There is no doubt that Santa Claus arrived on Wall Street this year! With the S&P 500 and the NASDAQ Composite up 14 of the last 17 trading days, the Santa Claus rally posted a return of over 6% on both indices. Not a bad return from the bearded one. But who really is Santa Claus? Is he the historical figure that we all heard about? Or is the bearded one a new Santa, one bringing billions of dollars of cash to Wall Street firms daily, from the Federal Reserve Bank?
Yes ladies and gentlemen, the new Santa is none other than Ben Bernanke. He does have the beard and he did spend the end of this year bringing gifts of large amounts of cash to the once beleaguered Wall Street banks, but after that the similarities stop. I’ve never seen him photographed in a red suit and I’m pretty sure he arrives to work in a car with no reindeer or a sleigh in sight.
Now the Fed through their QE2 program is going to continue to flood Wall Street with billions of dollars through the spring, but will the rally continue? That remains to be seen. Complacency among investors is at almost unprecedented levels. The extreme bullishness is pervasive. It’s as if investors believe that nothing could go wrong. However, it is at times like these that the majority almost always is mistaken and the market does the most damage to highest number of participants.
So where are the warning signs? Oh they are out there and it is in the form of rising interest rates. The bond vigilantes may cause Fed Chair Bernanke some headaches. Recall that the Fed is trying to buy bonds with the intent of keeping interest rates low. They want low interest rates to attempt to stimulate the housing market and to keep corporate lending rates down to motivate businesses to borrow and expand, in an effort to create jobs.
The Fed also wanted to stimulate the stock market to recreate a wealth effect for investors and retirement plans. The success the Fed is having so far with stocks is causing bond holders to rethink their strategy of avoiding stocks and holding safer Treasuries. Rising stock prices are starting to influence droves of investors to sell their bond positions, which are driving bond prices lower and conversely resulting in higher interest rates. How far and how fast rates go up remains to be seen, but printing more money to the tune of hundreds of billions of dollars historically would be considered inflationary. And inflation is bad for bonds as it also drives interest rates higher.
This new conundrum of higher interest rates with an economy struggling to stand its own is not good and will have to come to terms probably sooner rather than later. When? Perhaps next week or maybe money managers will do what they can to sustain the market one more week and wait until after the first of the year. One thing is clear Santa had his rally. The Wall Street gang is celebrating right now. While it is good to enjoy the season and the recent rally, there are some dark clouds on the horizon and to ignore them would be unwise.
Happy Holidays to all and best wishes for a healthy, happy, and prosperous new year.
Thursday, December 23, 2010
Friday, December 10, 2010
According to Plan?
This week the NASDAQ Composite and the Small Cap Russell 2000 Index closed at levels not achieved since January 2008. The S&P 500 is flirting with prices that were held back in September of 2008. The stock market is responding according to the QE2 plan laid out by Fed Chair Ben Bernanke a couple of months ago.
However the bond market is responding inverse to the Bernanke plan as yields are rising across the board, driving bond prices lower. This week Treasuries experienced the second largest two day selloff in the last 50 years. Is this a sign that the bond vigilantes are out, disgusted that the national debt continues to escalate at a mind boggling pace? Or could it be that investors, who over the last year piled into bonds, are now open to taking on more risk in the stock market. This will remain a critical discussion going forward and will determine how well the Bernanke plan succeeds.
If interest rates rise at an orderly pace and the economy continues to show strength, the stock market could retest the all time highs over the next 12 to 18 months. However, if inflation starts to accelerate, it could spell trouble for both the stock and bond markets, as well as the economy. Already there are signs that higher mortgage rates are slowing the pace of the loan refinance market. Could the fledgling housing recovery fall into a double dip should mortgage rates continue to rise? The Fed is attempting to thread the needle when it comes to the inflation / deflation conundrum.
For the moment the markets are breaking out to new multi year highs. The Fed’s game plan to purchase bonds from the primary broker dealers to the tune of tens of billions of dollars per week seems to be producing the desired outcome where some of the proceeds are migrating over to the stock market. Corporate earnings, which had declined over 92% from its 2007 peak to the 2009 trough (which brought inflation-adjusted earnings to near Great Depression lows), have recovered significantly. S&P 500 earnings have surged up over 900% and are now above the levels attained at the peak of the dot-com era. In fact, earnings have only been higher than current levels for a two plus year period of time that occurred at the tail end of the credit bubble.
While earnings are above those achieved at the dot com peak, it must be noted that S&P prices are not. On December 31, 1998, the S&P closed the year out at 1,229. We were at those levels yesterday, some 12 years later. Does that mean that stocks are undervalued? Not by historical standards. The market is fairly valued today and was overvalued back in the late 1990’s.
Investor Intelligence readings display a high level of optimism: 56.2% Bulls with Bears at 21.3%. Bullish sentiment has not been this high since the end of 2007, while the bull/bear spread is approaching levels seen in April of this year just before the flash crash. Sentiment is a secondary indicator but it should not be ignored. The VIX also shows complacency among investors.
There are other outside factors that could have an effect on the market in a meaningful way in either direction. The markets have priced in the extension of the Bush tax cuts. A failure to get this done before the Congressional Holiday recess could be detrimental. Hot spots geopolitically like Korea can change the temperature on markets rather quickly. China may have inflation issues and at some point next year global debt problems will once again take center stage.
So far the Fed has managed the stock market according to plan. Participants are hopeful that this will continue. Most money managers are hoping for a Santa Claus rally or at the very least a sideways market through the end of the year to protect their bonuses. We are in the favorable season for stocks. The third year of a Presidents term has had an uncanny tendency to produce superior returns. Hopefully the stars stay aligned and the markets climb back to all time highs. Small cap stocks and the NASDAQ are the market leaders, with mid cap stocks not far behind.
* Pacific Financial Planners maintains positions in the following: ACAS, AINV, BG, DRYS, EEM, GLD, IWM, KOL, MDY, PCL, PDP, PIE, SGG, SWHC, XLF, WTNY
However the bond market is responding inverse to the Bernanke plan as yields are rising across the board, driving bond prices lower. This week Treasuries experienced the second largest two day selloff in the last 50 years. Is this a sign that the bond vigilantes are out, disgusted that the national debt continues to escalate at a mind boggling pace? Or could it be that investors, who over the last year piled into bonds, are now open to taking on more risk in the stock market. This will remain a critical discussion going forward and will determine how well the Bernanke plan succeeds.
If interest rates rise at an orderly pace and the economy continues to show strength, the stock market could retest the all time highs over the next 12 to 18 months. However, if inflation starts to accelerate, it could spell trouble for both the stock and bond markets, as well as the economy. Already there are signs that higher mortgage rates are slowing the pace of the loan refinance market. Could the fledgling housing recovery fall into a double dip should mortgage rates continue to rise? The Fed is attempting to thread the needle when it comes to the inflation / deflation conundrum.
For the moment the markets are breaking out to new multi year highs. The Fed’s game plan to purchase bonds from the primary broker dealers to the tune of tens of billions of dollars per week seems to be producing the desired outcome where some of the proceeds are migrating over to the stock market. Corporate earnings, which had declined over 92% from its 2007 peak to the 2009 trough (which brought inflation-adjusted earnings to near Great Depression lows), have recovered significantly. S&P 500 earnings have surged up over 900% and are now above the levels attained at the peak of the dot-com era. In fact, earnings have only been higher than current levels for a two plus year period of time that occurred at the tail end of the credit bubble.
While earnings are above those achieved at the dot com peak, it must be noted that S&P prices are not. On December 31, 1998, the S&P closed the year out at 1,229. We were at those levels yesterday, some 12 years later. Does that mean that stocks are undervalued? Not by historical standards. The market is fairly valued today and was overvalued back in the late 1990’s.
Investor Intelligence readings display a high level of optimism: 56.2% Bulls with Bears at 21.3%. Bullish sentiment has not been this high since the end of 2007, while the bull/bear spread is approaching levels seen in April of this year just before the flash crash. Sentiment is a secondary indicator but it should not be ignored. The VIX also shows complacency among investors.
There are other outside factors that could have an effect on the market in a meaningful way in either direction. The markets have priced in the extension of the Bush tax cuts. A failure to get this done before the Congressional Holiday recess could be detrimental. Hot spots geopolitically like Korea can change the temperature on markets rather quickly. China may have inflation issues and at some point next year global debt problems will once again take center stage.
So far the Fed has managed the stock market according to plan. Participants are hopeful that this will continue. Most money managers are hoping for a Santa Claus rally or at the very least a sideways market through the end of the year to protect their bonuses. We are in the favorable season for stocks. The third year of a Presidents term has had an uncanny tendency to produce superior returns. Hopefully the stars stay aligned and the markets climb back to all time highs. Small cap stocks and the NASDAQ are the market leaders, with mid cap stocks not far behind.
* Pacific Financial Planners maintains positions in the following: ACAS, AINV, BG, DRYS, EEM, GLD, IWM, KOL, MDY, PCL, PDP, PIE, SGG, SWHC, XLF, WTNY
Friday, October 29, 2010
Next Week Could be Huge
Does it really matter that markets are overbought technically using a variety of indicators? How about the fact that investor sentiment is at levels historically associated with near term market tops? Is it a concern that corporate insiders are selling their own company stock at near record levels? If the future is so bright, why are insiders selling so heavily? Has the market factored in more “quantitative easing” than the Fed is likely to propose? Will the election outcome, however it turns out, excite or disappoint investors? All these questions and more, most likely will be answered by mid next week.
It is not hyperbole to suggest that next week may turn out to be the biggest week of the year for Wall Street. On its own, the market should have a significant pull back. However, with the makeup of the legislature and the purchase of some unknown quantity (possibly trillions of dollars worth) of bonds on the line, we could have some real fireworks go off by this time next week.
It is said that markets are discounting mechanisms. They move in advance of any news, supposedly factoring in a predetermined result. I believe that is true except in cases of market tops and market bottoms. For example in 2007, in the age of excess liquidity, most investors were hardly planning for the real estate debacle that ensued, causing a severe recession. In March 2009, most investors were seeing continued gloom and doom, only to have the market rally. Since the end of August markets have been rallying on the notion that bad news is good news and that the Fed will ride in on a white horse (or helicopter) and purchase about $1,000,000,000,000.00 in assets.
If the Fed follows the Japanese model from a couple months back, those assets could include not only bonds, but real estate, stocks, and ETF’s. Technical factors such as being overbought, excessively bullish sentiment, among others, may be overwhelmed by such a windfall of newly printed cash. On the other hand much of these long anticipated decisions may have already been factored into today’s current prices and the only result could be disappointment from the actual facts. The old adage has always been to “buy on rumor and sell on news.” If that holds true, we could be set up for a drop.
The recent tight trading range on the indices, up against their major resistance levels, as well as internal divergences, suggests a significant breakout move is at hand. As usual, it is the direction of the next move that is not very clear. Investors most likely will have to wait for next week’s key events to gauge the market’s reaction. I believe the recent highs and lows on the S&P 500, offer critical pivot points that will present the direction participants are searching for. Above 1220 or below 1159, after next Wednesday, will most likely determine the markets next near term move.
Acting as a buffer to the downside going forward are few key elements. One is that the Fed will announce some sort of support to keep markets from crashing more than a healthy pullback. Also the calendar is favorable. The “sell in May and go away” cycle is replaced by its bullish opposite which is to buy in November and hold into spring. In addition, the third year of the Presidential four year cycle, has historically offered the best returns for market investors.
One negative potential factor that could come into play is that traditionally mutual funds lock in their trading profits before Halloween to create a taxable event for the fund holder in the same year. However, profits taken after October are not taxed until the following year. Are mutual funds sitting on a host of profits that will result in sales starting soon?
Next week is huge for news that will affect the markets in the near and long term. It will be very interesting to see which way we go. Watch the pivots and protect your capital.
It is not hyperbole to suggest that next week may turn out to be the biggest week of the year for Wall Street. On its own, the market should have a significant pull back. However, with the makeup of the legislature and the purchase of some unknown quantity (possibly trillions of dollars worth) of bonds on the line, we could have some real fireworks go off by this time next week.
It is said that markets are discounting mechanisms. They move in advance of any news, supposedly factoring in a predetermined result. I believe that is true except in cases of market tops and market bottoms. For example in 2007, in the age of excess liquidity, most investors were hardly planning for the real estate debacle that ensued, causing a severe recession. In March 2009, most investors were seeing continued gloom and doom, only to have the market rally. Since the end of August markets have been rallying on the notion that bad news is good news and that the Fed will ride in on a white horse (or helicopter) and purchase about $1,000,000,000,000.00 in assets.
If the Fed follows the Japanese model from a couple months back, those assets could include not only bonds, but real estate, stocks, and ETF’s. Technical factors such as being overbought, excessively bullish sentiment, among others, may be overwhelmed by such a windfall of newly printed cash. On the other hand much of these long anticipated decisions may have already been factored into today’s current prices and the only result could be disappointment from the actual facts. The old adage has always been to “buy on rumor and sell on news.” If that holds true, we could be set up for a drop.
The recent tight trading range on the indices, up against their major resistance levels, as well as internal divergences, suggests a significant breakout move is at hand. As usual, it is the direction of the next move that is not very clear. Investors most likely will have to wait for next week’s key events to gauge the market’s reaction. I believe the recent highs and lows on the S&P 500, offer critical pivot points that will present the direction participants are searching for. Above 1220 or below 1159, after next Wednesday, will most likely determine the markets next near term move.
Acting as a buffer to the downside going forward are few key elements. One is that the Fed will announce some sort of support to keep markets from crashing more than a healthy pullback. Also the calendar is favorable. The “sell in May and go away” cycle is replaced by its bullish opposite which is to buy in November and hold into spring. In addition, the third year of the Presidential four year cycle, has historically offered the best returns for market investors.
One negative potential factor that could come into play is that traditionally mutual funds lock in their trading profits before Halloween to create a taxable event for the fund holder in the same year. However, profits taken after October are not taxed until the following year. Are mutual funds sitting on a host of profits that will result in sales starting soon?
Next week is huge for news that will affect the markets in the near and long term. It will be very interesting to see which way we go. Watch the pivots and protect your capital.
Friday, October 22, 2010
Nothing to Cheer About
My daughter is a cheerleader at her school. As you know cheerleaders have to cheer for their teams through good and bad times no matter what. It seems that investors today are acting as cheerleaders for the Federal Reserve. The current chant goes something like this; “Go Ben – Print more money – Buy more Bonds! Go Ben Go – Buy more Assets!”
It doesn’t matter that this same Fed that back in the beginning of 2007, when New Century Financial (the first big time subprime lending company) failed, the Fed continued to talk about ‘excess liquidity.’ When the problems became worse the Fed said that the problems would be contained to only subprime loans. When the problems spread from subprime to prime loans - this same Fed clearly announced that the problems would be minor and not extend into the rest of the US economy.
When the economy started into a full blown recession in 2008– Fed officials were saying it would only be a soft patch in a robust economy until it was too late. They were behind the curve ball all the way down. The first Quantitative Easing program, which had the Fed buying mortgage securities in an attempt to keep interest rates low to stimulate the housing market, was only partially successful. Because, while interest rates for mortgages stayed low, seniors on fixed incomes suffered and the housing market still remains vulnerable. So far Fed actions have not been too successful are reviving our economy on a widespread basis – just look at job growth or the lack thereof.
Some will argue that without the Fed things would have been much worse. That is debatable. My contention is that we would have dropped farther and faster, but the recovery would have also been much quicker without the humongous debt burden we created that will likely last for generations. But that is not the point of discussion in this prose. The real concern is that if investors feel that America is on the road to recovery – what do we need to print another trillion dollars for (QE2)? Could it be that structurally we still have some issues? One would never know it judging from the complacency of investors.
The VIX fear index is at extreme low levels. The AAII investors’ sentiment gauge also shows a high level of bullishness and an extreme low level of bears. The spread from bulls to bears is one that is normally associated with market tops. This could mean that investors either trust or fear the bearded one who wields a big printing press. Institutions are also very bullish as mutual funds are carrying near record low levels of cash today. Also adding to the mutual fund dilemma has been the record amount of redemptions by individual investors from stock funds over the preceding several months.
