Pacific Financial Planners, LLC

Time for Protection

2012-01-27T14:15:00.001-08:00

This week Jerry discusses the markets great performance since October and the fact that this has been the best January in 25 years. Rather than popping champagne Jerry gives several reasons to be cautious in the coming weeks. He also discusses the Fed’s game changing announcement from Wednesday and how that will affect gold prices going forward. Finally he reviews all the top economic and earnings news coming- Next Week on Wall Street.

Money Talks with Jerry Slusiewicz 01-17-2012

2012-01-24T14:05:00.000-08:00

This week Jerry will discuss the markets rapid advance on ever decreasing volume and what that means for investors going forward. Also will be a review of the US Treasury bond market prior to tomorrows Federal Open Market Committee meeting. Of course the discussion would not be complete without an update on Europe on the yet unresolved debt crisis. All this PLUS your questions will be answered on this week’s edition of Money Talks Radio with Jerry Slusiewicz today Tuesday January 24^th, 2012 from 1:30 – 2pm PST. To get your financial questions answered call (347) 826-9341 and ask Jerry directly.

Click on this link to listen to this week's Money Talks radio broadcast: http://www.blogtalkradio.com/yourmoneytalks/2012/01/24/money-talks-with-jerry-slusiewicz

The Beat Goes On...

2012-01-20T14:16:00.000-08:00

This week Jerry discusses the earnings season which goes into full bore next week. Investors are focused on the stocks that beat expectations and seem to be giving a pass to those that miss. All eyes will be on the speakers next week as The State of the Union is Tuesday. The Fed announces on Wednesday with Bernanke chiming in after. International investment leaders are meeting in Davos, Switzerland to discuss all that ails the financial world as well next week. Plenty of action for this slightly overbought market which seems to be gaining steam every week. A short term pullback would be healthy to allow for an even longer term run up in stock prices.

Click on this link to listen to this week's Money Talks radio broadcast: http://yourmoneytalks.podbean.com/2012/01/20/the-beat-goes-on%E2%80%A6/

Money Talks with Jerry Slusiewicz 01-17-2012

2012-01-17T14:05:00.000-08:00

This week on the Money Talks Radio Program, Jerry will discuss the reasons for the markets positive move so far in 2012, despite many warning signs to the contrary. Jerry will discuss the plight of gold, silver, and other commodities as well as what to make of the high bullish sentiment now held by the American Association of Individual Investors.

Click on this link to listen to this week's Money Talks radio broadcast: http://www.blogtalkradio.com/yourmoneytalks/2012/01/17/money-talks-with-jerry-slusiewicz

Money Talks with Jerry Slusiewicz 01-10-2012

2012-01-10T14:06:00.000-08:00

Today Jerry will discuss some very interesting seasonal patterns that are occurring that may make 2012 the best year for investors in a long while. Cheap valuations combine with technical patterns to give the markets a bullish bias as we start 2012. Also Jerry will discuss a plan that is already in place that may push the European debt crisis further down the road - once again! As always Jerry will take your calls and questions to help you become a better investor based on your needs and desires!

Click on this link to listen to this week's Money Talks radio broadcast: http://www.blogtalkradio.com/yourmoneytalks/2012/01/10/money-talks-with-jerry-slusiewicz

Starting Off Strong

2012-01-06T14:32:00.000-08:00

This week Jerry outlines the case for a continuing rally as the market posted its fourth up week in the last six. Cheap valuations with technical breakouts are reasons to be optimistic going forward. While one week does not a year make, investors are hoping that 2012 will be an improvement over last year. Find out more by tuning into Next Week on Wall Street.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2012/01/06/starting-off-strong/

2011 Review – 2012 Preview

2011-12-30T12:20:00.001-08:00

This week Jerry reviews the major events of 2011 and gives his forecast for 2012. This one may surprise you! Find out more Next Week on Wall Street.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/12/30/2011-review-%E2%80%93-2012-preview/

The Holiday Rally

2011-12-23T07:36:00.000-08:00

This week Jerry outlines a case for the traditional holiday rally to continue into next year. While still not clearly defined the Europeans may have created a loophole for their banks to fund the Sovereign debt issues indirectly with European Central Bank monies. Happy Holidays to all and find out more Next Week on Wall Street.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/12/23/the-holiday-rally/

Hoping for a Yearend Rally

2011-12-16T15:13:00.001-08:00

This week Jerry lays out three scenarios for a yearend rally in stocks to occur. In addition he covers some of the pitfalls which could derail this attempt. Also discussed is the severe breakdown in gold and silver prices this week and the longer term implications for precious metals going forward. Find out more on Next Week on Wall Street.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/12/16/hoping-for-a-yearend-rally/

Markets Against Resistance

2011-12-09T07:33:00.000-08:00

This week Jerry discusses the strong valuation of the US markets and the seasonal positive factors that are pressed against the negative winds from Europe and some other potentially difficult technical resistance patterns. Jerry discusses the value of protection and the use of exit strategies in this environment as we hope for a strong finish to the year. Find out more – Next Week on Wall Street.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/12/09/markets-against-resistance/

Winds of Change

2011-12-02T07:15:00.000-08:00

This week markets staged a powerful rally from its oversold condition on news that the US Federal Reserve Bank is willing to be the lender of last resort to the European community. All the details are not worked out, but for the time being any default is once again tabled at least until a later date. This opens the door for a yearend rally and many sectors are benefiting from this potential. Find out more Next Week on Wall Street.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/12/02/winds-of-change/

Markets in Trouble

2011-11-23T07:15:00.000-08:00

The major market indices have broken decisively to the downside and support appears to be lower still. The reasons for the poor market performance are many. Stocks have been down six days in a row and 7 of the last 8 trading days. Is the worst over? Find out more Next Week on Wall Street.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/11/23/markets-in-trouble/

Rally or Bust

2011-11-18T07:15:00.000-08:00

This week the markets broke down from some constructive fundamental and technical patterns. The US economy is hanging in quite well but pressure from Europe and China could derail our best laid plans. Thanksgiving week is usually one of the best weeks of the year. After this week’s drop – a rally could be in store. The bigger question is what happens from now to the end of the year. Find out more “Next Week on Wall Street.”

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/11/18/rally-or-bust/

Moving Away for the Abyss

2011-10-28T07:15:00.000-07:00

This week Jerry describes the incredible run the markets have had this month as well as some of the risks that still exist. We are moving in the right direction but have only made a three month full circle turn. Jerry closes with a discussion about risk and how investors should view risk as it relates to their own portfolio. Find out more Next Week on Wall Street.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/10/28/moving-away-for-the-abyss/

Europe Still Holding Court

2011-10-21T08:08:00.000-07:00

This week Jerry discusses the back and forth action for stocks. The world is distracted by the events in Europe to bail out their banks. Corporate earnings and economic news is mixed. This could be a case of “buy on the rumor and sell on the news.” Markets are up against resistance and are at a crossroads. Everyone is hoping for a yearend rally, the market generally does not accommodate the masses. We’ll know more Next Week on Wall Street.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/10/21/europe-still-holding-court/

Timing is Everything

2011-10-14T07:56:00.000-07:00

This week Jerry discusses the rapidly rising, low volume rally that the market has gone through in the last nine trading days. Economic reports continue to be mixed and news out of Europe are more positive, but the details are noticeably missing. Tech earnings have been nothing less than spectacular, but most of the earnings news is yet to come. The major indices are right at resistance but seem poised to break out. Find out more Next Week on Wall Street.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/10/14/timing-is-everything/

Markets Bounce From Bear Market Territory

2011-10-07T08:10:00.000-07:00

This week the market fell into Bear Market Territory as they were at one point down more than 20% from their April peak. Markets reversed course to finish higher for the week, but still weak none the less. Economic reports are coming in better than expected but not anywhere near levels to create a sustained market rally. Europe is talking about several plans to bail out the banks and Greece. We can only hope that third quarter earnings gives stocks the boost they need to stem the decline soon. Find out more “Next Week on Wall Street.”

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/10/07/markets-bounce-from-bear-market-territory/

Tough Quarter

2011-09-30T07:15:00.000-07:00

This week Jerry discusses the results of the third quarter. He analyzes the winners and losers as well as outlines his views looking forward. Find out more “Next Week on Wall Street.”

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/09/30/tough-quarter/

No Jobs for Labor Day

2011-09-02T14:26:00.003-07:00

The economic news is becoming more dismal every day. This morning’s jobs report showed that was no new jobs were created last month. Unemployment remained at 9.1% because they only count the people who are actively looking for work. When jobs are not being created many stop their search. All this just before the Labor Day Holiday – enjoy your weekend!

The overall data suggests that the economy is stalling. News from Europe is actually much worse than it is over here. Germany is slowing and Greece may be done with austerity as their leaders have had enough with their economy contracting over 5% this year.

The bond market is rallying and Pimco’s Bill Gross capitulated early this week stating that he should have owned more US Treasury Bonds. The Fed is doing battle internally as the recently released minutes of the last FOMC meeting demonstrated. Some voting members called for immediate action to restart the bond repurchase program (QE3), while others felt that even the promise to keep interest rates low until mid-2013 was too aggressive.

The fact that the first two rounds of quantitative easing did not help the "real" economy is beside the point. The Fed’s job is to protect the banking system and apparently the stock market. The Fed seems likely to use today’s weak jobs report as a reason to launch another round of easing. At least initially the bullish crowd will be happy.

The Fed appears to be running out of tools to battle today’s issues. Europe is a powder keg with potentially dangerous results coming from the mix of bad economic news and debt problems. Avoiding too much stock exposure, at least temporarily, is most likely a good idea. September and October have a history of being rather cruel to investors.

The prospects for more money printing operations coming from our Fed increases the chance for gold to continue its ascent to new all time highs. Many feel it is too late to join the gold bandwagon, but one look at the current economy and the Fed’s most likely response to it and investors have to ask – what is the Fed going to do? Nothing? Highly unlikely!

Helicopter Ben (as his nickname goes from an article he wrote years ago) has been and will remain true to his moniker. Dollar devaluation in an attempt to create inflation is his goal. Gold will likely continue to rise in such an environment.

The SPDR Gold Trust (GLD) is a good way to invest in today’s volatile environment. Fear begs for safety. Closing at $183.23 today GLD could cross $200 in short order. Use $165.75 as protection should things turn around for the economy.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/09/02/no-jobs-for-labor-day/

Pressing Against Resistance

2011-08-29T08:15:00.000-07:00

Markets had their first up week after four consecutive weeks of lower finishes. The Fed put any new action on hold but left the door open to make an announcement after the next meeting in September. The economic reports continue to show deterioration and nothing has been resolved in Europe. The charts show clear support and resistance levels to indicate when investors should take action. Get more on Next Week on Wall Street.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/08/29/pressing-against-resistance/

A Record Week for Wall Street

2011-08-12T08:17:00.000-07:00

This week a discomfiting record was set on Wall Street as the market oscillated up and down more than 400 points four days in a row. The whipsaw market action shattered investor confidence sending waves of sell orders to the floor of the exchanges. The economic numbers were mixed, but contagion fears are growing in Europe. The final numbers on the week weren’t that bad had you missed the daily action. There are some signs of hope. Find out more Next Week on Wall Street.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/08/12/a-record-week-for-wall-street/

Markets Stage a Mini Crash

2011-08-05T08:18:00.000-07:00

This week Jerry discusses the mini crash in the market that happened on Thursday. Stocks are technically broken, but that doesn’t mean that we can’t rally first. The Fed makes an announcement on Tuesday and more Quantitative Easing may be in the cards or the market could be disappointed once again. Earnings has taken a back seat to news out of Italy. Find out more “Next Week on Wall Street.”

