North America in the Lead?

  • Posted by
  • on June 17th, 2010

“The greatest enemy of knowledge is not ignorance; it is the illusion of knowledge.” Stephen Hawking

On a housekeeping note, I’m shifting this weekly report in order to make it a little more timely.  In managing our accounts, I start measuring the relative and absolute strength of these ETFs on Thursday afternoons.  This gives us a chance to eliminate weakened holdings, and prepare for opportunities to enter emerging trends.  I thought it would be helpful to readers to get a sneak peek at the data before starting a new week.  This way, moderate weakness between Friday and Tuesday might be a great opportunity to join a new trend at a fair price.

Like last week with IYR, I am very intrigued by some of the developments bubbling under the surface of this light volume bounce that everyone hates(myself included).  Take a look at the following graphic:

On the heels of last week’s post, when I noted that 5 bear patterns had to be stopped out and 1 new bull pattern emerged, we’ve seen another healthy week for most groups.  And again, we have bullish evidence with 3 bear patterns ending(EWG, EWZ, RSX) and 5 new bull patterns emerging(EWW, IYT, GDX, XLY, QQQQ).  This DOES NOT give us a license to buy freely, but gives us further indications that the correction of May and June appears to be just that…a correction.

Inside the graphic, the following items catch my attention:

1) North American assets are the clear recipients of money flows right now.  Yes, it shocks me as well, but with Europe flailing and Asia overloved, perhaps the good old USA and its main trading partners Canada & Mexico actually are the engine of global growth.

2) The addition of Mexico(EWW), NASDAQ(QQQQ), & Consumer Discretionary(XLY) gives us three groups tightly correlated to the S&P 500 that are emerging from their corrections ahead of the index.  This is a new development, as Gold, Bonds, and the US Dollar have had the strongest trends but their low correlation to equities appeared to be the reason for the strength.

3)  The rapid erosion of the bearish patterns in many assets has led to a sizable bounce in just 6 days…5% for the S&P, and more for other indices.  A low volume rally is exploitable, but not when it reaches overhead resistance.  I need either time or price to correct a little to feel more comfortable about new purchases.

The evidence tells me a foundation is building for a U.S.-led rally over the coming weeks and months.  It seems unfeasible, given the daily focus on the oil spill, exploding debt, and anti-business rhetoric.  But if I’m aware of those issues, aren’t you?  And aren’t most of us now expecting a dramatic slowdown and difficult market ahead?  This is why I focus on price.  I believe I have a much better chance of assessing the mood of participants, and how they might react under different outcomes, than I do of assembling an infinite number of macro issues into a profitable plan.  The side benefit is knowing exactly what to do when the evidence shifts…sell!

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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