From a technical perspective, I see a very extended rising bearish wedge pattern formed since the August 31st lows on the major indices. The market run up over that timeframe also has an eerie similarity to the run up from February to the April highs of this year. I observe a double top formation with the current and April highs and the markets are currently intersecting their respective 200 week declining moving averages, adding resistance to the uptrend. We have more volume on the down days than on the up days, signaling distribution. The High Frequency Traders that caused the flash crash in May still constitute the majority of the volume each trading day – which to me still demonstrates potential instability.
The market set up is very similar to the April highs, but the only thing missing is a catalyst to get the market moving up or down from here. I am very concerned about the inverse relationship markets have with the US Dollar. Sentiment on the dollar is 100% bearish! The old adage is to invest opposite of everyone else – especially when everyone is all on one side. You cannot get more bearish on the dollar than what it is today. If the dollar reverses back up and the inverse relationship holds true to form – then the stock market could be in for a reversal. Now the dollar bears are going to see the QE2 that’s coming and state that the dollar is going to continue its slide. It wasn’t too long ago that many pundits were saying that the Euro would not only drop to par with the US dollar – but it would cease to exist as a currency. Look what has transpired since. The only certainty is change.
Now is a time for caution! Some major events are coming soon. The election on November 2nd and the much anticipated Fed announcement the next day to name a few. Clearly investors are cheering, hoping, and waiting for the next move by the Fed. November 3rd cannot get here soon enough. Is this going to be one of those buy on rumor and sell on news events? Can the Fed live up to the expectations built into current market prices for another round of quantitative easing? Will the Fed’s action really spread to the overall economy and create jobs and boost our nation into a self sustaining recovery? I’ll keep my daughter cheering on Ben Bernanke and his friends – “Go Bernanke – the economy doesn’t want another spanky” – or something like that.
It doesn’t matter that this same Fed that back in the beginning of 2007, when New Century Financial (the first big time subprime lending company) failed, the Fed continued to talk about ‘excess liquidity.’ When the problems became worse the Fed said that the problems would be contained to only subprime loans. When the problems spread from subprime to prime loans - this same Fed clearly announced that the problems would be minor and not extend into the rest of the US economy.
When the economy started into a full blown recession in 2008– Fed officials were saying it would only be a soft patch in a robust economy until it was too late. They were behind the curve ball all the way down. The first Quantitative Easing program, which had the Fed buying mortgage securities in an attempt to keep interest rates low to stimulate the housing market, was only partially successful. Because, while interest rates for mortgages stayed low, seniors on fixed incomes suffered and the housing market still remains vulnerable. So far Fed actions have not been too successful are reviving our economy on a widespread basis – just look at job growth or the lack thereof.
Some will argue that without the Fed things would have been much worse. That is debatable. My contention is that we would have dropped farther and faster, but the recovery would have also been much quicker without the humongous debt burden we created that will likely last for generations. But that is not the point of discussion in this prose. The real concern is that if investors feel that America is on the road to recovery – what do we need to print another trillion dollars for (QE2)? Could it be that structurally we still have some issues? One would never know it judging from the complacency of investors.
The VIX fear index is at extreme low levels. The AAII investors’ sentiment gauge also shows a high level of bullishness and an extreme low level of bears. The spread from bulls to bears is one that is normally associated with market tops. This could mean that investors either trust or fear the bearded one who wields a big printing press. Institutions are also very bullish as mutual funds are carrying near record low levels of cash today. Also adding to the mutual fund dilemma has been the record amount of redemptions by individual investors from stock funds over the preceding several months.
From a technical perspective, I see a very extended rising bearish wedge pattern formed since the August 31st lows on the major indices. The market run up over that timeframe also has an eerie similarity to the run up from February to the April highs of this year. I observe a double top formation with the current and April highs and the markets are currently intersecting their respective 200 week declining moving averages, adding resistance to the uptrend. We have more volume on the down days than on the up days, signaling distribution. The High Frequency Traders that caused the flash crash in May still constitute the majority of the volume each trading day – which to me still demonstrates potential instability.
The market set up is very similar to the April highs, but the only thing missing is a catalyst to get the market moving up or down from here. I am very concerned about the inverse relationship markets have with the US Dollar. Sentiment on the dollar is 100% bearish! The old adage is to invest opposite of everyone else – especially when everyone is all on one side. You cannot get more bearish on the dollar than what it is today. If the dollar reverses back up and the inverse relationship holds true to form – then the stock market could be in for a reversal. Now the dollar bears are going to see the QE2 that’s coming and state that the dollar is going to continue its slide. It wasn’t too long ago that many pundits were saying that the Euro would not only drop to par with the US dollar – but it would cease to exist as a currency. Look what has transpired since. The only certainty is change.
Now is a time for caution! Some major events are coming soon. The election on November 2nd and the much anticipated Fed announcement the next day to name a few. Clearly investors are cheering, hoping, and waiting for the next move by the Fed. November 3rd cannot get here soon enough. Is this going to be one of those buy on rumor and sell on news events? Can the Fed live up to the expectations built into current market prices for another round of quantitative easing? Will the Fed’s action really spread to the overall economy and create jobs and boost our nation into a self sustaining recovery? I’ll keep my daughter cheering on Ben Bernanke and his friends – “Go Bernanke – the economy doesn’t want another spanky” – or something like that.
Friday, October 1, 2010
It’s October – Should We Be Scared?
The month of October conjures up thoughts of market crashes and other frightful events. As we start the fourth quarter investors are wondering about the near term direction for the markets – are we dressed as bulls or bears? There are many factors that will come in play, that should clear up that picture very shortly. Make no mistake about it, regardless of whether you are a bull or a bear -we are extended and extended big time right here and now. I believe we will have some sort of correction in the near term. Its how deep and what follows that correction that matters most.
The markets staged a big run-up for the month of September. It was the best September since 1939. What happened after that run-up in 1939? Well it took until January 1945 to get back to those levels. If you recall your history – World War II may have had something to do with declines over that duration and I’m not predicting the next world war. However, there does appear to be a contest that is going on between countries across the globe to see who can devalue their currency the most and the fastest.
It appears that the US is winning the race to devalue its dollar. The stock market seems to leading the cheer for this catastrophe to happen. As the dollar declines the goods manufactured by US multinational companies are more competitive overseas. Also repatriation of foreign currencies back into US dollars can be a profitable endeavor, enhancing corporate profits as our money weakens. Oil back over $80 a barrel is another by product of a weak currency. The US consumes half the gasoline in the world. We’re pretty much a captive market for the foreign oil producing nations. As our money’s purchasing power declines – they demand more dollars to make up the shortfall – because they can! Is higher oil and a weaker dollar good for the average American?
According to the Commodity Futures Trading Commission the bullish sentiment for the US dollar is close to 0%. We, as Americans, can only hope that sentiment acts as a contrary indicator and the dollar starts to rally soon. Gold is giving all global currencies a thumbs down. Central Banks across the globe are trying to devalue their own currency, by printing more green, red, or orange dollars in their own countries flavor and using their freshly minted currency as bailout money. With the US Dollar as the global reserve currency – we seem to be winning the race currently, but is this really what we want to do?? I think not, but others are rejoicing.
As far as our markets are concerned, we have entered into one of the seasonally weakest periods of the year. Mutual Fund cash levels are at an all time low. Gold set yet another all time high Friday. Silver is at a new rally high as well. Gold and silver are fear trades. It seems contradictory that a weak dollar would drive the price of precious metals to new highs and indicate that the US business machine (as measured by the stock indices) would do well at the same time.
Technically, stock prices are at the upper boundary of a channel trend. Some markets like the NASDAQ 100 have formed an almost parabolic chart pattern since September 1st. Parabolas’ generally end and reverse into a mirror image. Daily stochastics are on a sell signal and the weekly stochastics are in nosebleed territory ready for a turn. Bearish divergence is occurring on the NYSE, RUT, S&P, and the NASDAQ Advance Decline lines. Advance / Decline divergence is a very reliable signal seen near market turns.
Fundamentally new home sales the last two months were the worst ever and second worst on record. The jobless claim numbers remain very high and sentiment seems to be getting worse. Make no mistake we are in a zone where a healthy sell off could occur. It's the magnitude of that sell off that we want to watch. Do we stop at 1122, 1105, or do we retest 1040 or more?
The real test will be what happens after we pullback and have a rally attempt. It will be interesting to watch and maybe worth a revisit! I believe the US dollar will be the key!
The markets staged a big run-up for the month of September. It was the best September since 1939. What happened after that run-up in 1939? Well it took until January 1945 to get back to those levels. If you recall your history – World War II may have had something to do with declines over that duration and I’m not predicting the next world war. However, there does appear to be a contest that is going on between countries across the globe to see who can devalue their currency the most and the fastest.
It appears that the US is winning the race to devalue its dollar. The stock market seems to leading the cheer for this catastrophe to happen. As the dollar declines the goods manufactured by US multinational companies are more competitive overseas. Also repatriation of foreign currencies back into US dollars can be a profitable endeavor, enhancing corporate profits as our money weakens. Oil back over $80 a barrel is another by product of a weak currency. The US consumes half the gasoline in the world. We’re pretty much a captive market for the foreign oil producing nations. As our money’s purchasing power declines – they demand more dollars to make up the shortfall – because they can! Is higher oil and a weaker dollar good for the average American?
According to the Commodity Futures Trading Commission the bullish sentiment for the US dollar is close to 0%. We, as Americans, can only hope that sentiment acts as a contrary indicator and the dollar starts to rally soon. Gold is giving all global currencies a thumbs down. Central Banks across the globe are trying to devalue their own currency, by printing more green, red, or orange dollars in their own countries flavor and using their freshly minted currency as bailout money. With the US Dollar as the global reserve currency – we seem to be winning the race currently, but is this really what we want to do?? I think not, but others are rejoicing.
As far as our markets are concerned, we have entered into one of the seasonally weakest periods of the year. Mutual Fund cash levels are at an all time low. Gold set yet another all time high Friday. Silver is at a new rally high as well. Gold and silver are fear trades. It seems contradictory that a weak dollar would drive the price of precious metals to new highs and indicate that the US business machine (as measured by the stock indices) would do well at the same time.
Technically, stock prices are at the upper boundary of a channel trend. Some markets like the NASDAQ 100 have formed an almost parabolic chart pattern since September 1st. Parabolas’ generally end and reverse into a mirror image. Daily stochastics are on a sell signal and the weekly stochastics are in nosebleed territory ready for a turn. Bearish divergence is occurring on the NYSE, RUT, S&P, and the NASDAQ Advance Decline lines. Advance / Decline divergence is a very reliable signal seen near market turns.
Fundamentally new home sales the last two months were the worst ever and second worst on record. The jobless claim numbers remain very high and sentiment seems to be getting worse. Make no mistake we are in a zone where a healthy sell off could occur. It's the magnitude of that sell off that we want to watch. Do we stop at 1122, 1105, or do we retest 1040 or more?
The real test will be what happens after we pullback and have a rally attempt. It will be interesting to watch and maybe worth a revisit! I believe the US dollar will be the key!
Monday, September 27, 2010
No Fear
Franklin Delano Roosevelt said in his First Inaugural Address, “The only thing we have to fear is fear itself.” Traders in today’s markets apparently have framed that phrase as their credo. There have been technical analysis warning signals flashing galore. Including but not limited to VIX sell signals, low volume rallies, black crosses, Hindenburg omens, and irrational exuberance from the AAII crowd (51% bulls recently). Yet the S&P has rallied significantly higher over the last 18 sessions without a meaningful pullback.
In the span of a few weeks, a new consensus view has emerged that the double-dip scare of July/August has diminished. New bullish technical patterns have emerged such as a break above 1132 on the S&P 500 and 2342 on the NASDAQ. The charts show a pattern of higher lows and higher highs since the July bottom. The markets have also crossed above the neckline of an inverse head and shoulders pattern which when measured properly should run the markets back to the old highs of this year. The technical picture certainly has a lot more positive aspects that didn’t exist just a few short weeks ago. There is now a shift in trend that could really make this market go.
So why am I still holding up the caution flag? First: The pace of the recent run up is unsustainable. While we could climb a little higher from here, some sort of pullback would alleviate some of the frothiness of the markets. Second: the autumn equinox, was Wednesday the 22nd, and over the past 13 years, major declines have occurred after the first day of fall ten times. Seven were crashes. Next: Prices have reached the upper boundary of their trend-channel which could signal a pullback is coming. However, it could also mean that we are about to see an upside breakout, so we are once again at a crossroads on the markets.
The final concern is that gold and silver are rallying to record highs as the stock market is rallying. Those precious metals are the fear trade. They also reflect a concern for our currency that the US fiat dollar may be in trouble. I can’t imagine investors believe that a weak dollar equates to a strong economy. A weak dollar helps the multinational companies – sure, but the words “Our economy is strong because our money is weak” don’t go together. I would think a disconnect should occur between gold and stocks, as well as bonds and stocks. Everything should not be going up simultaneously.
On Friday 98% of the S&P 500 companies were up. Generally fast run ups like the one we’ve just gone through, followed by exponential blow offs like what we witnessed on Friday causes me to take a more cautious point of view. It seems that the Fed is attempting to juice the markets with their Permanent Open Market Operations. This week alone the Federal Reserve purchased $11.15 Billion worth of various US Treasury securities from the seven primary banks. What the banks did what that immediate boatload of cash is unknown, but one would suspect that a portion of those founds found its way into the stock market. The alternative is to believe that the negative, but less bad durable goods order number and the second worst ever, but still improved from July’s all time low, new home sales drove the markets up 2% on Friday. There is a long held belief on Wall Street that you should never fight the Fed or the trend. That holds true today. The Fed is driving the markets.
According to Reuters, after the midterm elections, the S&P 500 has posted gains 18 out of the last 19 times. In the following six months the returns were up 13% on average, and up 17% after 12 months. Further the best combination for market returns has been when a Democrat held the White House with a Republican-controlled Congress. Maybe the markets are looking ahead.
I can understand the need to be optimistic and I am, but let’s not get too carried away too quickly. The market should probably have a new uptrend with a target of around 1240. But with the sudden shift in sentiment and the ‘ignore all the bad news mentality’, the markets will most likely have a pullback first to work off some of this overzealous false sense of security. The markets are acting as if the real economy does not matter. Over the short term maybe it doesn’t. It seems that the Fed is hoping that the stock market can pull the rest of the economy out of the mud slog that it is in. Former Fed Chair Alan Greenspan said as much in a speech a couple of weeks ago. However, technical factors still apply and a pull back to at least 1090 seems reasonable given all the headwinds facing the markets today.
Someone once said; “Efficiency is doing things right. Effectiveness is doing the right things.” It seems the Fed is doing things effectively to drive the markets up. I’m not so sure we have done things efficiently to solve our economic woes yet.
In the span of a few weeks, a new consensus view has emerged that the double-dip scare of July/August has diminished. New bullish technical patterns have emerged such as a break above 1132 on the S&P 500 and 2342 on the NASDAQ. The charts show a pattern of higher lows and higher highs since the July bottom. The markets have also crossed above the neckline of an inverse head and shoulders pattern which when measured properly should run the markets back to the old highs of this year. The technical picture certainly has a lot more positive aspects that didn’t exist just a few short weeks ago. There is now a shift in trend that could really make this market go.
So why am I still holding up the caution flag? First: The pace of the recent run up is unsustainable. While we could climb a little higher from here, some sort of pullback would alleviate some of the frothiness of the markets. Second: the autumn equinox, was Wednesday the 22nd, and over the past 13 years, major declines have occurred after the first day of fall ten times. Seven were crashes. Next: Prices have reached the upper boundary of their trend-channel which could signal a pullback is coming. However, it could also mean that we are about to see an upside breakout, so we are once again at a crossroads on the markets.
