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.
Friday, January 14, 2011
Thursday, December 23, 2010
Santa Claus Came This Year
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.
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.
Friday, December 10, 2010
According to Plan?
This week the NASDAQ Composite and the Small Cap Russell 2000 Index closed at levels not achieved since January 2008. The S&P 500 is flirting with prices that were held back in September of 2008. The stock market is responding according to the QE2 plan laid out by Fed Chair Ben Bernanke a couple of months ago.
However the bond market is responding inverse to the Bernanke plan as yields are rising across the board, driving bond prices lower. This week Treasuries experienced the second largest two day selloff in the last 50 years. Is this a sign that the bond vigilantes are out, disgusted that the national debt continues to escalate at a mind boggling pace? Or could it be that investors, who over the last year piled into bonds, are now open to taking on more risk in the stock market. This will remain a critical discussion going forward and will determine how well the Bernanke plan succeeds.
If interest rates rise at an orderly pace and the economy continues to show strength, the stock market could retest the all time highs over the next 12 to 18 months. However, if inflation starts to accelerate, it could spell trouble for both the stock and bond markets, as well as the economy. Already there are signs that higher mortgage rates are slowing the pace of the loan refinance market. Could the fledgling housing recovery fall into a double dip should mortgage rates continue to rise? The Fed is attempting to thread the needle when it comes to the inflation / deflation conundrum.
For the moment the markets are breaking out to new multi year highs. The Fed’s game plan to purchase bonds from the primary broker dealers to the tune of tens of billions of dollars per week seems to be producing the desired outcome where some of the proceeds are migrating over to the stock market. Corporate earnings, which had declined over 92% from its 2007 peak to the 2009 trough (which brought inflation-adjusted earnings to near Great Depression lows), have recovered significantly. S&P 500 earnings have surged up over 900% and are now above the levels attained at the peak of the dot-com era. In fact, earnings have only been higher than current levels for a two plus year period of time that occurred at the tail end of the credit bubble.
While earnings are above those achieved at the dot com peak, it must be noted that S&P prices are not. On December 31, 1998, the S&P closed the year out at 1,229. We were at those levels yesterday, some 12 years later. Does that mean that stocks are undervalued? Not by historical standards. The market is fairly valued today and was overvalued back in the late 1990’s.
Investor Intelligence readings display a high level of optimism: 56.2% Bulls with Bears at 21.3%. Bullish sentiment has not been this high since the end of 2007, while the bull/bear spread is approaching levels seen in April of this year just before the flash crash. Sentiment is a secondary indicator but it should not be ignored. The VIX also shows complacency among investors.
There are other outside factors that could have an effect on the market in a meaningful way in either direction. The markets have priced in the extension of the Bush tax cuts. A failure to get this done before the Congressional Holiday recess could be detrimental. Hot spots geopolitically like Korea can change the temperature on markets rather quickly. China may have inflation issues and at some point next year global debt problems will once again take center stage.
So far the Fed has managed the stock market according to plan. Participants are hopeful that this will continue. Most money managers are hoping for a Santa Claus rally or at the very least a sideways market through the end of the year to protect their bonuses. We are in the favorable season for stocks. The third year of a Presidents term has had an uncanny tendency to produce superior returns. Hopefully the stars stay aligned and the markets climb back to all time highs. Small cap stocks and the NASDAQ are the market leaders, with mid cap stocks not far behind.
* Pacific Financial Planners maintains positions in the following: ACAS, AINV, BG, DRYS, EEM, GLD, IWM, KOL, MDY, PCL, PDP, PIE, SGG, SWHC, XLF, WTNY
However the bond market is responding inverse to the Bernanke plan as yields are rising across the board, driving bond prices lower. This week Treasuries experienced the second largest two day selloff in the last 50 years. Is this a sign that the bond vigilantes are out, disgusted that the national debt continues to escalate at a mind boggling pace? Or could it be that investors, who over the last year piled into bonds, are now open to taking on more risk in the stock market. This will remain a critical discussion going forward and will determine how well the Bernanke plan succeeds.
