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.
Monday, September 27, 2010
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.
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