The final concern is that gold and silver are rallying to record highs as the stock market is rallying. Those precious metals are the fear trade. They also reflect a concern for our currency that the US fiat dollar may be in trouble. I can’t imagine investors believe that a weak dollar equates to a strong economy. A weak dollar helps the multinational companies – sure, but the words “Our economy is strong because our money is weak” don’t go together. I would think a disconnect should occur between gold and stocks, as well as bonds and stocks. Everything should not be going up simultaneously.
On Friday 98% of the S&P 500 companies were up. Generally fast run ups like the one we’ve just gone through, followed by exponential blow offs like what we witnessed on Friday causes me to take a more cautious point of view. It seems that the Fed is attempting to juice the markets with their Permanent Open Market Operations. This week alone the Federal Reserve purchased $11.15 Billion worth of various US Treasury securities from the seven primary banks. What the banks did what that immediate boatload of cash is unknown, but one would suspect that a portion of those founds found its way into the stock market. The alternative is to believe that the negative, but less bad durable goods order number and the second worst ever, but still improved from July’s all time low, new home sales drove the markets up 2% on Friday. There is a long held belief on Wall Street that you should never fight the Fed or the trend. That holds true today. The Fed is driving the markets.
According to Reuters, after the midterm elections, the S&P 500 has posted gains 18 out of the last 19 times. In the following six months the returns were up 13% on average, and up 17% after 12 months. Further the best combination for market returns has been when a Democrat held the White House with a Republican-controlled Congress. Maybe the markets are looking ahead.
I can understand the need to be optimistic and I am, but let’s not get too carried away too quickly. The market should probably have a new uptrend with a target of around 1240. But with the sudden shift in sentiment and the ‘ignore all the bad news mentality’, the markets will most likely have a pullback first to work off some of this overzealous false sense of security. The markets are acting as if the real economy does not matter. Over the short term maybe it doesn’t. It seems that the Fed is hoping that the stock market can pull the rest of the economy out of the mud slog that it is in. Former Fed Chair Alan Greenspan said as much in a speech a couple of weeks ago. However, technical factors still apply and a pull back to at least 1090 seems reasonable given all the headwinds facing the markets today.
Someone once said; “Efficiency is doing things right. Effectiveness is doing the right things.” It seems the Fed is doing things effectively to drive the markets up. I’m not so sure we have done things efficiently to solve our economic woes yet.
Friday, September 10, 2010
Sleepwalking at the Stock Exchange
Students are back in school, but market participants appear to be extending their vacations as volume is noticeably absent. What is the reason for this? It could be that individual investors have left the markets in droves and those that have stayed are no longer actively participating. It could be that banks are winding the practice of trading for their own accounts. Or possibly it could be that investors aren’t convinced about which direction the markets and the economy are heading.
It is that last suggestion that could create results that are really perilous, or could create quite a money making opportunity. If there really is a case of mass indecision, then once the majority aligns their views, a substantial move could result when a consensus is achieved. Until that time markets appear to be sleepwalking through their days. There is very little movement and extraordinarily low volume. Friday finished with the second lightest volume on the NYSE for the year.
Markets did manage to put together back to back winning weeks, something not accomplished since mid June for the S&P 500 and the NASDAQ. The gains were fractional at best, but hey a winner is a winner - right? I contend that the markets action from this week will be either improved upon or reversed very quickly once a majority decision is made.
Market analysis is a probability business, not a guarantee. Currently there are two very opposite views about what is happening with the economy, which is contributing to the contrary stance that participants have when investing in today’s market. The bulls contend that stocks are cheap. Valuations as measured by PE ratios show that stocks are trading around 12 times earnings. Tech stocks on a historical basis are trading at their cheapest levels in decades, including the years immediately after the early 2000’s tech wreck.
Bulls also argue that with interest rates near zero, and likely to stay that low for the foreseeable future, stocks are a great value relative to all other asset classes for investment. A popular refrain from by the bulls is that dividend stocks are much more attractive than the low bond yields of today. Personally, I hope the bulls are right. I would love nothing more than to have our economy recover and witness a long sustained rally in stocks to new all time highs. I believe that everyone hopes that this is the scenario that plays out – even the hardened bears.
The opposing belief held by those bears is that the economy cannot sustain its recovery. They point to a strapped consumer that is overleveraged in debt, a banking system that is hoarding cash rather than actively lending money, and higher taxes (hidden and revealed) that are soon coming for everyone which will further impinge spending. Bears believe that after all the government spending to date and the spending yet to come, there is no way that consumers will be able to maintain the lifestyles that they have become accustomed to, because it was built on unsustainable debt rather than actual affordability.
People of all ages and all classes of life share a similar sad story. Retirees who believed they had enough money to see them through are going back to work because they overestimated the returns that they would be able generate on their savings. With interest rates hanging around zero, their investment plans are not providing enough to supplement Social Security and any pension that they may or may not have. Rather than eating up their principal to meet expenses, many have had to take part time jobs. By keeping rates so low in hopes of increasing business activity, the Fed may be accidentally penalizing prudent savers and possibly be making jobs harder to get for young inexperienced workers, adding to that generation’s plight.
It is clear is that a trading range has formed on the major indices. Above 1132 on the S&P will signal a bullish breakout and a retest to at least the highs of this year. Below 1040 and there is potential for a drop down to 950 or even as low 875. The support and resistance for the NASDAQ Composite is 2100 and 2342 respectively. Until those levels are pierced, trading will most likely remain light and choppy. If you own stocks, ETF’s, or mutual funds, please always have an exit strategy assigned to each and every position! The risks remain very high until a positive resolution is achieved.
*Pacific Financial Planners maintains positions in GLD & SLV.
It is that last suggestion that could create results that are really perilous, or could create quite a money making opportunity. If there really is a case of mass indecision, then once the majority aligns their views, a substantial move could result when a consensus is achieved. Until that time markets appear to be sleepwalking through their days. There is very little movement and extraordinarily low volume. Friday finished with the second lightest volume on the NYSE for the year.
Markets did manage to put together back to back winning weeks, something not accomplished since mid June for the S&P 500 and the NASDAQ. The gains were fractional at best, but hey a winner is a winner - right? I contend that the markets action from this week will be either improved upon or reversed very quickly once a majority decision is made.
Market analysis is a probability business, not a guarantee. Currently there are two very opposite views about what is happening with the economy, which is contributing to the contrary stance that participants have when investing in today’s market. The bulls contend that stocks are cheap. Valuations as measured by PE ratios show that stocks are trading around 12 times earnings. Tech stocks on a historical basis are trading at their cheapest levels in decades, including the years immediately after the early 2000’s tech wreck.
Bulls also argue that with interest rates near zero, and likely to stay that low for the foreseeable future, stocks are a great value relative to all other asset classes for investment. A popular refrain from by the bulls is that dividend stocks are much more attractive than the low bond yields of today. Personally, I hope the bulls are right. I would love nothing more than to have our economy recover and witness a long sustained rally in stocks to new all time highs. I believe that everyone hopes that this is the scenario that plays out – even the hardened bears.
The opposing belief held by those bears is that the economy cannot sustain its recovery. They point to a strapped consumer that is overleveraged in debt, a banking system that is hoarding cash rather than actively lending money, and higher taxes (hidden and revealed) that are soon coming for everyone which will further impinge spending. Bears believe that after all the government spending to date and the spending yet to come, there is no way that consumers will be able to maintain the lifestyles that they have become accustomed to, because it was built on unsustainable debt rather than actual affordability.
People of all ages and all classes of life share a similar sad story. Retirees who believed they had enough money to see them through are going back to work because they overestimated the returns that they would be able generate on their savings. With interest rates hanging around zero, their investment plans are not providing enough to supplement Social Security and any pension that they may or may not have. Rather than eating up their principal to meet expenses, many have had to take part time jobs. By keeping rates so low in hopes of increasing business activity, the Fed may be accidentally penalizing prudent savers and possibly be making jobs harder to get for young inexperienced workers, adding to that generation’s plight.
It is clear is that a trading range has formed on the major indices. Above 1132 on the S&P will signal a bullish breakout and a retest to at least the highs of this year. Below 1040 and there is potential for a drop down to 950 or even as low 875. The support and resistance for the NASDAQ Composite is 2100 and 2342 respectively. Until those levels are pierced, trading will most likely remain light and choppy. If you own stocks, ETF’s, or mutual funds, please always have an exit strategy assigned to each and every position! The risks remain very high until a positive resolution is achieved.
*Pacific Financial Planners maintains positions in GLD & SLV.
Friday, September 3, 2010
Celebrating Job Losses
We got the bounce I was calling for last week from our technically oversold condition and the extreme bearish sentiment we had then. Early in the week, the markets held support at 1040 and then proceeded to rally fast, for a weekly gain of around 3.7%. Not bad, but the up week was a reversal from the three prior down weeks. We completed the worst August in nine years this past week and we are heading into the seasonally most difficult time of the year for the markets.
It appears that the wild swings are continuing as the markets are churning mostly sideways for the last few months. Another observation is that the markets are trading at the same levels as they were 11 months ago. The markets are forming a base. It is yet to be determined which way we break out from that base. It really comes down to a question of how much faith do you have in the economic recovery?
On Friday it was announced that the labor force lost 54,000 jobs in August. That was much better than the expected 105,000 job losses; therefore market participants celebrated and drove the market up on this news. Apparently, less bad means good for many investors. Government jobs are jobs too. If they offset private sector jobs, more real people are lining up in the unemployment line. It appears that investors ignored these facts on Friday as bulls were supercharged after this economic release. While the market currently loves the job report, at some point we must realize that the economy needs more jobs, not just a slower pace of losses.
The Federal Deposit Insurance Corporation (FDIC) reported that the number of banks on the FDIC's problem list jumped from 775 in the first quarter of 2010 to 829 today. So far this year, 118 banks have failed. A total of 140 banks failed in 2009, so we are on pace to surpass that number by a wide margin. It is said that money makes the world go ‘round. When more banks are closing, the troubled list is growing, and lending is declining what does that do to the global economy? I’m just asking.
While the markets rallied four days in a row, the volume has been decreasing with each passing day. Just like the sellers recently reached an exhaustion point – buyers may be quickly getting tired as well. There is significant overhead resistance at 1132 on the S&P 500, and 2342 on the NASDAQ. Other technical factors are quickly coming into play; such as the major downtrend line from the April highs and the 200 day moving averages. This should, very soon, also impede the market’s advance.
I have a few metal positions and a large cache of cash waiting for the markets to work its way through this the latest version of push and pull. The markets will have to break above the above mentioned resistance levels before I turn bullish in any significant fashion. I am aware of the second year Presidential cycle theory, where there have been significant rallies from the lows of the fall in year two of a Presidents term, to the highs the following year. Therefore I believe that if this market is going to have a momentous decline – it will occur in the next six to eight weeks.
For now I will stick with the belief that this was just another oversold rally in the context of a falling market. I would love for the economy to right itself. Nothing would make me happier than to have the housing market gain real strength. If we could attain consistent job creation, above 150,000 jobs per month (to keep up with the population growth of the US workforce), and to have consumers with more money available for disposable spending, I would be ecstatic! Unfortunately I still don’t see or understand how we are going to accomplish those things in the near term.
I do see many technical indicators flashing warning signs. Fundamentally, more jobs are being lost (whatever kind they are – public or private), and we have a Fed whose leadership has diametrically opposed viewpoints on how we solve our current problems (read Messrs. Hoenig and Bullard). Until the market breaks above or below the stated resistance or support lines we will patiently wait for the markets to signal its next major move. Until then cash is the safest investment and all celebrations should be put on hold.
Pacific Financial Planners recommends that you check with your own advisor before investing. Risk tolerance and time horizons are different for each individual. Pacific Financial maintains positions in GLD, SLV, JJC, SINA, and plenty of Cash.
It appears that the wild swings are continuing as the markets are churning mostly sideways for the last few months. Another observation is that the markets are trading at the same levels as they were 11 months ago. The markets are forming a base. It is yet to be determined which way we break out from that base. It really comes down to a question of how much faith do you have in the economic recovery?
On Friday it was announced that the labor force lost 54,000 jobs in August. That was much better than the expected 105,000 job losses; therefore market participants celebrated and drove the market up on this news. Apparently, less bad means good for many investors. Government jobs are jobs too. If they offset private sector jobs, more real people are lining up in the unemployment line. It appears that investors ignored these facts on Friday as bulls were supercharged after this economic release. While the market currently loves the job report, at some point we must realize that the economy needs more jobs, not just a slower pace of losses.
The Federal Deposit Insurance Corporation (FDIC) reported that the number of banks on the FDIC's problem list jumped from 775 in the first quarter of 2010 to 829 today. So far this year, 118 banks have failed. A total of 140 banks failed in 2009, so we are on pace to surpass that number by a wide margin. It is said that money makes the world go ‘round. When more banks are closing, the troubled list is growing, and lending is declining what does that do to the global economy? I’m just asking.
While the markets rallied four days in a row, the volume has been decreasing with each passing day. Just like the sellers recently reached an exhaustion point – buyers may be quickly getting tired as well. There is significant overhead resistance at 1132 on the S&P 500, and 2342 on the NASDAQ. Other technical factors are quickly coming into play; such as the major downtrend line from the April highs and the 200 day moving averages. This should, very soon, also impede the market’s advance.
I have a few metal positions and a large cache of cash waiting for the markets to work its way through this the latest version of push and pull. The markets will have to break above the above mentioned resistance levels before I turn bullish in any significant fashion. I am aware of the second year Presidential cycle theory, where there have been significant rallies from the lows of the fall in year two of a Presidents term, to the highs the following year. Therefore I believe that if this market is going to have a momentous decline – it will occur in the next six to eight weeks.
For now I will stick with the belief that this was just another oversold rally in the context of a falling market. I would love for the economy to right itself. Nothing would make me happier than to have the housing market gain real strength. If we could attain consistent job creation, above 150,000 jobs per month (to keep up with the population growth of the US workforce), and to have consumers with more money available for disposable spending, I would be ecstatic! Unfortunately I still don’t see or understand how we are going to accomplish those things in the near term.
I do see many technical indicators flashing warning signs. Fundamentally, more jobs are being lost (whatever kind they are – public or private), and we have a Fed whose leadership has diametrically opposed viewpoints on how we solve our current problems (read Messrs. Hoenig and Bullard). Until the market breaks above or below the stated resistance or support lines we will patiently wait for the markets to signal its next major move. Until then cash is the safest investment and all celebrations should be put on hold.
Pacific Financial Planners recommends that you check with your own advisor before investing. Risk tolerance and time horizons are different for each individual. Pacific Financial maintains positions in GLD, SLV, JJC, SINA, and plenty of Cash.
Friday, August 27, 2010
Investing in the Real World
So let’s get this straight right from the beginning. The real world that we all live in has a lot of problems. Many economists say we are slipping back into a recession - a double dip. Others point out that the economy has never gained enough traction to come out of the original recession that started back in December of 2007. The most optimistic of economists state that the economy is actually growing, albeit at a very slow pace and that we are currently experiencing a “soft patch.”
Then there is another economy, one that my friend and writer Ron Coby refers to as the casino economy. That economy is comprised of the stock and bond markets. That economy is also heavily influenced by the Federal Reserve and their money printing machines. That economy is analogous to a professional athlete on steroids. How good would these markets really be if it weren’t under the constant injection of freshly printed money?
The S& P is down 4.6% year to date, not exactly setting the world on fire. There is talk of a bond bubble. The housing market looks to be imploding again. The job market is stagnant and maybe vulnerable. Congress is already getting into reelected mode. I understand the need to be optimistic, but it is essential to recognize the type economic backdrop we are in. After a period of unprecedented government bailouts and stimulus programs, existing home sales collapsed a record 27%, month over month, to an all time low of 3.83 million annualized units. New home sales fell 12% last month, to a rate of 276,000 units annually, which marked the lowest number since economists started tracking home sales back in 1963. Are you kidding me? In addition, the average price for a home dipped again and is now back to levels last seen in 2003.
This Housing data is telling us something valuable about the real world economy where mortgage rates have tumbled nearly 100 basis points in the last year to a record low of 4.36% for 30-year loans, and the government has implemented a plethora of programs to put a floor under the housing market, yet housing continues to decline in both prices and sales. Some will argue that things would be much worse without all this manipulation, but when is enough going to be enough?
