Global Exposure

"Devaluation...would be a lunatic self-destroying operation."

Harold Wilson in 1963; in 1967 he devalued the British pound.

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The above chart of the S&P 500 Index compares the prices in the upper pane with the percentage of stocks trading above their 40 day moving average. Since the end of April the number of stocks above their 40day moving average has been in a decline, yet the rally has held and gone higher. This signifies that the market is being carried higher by fewer stocks, and the ones doing the lifting are larger capitalization stocks.

One way to see the true power of these stocks is to create a custom basket of selected stocks and in essence make our own index. Since most of these stocks we already know to be larger-cap stocks, the weighting of this custom index will be based on price alone. To avoid one or two stocks skewing the data, we will include in our index 16 multinational companies that are well known and trade with large volume.

The index will be made up of 16 stocks:

UTX - United Technologies Corporation
BA - The Boeing Company
CAT - Caterpillar Inc.
GE - General Electric Company
PCP - Precision Castparts Corp
PH - Parker-Hannifin Corporation
MO - Altria Group, Inc
JCI - Johnson Controls, Inc.
EMR - Emerson Electric Co.
ROP - Roper Industries, Inc.
SWK - The Stanley Works
TKR - The Timken Company
KMT - Kennametal Inc.
ITT - ITT Corporation
CMI - Cummins Inc.
MMM - 3M Company

Below is a weekly chart of the S&P 500 compared to the created multinational large-cap index. Since the spring 2003 it has doubled the performance of the S&P 500 Index.



Why have these companies performed so much better than the overall market? Well it can be assumed that they are well run companies and have great products and/or services. Importantly, they have two common traits that have both aided greatly to their success. One is they sell globally which takes advantage of strong global economic growth. Two, the weakening U.S. Dollar makes their goods and services more appealing in foreign markets.

The two charts below compare our custom created index to the U.S. Dollar Index and then to an ETF that tracks global markets. Both pictures help show that these companies, and there are others, have been thriving in a global economic expansion along with the weakening dollar.





As long as this group of stocks holds strong, it is going to be hard for the over-all market to really crack and take a hard fall. Creating custom indexes like this can be a helpful tool in assessing the internal strength of the market. If this group of stocks starts to weaken, then it sets up a different situation, and money coming out of this group will soon start to look for a new home of out-performance. The next post will deal with another custom index that might hold a key to where money might find a home in the future.

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Description of companies used in this post's created index.

UTX - United Technologies Corporation (UTC) provides high-technology products and services to the building systems and aerospace industries. It has six segments: Otis, Carrier, UTC Fire & Security (UTC F&S), Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Otis includes elevators, escalators, moving walkways and services. Carrier includes heating, ventilating, air conditioning and refrigeration systems and equipment, and food service equipment. UTC F&S offers electronic security, fire detection and suppression, monitoring and response systems and services, and security personnel services. Pratt & Whitney includes military aircraft engines, parts and services, industrial gas turbines and space propulsion. Hamilton Sundstrand includes aerospace products and aftermarket services. Sikorsky offers military and commercial helicopters, aftermarket helicopter, and aircraft parts and services. In March 2007, Sikorsky Aircraft acquired aircraft maker, PZL Mielec, from the Polish Government.

BA - The Boeing Company is involved in the design, development, manufacturing, sale and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services. The Company operates in five principal segments: Commercial Airplanes, Precision Engagement and Mobility Systems (PE&MS), Network and Space Systems (N&SS), Support Systems and Boeing Capital Corporation (BCC). PE&MS, N&SS and Support Systems comprise the Company’s Integrated Defense Systems (IDS) business.

CAT - Caterpillar Inc. operates in three principal lines of business: Machinery, Engines and Financial Products. Machinery deals with the design, manufacture, marketing and sales of construction, mining and forestry machinery. Engines business deals with the design, manufacture, marketing and sales of engines. Financial Products, consists primarily of Caterpillar Financial Services Corporation, Caterpillar Insurance Holdings, Inc., Caterpillar Power Ventures Corporation and their respective subsidiaries.