If interest rates rise at an orderly pace and the economy continues to show strength, the stock market could retest the all time highs over the next 12 to 18 months. However, if inflation starts to accelerate, it could spell trouble for both the stock and bond markets, as well as the economy. Already there are signs that higher mortgage rates are slowing the pace of the loan refinance market. Could the fledgling housing recovery fall into a double dip should mortgage rates continue to rise? The Fed is attempting to thread the needle when it comes to the inflation / deflation conundrum.
For the moment the markets are breaking out to new multi year highs. The Fed’s game plan to purchase bonds from the primary broker dealers to the tune of tens of billions of dollars per week seems to be producing the desired outcome where some of the proceeds are migrating over to the stock market. Corporate earnings, which had declined over 92% from its 2007 peak to the 2009 trough (which brought inflation-adjusted earnings to near Great Depression lows), have recovered significantly. S&P 500 earnings have surged up over 900% and are now above the levels attained at the peak of the dot-com era. In fact, earnings have only been higher than current levels for a two plus year period of time that occurred at the tail end of the credit bubble.
While earnings are above those achieved at the dot com peak, it must be noted that S&P prices are not. On December 31, 1998, the S&P closed the year out at 1,229. We were at those levels yesterday, some 12 years later. Does that mean that stocks are undervalued? Not by historical standards. The market is fairly valued today and was overvalued back in the late 1990’s.
Investor Intelligence readings display a high level of optimism: 56.2% Bulls with Bears at 21.3%. Bullish sentiment has not been this high since the end of 2007, while the bull/bear spread is approaching levels seen in April of this year just before the flash crash. Sentiment is a secondary indicator but it should not be ignored. The VIX also shows complacency among investors.
There are other outside factors that could have an effect on the market in a meaningful way in either direction. The markets have priced in the extension of the Bush tax cuts. A failure to get this done before the Congressional Holiday recess could be detrimental. Hot spots geopolitically like Korea can change the temperature on markets rather quickly. China may have inflation issues and at some point next year global debt problems will once again take center stage.
So far the Fed has managed the stock market according to plan. Participants are hopeful that this will continue. Most money managers are hoping for a Santa Claus rally or at the very least a sideways market through the end of the year to protect their bonuses. We are in the favorable season for stocks. The third year of a Presidents term has had an uncanny tendency to produce superior returns. Hopefully the stars stay aligned and the markets climb back to all time highs. Small cap stocks and the NASDAQ are the market leaders, with mid cap stocks not far behind.
* Pacific Financial Planners maintains positions in the following: ACAS, AINV, BG, DRYS, EEM, GLD, IWM, KOL, MDY, PCL, PDP, PIE, SGG, SWHC, XLF, WTNY
Friday, October 29, 2010
Next Week Could be Huge
Does it really matter that markets are overbought technically using a variety of indicators? How about the fact that investor sentiment is at levels historically associated with near term market tops? Is it a concern that corporate insiders are selling their own company stock at near record levels? If the future is so bright, why are insiders selling so heavily? Has the market factored in more “quantitative easing” than the Fed is likely to propose? Will the election outcome, however it turns out, excite or disappoint investors? All these questions and more, most likely will be answered by mid next week.
It is not hyperbole to suggest that next week may turn out to be the biggest week of the year for Wall Street. On its own, the market should have a significant pull back. However, with the makeup of the legislature and the purchase of some unknown quantity (possibly trillions of dollars worth) of bonds on the line, we could have some real fireworks go off by this time next week.
It is said that markets are discounting mechanisms. They move in advance of any news, supposedly factoring in a predetermined result. I believe that is true except in cases of market tops and market bottoms. For example in 2007, in the age of excess liquidity, most investors were hardly planning for the real estate debacle that ensued, causing a severe recession. In March 2009, most investors were seeing continued gloom and doom, only to have the market rally. Since the end of August markets have been rallying on the notion that bad news is good news and that the Fed will ride in on a white horse (or helicopter) and purchase about $1,000,000,000,000.00 in assets.