In the casino stock market, droves of individual investors are pulling the cord and bailing out of any further participation as the real world data does not seem congruent with the stock markets action. The market is being supported in a very big way by the Federal Reserve’s commitment to keep the money printing presses on overdrive for an extended period of time. What does it mean when the US Federal Reserve is the second largest owner of US Treasury debt globally? How good would it be if you could go down to your tool shed and print your own money to buy back your own debt?
There is money out there. But try to get a loan if you’re an average American or a small struggling business – that money is hardly available to you. It is estimated that corporate America has over $1 trillion in excess reserves. We are witnessing a pickup in mergers and acquisitions, and many of these deals are for cash – not debt (like the 80’s) or equities (like the 90’s). Let the stock and housing markets find their own equilibrium. Stop wasting taxpayers’ money on trying to influence those markets. After more than ten trillion dollars of global government intervention, how much better off are we in the real world economy?
If the government stopped intervening on behalf of the business community, there would most likely be a sharp and painful reconciliation, but the economy and markets would bottom quicker and allow the healing process to begin sooner. They should focus on job creation, or the lack thereof. So far we have had the government expend huge resources to keep many failing industries afloat, but that has generated very little in the way of positive long lasting results as the economy is teetering back towards a recession. Hopefully the real world starts to recover soon but band aides only treat the symptoms, they don’t provide a cure.
As far as the casino economy is concerned, the stock market has become extremely oversold on a technical basis. Markets tend to back and fill in those instances. In addition sentiment has become overwhelmingly bearish. The recent AAII (American Association of Individual Investors – sometimes referred to by professionals in the industry as dumb money) numbers show only 20.7% bullish. There have been only 48 times in the history of this association that bullishness has dropped below 21% and in 47 of those 48 instances the market was higher three months later. Finally we had Fed Chair Ben Bernanke’s promise on Friday that he was ready, willing, and able to employ all his resources (read keep the money printing presses going 24 / 7) to keep the economy from falling off a cliff.
So we covered our short positions in anticipation of support holding at around 1040 on the S&P 500; 2100 holding on the NASDAQ; and 580 holding on the Russell 2000 small company index. The markets will most likely rally enough to work off the oversold conditions and lift the spirits of individual investors just enough to get crushed at a later date. Resistance for the above mentioned indices are probably in the ranges of 1100- 1130; 2220 – 2280; and 630 – 645 respectively before the market again pursues a lower path.
There is a tremendous amount of speculation in the bond market. Is it a bubble or not? Can bonds even have a bubble – or not? Are heavily debated topics of conversation. Let me clarify this right here – ALL INVESTMENTS CARRY RISK! If you put your money under a mattress you have inflation risk and risk of theft. If you buy treasuries, rates can go up and you can lose principal if you sell prior to maturity. If you hold individual treasury bonds for the full term, sure you get the full amount back, but inflation could decrease the purchasing power of your matured value.
Ten year treasury rates have dropped from over 4% in April to 2.5% Friday morning. That’s a 37.5% move in four months. That kind of move happened most recently at the end of 2008. Within seven months the entire move was retraced and many people lost a lot of money. Currently bonds carry a lot of risk! To lock in a rate of 3.7% for ten years, one would really have to believe that we are and will be in dire straits economically for a long, long time.
I believe patience will pay dividends. For those traders out there – money can be made buying stock and shorting bonds for an ultra short time frame. For more conservative long term investors sit this rally out, wait for better yields on the bonds and hopefully by the time the elections are over, the markets will start to normalize again. There are two worlds right now – the one we all live in and the stock and bond market world that is under the control of the Fed. Ensure you can separate the two before they separate you from your money.
* Pacific Financial Planners is not recommending any investments in this article as we do not know your timeframe and risk tolerance. Before investing in any ideas or taking any action you should first consult with your own financial advisor.
** Pacific Financial Planners holds positions in GLD, JJC, SINA, SLV, & TBT
Then there is another economy, one that my friend and writer Ron Coby refers to as the casino economy. That economy is comprised of the stock and bond markets. That economy is also heavily influenced by the Federal Reserve and their money printing machines. That economy is analogous to a professional athlete on steroids. How good would these markets really be if it weren’t under the constant injection of freshly printed money?
The S& P is down 4.6% year to date, not exactly setting the world on fire. There is talk of a bond bubble. The housing market looks to be imploding again. The job market is stagnant and maybe vulnerable. Congress is already getting into reelected mode. I understand the need to be optimistic, but it is essential to recognize the type economic backdrop we are in. After a period of unprecedented government bailouts and stimulus programs, existing home sales collapsed a record 27%, month over month, to an all time low of 3.83 million annualized units. New home sales fell 12% last month, to a rate of 276,000 units annually, which marked the lowest number since economists started tracking home sales back in 1963. Are you kidding me? In addition, the average price for a home dipped again and is now back to levels last seen in 2003.
This Housing data is telling us something valuable about the real world economy where mortgage rates have tumbled nearly 100 basis points in the last year to a record low of 4.36% for 30-year loans, and the government has implemented a plethora of programs to put a floor under the housing market, yet housing continues to decline in both prices and sales. Some will argue that things would be much worse without all this manipulation, but when is enough going to be enough?
In the casino stock market, droves of individual investors are pulling the cord and bailing out of any further participation as the real world data does not seem congruent with the stock markets action. The market is being supported in a very big way by the Federal Reserve’s commitment to keep the money printing presses on overdrive for an extended period of time. What does it mean when the US Federal Reserve is the second largest owner of US Treasury debt globally? How good would it be if you could go down to your tool shed and print your own money to buy back your own debt?
There is money out there. But try to get a loan if you’re an average American or a small struggling business – that money is hardly available to you. It is estimated that corporate America has over $1 trillion in excess reserves. We are witnessing a pickup in mergers and acquisitions, and many of these deals are for cash – not debt (like the 80’s) or equities (like the 90’s). Let the stock and housing markets find their own equilibrium. Stop wasting taxpayers’ money on trying to influence those markets. After more than ten trillion dollars of global government intervention, how much better off are we in the real world economy?
If the government stopped intervening on behalf of the business community, there would most likely be a sharp and painful reconciliation, but the economy and markets would bottom quicker and allow the healing process to begin sooner. They should focus on job creation, or the lack thereof. So far we have had the government expend huge resources to keep many failing industries afloat, but that has generated very little in the way of positive long lasting results as the economy is teetering back towards a recession. Hopefully the real world starts to recover soon but band aides only treat the symptoms, they don’t provide a cure.
As far as the casino economy is concerned, the stock market has become extremely oversold on a technical basis. Markets tend to back and fill in those instances. In addition sentiment has become overwhelmingly bearish. The recent AAII (American Association of Individual Investors – sometimes referred to by professionals in the industry as dumb money) numbers show only 20.7% bullish. There have been only 48 times in the history of this association that bullishness has dropped below 21% and in 47 of those 48 instances the market was higher three months later. Finally we had Fed Chair Ben Bernanke’s promise on Friday that he was ready, willing, and able to employ all his resources (read keep the money printing presses going 24 / 7) to keep the economy from falling off a cliff.
So we covered our short positions in anticipation of support holding at around 1040 on the S&P 500; 2100 holding on the NASDAQ; and 580 holding on the Russell 2000 small company index. The markets will most likely rally enough to work off the oversold conditions and lift the spirits of individual investors just enough to get crushed at a later date. Resistance for the above mentioned indices are probably in the ranges of 1100- 1130; 2220 – 2280; and 630 – 645 respectively before the market again pursues a lower path.
There is a tremendous amount of speculation in the bond market. Is it a bubble or not? Can bonds even have a bubble – or not? Are heavily debated topics of conversation. Let me clarify this right here – ALL INVESTMENTS CARRY RISK! If you put your money under a mattress you have inflation risk and risk of theft. If you buy treasuries, rates can go up and you can lose principal if you sell prior to maturity. If you hold individual treasury bonds for the full term, sure you get the full amount back, but inflation could decrease the purchasing power of your matured value.
Ten year treasury rates have dropped from over 4% in April to 2.5% Friday morning. That’s a 37.5% move in four months. That kind of move happened most recently at the end of 2008. Within seven months the entire move was retraced and many people lost a lot of money. Currently bonds carry a lot of risk! To lock in a rate of 3.7% for ten years, one would really have to believe that we are and will be in dire straits economically for a long, long time.
I believe patience will pay dividends. For those traders out there – money can be made buying stock and shorting bonds for an ultra short time frame. For more conservative long term investors sit this rally out, wait for better yields on the bonds and hopefully by the time the elections are over, the markets will start to normalize again. There are two worlds right now – the one we all live in and the stock and bond market world that is under the control of the Fed. Ensure you can separate the two before they separate you from your money.
* Pacific Financial Planners is not recommending any investments in this article as we do not know your timeframe and risk tolerance. Before investing in any ideas or taking any action you should first consult with your own financial advisor.
** Pacific Financial Planners holds positions in GLD, JJC, SINA, SLV, & TBT
Friday, August 20, 2010
From Green Shoots to Brown Shoots
Economic numbers are becoming less good. In some cases they are downright bad. Back in the spring of 2009 many analysts were commenting that the news was getting less bad, therefore “green shoots” were starting to demonstrate new life for the markets. That turned out to be true. Whatever the reasons were: trillions of dollars of government stimulus, ending the “mark to market” (real) accounting standards on bank held mortgage and asset backed securities, or just a very oversold market. The market retraced 61% (An amazing Fibonacci coincident for those technical gurus) of the downtrend that started in 2007.
Now we are seeing a mirror image of that positive news. Jobless claims are rising back to 500,000. GDP revisions are becoming lower, and most every other economic release is slowing or slipping back into negative growth. This is not good! Could those green shoots be turning brown? The markets and the economy here in the US have never gained enough strength to stand on its own.
It was reported by Fidelity Funds on Friday that a record number of people are raiding their 401(k) assets. Fidelity is the largest manager of 401(k) plans with 11,000,000 participants. They report that in the second quarter alone 62,000 individuals have applied for a hardship withdrawal. That figure is up almost 40% from last year number. To be eligible for a 401(k) hardship withdrawal, individuals must demonstrate an immediate and heavy financial need, according to IRS regulations. Certain medical expenses; payments to prevent eviction or foreclosure on a primary home; burial or funeral expenses, meet the IRS definition and are permitted by most 401(k) plans. A key concern is that these withdrawals are just that, they are not loans. This can have a significant impact on someone's overall retirement plan. It seems many individuals are more concerned about getting through today than they are worried about their retirement. What message does that send about the strength of this recovery?
Stimulus has run its course and the situation seems to be sliding downhill. There is talk of more stimulus – recently there has been a lot of chatter about lowering mortgage rates for everybody with a Fannie Mae or Freddie Mac held mortgage -which includes 90% of all loans. While that would definitely help put more money in a lot of people’s pockets, what would that do for everyone else? What about renters? How about people who already lost their homes in foreclosure? How do they benefit? The bigger question is how would this program be implemented? Would everybody have to requalify or would it blanket everybody with a mortgage? Finally, where would the staffing come from to complete this herculean task? An easier and more equitable method of putting money into everyone’s pocket would be to just give a rebate – send them all a check! However, with the government deficit as large as it is and still rising, how likely is that? Not very!
The markets are now trending down on the short (weeks), medium (months), and longer term (years) timeframes. There have been many different ominous technical patterns that have occurred such as black crosses, double tops, head and shoulder patterns, and most recently a confirmed Hindenburg Omen. What does all that mean? For starters all these technical patterns don’t guarantee anything. They just have historically demonstrated an above average possibility of negative future price performance for the markets.
It is important to examine the big picture. When there are several pessimistic technical patterns, combined with numerous gloomy fundamental economic reports the odds are higher that the future market direction could be down. Even the Fed is stressing caution about the next direction for the economy. We are not alone. Many other countries in Europe are also experiencing a financial crisis. This problem has not gone away and appears to be reversing directions- getting less green.
I hate being bearish with my commentary. It comes off as being unpatriotic and that is hardly the case. People who have not known me very long think that I am a perma-bear. That also is not the case. I became negative in mid 2007 and since then the markets (as measured by the S&P 500) are down 32%. The bulls argue that with real estate so tenuous and bond yields so low that stocks are the only game in town. I think they fail to realize that cash would outperform if stocks yield a negative rate of return (The S&P is down 4% YTD).
Another bullish claim is that the stock market has a low valuation based on historic PE ratios. On actual 12 month reported trailing earning, the S&P 500 is trading at a PE of 15. It is widely acknowledged that this past recession was the worst since the Great Depression in the 1930’s. Yet there have been a couple of instances where the markets PE ratio was in the single digits since that Depression, as the risk appetite for each dollar of earnings was diminished. It was as low as seven at the 1974 – 1975 market bottom. PE ratios can vary with the mood of investors. So while I think the market can be called fairly valued today, that can change very quickly as investor sentiment adjusts.
The levels to watch are 1040 and 1132 on the S&P 500, 580 and 678 on the Russell 2000, and 2140 and 2342 on the NASDAQ. The first number in each case would signal a potential further market decline, perhaps precipitously so. The latter number is where the market would need to go for me to become bullish. We are heading into the fall of the year (no pun intended). Historically the next two months are the most difficult for the markets. Both technical and fundamentals are flashing warning signs. It may be prudent to apply caution in the near term.
Now we are seeing a mirror image of that positive news. Jobless claims are rising back to 500,000. GDP revisions are becoming lower, and most every other economic release is slowing or slipping back into negative growth. This is not good! Could those green shoots be turning brown? The markets and the economy here in the US have never gained enough strength to stand on its own.
It was reported by Fidelity Funds on Friday that a record number of people are raiding their 401(k) assets. Fidelity is the largest manager of 401(k) plans with 11,000,000 participants. They report that in the second quarter alone 62,000 individuals have applied for a hardship withdrawal. That figure is up almost 40% from last year number. To be eligible for a 401(k) hardship withdrawal, individuals must demonstrate an immediate and heavy financial need, according to IRS regulations. Certain medical expenses; payments to prevent eviction or foreclosure on a primary home; burial or funeral expenses, meet the IRS definition and are permitted by most 401(k) plans. A key concern is that these withdrawals are just that, they are not loans. This can have a significant impact on someone's overall retirement plan. It seems many individuals are more concerned about getting through today than they are worried about their retirement. What message does that send about the strength of this recovery?
Stimulus has run its course and the situation seems to be sliding downhill. There is talk of more stimulus – recently there has been a lot of chatter about lowering mortgage rates for everybody with a Fannie Mae or Freddie Mac held mortgage -which includes 90% of all loans. While that would definitely help put more money in a lot of people’s pockets, what would that do for everyone else? What about renters? How about people who already lost their homes in foreclosure? How do they benefit? The bigger question is how would this program be implemented? Would everybody have to requalify or would it blanket everybody with a mortgage? Finally, where would the staffing come from to complete this herculean task? An easier and more equitable method of putting money into everyone’s pocket would be to just give a rebate – send them all a check! However, with the government deficit as large as it is and still rising, how likely is that? Not very!
The markets are now trending down on the short (weeks), medium (months), and longer term (years) timeframes. There have been many different ominous technical patterns that have occurred such as black crosses, double tops, head and shoulder patterns, and most recently a confirmed Hindenburg Omen. What does all that mean? For starters all these technical patterns don’t guarantee anything. They just have historically demonstrated an above average possibility of negative future price performance for the markets.
It is important to examine the big picture. When there are several pessimistic technical patterns, combined with numerous gloomy fundamental economic reports the odds are higher that the future market direction could be down. Even the Fed is stressing caution about the next direction for the economy. We are not alone. Many other countries in Europe are also experiencing a financial crisis. This problem has not gone away and appears to be reversing directions- getting less green.
I hate being bearish with my commentary. It comes off as being unpatriotic and that is hardly the case. People who have not known me very long think that I am a perma-bear. That also is not the case. I became negative in mid 2007 and since then the markets (as measured by the S&P 500) are down 32%. The bulls argue that with real estate so tenuous and bond yields so low that stocks are the only game in town. I think they fail to realize that cash would outperform if stocks yield a negative rate of return (The S&P is down 4% YTD).