GE - General Electric Company (GE) is a diversified industrial corporation. It is engaged in developing, manufacturing and marketing a variety of products for the generation, transmission, distribution, control and utilization of electricity. During the year ended December 31, 2006, GE completed the sales of its Advanced Materials business by Industrial and GE Life, its United Kingdm-based life insurance business. During 2006, GE acquired IDX Systems Corporation, ZENON Environmental Inc. and Biacore International AB. In November 2006, GE Fanuc Embedded Systems acquired Radstone Technology PLC. In December 2006, Energy Metals Corporation's subsidiary, Golden Predator Mines Inc., acquired Springer Mining Company from GE. On March 15, 2007, GeoEye Inc. acquired M.J. Harden Associates, Inc., from GE. In May 2007, Smiths Group PLC sold its aerospace businesses to GE. In May 2007, STV Partners Corporation, the Japanese unit of GE, acquired a 97.15% interest in SANYO ELECTRIC CREDIT CO., LTD.

PCP - Precision Castparts Corp. (PCC) manufactures complex metal components and products, investment castings, forgings and fasteners/fastener systems for aerospace and industrial gas turbine (IGT) applications. The Company also provides investment castings and forgings for general industrial, automotive, armament, medical and other applications; specialty alloys, waxes and metal processing solutions for the investment casting industry; metal-injection-molded and ThixoFormed parts for automotive and other markets; sewer systems, and metalworking tools for the fastener market and other applications.

PH - Parker-Hannifin Corporation is a full-line diversified manufacturer of motion control products, including fluid power systems, electromechanical controls and related components. It has three business segments. The Industrial Segment produces motion-control and fluid systems and components used in manufacturing, packaging, processing, transportation, mobile construction, agricultural and military machinery and equipment. The Aerospace Segment designs and manufactures products and provides aftermarket support for commercial, military and general aviation aircraft, missile and spacecraft markets. The Climate & Industrial Controls Segment manufactures motion-control systems and components for use in the refrigeration and air conditioning and transportation industries.

MO - Altria Group, Inc. (ALG) is primarily a holding company. The Company, through its wholly owned subsidiaries, Philip Morris USA Inc. (PM USA) and Philip Morris International Inc. (PMI) are engaged in the manufacture and sale of cigarettes and other tobacco products. ALG’s 89% owned subsidiary Kraft Foods Inc. (Kraft) is engaged in the manufacture and sale of packaged foods and beverages. Philip Morris Capital Corporation (PMCC), another wholly owned subsidiary, maintains a portfolio of leveraged and direct finance leases.

JCI - Johnson Controls, Inc. (Johnson Controls) is engaged in the building efficiency business. It is a global supplier of heating, ventilation, and air-conditioning (HVAC) mechanical equipment and services. The Company operates in three primary businesses: building efficiency, automotive experience, and power solutions.

EMR - Emerson Electric Co. is engaged in designing and supplying product technology and delivering engineering services in a range of industrial, commercial and consumer markets.

ROP - Roper Industries, Inc. (Roper) is a diversified growth company that designs, manufactures and distributes energy systems and controls, scientific and industrial imaging products and software, industrial technology products, instrumentation products and services, and radio frequency products and services. Roper operated in four segments: Industrial Technology, Energy Systems and Controls, Scientific and Industrial Imaging, and RF Technology. The Company markets its products and services to selected segments of a range of markets, including RF applications, water, energy, research and medical, and general industry.

SWK - The Stanley Works (Stanley) is a worldwide producer of tools for professional, industrial and consumer use and security products. The Company’s operations are classified into three business segments: Consumer Products, Industrial Tools and Security Solutions.

TKR - The Timken Company (Timken) is a global manufacturer of engineered bearings, alloy and specialty steel and related components. The Company is a manufacturer of tapered roller bearings and alloy seamless mechanical steel tubing and a North America-based bearings manufacturer. Timken had facilities in 27 countries on six continents as of December 31, 2006.

KMT - Kennametal Inc. (Kennametal) is a global supplier of tooling, engineered components and advanced materials consumed in production processes. It provides metal cutting tools and tooling systems. Kennametal specializes in developing and manufacturing metalworking tools and wear-resistant parts using a specialized type of powder metallurgy. It also manufactures and markets a line of tool holders, tool holding systems and rotary cutting tools by machining and fabricating steel bars and other metal alloys.

ITT - ITT Corporation (ITT), formerly ITT Industries, Inc. is a global multi-industry company engaged, directly and through its subsidiaries, in the design and manufacture of a range of engineered products and related services. It operates in three business segments: Fluid Technology, Defense Electronics & Services, and Motion & Flow Control.

