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.
Friday, July 23, 2010
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!
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