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/08/05/markets-stage-a-mini-crash/

Rough Week on Wall Street

2011-07-29T10:38:00.000-07:00

This week investor fear rose as they watched our political leaders of the richest country in the history of the world debate the issue of borrowing another couple trillion dollars to meet our debt obligations. Why is this happening? It’s because as a country we haven’t figured out how to live within our means. Investors shouldn’t follow their lead but to learn what to do tune into Next Week on Wall Street.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/07/29/rough-week-on-wall-street/

Toying with Resistance

2011-07-22T14:04:00.000-07:00

Markets want to go higher but unfortunately some headwinds are still causing hesitation. Investors are still waiting on Congressional leaders to resolve the debt ceiling issue. Will they get it done before the US falls into a technical default and has its AAA credit rating tarnished or will they prove inept.

Fed Chair Ben Bernanke is pumping an enormous amount of liquidity into the money supply system. Since the Quantitative Easing Program ended at the end of June, Bernanke has come up with more creative methods of putting money into our economy. He is doing his part to keep the bubble from bursting.

Treasury Secretary Tim Geithner is rumored to want to retire soon. He is furiously making the rounds attempting to push Congress to act urgently before we run short on money in 11 days. This is his one and done moment. He only needs Congress to cooperate.

The markets are not panicked. Stocks are flirting with recovery highs and the bond market is stable. Treasuries are not acting like interest rates are about to go up sharply.

Technically, stocks are at resistance and are poised to break higher should the House, Senate, and the President all agree on a comprise in time. Corporate earnings and even some of the recent economic releases have been quite positive. The trouble is other issues have been dominating center stage.

Europe may finally move out of the forefront with their Greek solution and the tempering of the problems facing other Euro zone nations. If only our leaders could agree that more immediate debt is a good solution, then we too could push our troubles off to sometime in the future.

Markets would most likely go on a tear for the second half of the year. That would coincide with what typically happens during the third year of a Presidents term. If the S&P 500 clears 1370 from it Friday’s close of 1347 – it would target 1483 or even go all the way back to the 2007 all time high of 1576.

NASDAQ is also poised to take off. It closed at 2862. There is major resistance here to 2887. Should it clear that level, the NASDAQ would target 3175 as its next objective. That would get the NASDAQ all the way back to its December 2000 levels.

Like it or not the government will raise the debt limit. If they get it done sooner the markets are poised to go higher. If they wait until after August 2^nd, and a downgrade of our credit rating, then this will be a resistance point that forces stock prices lower. We will have a much better picture in a week.

Toying with Resistance

2011-07-22T10:42:00.000-07:00

This week Jerry discusses the markets anticipation to the debt ceiling dilemma. The stock market is near its recent highs and currently stands at resistance. If Congress gets this issue resolved before August 2nd markets could stage a pretty big rally in the second half of the year. However if a compromise on the debt ceiling is not achieved in a timely manner – we may have seen the highs for a while as we would be entering a new paradigm. Get your fill by tuning into “Money Talks with Jerry Slusiewicz” today.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/07/22/toying-with-resistance/

All Eyes on Washington

2011-07-15T10:44:00.000-07:00

This week Jerry examines the relationship of stocks, bonds, and Precious metals to the Debt Ceiling crisis and possible outcomes. While we are all hopeful for a positive resolution, but this is not a time to take undue risks with your money. Tune in to Money Talks for more information and get your free portfolio review today.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/07/15/all-eyes-on-washington/

No Pause

2011-07-08T10:45:00.000-07:00

This week markets continued on a follow through from last week’s big rally. Friday’s jobs numbers would have knocked the strongest of markets for a large setback, but while markets were down Friday – they really barely flinched. Get Jerry’s historical market comparisons and his view on the “debt ceiling” issue by listening to Money Talks today.

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/07/08/no-pause/

The Bulls are Back

2011-07-01T10:45:00.000-07:00

This week markets charged ahead after the resolution of the Greek bankruptcy issue. The US must fall in line fairly quickly to raise the debt ceiling - it is just a matter of which party will dictate the terms. Stocks were up all five days recovering most of the losses that happened in the second quarter. There is a rotation of sector leadership taking place. Find out more on Money Talks!

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/07/01/the-bulls-are-back/

Reasons for Lower Oil Prices

2011-06-17T12:02:00.001-07:00

Americans are about to let out a big cheer because pretty soon gas at the pump should be a lot cheaper. Oil as measured by the S&P GSCI Crude Oil Index is down over 7% today! Since its peak on May 2^nd it is 21% lower. Now who says that there wasn’t a risk premium attributable to Osama bin Laden? (I believe it was just a coincidence that oil peaked the same day the Navy Seals took him out).

The amazing thing is that Americans are just satisfied that gasoline prices at the pump are heading lower. No one seems to be questioning the rate of decline. We should be outraged! Since the National average for regular gas hit close to $4 per gallon in early May, it should be around $3.16 today. However it is significantly higher than that.

Don’t give me this mega oil industry jargon about lag time for prices, crack spreads, and summer blending issues, because when the price of oil was rising the gas stations were raising their prices daily just to keep up. The rate of change should follow price in both directions.

So why are prices declining? Aren’t there multiple protests and even war zones in several of the oil producing countries? Apparently that does not outweigh the slowing rate of growth for the global economy.

Domestically all of the economic reports for the last few months point to a slowdown or in some cases a return to negative growth. Clearly the US housing market has slipped into double dip territory with prices lower today than at any point in the recovery.

The fears of inflation due to rising food and energy prices may soon get knocked off by a rising fear of deflation. Governments are continuing their attempt to stave off defaults around the globe due to lack of economic growth. Food prices may remain high as production factors, weather, and a growing global population put a crimp into supplies.

Fear is starting to grip investors and for good cause. Institutions are in sell mode. This is very evident when looking at the trading volume on down days versus the market’s rally day volumes.

Apparently investors like bailouts and other socialistic government interventionist programs that attempt to prop up markets. Collectively investors are hoping for a Greek bailout package to be put together this weekend so we can “kick the can down the road” once again.

Higher taxes and stringent austerity programs are not going to create growth for Greece. All a bailout is doing is delaying the inevitable. However as long as a Greek default is not today’s problem, it seems investors will be satisfied even though it is clear they don’t have enough money to meet their current obligations. Apparently that is just a minor detail.

Oil prices are falling – fast. Aggressive investors can capitalize by buying into the ProShares UltraShort Crude Oil ETF (SCO). SCO broke above its recent base today when it cleared $49.49. The price target for SCO applying some technical analysis techniques is $63 to a $66 per share.

Fundamentally, if the problems in the oil producing regions do not spread any further oil prices could decline. In addition should our economy continue to slog along with slow or no growth, this trade to make sense for today’s investors.

SCO is a two time leveraged inverse fund, so it is not for the faint of heart. It will move at a rate that is twice as fast in the opposite direction of oil prices as measured by the Dow Jones- UBS Crude Oil Sub-Index. Over time leveraged funds do not track an exact inverse rate – but it will move!

SCO was at $51at the time of publication. Use $44.50 as an exit point should oil prices begin to rise again and the economy begin to accelerate.

Reasons to Cheer

2011-06-17T10:46:00.000-07:00

This week markets closed almost flat on the week depending on which index you review. Prospects for a Greek bailout package getting approved and fast falling oil prices should give investors a reason to cheer next week. Find out more by tuning into Money Talks today!

Click on this link to listen to this week's market comments: http://yourmoneytalks.podbean.com/2011/06/17/reasons-to-cheer/

Bullish or Bearish?

2011-05-27T13:43:00.000-07:00

The major market indices are all down around three percent for the month of May which coincides with the amount they are off from their recent recovery highs. As a percentage that really is not a lot to be concerned about.

However a review of the most recent economic data, the picture gets a little fuzzy. A few weeks back was the ISM Services report plunged from 57.3 to 52.8. Anything over 50 demonstrates growth, but the consensus was for an improvement to 57.8 and this obviously indicates we are heading in the opposite direction. It is important to note that 80% of our economy is dependent on the services sector.

On the manufacturing side of the ledger the situation actually looks even worse. The Empire State Manufacturing Index, the Philadelphia Fed Manufacturing, and Durable Goods Orders all came in the last couple weeks at their lowest levels in many months. It clearly indicates that the rate of the economic recovery is shrinking and unless something changes, could fall into negative territory.

The Conference Board’s Index of Leading Economic Indicators reported its first negative reading in nine months falling to a negative 0.3% for April. The much anticipated upward revision for first quarter GDP fizzled as it stayed at an unimpressive 1.8% this week. That is down from the 3.1% GDP growth reported for the fourth quarter of last year.

Meanwhile housing remains at depressed levels as prices continue to fall and sales of both new and existing homes are down in the double digit levels from a year ago. This occurred while the economy was actually getting stronger.

Emerging market and the so called BRIC countries (Brazil, Russia, India, and China) are all down more than our markets which is causing some concerns among investors as many thought that the BRIC’s would lead the global recovery this year. With commodities off as much as they are many of these resource rich nations have fallen hard.

Still encouraging the bulls is the fact that the Fed’s Quantitative Easing Program still has a month to go. It doesn’t hurt stocks that the Fed kicked in an extra $31 Billion in the last five days to the Primary Broker Dealers to do with as they please. Rumors that another round of Quantitative Easing may occur also helped juice the markets in the last couple of days. At the very least the bad economic reports lately are pacifying all concerns about an interest rate hike coming anytime soon.

Markets had also reached oversold levels this week and were due for a bounce. How big that bounce turns out to be remains the big question. On a technical level markets paint two opposing pictures. On one hand a breakdown of the uptrend from the March 16^th low has occurred – which is negative.

However another obvious pattern in the charts is that of a flag formation. Flags generally fly at half mast. This means that there is likely a case for the markets to break out of the downward flag slope and most likely rise to even higher highs for the year.

It must be noted that the Dow has been down the last six years in a row in the month of June. However, there is a high propensity for markets to rise going into three day Holiday weekends. Plus the end of the month may give the bulls some strength. So is the current market bullish or bearish? Time will tell.

The Debt Problem

2011-04-21T14:33:00.000-07:00

Monday before the market opened, Standard and Poor’s reaffirmed the U.S. government's top credit rating of AAA but not before expressing concern that our legislators are not move quickly enough to stop our growing budget deficit. S&P said there is a 33 percent chance it would lower the country's credit rating from AAA in the next two years if Washington fails act.

U.S. Treasury Bonds have historically been known as the safest investments on the planet. But now top money managers such as Pimco’s Bill Gross are calling our debt issuance a Ponzi scheme, where one arm of the government – the Federal Reserve Bank, is supporting the US Treasury, by buying as much as 70% of the new debt that has been issued since last September.

Many pundits are stating that this move by the ratings agency to lower its outlook for U.S. paper from "stable" to "negative" caught investors off guard. While this is a first since it began rating the creditworthiness of government bonds back in 1860, this action should hardly be a surprise. Our debt has skyrocketed over the last few years to levels only achieved during major wars.

Today the total outstanding public debt in the US is around $14 Trillion. The debt to GDP ratio is among the highest in the world. The federal deficit has approached this echelon only a few times in US history; during the Civil War, World War I, World War II, and today in aftermath of the financial crisis of 2008.

Should our government debt get downgraded in the future, we would have to pay a higher interest rate to attract new buyers. More problems would occur, as many institutions are banned from holding anything but AAA rated investments. That would force a sale of their holdings, which would result in lower prices and even higher interest rates.

As troubling as this may be for the US, the situation in parts of Europe are even more problematic. Greece and Ireland have already needed to be bailed out by the IMF and other Euro zone countries and are still reeling. Both countries have had their credit rating downgraded again in the last month.