If the Fed follows the Japanese model from a couple months back, those assets could include not only bonds, but real estate, stocks, and ETF’s. Technical factors such as being overbought, excessively bullish sentiment, among others, may be overwhelmed by such a windfall of newly printed cash. On the other hand much of these long anticipated decisions may have already been factored into today’s current prices and the only result could be disappointment from the actual facts. The old adage has always been to “buy on rumor and sell on news.” If that holds true, we could be set up for a drop.
The recent tight trading range on the indices, up against their major resistance levels, as well as internal divergences, suggests a significant breakout move is at hand. As usual, it is the direction of the next move that is not very clear. Investors most likely will have to wait for next week’s key events to gauge the market’s reaction. I believe the recent highs and lows on the S&P 500, offer critical pivot points that will present the direction participants are searching for. Above 1220 or below 1159, after next Wednesday, will most likely determine the markets next near term move.
Acting as a buffer to the downside going forward are few key elements. One is that the Fed will announce some sort of support to keep markets from crashing more than a healthy pullback. Also the calendar is favorable. The “sell in May and go away” cycle is replaced by its bullish opposite which is to buy in November and hold into spring. In addition, the third year of the Presidential four year cycle, has historically offered the best returns for market investors.
One negative potential factor that could come into play is that traditionally mutual funds lock in their trading profits before Halloween to create a taxable event for the fund holder in the same year. However, profits taken after October are not taxed until the following year. Are mutual funds sitting on a host of profits that will result in sales starting soon?
Next week is huge for news that will affect the markets in the near and long term. It will be very interesting to see which way we go. Watch the pivots and protect your capital.
It is not hyperbole to suggest that next week may turn out to be the biggest week of the year for Wall Street. On its own, the market should have a significant pull back. However, with the makeup of the legislature and the purchase of some unknown quantity (possibly trillions of dollars worth) of bonds on the line, we could have some real fireworks go off by this time next week.
It is said that markets are discounting mechanisms. They move in advance of any news, supposedly factoring in a predetermined result. I believe that is true except in cases of market tops and market bottoms. For example in 2007, in the age of excess liquidity, most investors were hardly planning for the real estate debacle that ensued, causing a severe recession. In March 2009, most investors were seeing continued gloom and doom, only to have the market rally. Since the end of August markets have been rallying on the notion that bad news is good news and that the Fed will ride in on a white horse (or helicopter) and purchase about $1,000,000,000,000.00 in assets.
If the Fed follows the Japanese model from a couple months back, those assets could include not only bonds, but real estate, stocks, and ETF’s. Technical factors such as being overbought, excessively bullish sentiment, among others, may be overwhelmed by such a windfall of newly printed cash. On the other hand much of these long anticipated decisions may have already been factored into today’s current prices and the only result could be disappointment from the actual facts. The old adage has always been to “buy on rumor and sell on news.” If that holds true, we could be set up for a drop.
The recent tight trading range on the indices, up against their major resistance levels, as well as internal divergences, suggests a significant breakout move is at hand. As usual, it is the direction of the next move that is not very clear. Investors most likely will have to wait for next week’s key events to gauge the market’s reaction. I believe the recent highs and lows on the S&P 500, offer critical pivot points that will present the direction participants are searching for. Above 1220 or below 1159, after next Wednesday, will most likely determine the markets next near term move.
Acting as a buffer to the downside going forward are few key elements. One is that the Fed will announce some sort of support to keep markets from crashing more than a healthy pullback. Also the calendar is favorable. The “sell in May and go away” cycle is replaced by its bullish opposite which is to buy in November and hold into spring. In addition, the third year of the Presidential four year cycle, has historically offered the best returns for market investors.
One negative potential factor that could come into play is that traditionally mutual funds lock in their trading profits before Halloween to create a taxable event for the fund holder in the same year. However, profits taken after October are not taxed until the following year. Are mutual funds sitting on a host of profits that will result in sales starting soon?
Next week is huge for news that will affect the markets in the near and long term. It will be very interesting to see which way we go. Watch the pivots and protect your capital.
Friday, October 22, 2010
Nothing to Cheer About
My daughter is a cheerleader at her school. As you know cheerleaders have to cheer for their teams through good and bad times no matter what. It seems that investors today are acting as cheerleaders for the Federal Reserve. The current chant goes something like this; “Go Ben – Print more money – Buy more Bonds! Go Ben Go – Buy more Assets!”
