We saw a pretty significant signal recently from the oil sector.   A relative strength sell signal.

This does not mean oil immediately becomes a terrible place to have money at work in March or April 2010.

But longer term, it suggests oil will (likely) under-perform the overall markets.  And, it's possible the sector could significantly under-perform.

This is really important, in more than one way.

First, let me walk you through another example where a sector gave a relative strength sell signal. The Financial sector gave a relative strength sell signal in April 2007.  Think about that.  That signal came before any of the mortgage stocks melted, well before Bear Stearns imploded (like nearly a year before that event) and significantly (18 months) before Lehman Brothers collapsed. And long before things like "sub-prime mortgages" and "TARP" became household terms.

And since "financial companies" were the largest component of the S&P 500 (at the time), it was a pretty serious signal for the whole market.

What was even MORE significant was that April 2007 was the first time that chart had flashed a relative strength sell signal…period.

Sure, some financial stocks rallied – and were even good trades AFTER the relative strength sell signal in April 2007.  But those gains were fleeting, and most were only short term trades.   You were trying to swim upstream in downward environment.

What relative strength charts can tell us is which areas will out-perform (or under-perform) their peers (or the whole market). And relative strength signals tend to last (on average) about two years.

Relative strength is not a trading tool.

So, oil, as a sector, has now given a relative strength sell signal. This is important because as the market has improved over the past year we've seen some common characteristics: as oil prices climbed, the dollar fell.  Are these two actions mutually exclusive?  Probably not.  However, in some ways, in the last twelve months oil became a proxy for inflation – and for the markets overall.  We saw areas rich in natural resources (like Latin America) perform really well over the past 12 months.

And now, in the last few weeks, we've seen the dollar strengthen (somewhat), we've seen emerging markets slow down (again, somewhat) and the price per barrel of oil has leveled off around the high 70's-low 80's area.

This does not imply oil will collapse with absolute certainty.  After all, the market generally looks pretty virile.  It also does not mean we will absolutely see Lehman-style collapses in the area either.  But never say never.

This is the first relative strength sell signal the oil sector has given, dating all the way back into the 1990's.

This is one big reason why I have stopped buying in the oil patch and the emerging markets.  These areas were "hot to trot" a year ago.   Now, I am more skeptical about investing in these areas. Too many times, investors will look at "what did the best last year" and blindly stick their 401k money there, or invest in the hot mutual fund of 2009.  Last year's superstars may become this year's (or next year's) duds.

Be careful!  Again, this signal could foreshadow conditions that may not appear for a few months, or even a year.  Or not at all. The sector could just stall.  But I'd rather be early, than a minute late.

Exxon reported nearly $12 billion in profits for the previous quarter recently. $12 billion! More net profits in one quarter, than ever recorded in the history of mankind.

And what did the stock do?

It went down.

Numbers like $12 billion generate emotional responses: anger, jealousy, envy, and even pride. The media does a good job of stirring the pot. Once the emotion subsides, a lot of people start to realize that Exxon is one of the largest employers in the United States, along with being one of the biggest taxpayers in the United States as well.

But there was something in the earnings report that really got my attention — maybe you saw it, too.

In addition to reporting record earnings, Exxon also reported their total production declined. Companies like Exxon simply don't have the tools in place — or even available — to do more drilling or exploration. They simply don't have the infrastructure to increase production.

Now let's talk about their stock. And a short lesson in relative strength!

When compared to other oil stocks (Exxon's peer group), Exxon stock has been on a relative strength sell signal since 2001. While this member of the Dow Jones has done well compared to the S&P 500 and the other Dow Jones stocks, Exxon appears to be a weak-kneed Willie getting sand kicked on it by some of the other bruisers in the sector.

And now that Exxon has broken the support line, and the sector is falling out of favor…well, it's really starting to lead the parade out of town.

I suppose $12 billion just doesn't get you what it used to anymore, does it? This company is posting record earnings, record revenues, record profits… and the stock goes down.

Oh…one more thing. Can you guess what stock you will find listed as the first or second largest position (investments) in most large-cap growth mutual funds? Here's a hint…it used to be called Standard Oil.

Go ahead and read the headlines — just don't base your entire investment decision on headlines… like most people do.

 Looking at relative strength changes really helps to drive home underlying themes in the market. As I have been saying for several weeks, there are only a few sectors that have been going up — most sectors have been just treading water — and some sectors are completely falling apart.

Here are some recent relative strength changes, you tell me if you can spot the underlying themes: New relative strength buy signals: Dominion Resources, Cross Timbers, Cal Dive International, Natural Gas and Worthington Industries (a steel stock).
New relative strength sell signals: Bank of America, more local and regional banks (too many to list), Enstar and Fortis (insurance companies), Black & Decker and Pier One Imports.

Remember that relative strength signals tend to last approximately two years (some longer, some shorter). By the look of things, I think this may be round two for the financial stocks (banks, brokers, insurance companies). And it doesn't look like oil and other commodities are done yet either.

