Franklin Delano Roosevelt said in his First Inaugural Address, “The only thing we have to fear is fear itself.” Traders in today’s markets apparently have framed that phrase as their credo. There have been technical analysis warning signals flashing galore. Including but not limited to VIX sell signals, low volume rallies, black crosses, Hindenburg omens, and irrational exuberance from the AAII crowd (51% bulls recently). Yet the S&P has rallied significantly higher over the last 18 sessions without a meaningful pullback.
In the span of a few weeks, a new consensus view has emerged that the double-dip scare of July/August has diminished. New bullish technical patterns have emerged such as a break above 1132 on the S&P 500 and 2342 on the NASDAQ. The charts show a pattern of higher lows and higher highs since the July bottom. The markets have also crossed above the neckline of an inverse head and shoulders pattern which when measured properly should run the markets back to the old highs of this year. The technical picture certainly has a lot more positive aspects that didn’t exist just a few short weeks ago. There is now a shift in trend that could really make this market go.
So why am I still holding up the caution flag? First: The pace of the recent run up is unsustainable. While we could climb a little higher from here, some sort of pullback would alleviate some of the frothiness of the markets. Second: the autumn equinox, was Wednesday the 22nd, and over the past 13 years, major declines have occurred after the first day of fall ten times. Seven were crashes. Next: Prices have reached the upper boundary of their trend-channel which could signal a pullback is coming. However, it could also mean that we are about to see an upside breakout, so we are once again at a crossroads on the markets.
The final concern is that gold and silver are rallying to record highs as the stock market is rallying. Those precious metals are the fear trade. They also reflect a concern for our currency that the US fiat dollar may be in trouble. I can’t imagine investors believe that a weak dollar equates to a strong economy. A weak dollar helps the multinational companies – sure, but the words “Our economy is strong because our money is weak” don’t go together. I would think a disconnect should occur between gold and stocks, as well as bonds and stocks. Everything should not be going up simultaneously.
On Friday 98% of the S&P 500 companies were up. Generally fast run ups like the one we’ve just gone through, followed by exponential blow offs like what we witnessed on Friday causes me to take a more cautious point of view. It seems that the Fed is attempting to juice the markets with their Permanent Open Market Operations. This week alone the Federal Reserve purchased $11.15 Billion worth of various US Treasury securities from the seven primary banks. What the banks did what that immediate boatload of cash is unknown, but one would suspect that a portion of those founds found its way into the stock market. The alternative is to believe that the negative, but less bad durable goods order number and the second worst ever, but still improved from July’s all time low, new home sales drove the markets up 2% on Friday. There is a long held belief on Wall Street that you should never fight the Fed or the trend. That holds true today. The Fed is driving the markets.
According to Reuters, after the midterm elections, the S&P 500 has posted gains 18 out of the last 19 times. In the following six months the returns were up 13% on average, and up 17% after 12 months. Further the best combination for market returns has been when a Democrat held the White House with a Republican-controlled Congress. Maybe the markets are looking ahead.
I can understand the need to be optimistic and I am, but let’s not get too carried away too quickly. The market should probably have a new uptrend with a target of around 1240. But with the sudden shift in sentiment and the ‘ignore all the bad news mentality’, the markets will most likely have a pullback first to work off some of this overzealous false sense of security. The markets are acting as if the real economy does not matter. Over the short term maybe it doesn’t. It seems that the Fed is hoping that the stock market can pull the rest of the economy out of the mud slog that it is in. Former Fed Chair Alan Greenspan said as much in a speech a couple of weeks ago. However, technical factors still apply and a pull back to at least 1090 seems reasonable given all the headwinds facing the markets today.
Someone once said; “Efficiency is doing things right. Effectiveness is doing the right things.” It seems the Fed is doing things effectively to drive the markets up. I’m not so sure we have done things efficiently to solve our economic woes yet.
Monday, September 27, 2010
Friday, September 10, 2010
Sleepwalking at the Stock Exchange
Students are back in school, but market participants appear to be extending their vacations as volume is noticeably absent. What is the reason for this? It could be that individual investors have left the markets in droves and those that have stayed are no longer actively participating. It could be that banks are winding the practice of trading for their own accounts. Or possibly it could be that investors aren’t convinced about which direction the markets and the economy are heading.