CMI - Cummins Inc. (Cummins) designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration and emissions solutions, fuel systems, controls and air handling systems. The Company operates in four segments: Engine, Power Generation, Components and Distribution.

MMM - 3M Company (3M) is a diversified technology company with a global presence in various businesses, including industrial and transportation, healthcare, display and graphics, consumer and office, safety, security and protection services, and electro and communications. The Company manages its operations in six operating business segments: Industrial and Transportation; Health Care; Display and Graphics; Consumer and Office; Safety, Security and Protection Services, and Electro and Communications.

Shift In The Force

"To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory. Ultimately through capital market arbitrage it will affect risk spreads in markets completely divorced from U.S. housing."

Bill Gross - July Investment Outlook

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This is a chart comparing the S&P 500 Index to the Broker/Dealer Index. The broker dealers are the ones who own the laboratories that many of these toxic petri dishes are kept. If they don't have first hand exposure to them, the have second hand exposure to them. Bill Gross' July Investment Outlook makes a very plain case for the trouble, caused by leverage in relation to the mortgage market, not being over and will effect other sectors because there will be a restriction to extend credit in other areas.

"Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction. If not taken too far – and there is no hint yet of a true “crisis” – these developments may be just what the Fed has been looking for: easy credit becoming less easy; excessive liquidity returning to more rational levels." - Bill Gross



In a somewhat unrelated topic, the chart below is of the S&P 500 Index, with the bottom pane showing the percentage of stocks trading above their 40 period moving average. This shows that as we have made these new highs and headlines, fewer and fewer stocks are carrying the load. This does not mean the rally is invalid by any means, it just means that stock selection is important.



This compared to the broker/dealer index not making a new high with the market, could mean it's time to tighten stops and/or re-balance holdings to reduce risk by ensuring that concentrations in a few outperforming assets are not out of balance.

Below is a graph showing the returns of Stanford's Endowment over the past year, along with a graph showing the 10 year averages.





As can be see everything pretty much followed the benchmarks until you see the 61.2% gain in their exposure to natural resources. According to there asset allocation, they have a 7% exposure to natural resources in their endowment. Without going into the individual holdings they might have, the make up of the endowment at the end of June would have a greater than 7% exposure to natural resources because of its tremendous gain. This requires the endowment to enact the discipline to trim out of some of its great winners and re-balance to the original asset allocation model.



This re-establishing of the original asset allocations might seem like a small thing, but it is what makes the difference in the long run to outstanding out-performance. It is not rocket science, but it does take discipline to sell winners and buy into lagging areas. This is best done when you are selling high and buying low, rather than being forced to do the re-allocation in times of adverse moves when you are forced to sell lower and buy higher. David Swensen's, who runs Yale's endowment, book was mentioned in the previous post is a great source of information on this topic.

Below is a chart comparing the CRB Index(commodities), S&P 500 Index, and the U.S.Dollar Index from 1992 to current.



It clearly shows the inverse relationship between the U.S Dollar Index and commodities. Supply and demand aside, if the dollar loses 30% of its value, a commodity would gain in dollar terms to just account for the currency it is traded in. The demand for commodities is shown in the growth of economies which translate to the growth in equity earnings, which show up in the prices of stocks. It then makes sense that commodities would have a lead in appreciation before this growth might show up in improved stock earnings. This can be seen in 1993 and in 2002 in the chart above. The next few weeks should hold for some interesting times. The U.S.Dollar index is testing an important low, commodities seem to be at an inflection point. Some are coming off great runs and could be due for consolidation. Oil still makes new 11month highs as we come into hurricane season. Boring is the one things it shouldn't be over the next few weeks. Below are some commodity charts along with one of China's exchange.

Beta Beware

"Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."

Alan Greenspan

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This is a simple chart of the S&P 500 Index and the Nasdaq 100 Index. The bottom section of the chart shows the spread ratio between the two, NDX / SPX. The blue line is a 21 period moving average of this ratio. The slope of this average is getting stronger and stronger since early June. This signifies that technology stocks have been outperforming the overall market. This could be a result of a rotation out of the financial and banking sectors. The chart below shows the ratio between the S&P 500 and the XLF Financial Spdr.



