Friday market update

Yesterday, the charts made a pretty compelling argument that the market was extremely extended and at key resistance at the 50-day moving averages.

This is where you get technical sellers in bear markets and sellers did materialize today. However, selling wasn’t severe so we may yet see another retest of the 50-day moving averages.

With as overbought as we are right now, the probabilities favor a sell off going into the end of March and with corporate earning announcement to come in early April, we are about to find out how brave the bulls really are.

The ugly fact is that corporate earnings dropped 57 percent on average for the 480 companies in the S&P 500 that have reported results since Jan. 12th, according to Bloomberg data. Earnings are nose diving at a speed we have never seen before.

If we have literally no or very little earnings in the P/E ratio for the S&P 500 in the first quarter, rising prices are simply not sustainable. These bear market traps are seductive but deadly.

The Fed’s decision yesterday to buy back some of its debt is something the Fed has not done in 50 years and illustrates that it is operating within a worte case scenario in a desperate attempt to stop the economy from falling into a depression.

What the Fed did yesterday is called deficit monetization and it has resorted to this scenario because we have been moving into a deflationary spiral and a protracted credit tightening (money supply contraction).

If you have been watching the rate of growth of M2 it has been dropping like a rock recently as money flees getting caught in a banking crisis.

Some have interpreted as hyperinflationary with the fallout being a plunge in the dollar the last couple of days and a surge in commodity prices.

However, if you think about what they did yesterday, the Fed is issuing $750 billion in debt to recapitalize Freddie and Fannie, but is buying back $350 billion worth of long-term debt.

Still, the US dollar was slammed by this news and is under heavy selling pressure. Also, pressuring the dollar is talk that a U.N. panel will recommend ditching the dollar as its reserve currency in favor of a shared basket of currencies.

Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.

This caused a huge jump in gold which jumped $69.60 an ounce to close at $958.3. Remember, the key number here is $1,017 for gold, which was last year’s high.

The sell off in the dollar over this news sent crude oil prices up $3.47 a barrel to $51.61. It is looking more and more like crude oil prices have put in a long-term bottom but where from here?

Are we looking at $75 a barrel this summer? This is all consumers and corporations need – to see another surge in commodity prices with corporate earnings deteriorating at the fastest pace in history.

All of these issues give me a headache, which is why we need to remain focused on the technical underpinnings of the market.

Despite this rally, market breadth remains subpar. The McClellan Oscillator is at a short-term high and the McClellan Summation Index is well below zero, with NYSE at -611 and the OTC at -782. Any rallies under zero, with numbers this bad should be viewed as an opportunity to sell into rallies.

We have seen some positive changes in the new low/new high indicators. It is constructive to see new lows below 50 in the NYSE and below 75 in the OTC. The 10-day differential is very close to turning positive, but we have gotten very close on every bear market rally only to see it fade at the 50-day moving averages, so the jury is still out here.

Remain defensive.