Most Wall Street recommendations to buy are based on projected future revenues and/or projected future earnings. Projected. Or you could say, "predicted".

Ever notice that a stock will begin to drop (many times without any news), and people will begin to ask "why is XYZ dropping?" Then rumors begin to swirl that something might be wrong, and the stock drops even further. In fact, it slides quite a bit until the actual news is released.

And by then, it's often TOO late to sell the stock.

This makes some folks jumpy…and with good reason. I'm sure you know someone who makes a point or two in a stock and then flips it. Why is it that some folks just seem so thirsty for a profit? Probably because they rarely make money in stocks. And yet, these same folks will ride XYZ down 50% because "it's not a loss until you sell it."

Yeah, right! People in my line of work always preach cutting your losses short and let the winners run. The problem is most folks don't know whether to sell — or hold on, and they wind up making a mistake.

Look, this is where the charts can give you guidance. They don't predict the future, they just tell you if a mutual or a stock is fund is going down because of the market or because there is something actually wrong.

If a fund or stock is in a strong sector, has good relative strength compared to it's peers and the market overall, and is on a buy signal…then stick it out. If a mutual fund or your stock is giving multiple sell signals, breaks the support line, is on a relative strength sell signal, then it's a loser, and it's time to go.

Point and figure lets you know if the move today in your stock was just a wiggle with the rest of the market, or a change in trend. And trends REALLY matter. And the charts don't care if there was a big seller of shares, or if someone has inside information about the company.

When enough sellers show up to change the trend of the stock (from a stock in demand to a stock that everyone is selling — supply), we will see that very plainly on the chart. Plain as the nose on your face. These point and figure charts are unbiased – they do not care if you have owned XYZ for 44 days or 44 years – when it's time to go, it is time to GO.

The charts are very clear. There's no ambiguity. Buy, sell, or hold on. Simple.

The beauty of the Point & Figure chart is that the chart has no preconceived bias. A Point and Figure chart doesn't care who owns the stock, or who likes the stock…or even if somebody just predicted some stock would double in the next 12 months.

The chart only cares about the daily highs and lows of the stock price, that's all!

And over time — that alone — tells an interesting story of its own.

Which is why it is so easy to spot mutual funds, sectors and individual stocks that are about to collapse — very often, they give a LOT of clues! Red flags — like multiple sell signals, support line breaks, relative strength signals…they often come in bunches, so it's easy to tell when trouble is brewing.

And I see them all the time.

Notice I wrote that Point and Figure can be EASY. That's E-A-S-Y, meaning you don't need a PhD, or a Harvard MBA to see what's happening with your investment.

Well, if it's so easy, why don't more people use point and figure charts?

Its is true, once you get the hang of the charts, they DO become easy.

Easy, but not SIMPLE.

The biggest problem with using charts is that you have to review the changes every day, and that is something a lot of folks just cannot be bothered doing. Does it get you into some good situations too early? Yes. But does it get you OUT of some situations before a meltdown? Yes, it often can. But people want instant gratification today, not more work.

And using point and figure charts can be work.

But here is the rub: look, no system is perfect, but after twenty-plus years of doing this professionally, I have found that the point and figure charts work extremely well in helping us manage the RISK in your portfolio.

And here is why: they do not offer excuses why something things did not work, they do not blame something (or somebody) else when things go unexpectedly.

I like that.

We've been saying for months to avoid real estate, financial, insurance, banking, and brokers. This past week, all of these sectors were taken behind the woodshed and slapped silly again.

See, when you add up all of these sectors, we're talking about a group that represents almost 1/3 of the S&P 500. So, of course the market will get smacked.

There have been several attempts in the media to compare what's happening now with this group to what happened to the same group in 1998 — during the "Asian flu" and the Long-Term Capital hedge fund implosion.

Look, I don't think we're going back far enough.

Think back to 1990. Iraq had just invaded Kuwait, the US economy was slipping into a recession, several large leveraged buyouts had melted, and the real estate market was cooling off after a really fabulous run through the mid-to late 1980s.

Citibank soon dropped below $10/share.

There were also many several well-known banks throughout New York and New Jersey (and up and down the East Coast) that were trading for $2/share. Or less.

Has everyone forgotten that?

Many of the stocks in these sectors have broken support and are essentially in free fall. It does NOT mean the carnage is guaranteed to continue, but the likelihood is this may not end tomorrow, either. American Express is just the latest chart in the group to flash the "I'm melting" pose.

Now don't get bummed out. There are STILL several great places to have your money invested. And we remain invested in stocks with the best relative strength. I know that I sound like a broken record when it comes to relative strength, but it's VERY important.

So even though — in the short term — we may see some stocks (and some sectors) slip — just know that longer term, we're in the right places, like stocks on relative strength buy signals. Stocks and mutual funds with the best relative strength are the names that come back the fastest.