It doesn’t matter that this same Fed that back in the beginning of 2007, when New Century Financial (the first big time subprime lending company) failed, the Fed continued to talk about ‘excess liquidity.’ When the problems became worse the Fed said that the problems would be contained to only subprime loans. When the problems spread from subprime to prime loans - this same Fed clearly announced that the problems would be minor and not extend into the rest of the US economy.
When the economy started into a full blown recession in 2008– Fed officials were saying it would only be a soft patch in a robust economy until it was too late. They were behind the curve ball all the way down. The first Quantitative Easing program, which had the Fed buying mortgage securities in an attempt to keep interest rates low to stimulate the housing market, was only partially successful. Because, while interest rates for mortgages stayed low, seniors on fixed incomes suffered and the housing market still remains vulnerable. So far Fed actions have not been too successful are reviving our economy on a widespread basis – just look at job growth or the lack thereof.
Some will argue that without the Fed things would have been much worse. That is debatable. My contention is that we would have dropped farther and faster, but the recovery would have also been much quicker without the humongous debt burden we created that will likely last for generations. But that is not the point of discussion in this prose. The real concern is that if investors feel that America is on the road to recovery – what do we need to print another trillion dollars for (QE2)? Could it be that structurally we still have some issues? One would never know it judging from the complacency of investors.
The VIX fear index is at extreme low levels. The AAII investors’ sentiment gauge also shows a high level of bullishness and an extreme low level of bears. The spread from bulls to bears is one that is normally associated with market tops. This could mean that investors either trust or fear the bearded one who wields a big printing press. Institutions are also very bullish as mutual funds are carrying near record low levels of cash today. Also adding to the mutual fund dilemma has been the record amount of redemptions by individual investors from stock funds over the preceding several months.
From a technical perspective, I see a very extended rising bearish wedge pattern formed since the August 31st lows on the major indices. The market run up over that timeframe also has an eerie similarity to the run up from February to the April highs of this year. I observe a double top formation with the current and April highs and the markets are currently intersecting their respective 200 week declining moving averages, adding resistance to the uptrend. We have more volume on the down days than on the up days, signaling distribution. The High Frequency Traders that caused the flash crash in May still constitute the majority of the volume each trading day – which to me still demonstrates potential instability.
The market set up is very similar to the April highs, but the only thing missing is a catalyst to get the market moving up or down from here. I am very concerned about the inverse relationship markets have with the US Dollar. Sentiment on the dollar is 100% bearish! The old adage is to invest opposite of everyone else – especially when everyone is all on one side. You cannot get more bearish on the dollar than what it is today. If the dollar reverses back up and the inverse relationship holds true to form – then the stock market could be in for a reversal. Now the dollar bears are going to see the QE2 that’s coming and state that the dollar is going to continue its slide. It wasn’t too long ago that many pundits were saying that the Euro would not only drop to par with the US dollar – but it would cease to exist as a currency. Look what has transpired since. The only certainty is change.
Now is a time for caution! Some major events are coming soon. The election on November 2nd and the much anticipated Fed announcement the next day to name a few. Clearly investors are cheering, hoping, and waiting for the next move by the Fed. November 3rd cannot get here soon enough. Is this going to be one of those buy on rumor and sell on news events? Can the Fed live up to the expectations built into current market prices for another round of quantitative easing? Will the Fed’s action really spread to the overall economy and create jobs and boost our nation into a self sustaining recovery? I’ll keep my daughter cheering on Ben Bernanke and his friends – “Go Bernanke – the economy doesn’t want another spanky” – or something like that.
It doesn’t matter that this same Fed that back in the beginning of 2007, when New Century Financial (the first big time subprime lending company) failed, the Fed continued to talk about ‘excess liquidity.’ When the problems became worse the Fed said that the problems would be contained to only subprime loans. When the problems spread from subprime to prime loans - this same Fed clearly announced that the problems would be minor and not extend into the rest of the US economy.
