STAND OUT 2009 WINNERS

The stand out winning index and sector in 2009 was technology, especially the biggies such as Apple Computer (AAPL). The Nasdaq 100 (NDX) has to date retraced a little over 70% of its 2007-2009 decline. AAPL has even made a new high relative to the prior top for the period seen on the chart.

NDX made an approximate double bottom low in the November '08-March '09 period and there in NO single better chart indication than that to have signaled a major buy. AAPL formed an exact double bottom.

NDX recently cleared its 66% or 2/3rds retracement level, a significant hurtle in that retracements of more than 66% often go on to a retracement of ALL of the prior decline. Stay tuned in 2010 for what happens with this 'prediction'!

AND WITHIN TECH, A BELLWETHER WINNER

Within the tech heavy Nasdaq, a bellwether sector winner was the semiconductor stock group. The most widely followed index of this sector is the PHLX Semiconductor sector (SOX), a modified capitalization-weighted index composed of 17 companies primarily involved in the design, distribution, manufacture, and sale of semiconductors. (This Index was set to an initial value of 200 on December 1, 1993 and was split 2-for-1 in July, 1995.)

From its March low, SOX has nearly doubled; it will be an exact double at 376. A good example of one of Sox's stand out performers is Advanced Micro Devices (AMD), as the stock has gone from the $3 area in March to a recent high of $10 (chart not shown).

A 'NATURAL' RESISTANCE?

The 50% retracement level in the NYSE-related indexes (including the NYSE Composite Index itself, NYA) of a prior major decline is often an area where buying and selling get in balance and an area that can take a while to overcome, assuming that's going to happen. I don't think that the market will stall out here for any prolonged period, but this level should be watched, especially given the overbought condition suggested by the 8-week Relative Strength Index (RSI).

THE PIVOTAL MARCH '09 BOTTOM SEEN CLOSER UP

The March low in SPX had many of the 'typical' technical signs of a bottom in the stock indices: A V-type bottom, although this had been seen in a prior period; a breakout above a key down trendline, followed by a rebound (after a subsequent pullback) from this same line, 'verifying' the validity of the trendline as a new support; an oversold extreme in the 13-day RSI; several prior days of extreme bearish readings in my equities Call to Put (CPRATIO) indicator. I like dividing calls BY puts, rather than the usual reverse method, as LOW readings ALSO suggest an 'oversold' extreme.

DOW THEORY: 2009 BULLISH 'CONFIRMATIONS'

Dow's 100 plus year old theory and which is still a good bellwether for the major market trend, says that the Dow 30 stock average (INDU) should perform in tandem with the Dow Transports (TRAN); i.e., the averages should 'confirm' each other. If INDU makes a new high, so should TRAN and vice-versa; e.g., if shipping is showing, production of goods and services will follow. Maybe not immediately, but within a few weeks or months. If one Average falls below a prior low, it may or may not be significant for a trend reversal. Only if the other Average does the same would it suggest that a bear market could be in the offing.

In 2009 we had two instances where either INDU or TRAN fell below prior weekly lows, 'unconfirmed' by the other Average. Both instances suggested that the major (up) trend was intact.

INFLATION FEARS

Rising gold and other precious metals prices have often PRECEDED or gone hand in hand with increasing inflation. Advocates of holding gold in addition to or even in lieu of financial assets like stocks, is an old theme. The gold bugs feel vindicated by the very strong rise in gold prices since lows made in late-2008. This rise has been fueled to a degree by investor buying of precious metals as an asset class; especially to protect against expected inflation due to money supply expansion, a big federal deficit and weakness in the dollar. Gold investment companies have been rampant on both conservative and progressive talk radio, one of the few areas of 'agreement'.

I'm not much of a fan of major gold investing; it's a non 'productive' asset and frequently an environmentally destructive mining practice. Mainly, I don't see a major danger of a huge inflation ahead given economic weakness that may extend out for years more. If you want a play against a long-term decline in the dollar, you could buy some euros or, better perhaps, some euro denominated investments.

But, to try to be more objective on this front we could look at what the gold stocks are doing. The widely followed XAU index is suggested and its weekly chart is seen below. There of course has been a heck of a rise in the PHLX Gold & Silver Index, more than a doubling from trough to recent peak. However, I also view the prior major XAU top as tough resistance. Moreover, upside price momentum has slowed in recent weeks.

Oil stocks, as measured by the CBOE Oil Index (OIX) have rebounded from the double bottom low of late-08/early-09, but haven't retraced as much as 50 percent (i.e., around 46%) of the 2008-2009 OIX decline. This is not to say that I don't think there won't be another big run up in oil prices sometime ahead. It's a increasingly scarce resource, but conservation and alternative energy production is ramping up too. It will be an interesting 'race'.

On the INFLATION question, it's helpful to look at a non-stock index and the classic one is the 52 year old Commodity Research Bureau (CRB) one. This Index like everything else has been bought out!

The mother of all commodities indices, the CRB, is now the Reuters/Jeffries CRB Index and was changed in terms of its calculation in 2005. Whereas the old CRB Index was an arithmetic average, the new Reuters-Thompson/CRB Index employs geometric averaging with monthly rebalancing. This more accurately represents the effect of trending markets, while still maintaining a uniform exposure to the various component commodities.

A bit more on the history of the CRB index, which you can skim (or not) on your way to my last chart.

The history of the Thomson Reuters/Jefferies CRB Index dates back to 1957, when the Commodity Research Bureau constructed an index comprised of 28 commodities that made its first appearance in the 1958 CRB Commodity Year Book. Since then of course the commodity markets have evolved and the Index has undergone periodic updates to remain a leading benchmark for the performance of commodities as an asset class.

The Index was renamed the Reuters/Jefferies CRB Index in 2005 when it underwent a 10th revision; the collaborative effort of Reuters (now Thomson Reuters), and Jefferies Financial Products, in order to maintain its continued accurate representation of modern commodity markets. The Index was renamed the Thomson Reuters/Jefferies CRB Index in 2009 to reflect the 2008 combination of the Thomson Corporation and Reuters Group PLC. Blah, blah, blah.

Gold is not in the Index, silver is, along with copper and aluminum. Crude oil, heating oil, unleaded gas and natural gas (lead-month) futures are part of this index, along with traditional ag commodity futures like soybeans, corn, wheat, cattle, cotton, cocoa, sugar, coffee, etc.

The PIVOTAL thing is that the CRB index is of course, in this very weak economy, not racing ahead. Some components have run up, like silver and copper, oil to some extent and so on whereas most commodity prices are stable or historically quite cheap. The CRB chart below (Oct 2007 to end-Dec 09) tells the story; NYBOT is the New York Board of Trade, where there is a CRB futures contract that is traded:


MY BEST WISHES FOR A SAFE AND HAPPY NEW YEAR!


and ... GOOD TRADING SUCCESS!!