It is that last suggestion that could create results that are really perilous, or could create quite a money making opportunity. If there really is a case of mass indecision, then once the majority aligns their views, a substantial move could result when a consensus is achieved. Until that time markets appear to be sleepwalking through their days. There is very little movement and extraordinarily low volume. Friday finished with the second lightest volume on the NYSE for the year.
Markets did manage to put together back to back winning weeks, something not accomplished since mid June for the S&P 500 and the NASDAQ. The gains were fractional at best, but hey a winner is a winner - right? I contend that the markets action from this week will be either improved upon or reversed very quickly once a majority decision is made.
Market analysis is a probability business, not a guarantee. Currently there are two very opposite views about what is happening with the economy, which is contributing to the contrary stance that participants have when investing in today’s market. The bulls contend that stocks are cheap. Valuations as measured by PE ratios show that stocks are trading around 12 times earnings. Tech stocks on a historical basis are trading at their cheapest levels in decades, including the years immediately after the early 2000’s tech wreck.
Bulls also argue that with interest rates near zero, and likely to stay that low for the foreseeable future, stocks are a great value relative to all other asset classes for investment. A popular refrain from by the bulls is that dividend stocks are much more attractive than the low bond yields of today. Personally, I hope the bulls are right. I would love nothing more than to have our economy recover and witness a long sustained rally in stocks to new all time highs. I believe that everyone hopes that this is the scenario that plays out – even the hardened bears.
The opposing belief held by those bears is that the economy cannot sustain its recovery. They point to a strapped consumer that is overleveraged in debt, a banking system that is hoarding cash rather than actively lending money, and higher taxes (hidden and revealed) that are soon coming for everyone which will further impinge spending. Bears believe that after all the government spending to date and the spending yet to come, there is no way that consumers will be able to maintain the lifestyles that they have become accustomed to, because it was built on unsustainable debt rather than actual affordability.
People of all ages and all classes of life share a similar sad story. Retirees who believed they had enough money to see them through are going back to work because they overestimated the returns that they would be able generate on their savings. With interest rates hanging around zero, their investment plans are not providing enough to supplement Social Security and any pension that they may or may not have. Rather than eating up their principal to meet expenses, many have had to take part time jobs. By keeping rates so low in hopes of increasing business activity, the Fed may be accidentally penalizing prudent savers and possibly be making jobs harder to get for young inexperienced workers, adding to that generation’s plight.
It is clear is that a trading range has formed on the major indices. Above 1132 on the S&P will signal a bullish breakout and a retest to at least the highs of this year. Below 1040 and there is potential for a drop down to 950 or even as low 875. The support and resistance for the NASDAQ Composite is 2100 and 2342 respectively. Until those levels are pierced, trading will most likely remain light and choppy. If you own stocks, ETF’s, or mutual funds, please always have an exit strategy assigned to each and every position! The risks remain very high until a positive resolution is achieved.
*Pacific Financial Planners maintains positions in GLD & SLV.
It is that last suggestion that could create results that are really perilous, or could create quite a money making opportunity. If there really is a case of mass indecision, then once the majority aligns their views, a substantial move could result when a consensus is achieved. Until that time markets appear to be sleepwalking through their days. There is very little movement and extraordinarily low volume. Friday finished with the second lightest volume on the NYSE for the year.
Markets did manage to put together back to back winning weeks, something not accomplished since mid June for the S&P 500 and the NASDAQ. The gains were fractional at best, but hey a winner is a winner - right? I contend that the markets action from this week will be either improved upon or reversed very quickly once a majority decision is made.
Market analysis is a probability business, not a guarantee. Currently there are two very opposite views about what is happening with the economy, which is contributing to the contrary stance that participants have when investing in today’s market. The bulls contend that stocks are cheap. Valuations as measured by PE ratios show that stocks are trading around 12 times earnings. Tech stocks on a historical basis are trading at their cheapest levels in decades, including the years immediately after the early 2000’s tech wreck.
Bulls also argue that with interest rates near zero, and likely to stay that low for the foreseeable future, stocks are a great value relative to all other asset classes for investment. A popular refrain from by the bulls is that dividend stocks are much more attractive than the low bond yields of today. Personally, I hope the bulls are right. I would love nothing more than to have our economy recover and witness a long sustained rally in stocks to new all time highs. I believe that everyone hopes that this is the scenario that plays out – even the hardened bears.