Another bullish claim is that the stock market has a low valuation based on historic PE ratios. On actual 12 month reported trailing earning, the S&P 500 is trading at a PE of 15. It is widely acknowledged that this past recession was the worst since the Great Depression in the 1930’s. Yet there have been a couple of instances where the markets PE ratio was in the single digits since that Depression, as the risk appetite for each dollar of earnings was diminished. It was as low as seven at the 1974 – 1975 market bottom. PE ratios can vary with the mood of investors. So while I think the market can be called fairly valued today, that can change very quickly as investor sentiment adjusts.
The levels to watch are 1040 and 1132 on the S&P 500, 580 and 678 on the Russell 2000, and 2140 and 2342 on the NASDAQ. The first number in each case would signal a potential further market decline, perhaps precipitously so. The latter number is where the market would need to go for me to become bullish. We are heading into the fall of the year (no pun intended). Historically the next two months are the most difficult for the markets. Both technical and fundamentals are flashing warning signs. It may be prudent to apply caution in the near term.
Friday, August 13, 2010
Backed Into a Corner
The Federal Reserve Board has backed themselves into a corner for now, by not showing enough confidence that many investors desired this week. The Fed made clear that they will refrain from shrinking the Fed balance sheet. However, the bulls were looking for additional quantitative easing that just didn’t get announced. Don’t get me wrong – the Fed has the ability to act before their next meeting and if push comes to shove they probably will. So what would be the market’s reaction to some sort of new policy, if it were to be released mid-meeting? Would investors wonder if the Fed has lost control? Would the Fed appear desperate, thereby spooking investors into thinking that things are actually worse than what we already see on the surface (which is not very positive to begin with)?
Economic numbers being what they are (very poor); we should expect a downward revision of second quarter GDP to 1.5% from the originally disappointing number of 2.4%. As more data is being released it is apparent that we are witnessing even further deterioration here in the third quarter. Will we have a double dip or since it officially has never been declared that we have come out of the recession; is this just more of the same?
Globally governments have spent trillions of dollars to revive their economies. We are seeing mixed results from that largess, as some countries such as Germany and China are doing better than others, such as Greece, Ireland and the US. Will more government intervention help? I think not.
We may have reached a tipping point where many are tired of others being the benefactors of taxpayer money. Timing is now important. This week the markets broke their uptrend from early July. The rally from March 2009 was violated a few months back and has not recovered. The Fed will appear to be (once again) behind the curve ball if they make some kind of mid meeting announcement. It may cause more harm than good should the Fed take some action prior to their next meeting September 21st.
Volume has been pathetic, but it has been noticeably lighter on the up days than the down days. There are some technical patterns that have formed that are important to be aware of. Technical analysis DOES NOT predict the future. However, there are trends and formations that have been repeated on chart patterns over time, that indicate a higher than average probability of a predictable outcome. The beauty is, now is a perfect time for a low risk entry point on the short side of the market. Investors will know very quickly, without a large percentage loss, if theses patterns fail.
For example: There was a bearish wedge pattern forming on most of the major market indices. This resulted in a “double top” to be formed at 1132 on the S&P 500. That number is derived from the intraday high on June 21st and August 9th. The wedge pattern is drawn by connecting the lows from July 1st through the bottoms over the subsequent five weeks. The upper band was formed by drawing a line that connected the high on June 25th through the highs over the following several weeks. The technical rules state that if a “rising wedge” is broken to the downside, then prices should decline (at least) to the level at the start of that pattern. That would be 1010 on the S&P 500. 
So you could invest in an inverse S&P 500 ETF such as SH (single inverse) or SDS (double inverse for more aggressive investors), and stop yourself out if the S&P rises more than 5% from Friday’s close (above 1132 on the S&P). This is what I call a low risk trade.
Technically you have the double top and the rising wedge pattern suggestion downside risk for the market. We are seeing significantly lower than normal summer volume as well. Low volume usually is the results from a lack of conviction by investors. A possible reason that investors don’t have conviction is that they aren’t clear what action they should take next or possibly there is fear among traders. Generally bad things happen when investors are uncertain or fearful. A final negative technical pattern on the charts is the fact that the S&P 500, Russell 2000, and the NASDAQ Composite all dropped below their respective 21, 50, and 200 day moving averages. Some technicians feel that markets above those respective averages should be bought and markets trading below those averages should be sold.
Fundamentally, we have pretty bad news coming from most every economic report. We have the FOMC announcement itself, which cautioned about a potential slowdown. We have heard individual Fed Governors comparing our future economy to the last 20 years of Japanese styled deflation. Talk about quantitative easing, more government stimulus and state bailout packages usually don’t occur when we have a self sustaining economy. One look at bond prices and interest rates should also yield caution for those investors that think that the coast is clear for the stock market. Investors run for fear to the safety of government bonds in times of trouble. That seems to be the case today.
Both technically and fundamentally I feel we have problems that give a higher probability for lower market prices in the future. Next week is options expiration week and markets tend to go up. The markets are also near term oversold, so the potential for a small bounce exists. However, I think the next primary move for the markets is down. I will remain on the defensive until we go above 1132 on the S&P 500 and 2342 on the NASDAQ.
A couple of good things to close with: Now that interest rates are so low, it is a great time to refinance your mortgage if you can. Corporate America is refinancing their debt at much lower rates in this environment. In the long term that is a very good thing. Many times when fear is this high it actually works contrary to popular belief. Fear is rising, but it is not yet at extreme levels that would set off a rally. Caution remains the word of the day.
Economic numbers being what they are (very poor); we should expect a downward revision of second quarter GDP to 1.5% from the originally disappointing number of 2.4%. As more data is being released it is apparent that we are witnessing even further deterioration here in the third quarter. Will we have a double dip or since it officially has never been declared that we have come out of the recession; is this just more of the same?
Globally governments have spent trillions of dollars to revive their economies. We are seeing mixed results from that largess, as some countries such as Germany and China are doing better than others, such as Greece, Ireland and the US. Will more government intervention help? I think not.
We may have reached a tipping point where many are tired of others being the benefactors of taxpayer money. Timing is now important. This week the markets broke their uptrend from early July. The rally from March 2009 was violated a few months back and has not recovered. The Fed will appear to be (once again) behind the curve ball if they make some kind of mid meeting announcement. It may cause more harm than good should the Fed take some action prior to their next meeting September 21st.
Volume has been pathetic, but it has been noticeably lighter on the up days than the down days. There are some technical patterns that have formed that are important to be aware of. Technical analysis DOES NOT predict the future. However, there are trends and formations that have been repeated on chart patterns over time, that indicate a higher than average probability of a predictable outcome. The beauty is, now is a perfect time for a low risk entry point on the short side of the market. Investors will know very quickly, without a large percentage loss, if theses patterns fail.
For example: There was a bearish wedge pattern forming on most of the major market indices. This resulted in a “double top” to be formed at 1132 on the S&P 500. That number is derived from the intraday high on June 21st and August 9th. The wedge pattern is drawn by connecting the lows from July 1st through the bottoms over the subsequent five weeks. The upper band was formed by drawing a line that connected the high on June 25th through the highs over the following several weeks. The technical rules state that if a “rising wedge” is broken to the downside, then prices should decline (at least) to the level at the start of that pattern. That would be 1010 on the S&P 500.
So you could invest in an inverse S&P 500 ETF such as SH (single inverse) or SDS (double inverse for more aggressive investors), and stop yourself out if the S&P rises more than 5% from Friday’s close (above 1132 on the S&P). This is what I call a low risk trade.
Technically you have the double top and the rising wedge pattern suggestion downside risk for the market. We are seeing significantly lower than normal summer volume as well. Low volume usually is the results from a lack of conviction by investors. A possible reason that investors don’t have conviction is that they aren’t clear what action they should take next or possibly there is fear among traders. Generally bad things happen when investors are uncertain or fearful. A final negative technical pattern on the charts is the fact that the S&P 500, Russell 2000, and the NASDAQ Composite all dropped below their respective 21, 50, and 200 day moving averages. Some technicians feel that markets above those respective averages should be bought and markets trading below those averages should be sold.
Fundamentally, we have pretty bad news coming from most every economic report. We have the FOMC announcement itself, which cautioned about a potential slowdown. We have heard individual Fed Governors comparing our future economy to the last 20 years of Japanese styled deflation. Talk about quantitative easing, more government stimulus and state bailout packages usually don’t occur when we have a self sustaining economy. One look at bond prices and interest rates should also yield caution for those investors that think that the coast is clear for the stock market. Investors run for fear to the safety of government bonds in times of trouble. That seems to be the case today.
Both technically and fundamentally I feel we have problems that give a higher probability for lower market prices in the future. Next week is options expiration week and markets tend to go up. The markets are also near term oversold, so the potential for a small bounce exists. However, I think the next primary move for the markets is down. I will remain on the defensive until we go above 1132 on the S&P 500 and 2342 on the NASDAQ.
A couple of good things to close with: Now that interest rates are so low, it is a great time to refinance your mortgage if you can. Corporate America is refinancing their debt at much lower rates in this environment. In the long term that is a very good thing. Many times when fear is this high it actually works contrary to popular belief. Fear is rising, but it is not yet at extreme levels that would set off a rally. Caution remains the word of the day.
Friday, August 6, 2010
Is the Cup Half Full or Half Empty?
Everyone knows that being between a rock and a hard place is not a good place to be. That is where the market is right now. We continue to have terrible news in the housing sector. There is no general economic recovery as of yet. Jobless claims continue to mount, while net new jobs are not being created in a significant enough number to even sustain the population growth (approximately 150,000 net new jobs per month needed). By far the majority of economic reports for May, June, July, and now August, have been worse than forecast. That includes home starts, home sales, home-builder confidence, retail sales, auto sales, consumer confidence, durable goods orders, manufacturing, jobs, etc. Yet the market rallies or barely goes down on these bad reports. What gives?
It seems that bad news is good news right now. Market investors are hoping that all this bad news will lead to more government stimulus. Pundits talk about more stimuli as if it was a good thing. Our European partners are telling us to be more fiscally responsible or we will be the next Greece. But investors are hopeful that another round of quantitative easing will be announced by the Fed next Tuesday and there is hope for a mortgage bailout for those one in five households with a mortgage that is underwater by August 17th. Now if you have been prudent on your investments and spending the last decade or so and find yourself without any bailout potential (except to maybe write the check for these bailouts in the form of higher taxes) don’t worry because the government is telling us that you will benefit because this will stem the continuing downfall in home prices. Really?
After trillions of dollars of global government stimulus the markets are still down 30% from their highs three years ago. Housing is down by about the same percentage. Jobs are scarce and we continue to reward bad behavior or just plain bad luck in the name of ‘for the good of all.’ St. Louis Fed President James Bullard said recently that, the U.S. is closer to a Japanese-style deflation outcome today than at any time in recent history. That hit the head on the nail better than Fed Chair Ben Bernanke’s recent “unusually uncertain” assessment of the economic outlook. Japan has been performing various forms of government intervention for two decades and they are still in a troubled environment.
So what happened to capitalism? What happened to free enterprise? What happened to the concept that the markets will reward the winners and the companies that don’t manage well, or produce products that aren’t needed or overpriced, or did a heap of bad loans would perish. That worked for us for over 200 years. Now the markets appear to be cheering for more government intervention. I never thought I would see this day. I for one would like the markets to decide the winners and the losers. Free enterprise might be a short term more painful path – but it would be quicker and the economy would surely regroup much quicker. Don’t believe me – look at Japan! That is what we should not do – yet we are following their path.
Intervention is already here. These markets do not want to go down on every piece of bad news. Let the markets clear the air. Volume has traded at the lightest of the year recently. It is so light that it is lower than levels from not only this year but most every year’s light summer volume has not been this paltry. I think that the markets have become a controlled environment. It’s as if some major investors are saying. “Don’t worry about all the bad news; we’ll hold it up for now, because help is on the way (in the form of more intervention).”
Granted earnings season was pretty good, relative to expectations. But when those expectations are lowered dramatically, sometimes it becomes easy to beat those reduced levels. To be fair, some companies are actually doing better than before the recession began – but those companies are few and far between. Consumer credit is still shrinking and higher taxes starting in January is just around the corner. The consumer is needed to drive the economy. Savings is also up causing another crimp in spending.
I remember when the following old saying was a joke. Next week Tuesday could be very telling when we hear some variation of it: “Hi - we’re from the government – we’re here to help!” Let’s all hope it all works out – but I for one am not in favor of any more of this kind of assistance. I wish more people felt the way I do and believed we should just let the chips fall where they may and then let’s band together to pick up the pieces. But the likely hood is we’ll just add more scotch tape to the crumbling dam. I hope I am wrong for the good of us all!
It seems that bad news is good news right now. Market investors are hoping that all this bad news will lead to more government stimulus. Pundits talk about more stimuli as if it was a good thing. Our European partners are telling us to be more fiscally responsible or we will be the next Greece. But investors are hopeful that another round of quantitative easing will be announced by the Fed next Tuesday and there is hope for a mortgage bailout for those one in five households with a mortgage that is underwater by August 17th. Now if you have been prudent on your investments and spending the last decade or so and find yourself without any bailout potential (except to maybe write the check for these bailouts in the form of higher taxes) don’t worry because the government is telling us that you will benefit because this will stem the continuing downfall in home prices. Really?
After trillions of dollars of global government stimulus the markets are still down 30% from their highs three years ago. Housing is down by about the same percentage. Jobs are scarce and we continue to reward bad behavior or just plain bad luck in the name of ‘for the good of all.’ St. Louis Fed President James Bullard said recently that, the U.S. is closer to a Japanese-style deflation outcome today than at any time in recent history. That hit the head on the nail better than Fed Chair Ben Bernanke’s recent “unusually uncertain” assessment of the economic outlook. Japan has been performing various forms of government intervention for two decades and they are still in a troubled environment.
So what happened to capitalism? What happened to free enterprise? What happened to the concept that the markets will reward the winners and the companies that don’t manage well, or produce products that aren’t needed or overpriced, or did a heap of bad loans would perish. That worked for us for over 200 years. Now the markets appear to be cheering for more government intervention. I never thought I would see this day. I for one would like the markets to decide the winners and the losers. Free enterprise might be a short term more painful path – but it would be quicker and the economy would surely regroup much quicker. Don’t believe me – look at Japan! That is what we should not do – yet we are following their path.
Intervention is already here. These markets do not want to go down on every piece of bad news. Let the markets clear the air. Volume has traded at the lightest of the year recently. It is so light that it is lower than levels from not only this year but most every year’s light summer volume has not been this paltry. I think that the markets have become a controlled environment. It’s as if some major investors are saying. “Don’t worry about all the bad news; we’ll hold it up for now, because help is on the way (in the form of more intervention).”
Granted earnings season was pretty good, relative to expectations. But when those expectations are lowered dramatically, sometimes it becomes easy to beat those reduced levels. To be fair, some companies are actually doing better than before the recession began – but those companies are few and far between. Consumer credit is still shrinking and higher taxes starting in January is just around the corner. The consumer is needed to drive the economy. Savings is also up causing another crimp in spending.
I remember when the following old saying was a joke. Next week Tuesday could be very telling when we hear some variation of it: “Hi - we’re from the government – we’re here to help!” Let’s all hope it all works out – but I for one am not in favor of any more of this kind of assistance. I wish more people felt the way I do and believed we should just let the chips fall where they may and then let’s band together to pick up the pieces. But the likely hood is we’ll just add more scotch tape to the crumbling dam. I hope I am wrong for the good of us all!
Friday, July 23, 2010
Markets in the Mirror
Watching the markets recently has been like having midcourt seats at a professional tennis match – back and forth, back and forth. Since April 26th we have had two weeks down followed by one week up, one week down, one week up, one week down, followed by two weeks up, then two weeks down, only to be capped off with a week up, a week down, and this week we finished up. Whew! That is a back and forth market! After all the back and forth’s – the markets are down around 10% in that timeframe.