Portugal is now and need of a bailout. Also there is speculation that Spain and Italy will need help in the near future. Should Spain require a bailout, it is estimated that the money needed would amount to the sum of all three of the previous countries combined. It can be surmised that as bad as the situation is over here with our current debt warnings, the problems are even bigger in Europe.

The Dollar Destruction

2011-04-08T13:34:00.000-07:00

As infamous trader Jesse Livermore used to say, “Conditions are ripe for a sell off.” The litany of global problems that exist seem to be compounding every day. As if the market doesn’t care, the major indexes have spiked up over the last few weeks. It does seem odd to see such strength under these circumstances.

This week however, trading started off the day quite positive but then gave back much of it by the close. Strength in the morning followed by weakness in the afternoon is usually a bearish sign. While the S&P 500 has been up three of the last four days, we‘ve had only a fractional gain this week.

Usually the start of each month and especially the start of a new quarter is a time for strength as retirement plans of every ilk get funded and new money flows into the market. With April’s monthly strength period now over, hardly a dent has been made towards a market advance.

The strong season for the market is also coming to a close. There is historical statistical evidence that gives credence to the “sell in May and go away” concept for period investing. While markets don’t have a calendar, the November through April timeframe historically has significantly outperformed the May through October period, and May is coming soon.

Investor sentiment is running high. The recent Investors Intelligence Sentiment Survey reveals that less than 16% of professional newsletter writers are bearish and over 57% are bullish. This Bull to Bear ratio of 3.65 displays even more optimism than at the market peak in 2007.

This survey has been widely adopted by the investment community as a contrarian indicator. Since its inception in 1963, the indicator has had a consistent record for predicting the major market turning points.

Another contributing worrisome factor is the coming end of the Fed’s Quantitative Easing Program (QE2). When the Fed stops buying bonds, monetizing our debt, and pumping billions of new dollars into our economy on a daily basis, how will the markets fare? That is a big question. Currently it’s as if the economy is cycling ahead with training wheels on. What happens when they come off?

Should markets correct on anticipation of or at the end of the QE2 money pumping machine, it would mean that a market top was occurring at almost precisely the same time it did last year, which included the Flash Crash.

One of the key factors that markets appear to be ignoring today is the ever rising price of oil. High oil prices have always led to a recession. Oil is a direct reflection of a falling dollar. With the ongoing destruction of the US dollar, caused in a large part by the QE2 program, commodity prices are going through the roof. Now is a time for caution.

The New Era

2011-04-01T14:53:00.001-07:00

Many believe that the old saying, “it’s different this time” is never true. It is widely held that situations are never completely different; they’re just another version of events with slightly divergent circumstances. History may not repeat, but it sure rhymes, is another old saw bantered about Wall Street.

It is believed that the reason market events repeat generation after generation is that human emotions of greed and fear has always been and always will be present when it comes to money and investing. Today’s technological advances may create a contradiction to those old beliefs. It has made life simultaneously simpler and more complex, and has brought an element of change that hasn’t been present in the past.

Use Major League Baseball as an example. Baseball hit upon a new era with the development of steroids and human growth hormones. Old pitchers well past their prime became Cy Young award winners. Not just one but two players broke a 40 year old home run record in the same season, only to be surpassed again within a couple of seasons.

It became known as “the steroid era.” It truly was different. Fans were enthralled at the new found power of the times. They cheered along, but the Commissioner had to know that something was up. Those feats of athleticism had never been witnessed before, but the baseball brass stayed mum because ticket sales and TV revenues were doing great.

Now many fans are shocked to find out that the game was rigged by players’ use of steroids. They must have figured that players were just eating better and working out more. But no – things were different.

Today the Fed has done the same thing. They have created a new era. They have put the money printing press on steroids. Since August, the Fed has bought 70 percent of all the new government debt issued by our Treasury. The Fed is in effect monetizing our debt and creating an artificial stimulus for the economy. Fed Chair Ben Bernanke hopes that this crutch will be enough to create confidence among consumers to become a self fulfilling recovery.

Some very well known bond managers are not so sure this new era will work. Pimco’s Bill Gross calls the Fed’s path a Ponzi scheme. Gross believes that everything the Fed is currently doing will prove to be harmful in the long run.

Investors, like baseball fans in the steroid era, are currently very happy. We just had the best first quarter returns since 1999. Since the market was actually negative for the year on March 16th, if the media really called it correctly, it’s been a good couple of weeks! The commissioner (in this case the Fed Chair) is participating in the juicing of the game so to speak. At some point all this will come to a tragic end, but for now it’s just “Play Ball!”

The Luck of the Irish

2011-03-17T08:50:00.002-07:00

In today’s feature the “Luck of the Irish” will hopefully mean that we can make some green (as in backs) from today’s trading strategy. The markets have been more volatile in both price and volume lately, for good reason. Geopolitical events in the Middle East and North Africa are becoming more widespread. The Japanese crisis is more uncertain with each passing day.

On a technical basis, all the major market indices appear to have broken their up trends and recent support levels. Because markets rose at such a fast past since the beginning of September, there is very little support between here and their respective 200 day moving averages. This could mean there is more downside to go before reaching next support.

There is a lot riding on the depth and duration of this correction. The primary reason the rally started was that traders felt that the Fed had their backs in a sense. As Ben Bernanke outlined his Second Quantitative Easing Strategy (QE2), many traders did a little math and recognized that $4 to $5 Billion of new money was going to move from the Central Bank to Primary Broker Dealers on a daily basis for the next nine months.

The Fed monetizing debt, while simultaneously pumping banks with a plethora of cash, gave a level of comfort to traders that the stock market would be a one way street up. Until mid February, that has been true. The VIX “fear index” dropped below levels of complacency not seen since before the 2007 Great Recession began. Optimism among both institutional and individual investors held bull to bear ratios at extreme levels for extended periods.

It almost felt like the golden age of investing was back, as the “mom and pop” investors who missed the double off the bottom over the last 20 plus months started to come roaring back in. Now that the belief that the Fed can print our way into prosperity is coming into question, a vacuum of confidence could occur.

In the near term it appears that the market has more downside to go as support has been violated. Using one of the oldest and most actively traded ETF’s the SPDR S&P 500 (SPY) to create a synthetic short position by Selling an April 125 Call for $4.24 and Buying an April 125 Put for $3.37 per contract could be profitable in this environment. In this example you start by pocketing $87 per contract immediately.

A couple of technical analysis methods point to SPY having a near term price target of $119. Two reasons: First, that is where its 200 day moving average is. Second, this run started at the end of August with SPY trading at $104.29. It reached a high on February 18th of $134.69. A normal 50% Fibonacci retracement puts SPY at $119.49.

Should this happen in a week’s time this trade could result in a profit of approximately $650 per contract. The risk comes into play should the market move up quickly. SPY closed yesterday at $126.18. Should SPY trade here or lower this will be a good trade.

If you currently own shares of SPY, employing the same strategy creates a collar on your position and is an even lower risk trade should the market recover as your exposure is limited, but so is your return.

There are many reasons to believe that the market could continue in its downward trajectory. Not only are markets ripe for a pullback, should it start to accelerate down, a generation of investors will be lost as they throw in the towel quickly and the confidence of even most astute investors could be shaken. If that happens SPY could overshoot $119 making this recommendation even more profitable.

The Real Price of Oil

2011-03-17T08:50:00.001-07:00

Last week marked the two year anniversary of the March 9th, 2009 low for the S&P 500; it also was the 11th anniversary of the NASDAQ high of 5050 set back on March 10th, 2000. Is the cup half full or half empty? It all depends on your perspective.

The mood of the stock market has grown increasingly more downbeat over the last few weeks. It’s no wonder, as investors are facing widespread geopolitical turmoil in the Middle East and a catastrophe of yet unknown proportions in the world's third largest economy.

Almost defiantly, markets have displayed impressive resiliency. The combination of these events might have the ability to knock down any strong market. So far though it has absorbed these shocks, but markets remain vulnerable to a deeper correction.

Over the last couple of years governments have pumped money into their economies on a fast and furious basis to keep them propped up. This has resulted in a global increase of prices for food and energy. Higher food costs and lack of opportunity are the main factors causing much of the turmoil in Middle Eastern countries.

The problems over there are creating issues over here as we are seeing gas prices around $4 per gallon. Higher gas prices have the same effect as higher taxes only without any additional benefits. It leaves less money for consumers to spend on discretionary items, which could cause contraction for the overall economy.

In addition higher energy costs results in higher prices or fewer profits for most everything. Getting goods from the raw material stage through the manufacturing process to the end user will require additional cost. Already high food prices will surely continue to rise with the additional cost of shipping the goods from the farms to the grocery markets.

Unfortunately oil is the lifeblood of our society. Many daily activities require oil. From factories to farms, oil is needed as coolant or fuel. Heating homes, creating electricity; everything from lubricants to lipstick, and medicine to plastics, requires oil.

Americans consume more gasoline than South America, Europe, Africa, and Asia combined! We are gasoholics! We have an addiction with oil. Two thirds of all the oil used in America is for transportation.

With the earthquake that has devastated Japan; a huge problem for the country will be the restoration of power and water for many of their citizens. Electricity is out for millions and will take several weeks or months to restore. In the meantime, electricity would be rationed with rolling blackouts to several cities, including Tokyo.

A total of four nuclear plants in Japan have reported damaged and are offline – some permanently. There has to be a replacement for that energy shortfall. Nuclear power plants take years to build so it is not going to come from that source. Oil along with coal will be the most likely candidates as Japan will reopen some of their old non nuclear facilities. This will create an even higher demand for oil.

The battle in Libya as well as demonstrations in many other oil producing countries is a sign of instability. This could lead to supply issues and higher oil prices. There are several reasons to be concerned that our own economies fragile recovery could be derailed.

The United States Oil Fund (USO) is one of the most actively traded oil based funds on the market today. Through the use of the actively traded futures contracts, it tracks the price changes of light, sweet crude oil.

USO went up 21% in a recent three week period, only to pull back 4% last week. USO closed Monday at $40.91 and has big support in $38 per share range. With all the negative issues regarding potential supply disruptions and increased demand for oil, we could see price increases for the foreseeable future.

An investment in OIL could act as a personal hedge and help offset some of your increased costs at the pump. Use a stop of $37.70 and be hopeful that it drops to that level, because that will spell relief for American consumers. If the cost of oil continues to rise, you can expect the stock market to eventually capitulate and tumble due to the higher associated costs for almost everything else. That is the real price that we could pay for oil.

What a Run!

2011-01-14T15:04:00.000-08:00

The markets continue their advance riding the Feds daily pumping of freshly minted billions of new dollars. The S&P 500 has now been up seven weeks in a row. That’s never happened before! Equally unique is the fact that the S&P has not fallen below its ten day moving average for thirty straight trading days. That too, has never happened before! The Dow Jones Industrial Average has also been up for seven straight weeks. Both indices have been up eight of the last nine weeks, with the S&P up 17 of the last 20 weeks in a row. That’s pretty impressive! However, that type of performance strongly argues that this powerful rally is most likely over-extended and overbought.

The major indexes are extended far over their 200-day moving averages. Usually they have some sort of pullback, at least enough to test the support of their historical averages. Even through the strongest of bull markets, normal ebbs and flows to and from their long term averages happen. We are currently overdue for a retraction. From the current levels a retracement just to the 200 day moving average would be around 11% for the S&P 500, and 14% for the Russell 2000. That would erase much of last year’s 12.8% gain that the S&P had for all of 2010.

Another interesting scenario is that of the dollar / gold relationship. The dollar was down this week, but gold was down as well. Lately those trades have moved inverse to each other. Long bonds also continued to see outflows. The biggest sector hit this week was taken by municipal bonds. Fears that state and local governments are on the verge of default, as well as fears of rising interest rates took its toll on muni’s once again. The municipal market much like real estate is very localized. Therefore not all muni’s are bad and there probably are some great deals to be had – but that is a topic for another time.