If you have any questions, doubts, or concerns, you need to call the office *right now* to book a time to talk with Tom. We are standing by ready to help, at (732) 223-9000.

So, let's talk soon, ok?

Tom

Thomas Mullooly
Mullooly Asset Management LLC
Our Only Business Is Fee-Only Investment Advice
www.mullooly.net
support@mullooly.net

732-223-9000

One of Our Better Tools

We've got a tool we rely on here at Mullooly Asset Management called "relative strength." This tool simply tells us which investments are moving faster than the entire market, or moving slower than the entire market.

Pretty powerful tool!

That's important – if we want to beat the market, we need to own things that are moving faster than the overall market, right? And when the market is falling, some stocks just seem to really get crushed, while others hardly get scratched, right?

Why is that? Relative strength.

And since relative strength signals (buy signals AND sell signals) typically last about two YEARS; we have a high degree of confidence our money is in the right place.

So, the beauty of relative strength is that it keeps you in a stock (or in a sector) long after the "hot money" has left the playing field.

And this is where really tremendous gains can be scored.

For example, relative strength got us into oil in early 2002, well ahead of the crowds. And it told us to clear out of tech in the first quarter of 2000, before anyone knew the bloodbath that would occur.

Hey, relative strength doesn’t predict. It simply tells us what’s working RIGHT NOW. If you want to know what areas to avoid and what to focus on, send an email right now to research@mullooly.net and we can set up a time to talk on the phone.

Tom

Thomas Mullooly
Mullooly Asset Management LLC
Our Only Business Is Fee-Only Investment Advice
www.mullooly.net
support@mullooly.net

732-223-9000

One of the best tools we have at our disposal is something called "relative strength."

Look, you can't beat the market, unless the investments you own ARE beating the market. In other words, hanging onto something "just because" will always drag down your overall performance.

We should not get "married" to a stock.

Relative strength "signals" are long-term in nature — they often last two years or more on average.

Relative strength "buy" signals: these investments tend to go up FASTER than the rest of the market — and when the market is in trouble, they often go down slower than the rest of the market.

Relative strength "sell" signals: tend to go up SLOWER than the rest of the market — but when the market gets shaky, these investments often go down faster than the rest of the market. In fact, they usually crash — badly.

So when we're on defense (like we have been recently), we dropped all stocks or mutual funds with relative strength sell signals.

The stocks and mutual funds that we've held onto lately (while on defense) have been the stocks with the best relative strength. Yes, they can (and often do) go down — but they tend to go down slower than the rest of the overall market.

Tom

Thomas Mullooly
Mullooly Asset Management LLC
Our Only Business Is Fee-Only Investment Advice
www.mullooly.net
support@mullooly.net

Several indicators I follow have flipped positive recently. 
That doesn't mean I don't want to run right out and invest every
last dollar back into this market today. 

Here's why:
 

Financial stocks make up 20% of the S&P 500 Index.  At 20%,
financial stocks are the largest piece of the S&P 500, one of
the most widely watched "yardsticks" in the industry. 
Well, just this week, as a group, these financial stocks gave
a relative strength SELL signal…

…for the first time in eleven YEARS.
 

I discussed this with friends of mine in the industry.  We all
agreed that after eleven years, through financial events like
the implosion of Long Term Capital (hedge fund), the meltdown in
the financial area from mid 1999 through early 2000, and sheer
ugliness in the markets in 2001-2002, the relative strength for
this group "bent" at times, but never broke. 

So, I'm curious…why now?

What does the market know, that we don't?

Anyway, this reversal up in the market is positive…BUT… 
…it does come with some strings attached. Those "strings"
are that the indicators are at really high levels, so the risk
remains ultra-high.  It would not be a big surprise to see us
flip back to a negative trend quickly.
 

At times like this, the market will generally NOT bail us out
of mistakes.

So, sector rotation and picking the right stocks
remains really important now.  Again, I don't want to run right
out and invest our last dollar back into this market today. 
 

For now, we'll stay away from adding to Building stocks,
Gaming stocks, Banks, Savings & Loans, and the Wall Street stocks.
The commodities, and once again, oil, are where we really want
to focus now.

Tom

Thomas Mullooly
Mullooly Asset Management LLC
Our Only Business Is Fee-Only Investment Advice
www.mullooly.net
support@mullooly.net

Should we just “sell everything” and raise cash when the market flips from offense to defense?  The short answer is NO.
 
Look, going to 100% cash is a very aggressive call. 

We’d have to be pretty certain there’s no hope at all for the market…to make a decision like that.  It’s the most aggressive call you could ever make.So the next step is to simply STOP buying.  This alone will enhance your returns in a falling market.  You’ll have cash to put to work when the market does finally go back on offense — when the odds are stacked in your favor.
 
After that, we review stocks or mutual funds where we’ve got large gains.  We want to consider whether to take some profits off the table.  So many people simply did nothing and watched “over-size gains” become “super-size losses” a few years ago.
 Look, it just makes sense to periodically take some money off the table.