The economic and earnings news over that timeframe has been just as frenetic. Many of the economic reports are pointing to a second half slowdown, while some experts are calling for a double dip recession. The earnings releases thus far also paint a very mixed picture. Dozens of companies are back to all time record earnings. Many show vast improvement from their worst levels two years ago, yet others are still struggling to recover.
Fed Chair Ben Bernanke came out with some honest talk as he testified before the Senate Banking Committee and stated that current economic outlook is "unusually uncertain." The markets sold off on that news, but rallied the next two days when investors also took Mr. Bernanke’s comments to mean that interest rates would remain at zero for a much longer period of time. You and I can’t get at any of that free money – but bankers can and rather than lend it out to stimulate American business, they give it to their trading desks to drive up the markets. And that is where we stand today. A mixed to poor economy, with mixed earnings and free money for the banks to pump up the market.
How does that help us? The plan appears to be to print enough money to stimulate the stock market so investors make some money. They in turn will spend it to stimulate business profits. Which will eventually result in more business to create jobs which will allow other people to drive this circle effect further. Unfortunately investors are withdrawing money from the stock market in droves. Many have chosen to hide out in the bond market which is paying ridiculously low levels of income. The bond market does not seem to be acknowledging the rally in stocks. Whom would you rather believe? The bond market or notoriously bullish investment managers?
Markets are now breaking above their down trend channels and their respective 200 day moving averages. This could set the stage for a continuing rally. Could we possibly move in one direction more than two weeks in a row? Markets are overbought at this juncture so don’t pin your hopes for a straight line up just yet.
The European bank “stress test” results came in on Friday and not surprisingly they showed that for the most part, their banks are ok. It seemed quite humorous, the amount of attention given to these tests. The people doing the tests had a vested interest in ensuring that the majority of banks came through with flying colors, so they did. Last year the US markets started to rally in earnest after our own banking stress tests. I think the Europeans took this exercise from our playbook and are hoping for the same results.
Ironically, the markets are exactly at the same prices that they where they were one month ago. Maybe some investor’s perception has changed, but perceptions have had a way of changing very quickly lately. Since April 26th we have had nine days where 90% of the volume traded up and 11 days where 90% of the volume has traded down. If it were only 90% up days that might indicate a further rally to come. If it were all 90% down days – that might indicate a bottom and a rally to ensue. However, this mixed action indicates indecision and should the markets falter, there is tremendous risk to the downside. Ten of the last 22 trading days have produced moves of 1% or more. One usually has to go to an amusement park for rides like that. There is nothing fun about the current market environment. Only time will tell if this gambit by the Fed works, we will all be much better off if it does.
The economic and earnings news over that timeframe has been just as frenetic. Many of the economic reports are pointing to a second half slowdown, while some experts are calling for a double dip recession. The earnings releases thus far also paint a very mixed picture. Dozens of companies are back to all time record earnings. Many show vast improvement from their worst levels two years ago, yet others are still struggling to recover.
Fed Chair Ben Bernanke came out with some honest talk as he testified before the Senate Banking Committee and stated that current economic outlook is "unusually uncertain." The markets sold off on that news, but rallied the next two days when investors also took Mr. Bernanke’s comments to mean that interest rates would remain at zero for a much longer period of time. You and I can’t get at any of that free money – but bankers can and rather than lend it out to stimulate American business, they give it to their trading desks to drive up the markets. And that is where we stand today. A mixed to poor economy, with mixed earnings and free money for the banks to pump up the market.
How does that help us? The plan appears to be to print enough money to stimulate the stock market so investors make some money. They in turn will spend it to stimulate business profits. Which will eventually result in more business to create jobs which will allow other people to drive this circle effect further. Unfortunately investors are withdrawing money from the stock market in droves. Many have chosen to hide out in the bond market which is paying ridiculously low levels of income. The bond market does not seem to be acknowledging the rally in stocks. Whom would you rather believe? The bond market or notoriously bullish investment managers?
Markets are now breaking above their down trend channels and their respective 200 day moving averages. This could set the stage for a continuing rally. Could we possibly move in one direction more than two weeks in a row? Markets are overbought at this juncture so don’t pin your hopes for a straight line up just yet.
The European bank “stress test” results came in on Friday and not surprisingly they showed that for the most part, their banks are ok. It seemed quite humorous, the amount of attention given to these tests. The people doing the tests had a vested interest in ensuring that the majority of banks came through with flying colors, so they did. Last year the US markets started to rally in earnest after our own banking stress tests. I think the Europeans took this exercise from our playbook and are hoping for the same results.
Ironically, the markets are exactly at the same prices that they where they were one month ago. Maybe some investor’s perception has changed, but perceptions have had a way of changing very quickly lately. Since April 26th we have had nine days where 90% of the volume traded up and 11 days where 90% of the volume has traded down. If it were only 90% up days that might indicate a further rally to come. If it were all 90% down days – that might indicate a bottom and a rally to ensue. However, this mixed action indicates indecision and should the markets falter, there is tremendous risk to the downside. Ten of the last 22 trading days have produced moves of 1% or more. One usually has to go to an amusement park for rides like that. There is nothing fun about the current market environment. Only time will tell if this gambit by the Fed works, we will all be much better off if it does.
Friday, July 16, 2010
Unsustainable
I have said it before and I will say it again. If we continue on our current path, our economic recovery is unsustainable. Solving a debt problem with more debt is not a solution. Transferring bad debt from the private sector (banks and corporations) to the public sector (global governments and ultimately taxpayers), without any consequences for the perpetrators only rewards bad behavior. Fiscal constraint and stimulus for growth are necessary to turn this mess around.
I have had my doubts all along whether or not this has been a real recovery or just an illusion of one, artificially produced by government spending but unable to stand on its own. I hope and wish that I am wrong about all this, but unfortunately I doubt that I will be. There are many, many signs that the economy is slowing again now that much of the stimulus has been withdrawn. To add more stimulus would be adding to the future unpayable debt that our children and grandchildren will eventually have to deal with. Some entities must be allowed to fail and go bankrupt to allow others to remain solvent.
In spite of the impressive new bull market in stocks, investors continued to pull money out of stocks and equity mutual funds all last year. This year many investors started to regain their nerve and added $7.4 billion into equity mutual funds during the 2nd quarter 2010, only to be rewarded with negative returns. Now, the flow has reversed again, this time dramatically, with $11.6 billion pulled out of equity funds in the week ended July 7. (Yet somehow the market went up that week.)
Investor sentiment has whipsawed quickly as well, from overly bearish to neutral in a very short span. This week's AAII Sentiment Survey Results are as follows: Bullish: 39.4%, up 18.4 percentage points and Bearish: 37.8%, down 19.3 percentage points - in a WEEK. Sentiment can change like the wind.
According to the Mortgage Bankers Association mortgage applications index fell again despite the fact that mortgage rates remain at near record low levels. The main focus should be on the new purchase index, which extended its losing streak to nine of the past 10 weeks. This trend that can’t be ignored, it suggests that housing prices will likely continue to decline, and potentially bring the rest of the economy down with it.
The stock market is now in a downtrend that started at the end of April. The most likely target will be in the 875 – 950 range for the S&P 500. At that point we will reevaluate and come up with new targets – higher or lower. There will be some resistance along the way at 1040 and 1010. We are currently positioned to profit should the market continue this trend lower.
I have had my doubts all along whether or not this has been a real recovery or just an illusion of one, artificially produced by government spending but unable to stand on its own. I hope and wish that I am wrong about all this, but unfortunately I doubt that I will be. There are many, many signs that the economy is slowing again now that much of the stimulus has been withdrawn. To add more stimulus would be adding to the future unpayable debt that our children and grandchildren will eventually have to deal with. Some entities must be allowed to fail and go bankrupt to allow others to remain solvent.
In spite of the impressive new bull market in stocks, investors continued to pull money out of stocks and equity mutual funds all last year. This year many investors started to regain their nerve and added $7.4 billion into equity mutual funds during the 2nd quarter 2010, only to be rewarded with negative returns. Now, the flow has reversed again, this time dramatically, with $11.6 billion pulled out of equity funds in the week ended July 7. (Yet somehow the market went up that week.)
Investor sentiment has whipsawed quickly as well, from overly bearish to neutral in a very short span. This week's AAII Sentiment Survey Results are as follows: Bullish: 39.4%, up 18.4 percentage points and Bearish: 37.8%, down 19.3 percentage points - in a WEEK. Sentiment can change like the wind.
According to the Mortgage Bankers Association mortgage applications index fell again despite the fact that mortgage rates remain at near record low levels. The main focus should be on the new purchase index, which extended its losing streak to nine of the past 10 weeks. This trend that can’t be ignored, it suggests that housing prices will likely continue to decline, and potentially bring the rest of the economy down with it.
The stock market is now in a downtrend that started at the end of April. The most likely target will be in the 875 – 950 range for the S&P 500. At that point we will reevaluate and come up with new targets – higher or lower. There will be some resistance along the way at 1040 and 1010. We are currently positioned to profit should the market continue this trend lower.
Thursday, July 15, 2010
The Fear Index
Fear as measured by the VIX Index fell by nearly one third in less than two weeks as the markets marched higher for seven consecutive days. Investors went from panic to euphoria, quicker than you could say “it’s a new bull market.”
I don’t believe things are quite that simple. I still believe that we are mired in a long term secular bear market and the run up from March 2009 to April 2010 was a snap back rally. I also believe that rally has ended and we are going to take out the July 1st lows shortly.
The pathetic volume associated with the recent rally is significant. The poor economic news releases are flashing warning signs. The fact that markets are forward looking six to nine months coincides with the start of higher taxes that are to take effect on January 1, 2011.
Technically the market looks like it is stalling out right here. The fear that investors will come to understand that this rally has failed will be huge. We took a position on the VXX exchange traded fund in anticipation of fear (or in my opinion reality) coming back into the markets.
VXX can be bought here with a stop just below $24 with an 8% risk. A looser stop could be $23.60 for about 10.5% risk. There is a nice bottom of support formed by these lows as seen on the chart above, dating back to the beginning of May.
Friday, July 9, 2010
An Inside Week
It was a great week for the bulls as the markets rocketed up better than 4.5% on the major indexes. With all that great action, caution remains as the markets traded inside the farthest levels of the prior week. In technical terms it was an inside week, where neither the highs nor the lows of the prior week were penetrated. Which really means it was a waste of four clean shirts and gas as not much can be gleaned from the action. Even the volume extrapolated for the holiday, indicates less volume this week than last. So while constructive, unless there is a positive follow through next week, the action may be one of healing an oversold condition.
Prior to this week’s run, markets were stretched significantly below their respective 21 day moving averages. Those averages have now been retaken on the S&P and Dow Industrials. This has alleviated much of the oversold condition. The AAII poll showed bearishness at extreme levels as 57% of respondents fell into that camp. This echelon of negativity has not been witnessed since the March 2009 low. It must be noted though that sentiment is a secondary indicator and not necessarily a very good timing mechanism. Sentiment of any kind can change rather quickly.
Next week earnings season gets started with Alcoa (AA) announcing on Monday, Intel (INTC) on Tuesday, and many banks later in the week. Overall earnings for the S&P 500 companies are expected to rise 34% year over year. In all likelihood investors will be especially vigilant for the forward earnings forecasts as concerns about a second half slowdown are elevated. Initially markets may get whipsawed (what else is new) as each company announces. Once a trend for either better or worse than expected earnings or outlooks is established, the markets will settle into an appropriate trend as well – up or down depending on the results.
The facts remain, that the uptrend from last year has been broken and a new downtrend is now in place. There are a series of lower highs and lower lows for prices – which is a bearish trend. The current primary (multi-year) trend is down. The intermediate trend (multi month) is down but the short term (this week) trend is up. There is a significant amount of overhead resistance just above current levels which could also ignite some near term selling. I recommend a hedged position with exposure to both longs and shorts, with a good deal of cash on the sidelines ready to be allocated when the next move becomes clearer.
The markets are not out of the woods yet as some pundits would have you believe. This week did not reverse the market’s direction, but it did set up the potential for a positive follow through next week. Volume was light and no significant resistance points were reversed. Time will be the determining factor.
Prior to this week’s run, markets were stretched significantly below their respective 21 day moving averages. Those averages have now been retaken on the S&P and Dow Industrials. This has alleviated much of the oversold condition. The AAII poll showed bearishness at extreme levels as 57% of respondents fell into that camp. This echelon of negativity has not been witnessed since the March 2009 low. It must be noted though that sentiment is a secondary indicator and not necessarily a very good timing mechanism. Sentiment of any kind can change rather quickly.
Next week earnings season gets started with Alcoa (AA) announcing on Monday, Intel (INTC) on Tuesday, and many banks later in the week. Overall earnings for the S&P 500 companies are expected to rise 34% year over year. In all likelihood investors will be especially vigilant for the forward earnings forecasts as concerns about a second half slowdown are elevated. Initially markets may get whipsawed (what else is new) as each company announces. Once a trend for either better or worse than expected earnings or outlooks is established, the markets will settle into an appropriate trend as well – up or down depending on the results.
The facts remain, that the uptrend from last year has been broken and a new downtrend is now in place. There are a series of lower highs and lower lows for prices – which is a bearish trend. The current primary (multi-year) trend is down. The intermediate trend (multi month) is down but the short term (this week) trend is up. There is a significant amount of overhead resistance just above current levels which could also ignite some near term selling. I recommend a hedged position with exposure to both longs and shorts, with a good deal of cash on the sidelines ready to be allocated when the next move becomes clearer.
The markets are not out of the woods yet as some pundits would have you believe. This week did not reverse the market’s direction, but it did set up the potential for a positive follow through next week. Volume was light and no significant resistance points were reversed. Time will be the determining factor.
Thursday, July 8, 2010
The Bigger Picture
The markets current three day rally has lifted the animal spirits of investors from every breed. The bulls are now claiming victory and the bears are still growling away. I like to look at pictures because as they say, “A picture paints a thousand words.”
For traders maybe this three day rally on the heels of a nine day decline within the prior 10 trading days is meaningful. But this picture shows that the uptrend from last year is broken. The 50 day moving average is now lower than the 200 day average. We have a series of lower highs and lower lows which is forming a trend, and not shown is the light volume that has accompanied the recent market run-up.
From a fundamental standpoint not much has changed either. Europe is still in a quandary. Housing (and credit), which started this whole mess is still in trouble. As a matter of fact, mortgage rates are at record-low levels and and even with that, new home sales and pending home sales plunged to new all-time lows in May. Also mortgage applications for purchases are still declining in June, and that demonstrates how beleaguered the real estate sector truly is.
For those who think the economy doesn’t need the real estate sector to improve for the overall economy to recover, are forgetting that for most Americans their home is their largest investment. Add to that fact the realization that consumer spending accounts for 70% of our economy. When people feel “house poor” they are less inclined to spend heavily. Therefore housing must recover for there to be a lasting economic recovery.
Until the current downtrend actually changes, it is premature to guess that the correction is over. This is most likely a reprieve before the next leg down.
Thursday, July 1, 2010
Let This Be Your Warning
Thankfully my parents taught me to hope for the best but be prepared for the worst. There are two very important distinctions that must be made to truly understand this credo. Hope is to wish for the outcome you desire or stated another way, to yearn for the most favorable results given your circumstances. However it must be noted that hopes, yearning, and wishes do not make events happen. They are passive in nature. The second part of this gem of advice is to be prepared or to take action against the possibility of the most horrible situation from occurring. To prepare means being equipped or readiness. Preparation is controllable; it requires effort and planning. Everyone has the ability to get ready for action. Preparedness is to be proactive.
Investors today need to understand that markets are signaling a possible crash! Now I am not saying it will crash, although in my opinion, the markets are sure leaning in that direction. However, there is a coordinated global government effort, with unlimited resources to print money and spin news in any fashion they desire, to avoid the possibility of that kind of negative event from occurring. But, to depend outside forces that may or may not work to save your portfolio is to hope without action. To ignore the markets warnings and not reduce exposure or set stop losses (that should have been set a long time ago) is to not attempt to determine your own fate.