The stock market has too many bulls and too much complacency. The AAII & II bull to bear numbers are flashing record optimism. The VIX shows no fear. While the market continues its ascent we are still invested long. However something does not feel quite right to some savvy professional traders. A change will most likely happen soon. It would be wise to lighten up when some more sell signals occur and pivot points are breached.

For the S&P 500 a drop below 1250 might be a cause for concern. The Russell 2000 below 777 would trigger a defensive move and for the NASDAQ Composite below 2640 should also warrant protective action. When the majority of investors are on only one side of the trade with no concept of fear due to an imaginative Fed, sometimes unintended consequences come along that rebalance the market. Be careful – the markets are currently over-extended, overbought AND over manipulated.

Santa Claus Came This Year

2010-12-23T12:00:00.000-08:00

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.

According to Plan?

2010-12-10T13:29:00.000-08:00

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

Next Week Could be Huge

2010-10-29T14:27:00.000-07:00

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.

Nothing to Cheer About

2010-10-22T12:51:00.000-07:00

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’s October – Should We Be Scared?

2010-10-01T14:58:00.000-07:00

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!

No Fear

2010-09-27T07:21:00.000-07:00

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.

Sleepwalking at the Stock Exchange

2010-09-10T15:25:00.000-07:00

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.

Celebrating Job Losses

2010-09-03T14:46:00.000-07:00

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.

Investing in the Real World

2010-08-27T15:14:00.000-07:00

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

From Green Shoots to Brown Shoots

2010-08-20T16:16:00.000-07:00

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.

Backed Into a Corner

2010-08-13T15:04:00.000-07:00

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.

Is the Cup Half Full or Half Empty?

2010-08-06T14:07:00.000-07:00

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!

Markets in the Mirror

2010-07-23T13:51:00.000-07:00

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.

Unsustainable

2010-07-16T14:19:00.000-07:00

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.

The Fear Index

2010-07-15T12:00:00.000-07:00

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.

An Inside Week

2010-07-09T12:56:00.000-07:00

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.

The Bigger Picture

2010-07-08T13:38:00.000-07:00

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.

Let This Be Your Warning

2010-07-01T12:31:00.000-07:00

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!

Bad News for Bulls

2010-06-24T13:12:00.001-07:00

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.

Building a Base

2010-06-18T14:13:00.000-07:00

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

Neutral on the Markets

2010-06-16T15:52:00.000-07:00

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 Waiting is the Hardest Part

2010-06-11T13:01:00.000-07:00

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 Maginot Line

2010-06-09T14:21:00.000-07:00

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!

Lessons Learned from the Indy 500

2010-06-04T14:31:00.000-07:00

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.

Clues for Market Direction

2010-05-28T13:11:00.000-07:00

Volatility is back with a vengeance. The market is witnessing extreme swings in both directions, but primarily the market has been going down – fast. Support is at 1040 on the S&P (Tuesday’s intraday low) and resistance is first at 1104, then 1110 – 1140. The NASDAQ has major support at 2140 (also Tuesday’s low) and resistance at 2370.

Whether or not the recent market lows hold is the key for the markets next primary move. If the S&P breaks down below 1040, the bulls better run for cover! The Dow had an 800 point swing last week and a 500 point swing this week. That type of volatility is not normal for a traditional market correction. Many are calling for the bull market to resume and that a new high for equities is in store. If that does happen, it will take a little time for the market to build a new base to launch from.

Now it’s about follow through. The market hasn't recorded back-to-back positive days since April 28-29. From the April 25th high to the May 24th low this year, the S&P 500 corrected 14.7%. If you look at any chart pattern for the major market indices and the most of the major subsectors you will easily notice that a pattern of lower highs and lower lows exits. That is called a downtrend and until that trend is broken to the upside investors need to be careful. Also of note is that the uptrend from last year’s lows has been broken to the downside.

Many of the overbought and sentiment conditions that I have been concerned about recently have abated. It also seems that much of the negative emotion surrounding Europe has subsided. Today, Fitch downgraded Spain's long-term foreign and local currency issuer default ratings to AA+ from AAA, while maintaining a stable outlook. While the market reacted negatively, Armageddon did not break out as it might have earlier in the week.

We could rally for a while but whether or not we go to new highs, given the current environment is yet to be determined. This week’s release of the AAII poll showed that bearishness rose dramatically to 50.9% from 33.7% the previous week. That is the highest level of bearishness seen this year. These sentiment polls are contrary indicators. Usually when the majority of investors feel one way about the markets, the opposite occurs. For now, bearishness abounds.

On Thursday the markets melted up 3%, albeit on lighter volume repeating the pattern the markets had all last year. Historically price action needed to be confirmed by volume for that direction to be sustainable. But like most MBA books, some forms of technical analysis are not holding long established truths either. Currently, it seems that price alone is truth! The market’s ability to get so much of a bounce on so little news Thursday was a classic sign of a market that was extremely oversold on a short-term basis and desperate to launch a technical rebound.

On the economic front we have both good and bad news available. First some bad news: Now that the homebuyers tax credit has expired mortgage applications for new purchases of homes has dropped to a 13 year low according to the Mortgage Bankers Association. That means mortgage applications are lower now than anytime during the credit crunch of the last three years!

The most recent Case Shiller Home Price Index showed another monthly price decline. That is the sixth decline in a row, and 70% of the cities monitored posted a falloff. Long term, housing remains the key to US economic stability. In the past couple weeks many austerity programs for European countries and US states were outlined. These cuts in government jobs and services will not help create a V shaped recovery for the economy. Instead they will act as a drag and lower GDP expectations and quite possibly corporate earnings.

Consumer confidence, measured by the Conference Board, improved 5.6 points in May to 63.3. That is the best tally since March 2008 and the third increase in as many months. It must be noted however, that during times of economic expansion normal confidence numbers stand at around 102. In past recessions, consumer confidence averages 71. In fact, right after 9/11 consumer confidence was at 85.3 and that was immediately after the terrorist attacks and an economy that was eight months into a recession. So before anyone uncorks the champagne over this improvement in confidence, it may be wise to put the current situation into historical perspective.

Now for some positive news: We have a holiday shortened week with Memorial Day on Monday. Several summer rallies have started soon after Memorial Day. We will also have many positive economic reports due next week. The jobs number on Friday is expected to show 500,000 new jobs created for the economy last month. That could act as a strong catalyst for an upward market move. The average workweek is expected to increase demonstrating demand and the ISM Manufacturing and Services numbers should also show continued economic expansion. Next week also marks the monthly strength period for the markets. This is the time that automatic flows of money to fund retirement accounts from workers around the country hit the markets. This can lend strength to the markets.

I was not surprised by the huge rally Thursday since many indicators were screaming oversold. We went short at the beginning of May and captured profits as the market declined. We still have our gold and silver ETFs. But mostly we are in cash even though that can seem unsatisfying and unrewarding to investors as the market swings about in both directions. Sometimes it’s better to be safe than sorry. We feel it appropriate to wait for the clues that will clearly define the next major market directional move.

I’ll close with this final note of caution supplied by Dave Rosenberg of Gluskin Sheff. There have only been two other times when the stock market ran as quickly up from a low in barely over a year, as was the case this time around (+80% from March 2009 to April 2010): the 112% surge from June 1, 1932 to September 7, 1932; and the 116% run up from March 2, 1933 to July 18, 1933. In the first case, there was a 40% correction and in the second, the correction was 34%. So, using history as your guide, we are talking about the prospect of a pretty significant reversal that could take the S&P 500 down to as low as 850.

The clues are the support and resistance levels. If support is broken it is imperative to raise cash as that would signal a breakdown of a triple bottom. If we break above overhead resistance (1150 on the S&P) positions could be added, but use tight stops as things can change very quickly in this volatile environment.

Fade the Rally

2010-05-24T14:19:00.000-07:00

The market acted terrible last week and that was only seven days removed from a prior bad week that featured a mini crash! This is not your average correction that some are talking and writing about. The markets are broken and continue to break down.

The latest Investors Intelligence poll shows that the bull camp stayed positive, dropping only a small percentage, from 47.2% to 43.8%; while only 24.7% are bearish. Not many appear overly concerned, despite everything that has happened in the past few weeks from Greece, to flash crashes, to Euro breakdowns and possible government intervention.

As a money manager, I don't know if I am first and foremost supposed to be an economist, common sense bearer, political analyst, or realist, but there are many factors that are affecting the markets currently. Numerous investors are only focusing only on the recently better economic news and are forecasting that straight out into the future. Onward and upward.

It is the next market move that is important. Global governments are printing more fiat (fake) money to throw at every problem. For a while that has temporarily worked in the past, there is no certainty that it work again this time. If investors and everyone were to start to comprehend that more debt cannot solve a debt crisis, the house of cards will fall. It does appear that market participants perhaps are now starting to focus their attention to the growing debt predicament.

While I don't want our economy to fall off a cliff - I don't think printing more debt and moving it from the private sector (from the banks) to the public sector (the federal government) is a viable solution. Here in the US, we are at historically low interest rates; rates not seen since the Great Depression levels in the 1930's. Yet all these trillions of new debt dollars are being funded on the short end of the yield curve. The likely hood is that some time in the near future, interest rates will go up. The long term historical average yield on a 10 year US Treasury Note is around 7% - today that rate is 3.23%. So if interest rates just go to historical averages, the cost to finance our debt more than doubles and that is just to pay the interest. That money will do nothing productive like building roads, bridges, airports, etc., that will help our economy grow. This is a very bad idea. Everyone including global governments need to learn to live within their means. For now this credo is lost on the minds of the global decision makers.

Short term, markets are extremely oversold. There are many ways to gauge overbought and oversold conditions, but by almost every measure we are at extreme oversold levels. Therefore the market could stage some sort of rally this week. That would not surprise me, in fact last Friday, we covered all of our inverse ETF positions that we placed on the markets just a few weeks back for handsome profits.

If you are an average investor riding out this washout, don't. Use any rally as an opportunity to raise cash! Put your funds into money market funds or short term Treasuries. If the market takes out last Friday's low (May 21, 2010) without first rallying - I would suggest cashing out even quicker under that scenario.

Faith has been broken. I think we could see a rally back up to 1100 - 1135 on the S&P, but that may not happen. My first downside target is 940 - 950 on the S&P if we take out last week's low. I would reassess at that point so I do not suggest riding out the storm as it could get worse than that.

Here are some sobering statistics. In the past 130 years, whenever the Graham/ Dodd/ Shiller normalized P/E ratio goes above 20.6x (it's approximately 21x today), the market has experienced a correction of 31% on average over the next 16 months. It has never failed.

A couple of more stats courtesy of David Rosenberg of Gluskin Sheff:

-1 in every 10 American homeowners missed a mortgage payment in the first quarter (a record)
-1 in 6 Americans are either unemployed or underemployed
-Over 4 in 10 unemployed Americans have been out of work for at least six months.
-1 in 4 Americans with a mortgage have negative equity in their homes.
-There are 5 unemployed workers competing for every job opening (hence downward pressure on wage growth).

The markets are under pressure and could potentially crash. I don't want to sound like a gloom and doom sayer, but the markets dropped around 10% before it crashed in 1987. We just had a huge run-up in the markets since March 2009 and money managers will be much quicker exit this time. Most individuals, as well as many state, federal, and global governments owe more than they are worth. That is unsustainable. Debt to bailout prior bad debt and doesn't create anything, reminds me of the old saying, "Don't throw good money after bad!" Investing in today's stock market could be the same idea. Sell into any rally.

Can You Fight City Hall?

