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.
Thursday, June 24, 2010
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!
Friday, June 4, 2010
Lessons Learned from the Indy 500
As I watched the Indianapolis 500 last Sunday, an interesting thought occurred to me. The winner of the race Dario Franchitti, took several pit stops during the race and was completely stopped with his tires off his car at times. When I listen and read pundits comments about the markets I draw an analogy where one Indy 500 race is like a lifetime of investing. To be the winner it’s not about holding the pedal to the medal the whole time, but rather strategically planning times to get out of the race, refuel, get new tires, and plan your next strategy accordingly.
It is in volatile times like these, that analogy should come in handy for many investors. For the market, the yellow caution flags are up. This should be very apparent to all investors – bulls or bears. This is a great time to reduce exposure, digest all that is going on in the markets and get ready for your next move.
The S&P 500 lost over 8% for the month of May, which was the worst month since February 2009 and the worst May since 1962. Now just a few days into June, the market is already off another 2%, finishing at the lowest week ending close level since October of 2009. We just gave back seven months of gains.
The Euro continues to deteriorate, closing at multiyear lows. Sovereign debt contagion is now spreading. Another analogy is that the sovereign countries saved the private sector banks with their bailouts and acted as lifeguards that save a drowning victim. Unfortunately now some of the lifeguards (Sovereigns) are drowning. Who will save them?
Hungary’s announcement on Friday that their ‘economy is in a very grave situation’ and that it’s not ‘an exaggeration at all’ to talk about default, makes it abundantly clear that the problems in Greece are not going to stay contained. The world is awash with $222.5 trillion of total liabilities across public and private sectors, or the equivalent of 362% of global GDP. If that doesn’t give you pause – I don’t know what will. More debt will not solve a debt crisis. At some point spending cuts must be enacted, which will then slow down economic growth as an unintended consequence.
If you remember heading into the second half of 2002, visions of a “V”-shaped recovery soon turned “W” looking in nature and the real buying opportunity occurred later in the year or into 2003. We could be in for a double dip recession today. We are not seeing real private sector job growth. While the net creation of 41,000 permanent private sector jobs is positive, 150,000 new jobs are needed monthly, just to keep up with population expansion. Gallup publishes its own estimate of the unemployment/underemployment rate, and so far in May it is above 19%.
The S&P/Experian consumer credit default rate index hit a new high of 9.14% in April. This demonstrates that the proportion of credit card debt going bad is rising sharply. I believe this data is not receiving the attention it should but is yet another yellow flag for lenders and businesses.
This week’s poll by the American Association of Individual Investors was a bit of a surprise. The poll showed bearishness fell to 40.8% this week from 51% last week, while bullishness rose from only 29.8% to 37.1%.
1040 remains the magic threshold for the S&P 500. A break below there on heavy volume could trigger a swoosh down to the 875 – 950 level. The upside is we continue to build a base above 1040 while trying to regroup for another run to new highs. That trading range is 1170 – 1040. The longer the base the better the bullish case becomes.
Volume remains a problem for the bulls. The down days have much more volume than up days. Volume equals conviction. The major indices have now been down four of the last six weeks. Charts are forming a pattern showing a series of lower highs and lower lows. This is called a trend and it is not positive.
We did buy into a natural gas ETF this week and retain our gold and silver positions, but silver is starting to appear weak. The 200 day moving average must hold or we will cover that trade as well. Our cash position is very high.
We are in pit row, the caution flag is out. Investors are not institutions and do not have to always stay invested in the market. If the downtrends that started over a month ago are penetrated to the upside we will buy into the leading sectors. If we break 1040 on volume – we will short the weakest sectors. For now it is time to refuel and get ready for our next move.
It is in volatile times like these, that analogy should come in handy for many investors. For the market, the yellow caution flags are up. This should be very apparent to all investors – bulls or bears. This is a great time to reduce exposure, digest all that is going on in the markets and get ready for your next move.
The S&P 500 lost over 8% for the month of May, which was the worst month since February 2009 and the worst May since 1962. Now just a few days into June, the market is already off another 2%, finishing at the lowest week ending close level since October of 2009. We just gave back seven months of gains.
The Euro continues to deteriorate, closing at multiyear lows. Sovereign debt contagion is now spreading. Another analogy is that the sovereign countries saved the private sector banks with their bailouts and acted as lifeguards that save a drowning victim. Unfortunately now some of the lifeguards (Sovereigns) are drowning. Who will save them?
Hungary’s announcement on Friday that their ‘economy is in a very grave situation’ and that it’s not ‘an exaggeration at all’ to talk about default, makes it abundantly clear that the problems in Greece are not going to stay contained. The world is awash with $222.5 trillion of total liabilities across public and private sectors, or the equivalent of 362% of global GDP. If that doesn’t give you pause – I don’t know what will. More debt will not solve a debt crisis. At some point spending cuts must be enacted, which will then slow down economic growth as an unintended consequence.
If you remember heading into the second half of 2002, visions of a “V”-shaped recovery soon turned “W” looking in nature and the real buying opportunity occurred later in the year or into 2003. We could be in for a double dip recession today. We are not seeing real private sector job growth. While the net creation of 41,000 permanent private sector jobs is positive, 150,000 new jobs are needed monthly, just to keep up with population expansion. Gallup publishes its own estimate of the unemployment/underemployment rate, and so far in May it is above 19%.
The S&P/Experian consumer credit default rate index hit a new high of 9.14% in April. This demonstrates that the proportion of credit card debt going bad is rising sharply. I believe this data is not receiving the attention it should but is yet another yellow flag for lenders and businesses.
This week’s poll by the American Association of Individual Investors was a bit of a surprise. The poll showed bearishness fell to 40.8% this week from 51% last week, while bullishness rose from only 29.8% to 37.1%.
1040 remains the magic threshold for the S&P 500. A break below there on heavy volume could trigger a swoosh down to the 875 – 950 level. The upside is we continue to build a base above 1040 while trying to regroup for another run to new highs. That trading range is 1170 – 1040. The longer the base the better the bullish case becomes.
Volume remains a problem for the bulls. The down days have much more volume than up days. Volume equals conviction. The major indices have now been down four of the last six weeks. Charts are forming a pattern showing a series of lower highs and lower lows. This is called a trend and it is not positive.
We did buy into a natural gas ETF this week and retain our gold and silver positions, but silver is starting to appear weak. The 200 day moving average must hold or we will cover that trade as well. Our cash position is very high.
We are in pit row, the caution flag is out. Investors are not institutions and do not have to always stay invested in the market. If the downtrends that started over a month ago are penetrated to the upside we will buy into the leading sectors. If we break 1040 on volume – we will short the weakest sectors. For now it is time to refuel and get ready for our next move.
Subscribe to:
Posts (Atom)