One of the stronger groups leading the S&P 500 higher has been the energy sector. These are powerful movers at times when they are in rally mode, and having felt the pain of being on the short side of this group at times, sellers seem to almost disappear at times in areas of strong short covering. Lately the stocks that have received analyst downgrades have only suffered a day or two of weakness and then are off to the races again. Valero Energy has been the subject of strong short-selling over the past months, but it is still holding strong and as a result has some guaranteed buyers if it goes much higher. Below is a chart of the S&P 500 comparing the XLE Energy Spdr.



As can be seen, this chart is showing the XLE close to an upper resistance line. This line might not act as strong resistance, but when compared to the move oil has made lately and the Natural Resource ETF-IGE, this could point to a spot to take some profits.



The chart of the U.S. Dollar Index below shows the dollar is approaching an important level from the low it made in 2004. What will be the reaction globally if and when the dollar makes a new low? Is it already factored in or will it cause people to take a second look at the macro picture. Just how great is the recent global expansion?



"This is far and away the strongest global economy I've seen in my business lifetime," U.S. Treasury Secretary Hank Paulson.

He went on in an interview to say:

On risks: "We haven't had a global financial shock since 1998. I believe that these large and dramatic increases in private pools of capital [hedge funds and private equity] and in the credit derivatives markets since then have helped manage and disperse risk and make the economy more efficient. When we do have one - and it's when, not if; that's not me being negative, it's just that we're not going to defy economic gravity - we'll be seeing for the first time how some of these instruments perform under stress."

One preventive solution is to review portfolios to ensure that diversification and balance match the initial intent when they were created. It has been very easy to fall in love with the high flying energy and metal stocks. This could result in a portfolio that is severely overweighted in these areas. It is worth booking some profits and regained a diversified weighting. This does not mean sell all your winners. It means taking some profits from a group that has rewarded you well for taking risk and re-establishing found fiscal discipline so you won't have to take the same action when possible economic gravity shows it still exists. In the crash of 1987 because of the strong performance leading up to this fall, many money managers were not balanced correctly and this resulted in them doing this re-balancing out of necessity rather than planning. At a time when they should have been buying stocks they were selling. Stay ahead of the herd. Discipline pays off in the long run. Look at the record of David Swenson who has run Yale's endowment for the past 2 decades and averaged 16.1% return. His book, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, is a great resource for what really goes in a well run endowment. He also has a book, Unconventional Success - A Fundamental Approach to Personal Investment, that is written with the individual investor in mind. Both of these books have a lot to offer and are genuinely written educate the reader. Not a lot of hype, just honest wisdom from a true master.

Holiday Week Rally

With July 4th shortening the trading week and many people taking advantage of 3,4, or 5 day weekends, volume should be light this week. The above chart shows the S&P 500, with the advance decline moving average in the top pane and the short term pivot volume indicator in the middle pane. The index has held the 1500.43 area based on the opening range concept, a review can be seen here. Based on this concept the next target is 1524.10. Having a light volume week could make reaching that level relatively easy. The futures are currently up 4.50, so it could be a given that the target will be reached today. The next level after 1524.10 is 1547.77.



The Dow Jones Transportation Index has formed a short term triangle. It has started to make an attempt to break out of this pattern, but there is over head resistance and it feels like it could be a head fake. For the overall market to make new highs, this index will have to participate, and the way it looks right now that isn't the case.

The recent decline in interest rates could be ending as prices approach a key support level(yield).



This recent decline has let stocks regain some attention, but the fact is that rates have still made a strong move higher and more could still be in the works.

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Pivot Volume Indicator

The last post touched on an idea for an indicator based on the pivot price of a stock in relation to its daily range and volume. If a stock's pivot,(H+L+C)/3, is greater than the mid-line,(H+L)/2, then that day is marked as a positive day. The value for the day is then combined with volume. To smooth things out a moving average or two can be applied. Below are some examples of this indicator with results of buying and selling the moving average cross over with each.



This chart of the S&P 500 shows the results of 15 trades (9winners,6losers) going back to July 14th,2003. The average winner was 57pts while the average loser was 26pts. The system kept you out of the market 498 days of the 1449 days tested.


This chart of the NDX-100 shows the results of 15 trades (8winners,7losers) going back to July 14th,2003. The average winner was 114pts while the average loser was 39pts. The system kept you out of the market 527 days of the 1449 days tested.


