Current Market Outlook from Mike Burk

There's a free weekly newsletter I like from Mike Burk at Alpha Investment Management. Here's a short excerpt from the latest edition, which basically agrees with my own opinion:

The good news is: The small and mid cap indices as well as the NASDAQ composite (OTC) closed at multi year highs Friday.

The small caps hitting multi year highs is an intermediate term positive implying higher highs for all of the major indices in the next few months. [However,] most of the breadth indicators did not confirm Friday's highs and that, along with the seasonal pattern, suggests short term weakness.

The newsletter also has charts showing you the technical indicators he's talking about.

Next time, more about those seasonal patterns. Meanwhile, you can subscribe to the newsletter free.

Is It Time to Refinance Right Now?

Various factors go into a decision to refinance, but I'm just looking at the interest rate factor. We know rates are going down, but where is the bottom?

The Federal Reserve controls short-term interest rates, but mortgage rates are longer term and are set by the market (certainly influenced by the short-term rate, but the market also looks ahead to anticipate where the short-term rate is likely to move). The 30-year mortgage rate is more or less correlated with the rate of the 10-year Treasury note. There are a couple of ways to track and chart this.

One place the price movement of the Treasuries can be seen is on a chart of the iShares 7-10 Year Treasury Bond Fund. This is an ETF (Exchange-Traded Fund) that trades just like a stock, and the symbol is IEF.

The thing to remember is that when this ETF goes up, interest rates go down, and vice versa. So when it starts to go down below its uptrend, then mortgage rates have turned up.

Alternatively, the interest rate of the 10-year Treasuries can be charted directly. Most software and sites that I have seen use the symbol $TNX for this. Of course mortage rates are always higher than Treasuries, but again they move more or less together.

How do you know when the rate is is bottoming (or equivalently, the price is topping)? This is always the $64,000 question, and there are almost as many techniques for projecting this as there are analysts. Nobody can really tell for sure, but here are a couple of things to look for:

• If you see IEF suddenly spike higher (or $TNX spike lower), which quickly reverses the same day, you are quite possibly at an extreme point that will not be exceeded for a while. Instead of waiting to see if it is exceeded, you might want to lock in that rate immediately (that same day if possible). The bird-in-the-hand benefit of getting the lower rate sooner, may very possibly outweigh the two-in-the-bush chance of getting a better rate later on.
  
  I watched for a spike and did this in 2001. As it turned out, I could have gotten a somewhat better rate if I'd waited 6 to 24 months, but I didn't know that -- and then I wouldn't have had the benefit of lower payments during those months.
  


• You can look at a chart with trend indicators, and wait till IEF drops below its uptrend (or $TNX breaks above its downtrend). For instance, at the date of this writing, if you chart it with 21-day and 50-day exponential moving averages (EMAs), you'll see that since July of 2007, IEF has briefly dropped below the 21 on several occasions, only to rise again -- but has not really dropped below the 50. So the 50-day EMA seems to be a decent trend indicator, for now at least.
  


• You can also look at the MACD indicator, which I've talked about before.
  

Here's an example chart of IEF, and an example chart of $TNX with these indicators. Note the IEF price is well above (and $TNX is well below) both moving averages, but the MACD's black line has crossed over the red line. That's a clue that mortgage rates might not get any better, for a little while at least. The chart shows that the last time this happened, it took several weeks to see better rates. So maybe it's time to consider that bird in the hand.

(Note: The above was originally written before the rate spiked sharply on Feb. 7. The values in both cases temporarily crossed the 21-day EMA, but not the 50.)

On the other hand, this period might be like December, where the rate hovered around the same area much of the month, only to fall further in January. Looking at the $TNX chart, when the MACD rises without the rate itself rising very much, it's a sign that this might be about to happen. Compare the MACD since about January 23 with its behavior in December, and you'll see the similarity.

So it's up to you. As Clint Eastwood says in Dirty Harry, "You've got to ask yourself one question: 'Do I feel lucky?'" If so you might wait a little longer, and keep an eye on those EMAs. In the meantime, shop around, decide where you want to get this loan, and find out what they need in order to lock in a rate.

Is It Safe To Buy Stocks Again?

Many market analysts study corporate profits, interest rates, the general economy -- these are called fundamental factors. Other analysts study stock price charts, their patterns, and various indicators calculated from market action -- these are called technical factors. For various reasons, technical factors can often tell you more about market conditions than fundamental factors, especially in the short term.

One good way to help you figure out what's going on in the market is a commonly used technical market indicator called the MACD (that stands for Moving Average Convergence-Divergence). It's not perfect (no indicator is), but if you plot it on a weekly chart, the overall state of the market becomes much more apparent.

You can do this on many free charting web sites; my favorite is JavaCharts from prophet.net. Here are the steps to follow:

1. On the JavaCharts web page, first enter the symbol to chart. For instance, on this site the S&P 500 index is $SPX.

2. The next pulldown list determines the kind of chart. The simplest option is to leave it as a line chart, which shows the closing price every period. You can experiment with the other styles to see the difference; for example, bar charts and candle charts show the opening price, high, low, and close for each period.

3. In the next pulldown list, choose the desired time duration for the entire chart; for instance, one year.

4. In the next pulldown list, choose the period for each data point. For this example we are using "W" which produces a Weekly chart; i.e., there is one point on the chart per week.

5. Right-click inside the chart and choose Studies -- Apply Studies. Click the pulldown list entitled "Select Studies" and choose "MACD (2 lines)". Then click Close.

6. You now see an area below the main chart, whose main feature is two lines. On mine, there's a solid blue line and a dotted red line. Now look at where the lines cross -- those are the signals. There are variations in how to use this indicator, but the simplest way is, when the main line crosses below the dotted line, sell. When the main line crosses above the dotted line, buy.

Notice this signal gave a sell signal in May 2006, soon after the market started on its steep drop into the summer. Then it gave a buy signal in early August, soon after the market launched a powerful rally that ultimately gained nearly 18% in 7 1/2 months.

Please note that even though this indicator is pretty good, these are not standalone buy/sell signals and should be considered in combination with other indicators and market conditions. Still, you could do a lot worse than making the MACD a major guideline. The longer chart periods, especially weekly and monthly, are more reliable than shorter ones like daily and intraday.

Note that the nature of the signal is reactive rather than predictive, so it would not have gotten you out before the recent drop. But it can help you recognize when the trend has changed and thereby help prevent further losses.

So what's it saying now? It went to a sell signal in late February (due to the recent plunge) and is still on its sell. So even though the market could rebound right away, the odds are against it. Bottom line, it's not yet safe to get back in the market.

This also agrees with other information I'm seeing that it's not yet time to buy. In fact, if you haven't sold already, you still have the opportunity to do so. Even though I don't think this will be a severe correction, you never know how far down it might go.

So now you have a tool which should make you a lot more comfortable about being in or out of the market. In general, signals using the weekly chart occur every few months. If you don't want to trade even that often, use a monthly chart (expanding the view to about 5 years or more, so you can see past signals better) instead of a weekly one. On the monthly chart, the MACD gave a buy signal for the S&P 500 back in May of 2003 and that buy is still in effect.