When the economy started into a full blown recession in 2008– Fed officials were saying it would only be a soft patch in a robust economy until it was too late. They were behind the curve ball all the way down. The first Quantitative Easing program, which had the Fed buying mortgage securities in an attempt to keep interest rates low to stimulate the housing market, was only partially successful. Because, while interest rates for mortgages stayed low, seniors on fixed incomes suffered and the housing market still remains vulnerable. So far Fed actions have not been too successful are reviving our economy on a widespread basis – just look at job growth or the lack thereof.
Some will argue that without the Fed things would have been much worse. That is debatable. My contention is that we would have dropped farther and faster, but the recovery would have also been much quicker without the humongous debt burden we created that will likely last for generations. But that is not the point of discussion in this prose. The real concern is that if investors feel that America is on the road to recovery – what do we need to print another trillion dollars for (QE2)? Could it be that structurally we still have some issues? One would never know it judging from the complacency of investors.
The VIX fear index is at extreme low levels. The AAII investors’ sentiment gauge also shows a high level of bullishness and an extreme low level of bears. The spread from bulls to bears is one that is normally associated with market tops. This could mean that investors either trust or fear the bearded one who wields a big printing press. Institutions are also very bullish as mutual funds are carrying near record low levels of cash today. Also adding to the mutual fund dilemma has been the record amount of redemptions by individual investors from stock funds over the preceding several months.
From a technical perspective, I see a very extended rising bearish wedge pattern formed since the August 31st lows on the major indices. The market run up over that timeframe also has an eerie similarity to the run up from February to the April highs of this year. I observe a double top formation with the current and April highs and the markets are currently intersecting their respective 200 week declining moving averages, adding resistance to the uptrend. We have more volume on the down days than on the up days, signaling distribution. The High Frequency Traders that caused the flash crash in May still constitute the majority of the volume each trading day – which to me still demonstrates potential instability.
The market set up is very similar to the April highs, but the only thing missing is a catalyst to get the market moving up or down from here. I am very concerned about the inverse relationship markets have with the US Dollar. Sentiment on the dollar is 100% bearish! The old adage is to invest opposite of everyone else – especially when everyone is all on one side. You cannot get more bearish on the dollar than what it is today. If the dollar reverses back up and the inverse relationship holds true to form – then the stock market could be in for a reversal. Now the dollar bears are going to see the QE2 that’s coming and state that the dollar is going to continue its slide. It wasn’t too long ago that many pundits were saying that the Euro would not only drop to par with the US dollar – but it would cease to exist as a currency. Look what has transpired since. The only certainty is change.
Now is a time for caution! Some major events are coming soon. The election on November 2nd and the much anticipated Fed announcement the next day to name a few. Clearly investors are cheering, hoping, and waiting for the next move by the Fed. November 3rd cannot get here soon enough. Is this going to be one of those buy on rumor and sell on news events? Can the Fed live up to the expectations built into current market prices for another round of quantitative easing? Will the Fed’s action really spread to the overall economy and create jobs and boost our nation into a self sustaining recovery? I’ll keep my daughter cheering on Ben Bernanke and his friends – “Go Bernanke – the economy doesn’t want another spanky” – or something like that.
Friday, October 1, 2010
It’s October – Should We Be Scared?
The month of October conjures up thoughts of market crashes and other frightful events. As we start the fourth quarter investors are wondering about the near term direction for the markets – are we dressed as bulls or bears? There are many factors that will come in play, that should clear up that picture very shortly. Make no mistake about it, regardless of whether you are a bull or a bear -we are extended and extended big time right here and now. I believe we will have some sort of correction in the near term. Its how deep and what follows that correction that matters most.
The markets staged a big run-up for the month of September. It was the best September since 1939. What happened after that run-up in 1939? Well it took until January 1945 to get back to those levels. If you recall your history – World War II may have had something to do with declines over that duration and I’m not predicting the next world war. However, there does appear to be a contest that is going on between countries across the globe to see who can devalue their currency the most and the fastest.