The opposing belief held by those bears is that the economy cannot sustain its recovery. They point to a strapped consumer that is overleveraged in debt, a banking system that is hoarding cash rather than actively lending money, and higher taxes (hidden and revealed) that are soon coming for everyone which will further impinge spending. Bears believe that after all the government spending to date and the spending yet to come, there is no way that consumers will be able to maintain the lifestyles that they have become accustomed to, because it was built on unsustainable debt rather than actual affordability.
People of all ages and all classes of life share a similar sad story. Retirees who believed they had enough money to see them through are going back to work because they overestimated the returns that they would be able generate on their savings. With interest rates hanging around zero, their investment plans are not providing enough to supplement Social Security and any pension that they may or may not have. Rather than eating up their principal to meet expenses, many have had to take part time jobs. By keeping rates so low in hopes of increasing business activity, the Fed may be accidentally penalizing prudent savers and possibly be making jobs harder to get for young inexperienced workers, adding to that generation’s plight.
It is clear is that a trading range has formed on the major indices. Above 1132 on the S&P will signal a bullish breakout and a retest to at least the highs of this year. Below 1040 and there is potential for a drop down to 950 or even as low 875. The support and resistance for the NASDAQ Composite is 2100 and 2342 respectively. Until those levels are pierced, trading will most likely remain light and choppy. If you own stocks, ETF’s, or mutual funds, please always have an exit strategy assigned to each and every position! The risks remain very high until a positive resolution is achieved.
*Pacific Financial Planners maintains positions in GLD & SLV.
Friday, September 3, 2010
Celebrating Job Losses
We got the bounce I was calling for last week from our technically oversold condition and the extreme bearish sentiment we had then. Early in the week, the markets held support at 1040 and then proceeded to rally fast, for a weekly gain of around 3.7%. Not bad, but the up week was a reversal from the three prior down weeks. We completed the worst August in nine years this past week and we are heading into the seasonally most difficult time of the year for the markets.
It appears that the wild swings are continuing as the markets are churning mostly sideways for the last few months. Another observation is that the markets are trading at the same levels as they were 11 months ago. The markets are forming a base. It is yet to be determined which way we break out from that base. It really comes down to a question of how much faith do you have in the economic recovery?
On Friday it was announced that the labor force lost 54,000 jobs in August. That was much better than the expected 105,000 job losses; therefore market participants celebrated and drove the market up on this news. Apparently, less bad means good for many investors. Government jobs are jobs too. If they offset private sector jobs, more real people are lining up in the unemployment line. It appears that investors ignored these facts on Friday as bulls were supercharged after this economic release. While the market currently loves the job report, at some point we must realize that the economy needs more jobs, not just a slower pace of losses.
The Federal Deposit Insurance Corporation (FDIC) reported that the number of banks on the FDIC's problem list jumped from 775 in the first quarter of 2010 to 829 today. So far this year, 118 banks have failed. A total of 140 banks failed in 2009, so we are on pace to surpass that number by a wide margin. It is said that money makes the world go ‘round. When more banks are closing, the troubled list is growing, and lending is declining what does that do to the global economy? I’m just asking.
While the markets rallied four days in a row, the volume has been decreasing with each passing day. Just like the sellers recently reached an exhaustion point – buyers may be quickly getting tired as well. There is significant overhead resistance at 1132 on the S&P 500, and 2342 on the NASDAQ. Other technical factors are quickly coming into play; such as the major downtrend line from the April highs and the 200 day moving averages. This should, very soon, also impede the market’s advance.
I have a few metal positions and a large cache of cash waiting for the markets to work its way through this the latest version of push and pull. The markets will have to break above the above mentioned resistance levels before I turn bullish in any significant fashion. I am aware of the second year Presidential cycle theory, where there have been significant rallies from the lows of the fall in year two of a Presidents term, to the highs the following year. Therefore I believe that if this market is going to have a momentous decline – it will occur in the next six to eight weeks.