No one can control the markets, but you can control your risk. You are empowered to determine the amount of risk that you are willing to take. Great portfolio managers are not people who just know how to pick winners. Believe me no one is even close to being right all the time. Picking securities that go up is less than half the equation. Successful investors have realized that the most important aspect of managing money is to manage the risk! The markets are staging another waterfall event here. The markets are down 10% in just the last two weeks. Historically, all big losses started as small losses that were left unchecked.
A look at any chart of the major market indices will clearly show that the uptrend from March 2009 has been broken. First support, is somewhere between 875 and 950 for the S&P 500. Is that the worst? Absolutely not! As stated that is first support – not worst support from here. I understand the case for 666 to be tested in the near future, but I hope against all hope that we never see those levels again in my lifetime, because if we do, the “real world” will be pretty dismal. Therefore I am recommending protective measures be taken at this time.
We cannot ignore some awful facts about our current economic situation. For starters the global solution to the debt problems created over boom years has been to create more debt. Commons sense says that to solve a crisis of too much debt would be to become more fiscally responsible. Cut spending, increase savings, and reduce liabilities seems reasonable to me. The next area that has not yet been addressed is allowing institutions that ran amuck to fail. Yes, Lehman failed, but what about AIG, Bear Stearns, Fannie Mae, Freddie Mac and a huge list of other institutions. They all got bailed out in one form or another. Now the lifeguards, who saved these organizations, need saving themselves as many Sovereign nations are drowning in their own debt, including 40 of our own 50 states right here in the good ole US of A.
Initial claims for unemployment are rising once again, as is continuing claims for benefits. The elevated level regrettably suggests continued weakness on the jobs front. The Labor Department indicated today that 3.3 million people will lose unemployment benefits by the end of July- which will lower the unemployment rate, as those figures only include those poor souls collecting benefits. How are those people going to help the economy grow? The housing numbers are even more stark. Today’s pending home sales figures showed a 30% month-over-month drop for May. In case you’re not sure, that is a dramatic decline and indicates a potential further plunge for home prices despite record low mortgage rates.
Another example of the rush to safety is the falling yield on the benchmark 10-year Treasury Note. It is now below 2.9% for the first time since April of 2009. Yield and price are inverse to each other. Investors buy the price. As demand goes up, prices rise because they can (think about an auction – if several people wanted to buy your used car you would sell it to the highest bidder). Therefore as Treasury prices rise, the yields drop. Treasuries are thought to be the safest investment vehicles available. At current yields, one can deduce that the demand for safety is at a premium.
The recent selling in the Dow Industrials and the Transports has produced a Dow Theory sell signal. This is a more than 100 year old indicator that is now calling for a further decline in the markets. The S&P appears to have broken the head and shoulders formation that I have previously written about. Measuring from the top of the head to the neckline is about 179 points. Employing traditional technical methods, it projects to a possible S&P level of around 860. The Dow and the NASDAQ have also broken their head and shoulder formations. From both a fundamental and technical read, the markets are on very shaky ground. Put simply, this is the worst, and most dangerous times for the stock market I have seen since my early days as an investment advisor back in 1987. Long after the crash of ’87 people claimed that you could not see it coming. I disagree – yes you could have anticipated that danger lie ahead, just as you can today. Like today, the markets had dropped over 10% before the crash in 1987. It doesn’t mean we could identify the exact timing and magnitude of the drop, then or now, but it is in times like this that you should prepare your portfolio for a potentially huge negative outcome.
There are a couple of positives: The last two weeks of vicious selling has produced a marked oversold condition for stocks and a reflex rally could pop up soon. I would use those rallies to lighten up. The dollar/euro relationship may be turning, as the Euro is inexplicitly up today. There has been a direct relationship with our stock market and the Euro. Recently they both have been moving in the same direction. If the Euro rallies here in the short term, our markets could as well.
I hear many pundits talking about the markets today representing good values. Valuation is a very slippery slope. Historically coming out of a recession stocks trade at 11- 14 times earnings. Bad recessions have put PE ratios well below 10. In 1974 at the bottom of a terrible market, but one not quite as bad as ours has been, the PE went as low as seven. Today’s PE ratio is around 15 times earnings – fairly high from a historical perspective given the end of a recession. Investor risk appetite is a fickle item to attempt to quantify. Your own risk tolerance is what you should focus on.
Sometimes to win is to not lose. If you’re like me, and are absolutely insistent on not losing, then doing the work it takes to be prepared to position your portfolio for the winning side of things is imperative. If you thought 2008 was a tough year, there is a very real possibility that the coming period could be equally as difficult! How fast you recognize that, and react accordingly, may very well be the difference between having funds for your retirement or not. Let’s all hope for the best, but also recognize that Hope is not a strategy!
Investors today need to understand that markets are signaling a possible crash! Now I am not saying it will crash, although in my opinion, the markets are sure leaning in that direction. However, there is a coordinated global government effort, with unlimited resources to print money and spin news in any fashion they desire, to avoid the possibility of that kind of negative event from occurring. But, to depend outside forces that may or may not work to save your portfolio is to hope without action. To ignore the markets warnings and not reduce exposure or set stop losses (that should have been set a long time ago) is to not attempt to determine your own fate.
No one can control the markets, but you can control your risk. You are empowered to determine the amount of risk that you are willing to take. Great portfolio managers are not people who just know how to pick winners. Believe me no one is even close to being right all the time. Picking securities that go up is less than half the equation. Successful investors have realized that the most important aspect of managing money is to manage the risk! The markets are staging another waterfall event here. The markets are down 10% in just the last two weeks. Historically, all big losses started as small losses that were left unchecked.
A look at any chart of the major market indices will clearly show that the uptrend from March 2009 has been broken. First support, is somewhere between 875 and 950 for the S&P 500. Is that the worst? Absolutely not! As stated that is first support – not worst support from here. I understand the case for 666 to be tested in the near future, but I hope against all hope that we never see those levels again in my lifetime, because if we do, the “real world” will be pretty dismal. Therefore I am recommending protective measures be taken at this time.
We cannot ignore some awful facts about our current economic situation. For starters the global solution to the debt problems created over boom years has been to create more debt. Commons sense says that to solve a crisis of too much debt would be to become more fiscally responsible. Cut spending, increase savings, and reduce liabilities seems reasonable to me. The next area that has not yet been addressed is allowing institutions that ran amuck to fail. Yes, Lehman failed, but what about AIG, Bear Stearns, Fannie Mae, Freddie Mac and a huge list of other institutions. They all got bailed out in one form or another. Now the lifeguards, who saved these organizations, need saving themselves as many Sovereign nations are drowning in their own debt, including 40 of our own 50 states right here in the good ole US of A.
Initial claims for unemployment are rising once again, as is continuing claims for benefits. The elevated level regrettably suggests continued weakness on the jobs front. The Labor Department indicated today that 3.3 million people will lose unemployment benefits by the end of July- which will lower the unemployment rate, as those figures only include those poor souls collecting benefits. How are those people going to help the economy grow? The housing numbers are even more stark. Today’s pending home sales figures showed a 30% month-over-month drop for May. In case you’re not sure, that is a dramatic decline and indicates a potential further plunge for home prices despite record low mortgage rates.
Another example of the rush to safety is the falling yield on the benchmark 10-year Treasury Note. It is now below 2.9% for the first time since April of 2009. Yield and price are inverse to each other. Investors buy the price. As demand goes up, prices rise because they can (think about an auction – if several people wanted to buy your used car you would sell it to the highest bidder). Therefore as Treasury prices rise, the yields drop. Treasuries are thought to be the safest investment vehicles available. At current yields, one can deduce that the demand for safety is at a premium.
The recent selling in the Dow Industrials and the Transports has produced a Dow Theory sell signal. This is a more than 100 year old indicator that is now calling for a further decline in the markets. The S&P appears to have broken the head and shoulders formation that I have previously written about. Measuring from the top of the head to the neckline is about 179 points. Employing traditional technical methods, it projects to a possible S&P level of around 860. The Dow and the NASDAQ have also broken their head and shoulder formations. From both a fundamental and technical read, the markets are on very shaky ground. Put simply, this is the worst, and most dangerous times for the stock market I have seen since my early days as an investment advisor back in 1987. Long after the crash of ’87 people claimed that you could not see it coming. I disagree – yes you could have anticipated that danger lie ahead, just as you can today. Like today, the markets had dropped over 10% before the crash in 1987. It doesn’t mean we could identify the exact timing and magnitude of the drop, then or now, but it is in times like this that you should prepare your portfolio for a potentially huge negative outcome.
There are a couple of positives: The last two weeks of vicious selling has produced a marked oversold condition for stocks and a reflex rally could pop up soon. I would use those rallies to lighten up. The dollar/euro relationship may be turning, as the Euro is inexplicitly up today. There has been a direct relationship with our stock market and the Euro. Recently they both have been moving in the same direction. If the Euro rallies here in the short term, our markets could as well.
I hear many pundits talking about the markets today representing good values. Valuation is a very slippery slope. Historically coming out of a recession stocks trade at 11- 14 times earnings. Bad recessions have put PE ratios well below 10. In 1974 at the bottom of a terrible market, but one not quite as bad as ours has been, the PE went as low as seven. Today’s PE ratio is around 15 times earnings – fairly high from a historical perspective given the end of a recession. Investor risk appetite is a fickle item to attempt to quantify. Your own risk tolerance is what you should focus on.
Sometimes to win is to not lose. If you’re like me, and are absolutely insistent on not losing, then doing the work it takes to be prepared to position your portfolio for the winning side of things is imperative. If you thought 2008 was a tough year, there is a very real possibility that the coming period could be equally as difficult! How fast you recognize that, and react accordingly, may very well be the difference between having funds for your retirement or not. Let’s all hope for the best, but also recognize that Hope is not a strategy!
Thursday, June 24, 2010
Bad News for Bulls
After some constructive base building the last couple of weeks, the markets failed an important test at its 50 day moving average. Unfortunately the markets failed at their 50 day moving averages back in mid May, setting up a test of the February lows. Since that rebuff, all three of the major indices have fallen below their 200 day moving averages, signaling a change in control from the bulls back to the bears.
It is a widely held notion that previous support becomes resistance. Last week the 200 day moving averages acted as a floor for the markets. Now it is likely that those averages will act as a ceiling that will be difficult for the markets to go above. Obviously the 50 day moving averages have been impenetrable the last couple of months as well. Last Monday’s price action, when the bulls failed to seize the opportunity to rise above their 50 day moving averages on the heels of the most positive news of the month, raised the warning flags.
Both technical and fundamental analysis demonstrates a market rally that is broken and the odds now favor another retest of the S&P 1040 level. With the 50 day moving in the direction of forming a death cross under the 200 day moving average on all the major indices, it is quite possible that the markets will decline back down to 1040 and 2139 for the S&P and NASDAQ respectively. Should those levels be breached, a plunge down to 875 – 950 on the S&P witnessed last June and July, will most likely be targeted.
With the price of gold touching an all time high of $1260 per ounce in the past week, it is another of those flashing red lights that says all is not well with our economy. There is much discussion whether this price rise is signaling inflation or that global fiat currencies are collapsing, or perhaps a combination of both events. It must be stated that the price of gold has quadrupled over the past ten years, while the S&P 500 has remained basically flat. Recall that one is just metal removed from the earth and the other is a reflection of the aggregate value of the largest 500 companies (employers) in America. This has created one of the most difficult investment environments witnessed in several generations.
Much of the economic data recently has been negative. The housing and mortgage figures appear to be predicting another leg down for real estate. The jobs picture is not improving either. This is not an environment where one should expect to be able to buy and hold. While I remain long term optimistic, in the short run there are too many obstacles that could result in a significant price decline to ignore. We remain in a short term complicated trading environment for now.
It is a widely held notion that previous support becomes resistance. Last week the 200 day moving averages acted as a floor for the markets. Now it is likely that those averages will act as a ceiling that will be difficult for the markets to go above. Obviously the 50 day moving averages have been impenetrable the last couple of months as well. Last Monday’s price action, when the bulls failed to seize the opportunity to rise above their 50 day moving averages on the heels of the most positive news of the month, raised the warning flags.
Both technical and fundamental analysis demonstrates a market rally that is broken and the odds now favor another retest of the S&P 1040 level. With the 50 day moving in the direction of forming a death cross under the 200 day moving average on all the major indices, it is quite possible that the markets will decline back down to 1040 and 2139 for the S&P and NASDAQ respectively. Should those levels be breached, a plunge down to 875 – 950 on the S&P witnessed last June and July, will most likely be targeted.
With the price of gold touching an all time high of $1260 per ounce in the past week, it is another of those flashing red lights that says all is not well with our economy. There is much discussion whether this price rise is signaling inflation or that global fiat currencies are collapsing, or perhaps a combination of both events. It must be stated that the price of gold has quadrupled over the past ten years, while the S&P 500 has remained basically flat. Recall that one is just metal removed from the earth and the other is a reflection of the aggregate value of the largest 500 companies (employers) in America. This has created one of the most difficult investment environments witnessed in several generations.
Much of the economic data recently has been negative. The housing and mortgage figures appear to be predicting another leg down for real estate. The jobs picture is not improving either. This is not an environment where one should expect to be able to buy and hold. While I remain long term optimistic, in the short run there are too many obstacles that could result in a significant price decline to ignore. We remain in a short term complicated trading environment for now.
Friday, June 18, 2010
Building a Base
The markets finished the week up over 2% on the three major indices and we now have had our second up week in a row. Back to back positive weeks haven’t happened for the S&P since the second week of April. The markets appear to be building a base that could set the next run up. Base building after all the volatility we have experienced lately is needed and constructive.
The bear case is the market is running on fumes. We have a short term extreme overbought condition which could mean that at least a short term pullback is in order to alleviate that situation. All the recent economic reports have been poor at best, but the market has mostly ignored them. There is tremendous overhead resistance that will come in play soon from the 50 day moving average and the highs back in January at the 1140 -1150 level for the S&P 500. Resistance for the NASDAQ is in the 2325 -2350 range for the same reasons.
A technical indicator known as a Head and Shoulders pattern may be forming on the charts for the major indices. If resistance comes into play and the markets fail at the overhead resistance levels outlined above, and the 1040 level for the S&P doesn’t hold, expect a quick decline down to the 875 – 950 level. Since so many chartists are aware of this potential pattern, its likely outcome is probably unlikely, but time will tell.
The calendar does not favor the bulls either. Next week is the week following the quarterly quadruple-witching options expiration week, and most often it tends to be negative. However, it has an even stronger negative bias for the month of June. Using the Dow Jones Industrial Average as the benchmark, the week after June’s expirations has been down for 11 straight years, and 18 of the last 20 years. We shall see if that streak continues.
The markets resiliency has been amazing, but that is why I remain long equities. The markets 200 day moving averages were pierced to the upside this week and are now acting as near term support for the indexes. Gold, silver, and gold mining stocks all had great weeks. High yield ETF’s may be signaling further strength for the stock market. Both HYG and JNK have battled through their converging 50 and 200 day moving averages. If they can hold above these levels – expect the stock market rally to continue. Next week may add some clarity to the equation.
*Pacific Financial Planners maintains positions in the following: DIA, DT, EFA, GAZ, GDX, GLD, HYG, IEV, JNK, MDY, NHP, QQQQ, SGG, SLV
*Pacific Financial Planners maintains positions in the following: DIA, DT, EFA, GAZ, GDX, GLD, HYG, IEV, JNK, MDY, NHP, QQQQ, SGG, SLV
Wednesday, June 16, 2010
Neutral on the Markets
I have been a professional money manager for over two decades and therefore have seen several different environments, everything from market crashes to irrational exuberance. I claim to specialize in being a dual directional portfolio manager. I attempt to profit in any market environment – up or down, by limiting downside risk when positions don’t work and letting profits run when trades go my way. One of my main strengths has been “reading” the markets, through a combination of both technical and fundamental disciplines. However, I feel one of the most important attributes to being a successful portfolio manager is to be pragmatic. In this environment I believe that trait above all else will determine one’s near term fate for profit or loss.
