Daily Investment Interpretations

August 7, 2009

2009-8-7:  The indices hopped to new highs today. The NASDAQ Composite rose 27.09 points (1.37%) to close at 2,000.25, the Dow climbed 113.81 points (1.23%) to close at 9,370.07 and the S&P 500 vaulted 13.4 points (1.34%) to end at 1,010.48. Oil closed down slightly at $70.57 a barrel, while gold doffed $3 again to end at $960. The VIX ended the day at 24.76. 
    Mark Hulbert has reported today on Four signs to watch for the rally's end. Ned Davis, publisher of Ned Davis Research, uses four criteria to determine when a rally has peaked.
(1) When the P/E ratio on the S&P 500's normalized (adjusted for stage of the economic cycle) reaches 20. Right now, he estimates the S&P's normalized earnings at about $60 a share, so an S&P level of 1,200 would be required to trigger a sell signal.
(2) Ned Davis proprietary sentiment index stands at 62, which is incrementally above Mr. Davis' threshold of "extreme optimism". Typically, it will rise to 68 before subsiding.
(3) The Fosback "High-Low Logic Index". This index is currently at 0.8%; it would have to reach 2.5% to begin pointing to the exits.
(4) Rising interest rates. The 26-week rate of change for investment-grade bonds is currently falling at a 12.6% rate. When it starts rising, this would flash a sell  signal. 
    In the meantime, the 200-day moving averages for all the indices are starting to move up.
    Right now, I'm fishing for January, 2011, $30 calls, ZYLAF, on the exchange-traded fund, EWZ, and January, 2011, $10 calls, ZVLAB, on the Chinese solar power company, Suntech Power Systems, STP. I'm looking for a pullback to stock up on these. The Wilderhill Green Energy Technology Fund, PBW, is also a favorite of mine, but long-term options aren't available on it. I also own modest positions in the solar energy ETF, TAN, and in the wind-energy ETF, FAN. (So far, both of these are underwater.) I've sold my 30 shares of First Solar at a profit. I'm a bit concerned about the long-term safety of the cadmium telluride used in First Solar's solar cells.
    I'm depending upon the Cabot China and Emerging Markets Report for my Chinese investments. There's some possibility that a bubble might be forming in Chinese stocks, so I'm trying to diversify into other BRIC countries such as Brazil and India.