For now I will stick with the belief that this was just another oversold rally in the context of a falling market. I would love for the economy to right itself. Nothing would make me happier than to have the housing market gain real strength. If we could attain consistent job creation, above 150,000 jobs per month (to keep up with the population growth of the US workforce), and to have consumers with more money available for disposable spending, I would be ecstatic! Unfortunately I still don’t see or understand how we are going to accomplish those things in the near term.
I do see many technical indicators flashing warning signs. Fundamentally, more jobs are being lost (whatever kind they are – public or private), and we have a Fed whose leadership has diametrically opposed viewpoints on how we solve our current problems (read Messrs. Hoenig and Bullard). Until the market breaks above or below the stated resistance or support lines we will patiently wait for the markets to signal its next major move. Until then cash is the safest investment and all celebrations should be put on hold.
Pacific Financial Planners recommends that you check with your own advisor before investing. Risk tolerance and time horizons are different for each individual. Pacific Financial maintains positions in GLD, SLV, JJC, SINA, and plenty of Cash.
It appears that the wild swings are continuing as the markets are churning mostly sideways for the last few months. Another observation is that the markets are trading at the same levels as they were 11 months ago. The markets are forming a base. It is yet to be determined which way we break out from that base. It really comes down to a question of how much faith do you have in the economic recovery?
On Friday it was announced that the labor force lost 54,000 jobs in August. That was much better than the expected 105,000 job losses; therefore market participants celebrated and drove the market up on this news. Apparently, less bad means good for many investors. Government jobs are jobs too. If they offset private sector jobs, more real people are lining up in the unemployment line. It appears that investors ignored these facts on Friday as bulls were supercharged after this economic release. While the market currently loves the job report, at some point we must realize that the economy needs more jobs, not just a slower pace of losses.
The Federal Deposit Insurance Corporation (FDIC) reported that the number of banks on the FDIC's problem list jumped from 775 in the first quarter of 2010 to 829 today. So far this year, 118 banks have failed. A total of 140 banks failed in 2009, so we are on pace to surpass that number by a wide margin. It is said that money makes the world go ‘round. When more banks are closing, the troubled list is growing, and lending is declining what does that do to the global economy? I’m just asking.
While the markets rallied four days in a row, the volume has been decreasing with each passing day. Just like the sellers recently reached an exhaustion point – buyers may be quickly getting tired as well. There is significant overhead resistance at 1132 on the S&P 500, and 2342 on the NASDAQ. Other technical factors are quickly coming into play; such as the major downtrend line from the April highs and the 200 day moving averages. This should, very soon, also impede the market’s advance.
I have a few metal positions and a large cache of cash waiting for the markets to work its way through this the latest version of push and pull. The markets will have to break above the above mentioned resistance levels before I turn bullish in any significant fashion. I am aware of the second year Presidential cycle theory, where there have been significant rallies from the lows of the fall in year two of a Presidents term, to the highs the following year. Therefore I believe that if this market is going to have a momentous decline – it will occur in the next six to eight weeks.
For now I will stick with the belief that this was just another oversold rally in the context of a falling market. I would love for the economy to right itself. Nothing would make me happier than to have the housing market gain real strength. If we could attain consistent job creation, above 150,000 jobs per month (to keep up with the population growth of the US workforce), and to have consumers with more money available for disposable spending, I would be ecstatic! Unfortunately I still don’t see or understand how we are going to accomplish those things in the near term.
I do see many technical indicators flashing warning signs. Fundamentally, more jobs are being lost (whatever kind they are – public or private), and we have a Fed whose leadership has diametrically opposed viewpoints on how we solve our current problems (read Messrs. Hoenig and Bullard). Until the market breaks above or below the stated resistance or support lines we will patiently wait for the markets to signal its next major move. Until then cash is the safest investment and all celebrations should be put on hold.
Pacific Financial Planners recommends that you check with your own advisor before investing. Risk tolerance and time horizons are different for each individual. Pacific Financial maintains positions in GLD, SLV, JJC, SINA, and plenty of Cash.
Friday, August 27, 2010
Investing in the Real World
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
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
Friday, August 20, 2010
From Green Shoots to Brown Shoots
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.
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.
Friday, August 13, 2010
Backed Into a Corner
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.
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.
Friday, August 6, 2010
Is the Cup Half Full or Half Empty?
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!
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!
Subscribe to:
Posts (Atom)