The markets have really been tempting doom as of late, experiencing a 1000 point day “flash crash,” a 14%, thirty day price correction, and several tests of major support which failure would have left the market vulnerable to another significant and potentially quick decline. With that said, many negative factors have been overcome – at least for now! The market no longer is overly bullish or complacent. The high number of stocks trading above their 50 and 200 day moving averages has been alleviated. Important support levels have been tested several times and have withheld those assaults. While economic activity is still slow or slowing, the data is still substantially better than it was 12 – 18 months ago.
For those reasons I am near term neutral on the markets. Understand that neutral does not mean satisfied or unworried. The market has surpassed three important technical levels. The downtrend that started in late April has been pierced to the upside. This downtrend can be seen by drawing a line connecting the highest daily highs on any chart over that time. The overhead resistance line (around 1107 on the S&P) that was in place since May 20th was also breached to the upside. The 200 day moving averages for the major market indices have also been exceeded in recent days.
Investors always ask, “If you are out of the market – how do you know when to get back in?” My answer is always the same – when it stops going down. To which I always get a very stern glare back in my direction. The pattern just described, potentially demonstrates a market that has stopped going down. To cross above a confluence of three vital technical indicators in this close time proximity is a strong reason to take long positions back into the markets. Another bonus is that support is within 7% from this entry point on the S&P 500. This creates a low risk, potentially high reward trade.
Does that guarantee success? Of course not, as nothing is guaranteed in the markets, especially in this tough environment. This is the reason investors should use stop losses – to protect against those situations when the upside breakout doesn’t work out and the markets go against your positions.
So why am I not more bullish if several technical factors indicate a market that has stopped going down? Simply stated, the markets have more negative headlines that can knock it off course than potentially positive news that will drive it higher. Fears of another slowdown in housing, the problems in the Gulf of Mexico, the high unemployment rate, the problems in Europe, the potential housing bubble in China, and the unprecedented amount of global debt are just a few of the reasons to be bearish on the markets. On the flipside, the amount of money being printed and used to trade on the markets, and a willingness to print more money to bail out any troubled institution could be cause for near term bullishness.
We are investing on the long side of the market due to the positive technical developments, but the final huge benefit of being pragmatic is that it allows you the right to change your mind when more information becomes available. I assure you that a day of reckoning for the economy and the stock market is still coming. What can’t be foretold is when that day will arrive. Is it two weeks, two months, or two years away? That is the big unknown, but because it can happen sooner rather than later – I remain neutral on the markets.
The markets have really been tempting doom as of late, experiencing a 1000 point day “flash crash,” a 14%, thirty day price correction, and several tests of major support which failure would have left the market vulnerable to another significant and potentially quick decline. With that said, many negative factors have been overcome – at least for now! The market no longer is overly bullish or complacent. The high number of stocks trading above their 50 and 200 day moving averages has been alleviated. Important support levels have been tested several times and have withheld those assaults. While economic activity is still slow or slowing, the data is still substantially better than it was 12 – 18 months ago.
For those reasons I am near term neutral on the markets. Understand that neutral does not mean satisfied or unworried. The market has surpassed three important technical levels. The downtrend that started in late April has been pierced to the upside. This downtrend can be seen by drawing a line connecting the highest daily highs on any chart over that time. The overhead resistance line (around 1107 on the S&P) that was in place since May 20th was also breached to the upside. The 200 day moving averages for the major market indices have also been exceeded in recent days.
Investors always ask, “If you are out of the market – how do you know when to get back in?” My answer is always the same – when it stops going down. To which I always get a very stern glare back in my direction. The pattern just described, potentially demonstrates a market that has stopped going down. To cross above a confluence of three vital technical indicators in this close time proximity is a strong reason to take long positions back into the markets. Another bonus is that support is within 7% from this entry point on the S&P 500. This creates a low risk, potentially high reward trade.
Does that guarantee success? Of course not, as nothing is guaranteed in the markets, especially in this tough environment. This is the reason investors should use stop losses – to protect against those situations when the upside breakout doesn’t work out and the markets go against your positions.
So why am I not more bullish if several technical factors indicate a market that has stopped going down? Simply stated, the markets have more negative headlines that can knock it off course than potentially positive news that will drive it higher. Fears of another slowdown in housing, the problems in the Gulf of Mexico, the high unemployment rate, the problems in Europe, the potential housing bubble in China, and the unprecedented amount of global debt are just a few of the reasons to be bearish on the markets. On the flipside, the amount of money being printed and used to trade on the markets, and a willingness to print more money to bail out any troubled institution could be cause for near term bullishness.
We are investing on the long side of the market due to the positive technical developments, but the final huge benefit of being pragmatic is that it allows you the right to change your mind when more information becomes available. I assure you that a day of reckoning for the economy and the stock market is still coming. What can’t be foretold is when that day will arrive. Is it two weeks, two months, or two years away? That is the big unknown, but because it can happen sooner rather than later – I remain neutral on the markets.
Friday, June 11, 2010
The Waiting is the Hardest Part
Markets are once again proving their resiliency. The S&P 500 and the NASDAQ has reversed directions every other week for the past six weeks. This yo-yo effect smacks of uncertainty for the near term direction of the markets. The NASDAQ is down 11% over those six weeks, while the S&P is off 10%.
The market continues to toy with very important support levels (S&P 1040 & NASDAQ 2139) while it meanders back and forth, trying to pick its next big move. When the markets start the day up only to finish off down, that action is a called a bearish reversal. It's the kind of activity that eventually wears out those who are still bullish and trying to buy the dips, or those who are still in and haven't yet seen a need to take action to preserve capital.
On Thursday and Friday we finally had days that started strong and end even stronger. That is the type of action that will be necessary for the bulls to regain the upper hand in this market malaise. The negative to the week ending price progress was that one again there was a lack of volume for such a high percentage up move. Volume demonstrates conviction. It shows widespread appeal associated with that directional move. Therefore when the markets move over 2% one way or the other and the volume is lighter than the recent average activity, one can conclude that it was only a few players who orchestrated that development.
The market has yet to really identify if this latest downturn is just a correction in an ongoing bull market or are we at the end of a cyclical bull run, in an enduring secular bear market. That is the million dollar question! Many highly respected market observers have diametrically opposite views on where we stand today. The reality is that more time is needed for the market to determine its next primary move.
Should the markets break below the listed support numbers the odds are high that another 10% correction could take place. The markets actually have to break above 1170, before a safe call could be made that the correction is over and the bull is ready to resume. That is not to say that early trades can’t be made in this environment. It’s just that if the market moves opposite of your selections those purchases will be just trades – and not long term investments, unless you enjoy taking losses.
Should the market go in the direction you assume, you will have gotten an early start and a better price than had you waited until the risks were reduced. Currently, the risks are very high that this market could move against any long or short position that you put on or own today. From a technical perspective, the charts have shown a series of lower highs and lower lows. That establishes a negative trend which will remain in place until something changes for the better.
This week the American Association of Individual Investors showed little change in sentiment from last week’s numbers. 34.5% are bullish and 43.1% bearish. Bullishness usually falls to less than 25% and bearishness increases to 55% at major market bottoms. We have not seen that yet.
The trade deficit rose to the highest level in more than a year, according to the Commerce Department Thursday. Imports dropped by 0.4% and exports declined 0.7%. This shows weakness here at home as demand for goods decreased, but simultaneously demonstrated demand for our goods abroad has declined as well. Some of the export declines could be a result of our strengthening US Dollar causing some prices for goods to become less competitive overseas. So the next million dollar question is; with buying here in America down, and our selling to other countries slowing down, will it lead to a second half global slowdown or worse a double dip recession?
The trade deficit (the difference between exports and imports) rose to $40.3 billion in April, the largest deficit since December 2008. The silver lining however is that compared with the first four months of 2009, exports this year are up 17%, and imports are up 20%, as global trade appears to be recovering from its worst decline since the Great Depression. It is imperative that this positive trend continue for global economies to mend.
It is truly concerning that a sustainable recovery could occur while mortgage applications for home purchases are down 38% from a year ago, and the level a year ago was down almost 20% from the prior year. The housing industry is one of the largest job creation businesses for any economy. With housing come jobs. Job growth and wealth creation are necessary components for the economy to truly get better and the markets to run back to and past their old highs.
I am very concerned about the near term direction of the markets. The best advice if you’re an investor is to wait out the current daily inverse swings – be patient. It is strongly recommended to employ stop losses, setting the level just below the recent lowest price, for your specific securities.
If you are a trader some of the commodity plays look attractive. We use Exchange Traded Funds and currently have exposure to gold (GLD), gold miners (GDX), silver (SLV), sugar (SGG), and natural gas (GAZ). We use protective stop losses on all these investments as well. Some of the other commodity ETF’s are coming into our buy zones, but we have not added any new positions yet.
Shakespeare once wrote, “Discretion is the better part valor,” which is usually taken to mean that caution is better than rash courage. Proper judgment is better than unwarranted bravery, particularly when it comes to your money. In this market environment that’s pretty sound advice.
The market continues to toy with very important support levels (S&P 1040 & NASDAQ 2139) while it meanders back and forth, trying to pick its next big move. When the markets start the day up only to finish off down, that action is a called a bearish reversal. It's the kind of activity that eventually wears out those who are still bullish and trying to buy the dips, or those who are still in and haven't yet seen a need to take action to preserve capital.
On Thursday and Friday we finally had days that started strong and end even stronger. That is the type of action that will be necessary for the bulls to regain the upper hand in this market malaise. The negative to the week ending price progress was that one again there was a lack of volume for such a high percentage up move. Volume demonstrates conviction. It shows widespread appeal associated with that directional move. Therefore when the markets move over 2% one way or the other and the volume is lighter than the recent average activity, one can conclude that it was only a few players who orchestrated that development.
The market has yet to really identify if this latest downturn is just a correction in an ongoing bull market or are we at the end of a cyclical bull run, in an enduring secular bear market. That is the million dollar question! Many highly respected market observers have diametrically opposite views on where we stand today. The reality is that more time is needed for the market to determine its next primary move.
Should the markets break below the listed support numbers the odds are high that another 10% correction could take place. The markets actually have to break above 1170, before a safe call could be made that the correction is over and the bull is ready to resume. That is not to say that early trades can’t be made in this environment. It’s just that if the market moves opposite of your selections those purchases will be just trades – and not long term investments, unless you enjoy taking losses.
Should the market go in the direction you assume, you will have gotten an early start and a better price than had you waited until the risks were reduced. Currently, the risks are very high that this market could move against any long or short position that you put on or own today. From a technical perspective, the charts have shown a series of lower highs and lower lows. That establishes a negative trend which will remain in place until something changes for the better.
This week the American Association of Individual Investors showed little change in sentiment from last week’s numbers. 34.5% are bullish and 43.1% bearish. Bullishness usually falls to less than 25% and bearishness increases to 55% at major market bottoms. We have not seen that yet.
The trade deficit rose to the highest level in more than a year, according to the Commerce Department Thursday. Imports dropped by 0.4% and exports declined 0.7%. This shows weakness here at home as demand for goods decreased, but simultaneously demonstrated demand for our goods abroad has declined as well. Some of the export declines could be a result of our strengthening US Dollar causing some prices for goods to become less competitive overseas. So the next million dollar question is; with buying here in America down, and our selling to other countries slowing down, will it lead to a second half global slowdown or worse a double dip recession?
The trade deficit (the difference between exports and imports) rose to $40.3 billion in April, the largest deficit since December 2008. The silver lining however is that compared with the first four months of 2009, exports this year are up 17%, and imports are up 20%, as global trade appears to be recovering from its worst decline since the Great Depression. It is imperative that this positive trend continue for global economies to mend.
It is truly concerning that a sustainable recovery could occur while mortgage applications for home purchases are down 38% from a year ago, and the level a year ago was down almost 20% from the prior year. The housing industry is one of the largest job creation businesses for any economy. With housing come jobs. Job growth and wealth creation are necessary components for the economy to truly get better and the markets to run back to and past their old highs.
I am very concerned about the near term direction of the markets. The best advice if you’re an investor is to wait out the current daily inverse swings – be patient. It is strongly recommended to employ stop losses, setting the level just below the recent lowest price, for your specific securities.
If you are a trader some of the commodity plays look attractive. We use Exchange Traded Funds and currently have exposure to gold (GLD), gold miners (GDX), silver (SLV), sugar (SGG), and natural gas (GAZ). We use protective stop losses on all these investments as well. Some of the other commodity ETF’s are coming into our buy zones, but we have not added any new positions yet.
Shakespeare once wrote, “Discretion is the better part valor,” which is usually taken to mean that caution is better than rash courage. Proper judgment is better than unwarranted bravery, particularly when it comes to your money. In this market environment that’s pretty sound advice.
Wednesday, June 9, 2010
The Maginot Line
In World War II, the Maginot Line referred to a line of concrete fortifications, tank obstacles, artillery stations, machine gun posts, and other defenses, that France constructed along its borders with Germany and Italy. These various structures created a principal line of resistance, which was hoped to be impenetrable from a German attack. The Maginot Line was breached from the north and France was seized.
The stock market now has its own Maginot Line, that being 1040 on the S&P 500. That magic number has withheld four assaults on it since February of this year. It is thought that if 1040 is breached to the downside a high number of sell orders will tick off. Bulls would sell their long positions and bears would short the market, creating a cascade effect on prices.
The market is extremely oversold, but there appears to be a dearth of buyers, as bulls have had back to back positive days only once since April 29th. The high amount of intra week volatility is a warning sign that more trouble could be coming. Normal markets don’t have swings of 8%, 5%, and 4% in consecutive weeks like we just experienced the last three weeks.
The NASDAQ has been the market leader since the run up started in March of 2009. It has now been down four days in a row and closed today at its lowest level since February 10th. What happens next is very important for the markets near term direction. Are we going to have a summer rally? Or, do we fall below these key support levels (NASDAQ 2139) and have another 10% or more decline from here.
It’s been a painful five weeks of trading, with the major market averages down 13 -15% from their late April highs. Historical evidence points for more pain to come. In the past 70 years there have been 21 times when markets fell this far, this fast. 85% of the time (18 of 21 instances) the market continued to decline. On average the markets sold off an additional 10% after that first leg down!
In my previous writings, I have called for a market decline to 875 – 950 on the S&P 500. Should the Maginot Line be breached be prepared for a quick sell off to those levels. The markets, like France will surrender. Many pundits are calling for new highs for the market. Many are looking at recent, but old data and projecting that information forward. The market is forward looking, and seems to be indicating something very different for the markets and the economy. The battle lines are drawn; watch closely because the money you save may be your own!
The stock market now has its own Maginot Line, that being 1040 on the S&P 500. That magic number has withheld four assaults on it since February of this year. It is thought that if 1040 is breached to the downside a high number of sell orders will tick off. Bulls would sell their long positions and bears would short the market, creating a cascade effect on prices.
The market is extremely oversold, but there appears to be a dearth of buyers, as bulls have had back to back positive days only once since April 29th. The high amount of intra week volatility is a warning sign that more trouble could be coming. Normal markets don’t have swings of 8%, 5%, and 4% in consecutive weeks like we just experienced the last three weeks.
The NASDAQ has been the market leader since the run up started in March of 2009. It has now been down four days in a row and closed today at its lowest level since February 10th. What happens next is very important for the markets near term direction. Are we going to have a summer rally? Or, do we fall below these key support levels (NASDAQ 2139) and have another 10% or more decline from here.
It’s been a painful five weeks of trading, with the major market averages down 13 -15% from their late April highs. Historical evidence points for more pain to come. In the past 70 years there have been 21 times when markets fell this far, this fast. 85% of the time (18 of 21 instances) the market continued to decline. On average the markets sold off an additional 10% after that first leg down!
In my previous writings, I have called for a market decline to 875 – 950 on the S&P 500. Should the Maginot Line be breached be prepared for a quick sell off to those levels. The markets, like France will surrender. Many pundits are calling for new highs for the market. Many are looking at recent, but old data and projecting that information forward. The market is forward looking, and seems to be indicating something very different for the markets and the economy. The battle lines are drawn; watch closely because the money you save may be your own!
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