2010-05-18T15:00:00.000-07:00

I keep reminding myself of the old adage “you can’t fight City Hall” as I analyze current market conditions. I hear the pundits on major media talking about the economic recovery. Many go so far as to call it a V- shaped recovery, yet I don’t see it. I do think the US economy has stabilized. I would even go so far as to state that the economy has rebounded slightly from the bottom, but in most areas the economy is still at historically low levels.

Housing was the spark that started the whole economic calamity and as I have stated many times – the recovery will not be firm until the housing market is fixed. The government stimulus for first time and existing home buyers has now ended. What happens next will be very telling about our economic future. Major media was all fired up today about the 6% rise in housing starts to a seasonal adjusted annual rate of 672,000. For comparison, the April 2006 housing starts were annualizing over 2,000,000 – so I would suggest that we still have a ways to go.

However the bigger number that should be focused on was the drop for new housing permits by almost 12%. I think that homebuilders’ realize that without the tax credits going forward, housing is going to slow again from these extremely low levels. Another disturbing trend reveals that 12% of mortgage defaults are now “strategic” and that it is okay in our increasingly hedonistic society, to walk away from a mortgage that you could otherwise afford.

Further, banks that do foreclose upon a home are not required to carry that home on their books at current value. For example, a couple borrowed $500,000 from a bank a few years back to purchase a home with none of their own money down. The home is now worth $300,000 and the couple has stopped making their mortgage payment. After about a year they are forced out of their home. The bank is not required to put that asset on their books at the real market value ($300,000) until they sell that property. The bank still shows it as a $500,000 asset. This process is repeated all over the country by big banks and small, on commercial, residential, and industrial properties of all sizes. The banks are sitting on huge amounts of inventory unwilling to attempt to sell those properties for fear of having to actually realize the loss. Therefore banks are overstating their current value and apparently investors either aren’t aware or don’t care a lot about that.

The Euro was the hot trade in 2009. Talk was that the US dollar’s status as the world’s reserve currency was numbered. How times have quickly changed. The Euro has been plunging since November with the recognition of the debt crisis in parts of Europe. The Euro has given up all of its gains from the last five years, and is back to 2005 levels, with the potential to go even lower. Some, including European leaders and top Euro bankers, are projecting that the Euro will disappear altogether as a currency, with European countries returning to the days when each country had its own currency. That would be a global catastrophe if that happened quickly or at all.

The Chinese stock market is at an 11-month low, down 24% since its peak last July. If you think we had a housing bubble here at home – the rise for Chinese home prices in some areas, over the last decade, has gone twice as far and twice as fast as real estate did here in the once hot markets such as California. If or rather when that Chinese bubble bursts, it will have a global impact. China is the second largest economy in the world and their markets had actually acted like a leading indicator to our markets over the last two and a half years. Hopefully we have disconnected from their stock market trends, if not, the future doesn’t look good.

Things aren’t much better for our own federal government. The US posted only its third April deficit in the past 30 years, according to data recently released by the Treasury Department. We had an $82.7 billion shortfall for the month of April 2010, the most ever in the month that Americans file their tax returns. Historically, April has been a surplus month for the government because of the April 15 tax filing deadline. But spending is up rather dramatically. April recorded the 19th consecutive monthly deficit. Remember, we just recently gave $50 to $60 billion to Europe through the IMF so May won’t be much better– but who’s counting.

From a technical standpoint the stock market appears to be rolling over. We decline farther and on much higher volume on down days, than we go up on the positive days. This is called distribution and it appears to be widespread. The “flash crash” conditions have not been resolved; therefore it would be naïve to ignore the fact that it could happen again at any time. If our markets close below their respective 200 day moving averages and non flash crash inter day lows (S&P 1094), then we could see a fall all the way down to 880 - 900 on the S&P.

Now for the good news, City Hall in this case is much larger than the biggest of all cities vestibules. In this case, City Hall is represented by the Obama administration, the Federal Reserve Bank, European leaders, large global financial institutions, and many others who have a vested interest in making sure our global economy all works out. This consortium has at their disposal, printing presses and is offering to its member’s access to unlimited funds at almost zero interest rates. Their motto of “print you way to prosperity” has resonated with many investors who believe that live for today for tomorrow we may die, is the best way to solve all our global ills.

It remains to be seen whether or not investors have had enough of this foolishness of trying to solve a debt crisis with more debt or not. We are on the short side of the market but remain wary with tight stops in case we blow our markets a little bigger before it bursts. We are fighting City Hall! For the good of all we hope some semblance of restoring order to our society will prevail. Whether for an individual, household, corporation, or a government the following is imperative; each entity must all learn to live within its means. Where it all went wrong is too lengthy to detail, but where we need to go is clear. Unfortunately it will take some pain to reconcile and the markets will need to correct.

What Does a Trillion Dollars Buy These Days?

2010-05-14T14:12:00.000-07:00

What does a $1,000,000,000,000 buy these days? Apparently not a whole lot, maybe a couple of weeks. Last weekend the leaders of Europe got together and pledged that amount to the weaker members as they struggle to keep the European currency intact. The chiefs said that it needed to be big and had to get done before the Asian markets opened on Monday to avoid a crash. Mission accomplished – no Monday crash and instead a pretty strong rally. Was the rally due to the trillion dollar bailout or due to a bounce from oversold conditions? We will never know.

One thing we do know today is that the Euro is lower today than it was last week. Maybe investors have figured out that there really was no trillion dollars. There is no money! All countries around globe, including the US, are running at a negative deficit. So to give a trillion dollars is in reality just a pledge to create more money out of thin air. Remember that no one can print their way to prosperity. Just as we can’t solve a debt crisis with more debt.

And what about the Americans? What is our take what is going on in Europe? The United States taxpayers through the International Monetary Fund pledged over $50 Billion to bail out the Euro Zone Countries. Aren’t we a philanthropic group? Some economists have been saying that our economy is recovering after our own private sector bailout, so why not be generous and help those Socialists that are less fortunate than us.

I guess I don’t get it. Do Americans not understand what is happening here? Are we so immune to big numbers that $50 Billion US Dollars to reward bad behavior in other countries is a huge burden on the 50% of us who actually pay taxes? We should be outraged. We should take to the streets. We all want to maintain our current lifestyle. However some appear to have a better lifestyle than others – on our dime (or our $50 billion whatever the case may be).

The U.S. government debt now stands at 92.6% of projected 2010 gross domestic product, according to the International Monetary Fund. That means we have a heavier debt burden than several of the overleveraged countries that we are bailing out. Portugal’s debt, according to the IMF, is 85.9% of its GDP; Ireland’s, 78.8%; Italy, 118.6%; Greece, 124.1%; Spain, 66.9%.

Here is the well documented story. European Union members shocked markets Monday with the announcement of a one trillion dollar safety net, in an attempt to keep Greece and other heavily indebted countries from defaulting. It was assumed that a Euro sovereign country defaulting would cause the whole European Union to fall apart. This money won't create any jobs or build any roads or fix any bridges. It’s just the creation of additional debt to effectively dig a deeper hole.

Too big to fail not only applies to our big banks, but also now applies to outside nations and their debt. So everyone and everything is guaranteed everywhere. Has anyone looked at the balance sheets of the majority of states here in our own country? We need a good old fashion bailout right here at home. California and at least 20 other states need a bailout. I wouldn’t mind getting some bailout money – how about you? When will it end?

But before you start to feel good about this happy news, it is important to ask one simple question. Where do you suppose the trillion dollars is coming from exactly? Did it roll out from under the seat of their car? Did they collectively find some loose change in their pockets? Or perhaps they found a cool trillion in the jacket that they recently picked up from the Thrift store. Short term, they averted disaster, but someday investors will wake up to find that we bailed out a debt problem with more debt and that will have long term repercussions.

Their solution is akin to a consumer trying to solve their own debt problem by transferring debit balances from one credit card to another card with a higher credit limit. That tactic buys some time, but it does not change the fact that one still has a debt problem. The only way that a debt problem gets resolved is to cut spending and to allocate more income toward paying down the debt. If there is no real austerity imposed, moral hazard will soar. Why would anyone reform their spending patterns if Greece, the US bankers, and the like, keep getting their allowance even though they won’t clean their room?

The market reacted very positively to the bailout news on Monday and Wednesday. But by the end of the week the market started showing signs that it understands the unfortunate reality that printing more money is just not going to work. The market has other structural issues that are yet to be resolved. Experts still don’t have a solution to the mini crash that occurred last Thursday. Don’t kid yourself – without a fix this could happen again. The technical charts of the major indices look as though the market has broken. It is called a waterfall pattern or can be visualized as if prices fell of a cliff. Any fix for the market is like climbing up a waterfall, one can do it, but it won’t be easy. There have been 16 times that the Dow Industrials have rallied 400 or more points like it did last Monday. In every instance the markets went lower very shortly after. I just can’t rationalize how this time will be any different.

So what did the money buy us? The markets almost went on a full round trip this week. At one point this week the S&P 500 had rallied up 5.6% from last Friday’s close, only to finish the week only up 2 ¼%. We are still down almost 7% from the peak a few short weeks ago. Be careful! Nothing has been fixed – our problems have only gotten more costly. A trillion dollars more!

No Good Will Come From This

2010-05-07T07:53:00.000-07:00

Apparently the market gave us all a big fat finger yesterday when a trader typed a billion when it should have been a million. For anyone who knows me, I don’t believe that explanation for a second, at least the part about the trader mistyping. As the market ticked down 900 plus points, my first thought was Israel finally bombed Iran. In hindsight that may have been a good time for them to carry out that mission, as it seemed things couldn’t get much worse for the markets.

When I realized an attack wasn’t the case, I commented to my assistant that a hedge fund probably blew up and we wouldn’t find out the details until sometime in the future. I then noted as the markets were crossing back up over the down 600 mark that very shortly the media will come out with reports that the precipitous drop was due to some rogue trading error – a fat finger by some low level entry clerk. I further stated that this would be portrayed as an isolated incident. Just as initial reports last week about the Times Square attempted bombing was by a lone, unhappy, deranged madman. Or the Christmas Day underpants bomber acted alone as he tried to blow up a plane as it flew into Detroit Metro. None of these are isolated incidents.

I am constantly amazed that people actually buy into these media spun reasons for events that don’t make us feel comfortable. I was actually smiling as the market tanked as I was net short (investing in a manner whereby my clients would profit if the market to were to decline) heading into the day. I’m not happy for those who lost 3.2% of their hard earned investment dollars in one day, but at some point, investors have to realize that markets move in two directions – up and down! How many lessons will investors need to participate in to understand that concept?

The market is now down for the year. The S&P is still down 30% since the market peaked 31 months ago, and is down 28% for the last 10 plus years! Buy and hold and hope is not working. The NASDAQ is still less than half its value from 10 years ago! Oh but that was a bubble – they can explain!

There really is no explanation necessary. The market was ridiculously overvalued recently as outlined in my previous articles. Whether there is any truth to the fat finger trading error or if I am correct and a hedge fund blew up doesn’t matter. What matters is that the market has issues! It’s going to be very difficult for Mr. & Mrs. Average Investor to get excited about putting their life savings or their retirement account into an investment vehicle that can fluctuate 10% down over the course of an afternoon, for any reason.

I believe there will be lawsuits that come out of this from investors who were stopped out of positions as the market swooned. If I held a stock and my stop loss was filled 40% below where it closed, due to someone else’s trading error, I would be looking to hold someone else liable too.

The media finally started to blame the going-ons in Greece as a possible reason the markets haven’t been acting well lately. You think? Here EU member countries such as Germany and France, and the IMF (which is 17.1% funded by US taxpayers) have made loans available to Greece in the amount of approximately $110 Billion. (Greece needs the money after years of allowing their citizenry to retire by age 55, get 14 months pay for 12 months of work, and take two hour lunches in the middle of each day.) And what do the Greeks do? Riot in the streets and say, ‘hell no – we won’t work past 55, and getting paid 12 months pay for 12 months work is unreasonable.’ Some thanks.