It appears that the US is winning the race to devalue its dollar. The stock market seems to leading the cheer for this catastrophe to happen. As the dollar declines the goods manufactured by US multinational companies are more competitive overseas. Also repatriation of foreign currencies back into US dollars can be a profitable endeavor, enhancing corporate profits as our money weakens. Oil back over $80 a barrel is another by product of a weak currency. The US consumes half the gasoline in the world. We’re pretty much a captive market for the foreign oil producing nations. As our money’s purchasing power declines – they demand more dollars to make up the shortfall – because they can! Is higher oil and a weaker dollar good for the average American?
According to the Commodity Futures Trading Commission the bullish sentiment for the US dollar is close to 0%. We, as Americans, can only hope that sentiment acts as a contrary indicator and the dollar starts to rally soon. Gold is giving all global currencies a thumbs down. Central Banks across the globe are trying to devalue their own currency, by printing more green, red, or orange dollars in their own countries flavor and using their freshly minted currency as bailout money. With the US Dollar as the global reserve currency – we seem to be winning the race currently, but is this really what we want to do?? I think not, but others are rejoicing.
As far as our markets are concerned, we have entered into one of the seasonally weakest periods of the year. Mutual Fund cash levels are at an all time low. Gold set yet another all time high Friday. Silver is at a new rally high as well. Gold and silver are fear trades. It seems contradictory that a weak dollar would drive the price of precious metals to new highs and indicate that the US business machine (as measured by the stock indices) would do well at the same time.
Technically, stock prices are at the upper boundary of a channel trend. Some markets like the NASDAQ 100 have formed an almost parabolic chart pattern since September 1st. Parabolas’ generally end and reverse into a mirror image. Daily stochastics are on a sell signal and the weekly stochastics are in nosebleed territory ready for a turn. Bearish divergence is occurring on the NYSE, RUT, S&P, and the NASDAQ Advance Decline lines. Advance / Decline divergence is a very reliable signal seen near market turns.
Fundamentally new home sales the last two months were the worst ever and second worst on record. The jobless claim numbers remain very high and sentiment seems to be getting worse. Make no mistake we are in a zone where a healthy sell off could occur. It's the magnitude of that sell off that we want to watch. Do we stop at 1122, 1105, or do we retest 1040 or more?
The real test will be what happens after we pullback and have a rally attempt. It will be interesting to watch and maybe worth a revisit! I believe the US dollar will be the key!
The markets staged a big run-up for the month of September. It was the best September since 1939. What happened after that run-up in 1939? Well it took until January 1945 to get back to those levels. If you recall your history – World War II may have had something to do with declines over that duration and I’m not predicting the next world war. However, there does appear to be a contest that is going on between countries across the globe to see who can devalue their currency the most and the fastest.
It appears that the US is winning the race to devalue its dollar. The stock market seems to leading the cheer for this catastrophe to happen. As the dollar declines the goods manufactured by US multinational companies are more competitive overseas. Also repatriation of foreign currencies back into US dollars can be a profitable endeavor, enhancing corporate profits as our money weakens. Oil back over $80 a barrel is another by product of a weak currency. The US consumes half the gasoline in the world. We’re pretty much a captive market for the foreign oil producing nations. As our money’s purchasing power declines – they demand more dollars to make up the shortfall – because they can! Is higher oil and a weaker dollar good for the average American?
According to the Commodity Futures Trading Commission the bullish sentiment for the US dollar is close to 0%. We, as Americans, can only hope that sentiment acts as a contrary indicator and the dollar starts to rally soon. Gold is giving all global currencies a thumbs down. Central Banks across the globe are trying to devalue their own currency, by printing more green, red, or orange dollars in their own countries flavor and using their freshly minted currency as bailout money. With the US Dollar as the global reserve currency – we seem to be winning the race currently, but is this really what we want to do?? I think not, but others are rejoicing.
As far as our markets are concerned, we have entered into one of the seasonally weakest periods of the year. Mutual Fund cash levels are at an all time low. Gold set yet another all time high Friday. Silver is at a new rally high as well. Gold and silver are fear trades. It seems contradictory that a weak dollar would drive the price of precious metals to new highs and indicate that the US business machine (as measured by the stock indices) would do well at the same time.
