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.
Friday, October 29, 2010
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.
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
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