How do you think the hard working, efficient Germans feel about that? Our portion of the IMF contribution to Greece works out to be $6.7 billion of your money – How do you feel about their gratitude? Nice video footage of their warmth. The rock throwing and tear gas were especially touching. It would be different if the Greek situation was an isolated incident, but it’s not. Ireland, Portugal and Spain are not far behind. This could spread here once we recognize that many of our state governments are as broke as Greece.

Sovereign debt issues are the new subprime mortgage problems that got us here in the first place. Our government is complicit to this global and growing problem. The global plan to bail out debt with more debt is unworkable. It’s like the zombies feeding off the dead. We are dead (poor economy and growing debt issues) and the Greeks are the zombies (because they are rioting in the streets). The printing presses have been working overtime for so long here in the US that they are now making new $100 bills. I thought this was because the old presses broke, but I am told the bills were redesigned for a different reason.

I believe most will hope that this will be a one off event and we can go on with our lives and make money in the markets soon. Unfortunately, this is another in a series of warning shots across the bow that our debt problems are growing and getting worse. The market will most likely soon test the lows from yesterday. That means I think the Dow will drop another 656 points in the next month or so.

When the market crashed in 1987, it retested the crash lows within five weeks. After the retest we will reevaluate our next move. If our government and investors continue on in status quo mode between now and then don’t expect those lows to hold. Hopefully we can change course and get more fiscally responsible here and abroad. Somehow I have my doubts that will happen.

More to Come?

2010-05-04T12:42:00.000-07:00

I saw this ad for the Potomac Funds today so I’ll give credit where it is due, but I think this statement is really important to think about at this juncture. “What would you do if a fastball was flying towards your head? Buy and hold investors would do nothing and take the punishment!” Meanwhile, in spite of two cyclical bull markets in the last ten years, the stock market as measured by the S&P 500 is still 22% below levels seen at the market peak in 2000, and 26% lower than it was in 2007.

Dave Rosenberg, chief economist and strategist at Gluskin Sheff, warned this week that his ratio of trading volume on the New York Stock Exchange versus volume on the Nasdaq, is a sign of speculation. The current levels of risk taking are surging beyond levels seen during any period in the past 10 years.

The Hulbert Nasdaq Newsletter Sentiment Index, which measures the average exposure of newsletters to Nasdaq stocks, now stands at 80%, which Hulbert classifies as “dangerously high”. Hulbert says to find a higher reading you’d have to go back to July, 2000 [about 3 months after the Nasdaq had topped out into its severe 2000-2002 bear market, when newsletters were still bullish and saying it would only be a minor correction].

Carl Swenlin, editor of Decisionpoint reports that investor assets in Rydex money market funds and ‘inverse’ (bear-type) funds are at multi-year lows, while assets in Rydex bullish Index and sector funds are at their highest level since the October, 2007 market top. There is currently $7.50 in bullish funds for every $1 in bearish funds. Alan Newman, editor of Crosscurrents, says “It’s the most ridiculously one-sided investor sentiment we have seen since the high-tech mania [in 1999] convinced folks that no price for a stock was too high to pay.”

Last week the market had the highest weekly volume of the year. Unfortunately for the bulls, it was a down week. The small head and shoulders top formation was broken today and it appears that Europe is falling apart at the seams.

Today will be another, in a series of distribution days. Yes, the market has bounced back after the down days, but always on lower volume. Remember volume equals conviction.

The major averages are all trading above their respective 50 day moving averages which should provide some support. However should they fall through those averages, a bigger correction could be coming.

The biggest problem with the recovery is that it has been supported through the creation of more government debt, in an unprecedented fashion. Recall that the government needs tax money to support its various programs. However, in the last few years they have created even more, bigger government programs and spending, at a time when most Americans have been pinched by the double whammy of falling real estate prices and a drop in the value of their retirement accounts.

Imagine if you went out for drinks with a friend that asked if you could buy the rounds because they were short on cash. Then a while later you have lunch with the same friend who asks you cover the tab because things are tight. Soon after you see them pull up in a brand new Cadillac Escalade. You would wonder where they got the funds to make that purchase. That is my wonderment about our current global government bailout programs. Doesn’t anyone wonder where all this money for Greece and healthcare, etc., etc., etc. is coming from?

Our unborn children and grandchildren should very upset. To bail out our debt problem with more debt seems unfathomable. At some point the markets are going to consider the sustainability of that plan. Maybe that day is today.

A Down Week

2010-04-30T14:55:00.000-07:00

For the first time in a long time the markets did not go up for the week. The Dow Jones Industrial Average lost 1.8%, the S&P 500 dropped 2.6%, and the NASADAQ finished down 2.75%. The loss broke an eight week winning streak for the Dow and the NASDAQ.

Nevertheless, all the major indices finished the month of April up between 1.5% and 2.5%, and all three averages have closed positive 12 out of the last 14 months. It is a rare through market history that we have had successive monthly positive returns like the ones just experienced.

According to “Stockmarket Cycles,” the Dow has risen on 41 of the past 55 trading days. They note that such a sequence has occurred only three times in the last 70 years. Going forward it would seem unusual for the current uptrend to continue. So what does the future hold? According to the Fed’s FOMC announcement they were a bit more upbeat about the economy but said they will continue to keep interest rates low for an extended period of time. That made traders happy from the major banks that are borrowing money for virtually free and giving it to their trading desks to drive up the markets and line their own balance sheets. Additionally the Investors Intelligence Sentiment Index is at 53.3% bullish, and an extremely low 17.4% bearish. That’s the lowest level of bearishness since 1987.

It is imperative to remember that market sentiment is a contrary indicator. A high level of optimism was what was happening at market tops in 2000 and 2007. When the majority become too optimistic it is not a positive sign, but instead a warning sign. When virtually no one is bearish anymore that is usually when trouble breaks out. Conversely if everyone is bullish, who is left to buy? The greater fool theory hasn’t gone away.

Then where will trouble come from? It would seem strange that Greece would suddenly be the black swan to hit markets when it’s been in the news for months. It’s even stranger that the downgrades from the rating agencies of Greece, Portugal, and Spain’s sovereign debt would cause such a panic as it did this past week. I am surprised investors ascribe to anything that the rating agencies have to say about anything. Haven’t investors been paying attention to the bubble brewing in global sovereign debt for a while now? It is amazing that we are attempting to solve the debt crisis by increasing debt. What can possibly go wrong with that solution?

Perhaps the trouble will come from the financial reform bill rolling through congress. Maybe they will finally force major banks / brokerage firms to apply the “Fiduciary versus Suitable” standard to their advice going forward and enact the “Volker Rule” which would force a separation of traditional banking from investment banking. There was some interesting testimony on display this week from several members of Goldman Sachs to that end where they displayed a lack of fiduciary standard towards their clients. Also the recap of earnings from Goldman’s traditional banking profits versus investment profits was telling. Not much lending going on over there to help small businesses create jobs. Oh that’s right – that’s not what they do.

The next weekly pattern is that the ‘monthly strength period’ which will run through next week. It is the time that a tremendous amount of retirement money flows into the markets from employee and employer contributions. One final note is that the “Sell In May and go away” historical adage now comes into play. The long term track record of using May as an exit signal and not reentering the markets until November, takes effect on Monday. While this tendency has a great track record, it should be noted the market does not own a calendar.

It is important to use a sell discipline and tight stop losses at this time. Bears expect a double-dip recession now that government stimulus efforts are being removed and inventories have returned to normal. Bulls obviously feel that the coast is clear. I frankly am worried that a new problem will develop and knock the market down a notch. This oil problem off the Gulf of Mexico and the administrations halt of new drilling could be a catalyst. Be careful of the devil you know but be looking for the devil you don’t know, as that is the one that usually gets you.

Champagne on Ice

2010-04-23T14:12:00.000-07:00

Markets were up 2% across the board this past week. Earnings have been great on easy comparisons. New and existing home sales skyrocketed last month and are at levels not seen in decades. Investor fear is nonexistent.

The Dow Jones Industrials and the NASDAQ have been up eight weeks in a row and up 10 of the last 11 weeks. Money seems to be coming into the market in waves from the sidelines. Is this an all clear signal? Certainly not! At least not from the way valuations and sentiment appear.

The bull vs. bear’s survey of market newsletters is showing a frothy picture. Bulls exceed bears by 36 percent, according to Investors Intelligence. The last time this sentiment indicator was this extended was in January, just before the NASDAQ corrected more than 9%.

The VIX Index that measures investor fear is currently at levels only seen at market tops. The Producer Price Index, which measures inflation at the producer level, was up 0.7% in March, which annualizes out to over 8% annually. Friday it was reported that Durable Goods Orders declined 1.3% in March resulting in the first drop in four months. For those watching at home, those numbers are not healthy.

Yet the market is the final arbitrator of all information and for now it continues onward and upward. Thursday the markets were down significantly only to reverse late in the day and close slightly positive. Days with that kind of market action are called “reversal days” and they usually indicate further follow through from the day’s end direction, and Friday the market did not disappoint as the S&P 500 closed up at levels not seen since September 2008. The NASDAQ is now back to levels held in May 2008.

Next week 152 of the S&P 500 members will report their quarterly results. It will be the busiest week for earnings. According to Thomson Reuters, on average S&P 500 revenue is expected to be up 10% year-over-year while operating earnings are on track to increase 39%. However average stock prices have moved significantly higher than that than the first quarter of last year. The big question remains, have these better earnings already been priced into current valuations? Certainly not by the markets action over the last several weeks, but we invest for the future and time will tell. It’s definitely a time for caution not exuberance.

Next week the Fed meets and we shall be on watch for any change in policy regarding interest rates. I doubt they raise rates, but they may signal a plan for the removal of their long standing accommodative policy of free money. Next week also ends the stimulus for housing with the removal of the tax credit for home purchases for qualified buyers. How much of an effect that has on the housing market will be watched very closely by investors. If the housing market is unable to stand on its own, I think a correction in the stock market will also be forthcoming. The problems in Europe remain and are too lengthy to list.

Stock action seems to be forecasting a huge rebound for the overall economy. A V-shaped recovery would be the perfect outcome after a near global depression. While I am optimistic – I would leave the champagne on ice for now.

Everything’s Hunky-Dory

2010-04-20T14:19:00.000-07:00

The one day mini correction on high volume last Friday has passed. Just like Dubai, Greece, and the great recession before it, the alleged Goldman Sachs scandal seems to have already passed. The market continues its onward and upward trajectory with a V- shaped recovery off the bottom from last March 2009. Everything’s hunky- dory, right?

If you examine the VIX Index, also known as the Fear Index, it seems that complacency is everywhere. The VIX has been plunging as the year old rally has continued non-stop. It now stands at an incredibly low level of investor fear, or conversely a high level of investor optimism, given the overall state of the economy. We are currently at levels that have only been seen at market peaks. When the majority of investors feel that there is nothing to fear – that is precisely when fear should be the greatest.

Another method of measuring investor sentiment is the bull / bear ratios. The American Association of Individual Investors, showed bullishness at 48.5%. Usually it is strong contrary indicator when bullishness reaches 50% to 55%. So we are in the warning zone. The Consensus survey measures sentiment of brokerage firm analysts and independent advisors. Its readings are now 75% bullish. The last time it reached these levels was at the market peak back in October, 2007.

A further fundamental way to value the stock market is by evaluating the current dividend yield for the S&P 500. The market’s recent yield was 1.9%. The last time the dividend yield was this low was in December 2007, at the start of the great recession. Historically the dividend yield for the S&P 500 averages 3%. Since dividend yield accounts for as much as one third to one half of the stock markets total return over the long term, a higher dividend yield usually means healthy market returns going forward. The current paltry dividend yield does not bode well for superior returns going forward.