This chart of Globalsantafe (GSF) shows the results of 12 trades (10winners,2losers) going back to July 14th,2003. The average winner was 5.4pts while the average loser was 1.5pts. The system kept you out of the market 500 days of the 1449 days tested.

These results are from just using a moving average crossover on this pivot volume indicator. It was not optimized and used 2 moving averages based on standard Fibonacci numbers. These results did not outperform the buy-and-hold returns in the cases of the indexes, but in many liquid stocks tested it did outperform. The next post will deal with expanding this idea to include this indicator on two time frames along with some more widely known indicators.

If you have a stock you would like back-tested with this indicator, send an email to ttpblog@att.net along with the range of dates you would like tested. This indicator was not created to become a trigger to buy or sell, but to give an indication of when to be looking to be in a stock or market. With a little modification with oscillators and trend following indicators, this could turn out to be a helpful tool in building an automated trading system.

TeleChart Sample Scan Formulas(PCFs)

These are some sample scan formulas.

1. Closing price within 1% of 200day moving average.

C >= AvgC200*0.99 AND C <=AvgC200*1.01

2. Closing price within 1% of 50day moving average.

C >= AvgC50*0.99 AND C <= AvgC50*1.01

3. Price crossing 50day moving average.

C1 < AvgC50.1 AND C > AvgC50

4. Price crossing 50day moving average with an increase in volume.

C1 < AvgC50.1 AND C > AvgC50 AND V > AvgV20

5. 4day moving average crossing up through 9day moving average.

AvgC4.1 < AvgC9.1 AND AvgC4 > AvgC9

6. New 5day High

C >C1 AND C > C2 AND C > C3 AND C > C4 AND C > C5

7. First day up in the last 3days.

C > C1 AND C1 < C2 AND C2 < C3

8. Close up on declining volume.(short scan)

C > C1 AND C1 > C2 AND C2 > C3 AND V < V1 AND V1 < V2 AND V2 < V3

9. MACD Bullish Crossover

XAVGC12 - XAVGC26 > XAVG(XAVGC12,9) - XAVG(XAVGC26,9) AND (XAVGC12.1 - XAVGC26.1 < XAVG(XAVGC12.1,9) - XAVG(XAVGC26.1,9) OR XAVGC12.2 - XAVGC26.2 < XAVG(XAVGC12.2,9) - XAVG(XAVGC26.2,9))

10. Stochastic Cross Up Through > 20

STOC12.5.1 < 20 AND STOC12.5 >= 20

11. Stochastic Cross Down Through < 80

STOC12.5.1 > 80 AND STOC12.5 <= 80

12. Short Term Triangles(simple)

MAXC2 < MAXC2.5 AND MAXC2.8 < MAXC2.21 AND MINC2 > MINC2.5 AND MINC2.8 > MINC2.21 AND C > 5 AND XAVGV13 > 1500

13. Longer Term Triangles(simple)

H < MAXH5 AND MAXH5 < MAXH13 AND MAXH13 < MAXH34 AND L > MINL5 AND MINL5 > MINL13 AND MINL13 > MINL34 AND C > 5 AND XAVGV8 > 1500

14. Trending Consolidation 25day

(MAXH25 - MINL25) / ((AVGH25 - AVGL25) * 25) * 100

15. Close up with 2x Average Volume

C > C1 AND V > 2 * AVGV21

These are just some of the simple scans that can be written with Telechart's very simple language. The samples here are posted to provide a starting point for understanding the potential scanning software has for saving time in finding technical set ups.

If you have any ideas that you are having trouble writing the appropriate code for, use the email below to ask a question. Having used the software for 8 years, I might be able to offer some time saving help. It is possible to create many custom indicators and take advantage of some of Telechart's proprietary indicators to come up with a routine that should lessen the time in searching for winning stocks. In the future I will be posting some of the ideas and custom indicators I have come up with. They might be of help, or they could be the spark for a greater idea by someone else.

Telechart subscription runs $29.99 per month. They have discounts for a yearly subscription, but the best part is they let you try the product free for 30days. Even if you don't find the product something you need, it could be worth it to take the trial and see what they have to offer. They also offer a real-time package for $99 a month, with discounts for the yearly subscription. They also offer a new software package, Blocks, which is great for back testing trading ideas.

Email for questions about codes mentioned above or writing new ones :

technicaltradingpatterns@gmail.com

Link for 30day Trial