETF (GDX) rose 2.01% over the past five trading days. With gold taking a slight breather today, and the possibility of Fed Chairman Ben Bernanke offering little reassurance in terms of a future round of quantitative easing, this may be a great time to add to your position. GDX is a BUY.
Market Vectors Indonesia (IDX) fell 1.42%, but remains up 5.7% year-to-date. Indonesia has been the top performer in Asia in terms of a relative strength viewpoint. That bodes well for any recovery in Asian markets. IDX is trending up towards its 50-day moving average, but it is a HOLD for now.