Technically, stock prices are at the upper boundary of a channel trend. Some markets like the NASDAQ 100 have formed an almost parabolic chart pattern since September 1st. Parabolas’ generally end and reverse into a mirror image. Daily stochastics are on a sell signal and the weekly stochastics are in nosebleed territory ready for a turn. Bearish divergence is occurring on the NYSE, RUT, S&P, and the NASDAQ Advance Decline lines. Advance / Decline divergence is a very reliable signal seen near market turns.
Fundamentally new home sales the last two months were the worst ever and second worst on record. The jobless claim numbers remain very high and sentiment seems to be getting worse. Make no mistake we are in a zone where a healthy sell off could occur. It's the magnitude of that sell off that we want to watch. Do we stop at 1122, 1105, or do we retest 1040 or more?
The real test will be what happens after we pullback and have a rally attempt. It will be interesting to watch and maybe worth a revisit! I believe the US dollar will be the key!
Monday, September 27, 2010
No Fear
Franklin Delano Roosevelt said in his First Inaugural Address, “The only thing we have to fear is fear itself.” Traders in today’s markets apparently have framed that phrase as their credo. There have been technical analysis warning signals flashing galore. Including but not limited to VIX sell signals, low volume rallies, black crosses, Hindenburg omens, and irrational exuberance from the AAII crowd (51% bulls recently). Yet the S&P has rallied significantly higher over the last 18 sessions without a meaningful pullback.
In the span of a few weeks, a new consensus view has emerged that the double-dip scare of July/August has diminished. New bullish technical patterns have emerged such as a break above 1132 on the S&P 500 and 2342 on the NASDAQ. The charts show a pattern of higher lows and higher highs since the July bottom. The markets have also crossed above the neckline of an inverse head and shoulders pattern which when measured properly should run the markets back to the old highs of this year. The technical picture certainly has a lot more positive aspects that didn’t exist just a few short weeks ago. There is now a shift in trend that could really make this market go.
So why am I still holding up the caution flag? First: The pace of the recent run up is unsustainable. While we could climb a little higher from here, some sort of pullback would alleviate some of the frothiness of the markets. Second: the autumn equinox, was Wednesday the 22nd, and over the past 13 years, major declines have occurred after the first day of fall ten times. Seven were crashes. Next: Prices have reached the upper boundary of their trend-channel which could signal a pullback is coming. However, it could also mean that we are about to see an upside breakout, so we are once again at a crossroads on the markets.
The final concern is that gold and silver are rallying to record highs as the stock market is rallying. Those precious metals are the fear trade. They also reflect a concern for our currency that the US fiat dollar may be in trouble. I can’t imagine investors believe that a weak dollar equates to a strong economy. A weak dollar helps the multinational companies – sure, but the words “Our economy is strong because our money is weak” don’t go together. I would think a disconnect should occur between gold and stocks, as well as bonds and stocks. Everything should not be going up simultaneously.
On Friday 98% of the S&P 500 companies were up. Generally fast run ups like the one we’ve just gone through, followed by exponential blow offs like what we witnessed on Friday causes me to take a more cautious point of view. It seems that the Fed is attempting to juice the markets with their Permanent Open Market Operations. This week alone the Federal Reserve purchased $11.15 Billion worth of various US Treasury securities from the seven primary banks. What the banks did what that immediate boatload of cash is unknown, but one would suspect that a portion of those founds found its way into the stock market. The alternative is to believe that the negative, but less bad durable goods order number and the second worst ever, but still improved from July’s all time low, new home sales drove the markets up 2% on Friday. There is a long held belief on Wall Street that you should never fight the Fed or the trend. That holds true today. The Fed is driving the markets.
According to Reuters, after the midterm elections, the S&P 500 has posted gains 18 out of the last 19 times. In the following six months the returns were up 13% on average, and up 17% after 12 months. Further the best combination for market returns has been when a Democrat held the White House with a Republican-controlled Congress. Maybe the markets are looking ahead.