Yet the market continues higher. The rare down days are usually accompanied by higher volume. Nevertheless the multiple up days on low volume continues. The S&P 500 has been up eight of the last nine days. The NASDAQ has been up nine of the past 10 weeks.

Earnings thus far have been very good, but the current stock prices of most of the companies that have reported earnings are up even more than the earnings or revenue growth reported. It may turn out that stocks have already accounted for the better than expected earnings growth. At some point the markets will be forward looking again.

The future has two potential outcomes from my vantage point. One, is the economy is going to have a strong recovery – that is what the stock market is telling us with its V- shaped bounce off the bottom. If this happens, the excess government stimulus, to the tune of trillions of dollars globally, will have to be quickly removed to protect against inflation. Look at commodity prices over the last year – namely look at the price of gas at the pump and anyone can readily understand what I am saying. This will cause interest rates to rise very quickly. That will be good for savers and seniors but bad for everyone else. Interest rate represents the cost of money. As the cost of money goes up, earnings and growth go down.

The second potential outcome is that the economy is not nearly as strong as the stock market has been flashing. That is what leaders such as Ben Bernanke and the Fed have been saying. If this is the case, the outcome will result in a correction for the markets. How far and how fast remain to be seen. It really depends on how weak the economy remains. Job growth and housing appreciation are still nonexistent.

The other question for my two potential outcomes is when? When would a correction start? That answer is also elusive. There are many technical indicators to go along with the fundamental analysis stated above that demonstrate an overbought condition for the markets. The zero interest rate policy that is currently in place is fueling the markets and it could last a while longer. However the sooner the correction happens, the less detrimental it will be to buy and hold portfolios.

What should an investor do today? Be very cautious. These long term winning streaks for the stock market are very rare and usually there is an adjustment that follows. Use stop losses as a floor beneath today’s prices to protect your capital. These stop losses could be placed directly on the exchanges or mental notes of prices which must be executed when breached.

Bad Ending for a Strong Week

2010-04-16T14:12:00.000-07:00

The market continued its strong rally this week, albeit on tepid volume. Prior to Friday, the S&P 500 and the NASDAQ had been up 12 of the last 14 trading days. The Dow and NASDAQ have also been up nine of the last 10 weeks! Pretty impressive! So far this year the market has finished up or positive for the day 64% of the time. Historically that number is closer to 50%. This is akin to a coin toss -50 / 50. Does that mean that there will be some reversion to the mean or are things different this time?

As the market continued its climb higher, the volume continues to weaken. That is not the usual pattern of conviction for a market setting consecutive 52 week highs – week after week. It leads me to believe that some form of extreme manipulation is taking place. It is statistically impossible for a market to put in so many new highs on such low volume without something being amiss.

If one examines the history of the Dow of which we have more than 100 years of data, you would find that at any given point in history, the markets trended higher on higher volume. Especially if it was putting in a series of new highs.

Now we have allegations of fraud against Goldman Sachs. Banking has been the business to be in since the bailouts. The Feds are providing banks with virtually free money and instead of lending this money out, they are simply pumping up the markets, setting up for another monumental correction. Or they are buying longer dated Treasury bonds, further out the yield curve and keeping the spread.

The largest six American banks now have assets that are equal to 63% of U.S. GDP; let that figure sink in. The Top 6 banks are also involved in over 80% of the derivative trades and make up a high percentage of the daily volume of activity on the stock exchanges. Weren’t banks created to lend money and help business grow? So why are they using this money to trade the markets?

Overall American business is still terribly slow but inventories have been depleted to the point that shortages are occurring. Statistics show that revenues and earnings are up dramatically from 2009, but are still off, for most industries, about 30% from the peak. This year over year growth data is being spun by focusing on the one year data and conveniently ignoring the fact that most business are still way down.

The National Federation of Independent Businesses (NFIB) issued its March survey Tuesday morning. Optimism in the small business community fell again. It dropped to a nine month low of 86.8. The last time it was at this level was April of 2009. Small businesses produce more than half the GDP and provide nearly 70% of the private sector jobs. Usually we see small businesses leading the way out of recessions since they’re the first ones to see the consumer come back, but what’s happened this time is the consumer still hasn’t come back.

The bottom line is this: outside of banking, no one is all that busy and prices of materials are literally skyrocketing. That smells like stagflation to me. Anyone who tells me that there is no inflation on the horizon is probably not paying that close attention and could be in for a shock.

The S&P 500 broke above the 1,200 threshold again this week. Twice for that matter – once up and then down again on Friday. It may be worth noting that the first time the S&P pierced this milestone was back in mid-2005. The quarterly trailing EPS for the market was $75 then. If we take the consensus estimate for Q1 ($18) and tack on the prior three quarters from last year, then the trailing EPS as of now is less than $65. So what we now have is a market that is overvalued by at least 15%, based on the profit fundamentals from 2005 when we had a stronger, more predictable economy.

So the question is, when the music stops, will you have a chair to sit on? The market won’t go on like this forever. We are overdue for a meaningful correction. Maybe it started today – maybe it is still a few months out. Is your portfolio properly prepared? Do you have an exit strategy?

Ask yourself this, do you want to be emotionally satisfied or financially sound? As far as the indexes are concerned, the danger out there is that of nobody seems to believe this market can ever go down. That thinking is dangerous. Markets can fall faster than they go up. We witnessed a preview of that on Friday, when it dropped quickly accompanied by high volume. In the end it’s not what you make, but rather what you keep that counts.

Goldman Sachs Cheated?

2010-04-16T08:42:00.000-07:00

Why does Main Street not trust Wall Street? With reports like the one coming out about Goldman Sachs today, it becomes easy to understand. Allegedly, John Paulson’s multibillion hedge fund Paulson & Company with Goldman Sachs, put together a Collateralized Debt Obligation (CDO) pool of mortgages and sold that pool to the unsuspecting public.

Paulson then, allegedly, shorted that CDO on behalf of his own account or the account of Goldman Sachs. As an analogy, Pete Rose is banned from baseball and the Hall of Fame for life because he bet on baseball games that involved the Cincinnati Reds team that he was managing at that time. Rose could see the temperament of his players that day and he alone had control of the batting order and who would come in for relief pitching. Goldman handpicked the investments in this pool – sold it off to the unsuspecting public and then shorted that pool. Sounds very similar – but will the punishment be comparable? Somehow I doubt it.

Goldman’s stock is off more than 15% today – big deal. Does anyone really believe this is an isolated incident? Probably the gullible! I had heard rumors months ago that Goldman had put deals together for the country of Greece for them to demonstrate a stronger financial position to the European Union (EU). The rumor further indicated that Goldman afterwards placed short positions on Greece with the knowledge of already having looked at their books so to speak. Nothing ever came of that one. If that has any validity, it would have been another easy way to make money for the company.

Time will tell what comes out of these new revelations, but this will do nothing to instill confidence in the investing public that Wall Street is attempting to take advantage of Main Street on a wide spread basis. It was Thomas Jefferson who said, “Banks are more dangerous to the liberties of the people than the standing armies.” This helps prove Mr. Jefferson’s point! It is no wonder that the trading volume has been anemic on the exchanges. Much of the public has already had enough!

Bullishness Continues

2010-04-09T15:29:00.000-07:00

The market continues to rise as the Dow was up ¾ of 1%, the S&P 500 up 1.5%, and the NASDAQ up over 2% this past week. However, the latest Investors Intelligence poll has the bulls at 48.9%, while the ranks of the bears have slipped further to 18.9%. Bullish sentiment is now up in 7 of the past 8 weeks and bearish sentiment is down for the fourth week in a row. Al of this occurring as the major market indices have traded higher eight of the last nine weeks. We are approaching extreme levels.

Tax Day is Thursday, a dreaded deadline for millions of Americans. However, for nearly half of U.S. households it's simply somebody else's problem. About 47 percent of Americans will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions, and exemptions, to eliminate their liability.

The result is a system that allows almost half the country to not have to pay for programs that benefit everyone, including national defense, public safety, infrastructure and education. Conversely, the top 10 percent of earners pay about 73 percent of the total income taxes collected by the federal government. While the bottom 40 percent of US households make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment. Meaning we have half the people getting something for nothing. Not a bad deal for them.

Consumer credit slid $11.5 billion in February. Now declining 12 of the past 13 months. The year over year trend is running at -4.0%. Less credit is available to start business, buy homes, and create jobs.

Retail sales are up for those stores who are still standing. It must be noted that with no large chain stores like Mervyns or Circuit City plus the legions of mom and pop stores out of business, retailers that are left are going to of course look better than before. Their main competition went bankrupt. Somehow mainstream media fails to grasp that concept.

Sales of foreclosed and distressed homes are rising, representing 29% of all sales in January, just a few points lower than the record 32% in January 2009. US analysts suggest that foreclosures will continue to rise this year. New foreclosures filings are running at a rate of around 300,000 a month, according to RealtyTrac. There are currently some 5 million homeowners that are 90 days or more past due on their mortgages, according to Fannie Mae.

Millions more homeowners who are current on their mortgages owe more than their home is worth. This number is estimated to be north of one out of every five mortgages. In cities like Las Vegas the estimates skyrocket to 80% of all mortgages to be under water. As a result, an increasing number of families are walking away from their homes in a process known in the industry as “strategic default.”

Perhaps the next shoe to drop will come from the under-funded State pension plan arena. This is a disaster waiting to happen and could have a huge negative impact on our economy. An independent analysis of California’s three large pension funds last week, found an over $500 billion shortfall, and according to the NYT, more than six times the value of the California’s current outstanding bonds.

We are in a budding recovery from the depths of the recession, but the question is what kind of recovery are we going to actually have? Many suggest that we will see a typical V- shaped recovery. The stock market seems to be signaling this is what is going to happen. I don't think we've gone through a typical recession, and to expect a typical recovery is more faith-based than factual. We went through massive deleveraging and to date individuals are still deleveraging. This process will take years to fully complete. While the populace has stopped accumulating debt or in some cases, such as mortgages, has just walked away from their obligations, the federal government has stepped in and is now borrowing at lightning speed.

With that said the markets remain bullish, although still on light volume. The heaviest traded day was last Wednesday when the market went down. Next week starts the earnings start season and it is the week before options expire – usually negative week. Technically, we still have a rising wedge pattern and remain very overbought – both negative situations. Riskier investors can continue to play in the current bullish market environment until the pattern changes. I strongly recommend the use of tight stop losses.

Round Two

2010-04-01T13:50:00.000-07:00

The stock market opened this past week by moving higher – again! Remarkably, that’s been a pattern for 26 of the last 30 weeks. This is remarkable because historically Mondays tend to be the weakest trading day of the week, and Friday’s have traditionally been the strongest.

There was mixed news on the economic front. According to ADP and Macroeconomic Advisors, employers cut payrolls by 23,000 positions in March. The market had been expecting to see an increase of 40,000 positions. That is a swing of over 63,000 jobs to the negative. Last month when jobs were lost but less worse than expected, the markets staged a big rally. This time with a big miss the market held its own. On the bright side, the March decline in ADP payrolls was the smallest in over two years.

The current consensus estimate for nonfarm payrolls calls for an increase of 185,000 positions to be reported on Good Friday, while the US stock market is closed. At least 100,000 of those newly created jobs will come from the government hiring temporary census workers. Keep the champagne on ice when reviewing those statistics.

This week the S&P/Case-Shiller home-price index was announced revealing that prices nationally were down 0.7 percent from January 2009. The silver lining was that represented the smallest decline in over two years.