I can understand the need to be optimistic and I am, but let’s not get too carried away too quickly. The market should probably have a new uptrend with a target of around 1240. But with the sudden shift in sentiment and the ‘ignore all the bad news mentality’, the markets will most likely have a pullback first to work off some of this overzealous false sense of security. The markets are acting as if the real economy does not matter. Over the short term maybe it doesn’t. It seems that the Fed is hoping that the stock market can pull the rest of the economy out of the mud slog that it is in. Former Fed Chair Alan Greenspan said as much in a speech a couple of weeks ago. However, technical factors still apply and a pull back to at least 1090 seems reasonable given all the headwinds facing the markets today.
Someone once said; “Efficiency is doing things right. Effectiveness is doing the right things.” It seems the Fed is doing things effectively to drive the markets up. I’m not so sure we have done things efficiently to solve our economic woes yet.
In the span of a few weeks, a new consensus view has emerged that the double-dip scare of July/August has diminished. New bullish technical patterns have emerged such as a break above 1132 on the S&P 500 and 2342 on the NASDAQ. The charts show a pattern of higher lows and higher highs since the July bottom. The markets have also crossed above the neckline of an inverse head and shoulders pattern which when measured properly should run the markets back to the old highs of this year. The technical picture certainly has a lot more positive aspects that didn’t exist just a few short weeks ago. There is now a shift in trend that could really make this market go.
So why am I still holding up the caution flag? First: The pace of the recent run up is unsustainable. While we could climb a little higher from here, some sort of pullback would alleviate some of the frothiness of the markets. Second: the autumn equinox, was Wednesday the 22nd, and over the past 13 years, major declines have occurred after the first day of fall ten times. Seven were crashes. Next: Prices have reached the upper boundary of their trend-channel which could signal a pullback is coming. However, it could also mean that we are about to see an upside breakout, so we are once again at a crossroads on the markets.
The final concern is that gold and silver are rallying to record highs as the stock market is rallying. Those precious metals are the fear trade. They also reflect a concern for our currency that the US fiat dollar may be in trouble. I can’t imagine investors believe that a weak dollar equates to a strong economy. A weak dollar helps the multinational companies – sure, but the words “Our economy is strong because our money is weak” don’t go together. I would think a disconnect should occur between gold and stocks, as well as bonds and stocks. Everything should not be going up simultaneously.
On Friday 98% of the S&P 500 companies were up. Generally fast run ups like the one we’ve just gone through, followed by exponential blow offs like what we witnessed on Friday causes me to take a more cautious point of view. It seems that the Fed is attempting to juice the markets with their Permanent Open Market Operations. This week alone the Federal Reserve purchased $11.15 Billion worth of various US Treasury securities from the seven primary banks. What the banks did what that immediate boatload of cash is unknown, but one would suspect that a portion of those founds found its way into the stock market. The alternative is to believe that the negative, but less bad durable goods order number and the second worst ever, but still improved from July’s all time low, new home sales drove the markets up 2% on Friday. There is a long held belief on Wall Street that you should never fight the Fed or the trend. That holds true today. The Fed is driving the markets.
According to Reuters, after the midterm elections, the S&P 500 has posted gains 18 out of the last 19 times. In the following six months the returns were up 13% on average, and up 17% after 12 months. Further the best combination for market returns has been when a Democrat held the White House with a Republican-controlled Congress. Maybe the markets are looking ahead.
I can understand the need to be optimistic and I am, but let’s not get too carried away too quickly. The market should probably have a new uptrend with a target of around 1240. But with the sudden shift in sentiment and the ‘ignore all the bad news mentality’, the markets will most likely have a pullback first to work off some of this overzealous false sense of security. The markets are acting as if the real economy does not matter. Over the short term maybe it doesn’t. It seems that the Fed is hoping that the stock market can pull the rest of the economy out of the mud slog that it is in. Former Fed Chair Alan Greenspan said as much in a speech a couple of weeks ago. However, technical factors still apply and a pull back to at least 1090 seems reasonable given all the headwinds facing the markets today.
Someone once said; “Efficiency is doing things right. Effectiveness is doing the right things.” It seems the Fed is doing things effectively to drive the markets up. I’m not so sure we have done things efficiently to solve our economic woes yet.
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