Lower priced homes, record low borrowing costs and government incentives have combined to support the housing market. However, the Federal Reserve’s purchase of $1.25 Trillion of mortgage securities ended effective yesterday. It will be interesting to see who picks up the slack or will we witness a sharp increase in mortgage interest rates. That could really put a damper on the housing market. A lasting economic recovery also requires gains in hiring on a consistent long term basis. That could help stem foreclosures, easing the pressure on prices and give Americans the confidence to spend.

Tuesday, Iceland suffered from a credit rating decline. Irish banks were being bailed-out as Greece could only sell half its bond issue needed to refinance their debt. International markets are still deeply tied to each other. While some countries are doing better than others, I still feel a domino effect could happen should too many countries not solve their sovereign debt issues.

We are in the monthly strength period, the trading days surrounding the end and start of any month. It has a very strong tendency to be positive as large sums of money flow automatically into the markets at this time, mostly from 401k, 403b, and other retirement plans.

The Dow is struggling to get above 11,000. Markets are extremely overbought, but have been for several weeks. Investor complacency is rampant. The government’s attempt to bail out the private sector by creating more debt will one day have to be dealt with and will most likely cause a severe disruption in the stock market. In the interim, the market remains bullish. The second round of quarterly earnings will be starting shortly and the year over year comparisons should be easy. How much of the better earnings are already factored into today’s market price remains the question.

Volume remains extraordinarily low. Any number of events could trigger a selloff and it is important to note that the market always goes down much quicker than it goes up. In the meantime the market continues to claw its way higher in a measured fashion. It is important to participate in the markets, but ensure you have a plan for protection.

Reversal Day

2010-03-25T14:33:00.000-07:00

Thursday marked a big reversal for the markets. In the morning the Dow Jones Industrial Average was up over 120 points. The S&P 500 was up almost 13 and the NASDAQ composite was up over 33 points. Both the NASDAQ and the S&P closed lower for the day, on higher trading volume than Wednesday. That alone marks a distribution day. However when markets reverse off highs for the day that are 1 to 1 ½% higher than the day before, the technical term for that kind of action is a reversal day.

Reversal days, like any technical indicator, don’t guarantee anything. They should create an awareness that the current trend could be changing. How big of a change is yet to be determined.

In my previous posts I stated that the market is overbought on many levels. Combine that knowledge with today’s reversal and it creates an environment that will be interesting to observe over the next week or so.

The US dollar has broken out to the upside. While that is a good thing for individual Americans, there has been an inverse relationship between the US dollar and the stock market, plus precious metals and commodities. Meaning – should the US dollar continue its climb those other asset classes may start to decline.

The final note has to be US Treasuries. They have really taken a hit over the last couple of days. There were two auctions over the last couple of days. To raise enough money to cover our collective debt, the treasury had to pay extra yield. If the cost of money does start to rise as dramatically seen yesterday and today, that could be a bad thing for everybody. We’ll keep a close eye on Treasury bond prices as well over the next week as well. Higher yields equal lower prices.

This does not mean the bullish bias is gone. It does raise the caution flag a bit higher to watch out as there are some real negatives out there that could potentially stall the markets recovery.

Volume - MIA

2010-03-23T09:03:00.000-07:00

The market continues its bullish bias. On Monday the market greeted the newly passed government run health care program with an up day. Bigger government and higher taxes used to be considered a bad thing for business and the economy. We seem to be in a new era.

The only problem with Monday’s rally was that once again, volume was missing in action. Comparing Mondays NYSE volume of approximately 953 million shares on an up 5.91 point day, to Fridays 1.95 billion shares on a down 5.93 point day, I conclude that all things are not equal. Yes, Friday was quadruple witching day and volume does get exaggerated, but it was more than double Monday’s up volume.

Just like higher taxes and big government has an effect on the economy – so too does volume have an effect on the conviction of stock moves. When there are fewer investors on the upside – should something spook those participants at a later date, the rush to the exits could be faster and possibly more dramatic if that day comes.

But when is that day? That is the million dollar question. Governments globally are running today in a similar fashion that reminds me of the old Popeye cartoon character Wimpy, who used to say: “I will gladly pay you Tuesday for a hamburger today.” Except instead of asking for a hamburger, global governments are asking for more money and of course, "Tuesday" would never come, and Wimpy constantly secured himself a free lunch. Thus the line is used to jokingly to indicate that governments of today seem like they are "borrowing" money without any real intention of ever paying it back.

This live for today, for tomorrow we may die mentality is driving the markets higher. We have created another huge government program. We continue to borrow from future generations and many statistics don’t show improvement. For example: It was announced today that sales of existing homes fell for a third straight month in February, pushing sales down to the lowest level since last July. There is concern that the fragile housing rebound could falter, making it harder for the overall economy to recover.

The National Association of Realtors said the weakness in sales depressed prices further. The median home price dropped almost 2% from a year ago levels to $165,100. The Fed is going to end its purchase of mortgage securities next week and the government’s home buyer credits will end in April. What will happen to housing when it is no longer subsidized? It may work on its own, but caution is the key right now.

We will also get more details about the fate of the Greek debt issue later this week. The rumblings out of Germany and the EU are pretty negative. We shall see if it is all bark with no bite, or will Greece be forced out of the EU and possible default on their debt. Once again, things may work out and the party may continue, but keep a close eye on the exit doors.

Spring is in the Air

2010-03-19T09:57:00.000-07:00

I am reminded that perception is everything. Let’s say I articulate the following to my wife, “Honey you look like the first day of spring today.” She will probably be very pleased and feel very good about herself and be content with me. Now instead let’s assume I am a buffoon, and instead comment to my wife, “Honey you look like the last day of long, cold, hard winter.” Knowing my wife – I would probably be sleeping in the doghouse until next spring when I would finally have a chance to redeem myself.

While the first day of spring and the last day of winter are very close on the calendar, the perception one has from these extremely close events means everything in terms of outcome. For example, the Fed said this week that the economy is still too weak to raise interest rates. Therefore they are going to keep cheap money available for an extended period of time. Since institutions focused on the cheap or almost free money, the market rallied. Had they examined why cheap money was to remain an opposite result may have transpired.

Greece is another perception issue. For some time now it has been noted in many publications that Portugal, Ireland, Greece, and Spain (annotated to PIGS) are not meeting required standards to remain part of the European Union. Greece has been the primary country on the radar screen of late. They have too much debt, too much spending, and not enough income to the point that to issue new bonds to continue operating they might have to offer untenable yields. So they are looking for a helping hand from other EU countries or the IMF. Day to day or week to week different comments are made from those would could help, that cause the US Dollar / Euro exchange rate to rise or fall depending on the interpretation or perception of each comment made.

I feel that for the current rally, this US Dollar / Euro relationship is the key to the next move in the market. If the dollar resumes its rally that started in December of 2009, stocks, commodities, and precious metals will most likely start to go down. If the Greece issue is resolved favorably and the other PIG nations don’t immediately line up for their own handout, then the market rally can continue for a little while longer. The Greece issue has now been pushed out to an EU meeting on March 25 and 26th. Perceptions of a positive resolution will mean everything for the markets.

Until then the markets continue their ascent. They are extremely overbought, but that is secondary to price action. For now the price action remains bullish, but keep an eye on the exits just in case. As with the opening comment to my wife – what a difference a day can make.

Hawks and Doves

2010-03-16T13:46:00.000-07:00

The U.S. central bank as expected kept interest rates near zero and continued to commit to keeping rates exceptionally low for an "extended period" of time due to concerns that the economy is not yet strong enough to stand on its own without government support. Stock market investors were so pleased with this news that they bid the market right through the S&P 500 resistance level of 1151. No double top!

The near-depression was avoided early last year, through massive monetary and financial stimulus. Today we are keeping cheap money available at these low rates at the cost of doubling the public debt. Now the main worry should be runaway fiscal deficits. But only one voting member of the FOMC, expressed concerns about that today.

Exit policies pose a dilemma for the Fed, as withdrawing stimulus too soon could push the economy back into a recession, while leaving it too long will push the soaring deficits even higher. Today the Fed decided that the risk of the US economy going through a double-dip recession posed too much risk, and the announcement sounded similar to the past several announcements – status quo.

One hawk and many doves make up the Fed currently, but market participants love zero interest rates. Borrow all you can, live for today, and debt tomorrow be damned. At least that is the reading I get as I observe the market’s reaction to the spiked punchbowl effect of low rates and government stimulus.

There was some other news. EU finance ministers have essentially agreed to a blueprint on financial aid for Greece, if it is needed, however the details continue to be a mystery. Remember the old saying – the devil is in the details, but who cares what those details are apparently. The market wants us to believe the problem has been solved and we should all just gleefully move on and Greece just like Dubai before it, is just an isolated incident.

The sector that most befuddles me is that of homebuilders and REIT’s (real estate investment trusts). They are both doing great! I just don’t have the courage to buy them as they continue their ascent. I guess I don’t get it. I just read a local article this morning about a relatively new and large office complex being returned to the lender by one the county’s largest office owners. While the building is mostly full, the owner opted to not make any more debt payments due to the fact that the value has been cut in half over the last couple years and is worth a lot less than what is owed. This problem persists nationwide. I wrongly assume all this bad news is what is driving the real estate sector higher. I am reminded of the old adage that states, “better to be lucky than good.” Go figure!

The Moment of Truth

2010-03-11T13:53:00.000-08:00

Or is it? Apparently, everyone’s a bull. The market corrected 9% from January into February and despite an overwhelming number of bad economic reports, it seems everyone is looking for the markets to continue its trend higher as we closed equal to January’s high on Thursday. Bullish news is hard to find. However, bullish sentiment abounds.

The NYSE short term McClellan Oscillator shows a market that is very overbought. However markets can remain overbought for extended periods of time, so don’t bet the farm on that one. Volume for this run is also suspect. If you remove the huge volume from some of the low priced names like AIG and Citigroup the last few days, volume would be extremely light for any condition – let alone a market trying to push into new 18 month highs.

In the end price rules the day and Friday will present the moment of truth for the S&P 500. Will the market rise for the 10th day out of the past 11? Or will the oversold condition and double top formation cause a pause in the markets strong price advance on paltry participation (volume) and we have at least a temporary pullback.

If the markets do break out to the upside watch the reaction in the tape. There is likely to be a quick spike as shorts rush to cover and those that are under invested rush to take on new positions for a potential new leg up in the markets. If there is not a spike up in both price and volume be careful not to jump in too deep as we are in nosebleed territory with our short term overbought condition.

A Crossroad

2010-03-09T11:52:00.000-08:00

The market continues its bullish bias. Low interest rates remain the source for institutional investors to access cheap capital to trade the markets. The US Dollar continues to trade against resistance from above and the Euro is supported by resistance from below their current prices. This currency conundrum is what we will watch for resolution. That may be the single determining factor for the next directional move for the markets.

I still believe a rising US Dollar will be bad for asset classes such as stocks, precious metals and commodities – inverse to what we saw last year as the dollar fell and most markets rose. Should the Euro resolve their problems with Greece and not face immediate issues from Spain, Portugal, or Ireland then the Euro should rise and the dollar will fall. If that becomes the case, expect the bull market in stocks and commodities to continue.

From a technical standpoint the markets are rising on light participation – meaning extraordinarily light volume. Volume usually means conviction. Therefore there is not a huge amount of conviction from participants that the current rally will continue unless more volume starts to come in. The stock market is short term very overbought, however things can remain overbought for extended periods of time.

The January 2010 market highs on the Dow and S&P 500 remain to be breached and could act as resistance against further advancement. Should these indices fail at or below 1051 for the S&P and 10,730 on the Dow, a double top formation could cause the markets to drop once again with first support coming in at 1044 and 9835 for the S&P and Dow respectively. We remain at a crossroad.

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2010-03-03T09:03:00.000-08:00

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