Thursday Market update

The Dow was up 4 points today but the Russell 2000 was off a point, so I would call that a draw as the major averages approach key resistance levels. We have to keep a close eye on a number of risk factors as this is becoming more and more like a game of dodge ball.

CREDIT MARKETS STRUGGLING

I can’t see how the stock market can get a foothold here if the credit markets continue to deteriorate.

U.S. dollar Libor rates have edged higher. So have the Libor-OIS spread, a proxy for the scarcity of cash, and the TED spread, an indication of preference for interbank lending over safe-haven Treasury purchases. The credit market's recent erosion has not reached the panic associated with last fall's deterioration but it does indicate how precarious our situation is becoming.

This indicates things aren’t getting better, they’re getting worse and that is being reflected in credit spreads as banks continue to distrust each other.

Corporate debt issuance has deteriorated since January and bond prices continue to erode.

UNEMPLOYMENT

I am reading that unemployment is far worse than the government is reporting.

“ The February nonfarm payroll report estimates that the unemployment rate increased to 8.1%, but an alternative measure of labor underutilization suggests a much worse picture. The broad unemployment measure known as U-6 in the Bureau of Labor Statistics' household survey—which includes all marginally attached workers and part-time workers who would accept full-time jobs if offered—indicates that the percentage of those suffering from job loss may be as high as 14.8%.” Dismal Scientist

The scary part is that economists expect the top line unemployment report to climb from 8.1% to over 11% by the end of the year, which means the unreported unemployment report could reach 18%, or nearly one in five people in our country either unemployed or underemployed.

CRUDE OIL PRICES GET WHACKED

Oil price fell more than 7 percent (-$3.36 a barrel) today to close at $42 US per barrel Wednesday on further signs of weak global demand and rising inventories. This is a real tug-a-war between positive seasonality factors (warmer weather coming) but a rapidly deteriorating economy. Keep your eye on this fight because it looks like crude oil prices are now getting ready to test the lows in February again.

The intermediate-term picture for oil looks toppy to me with crude oil failing to trend above its weekly middle Bollinger Band line and weekly stochastics extremely extended (%K 98 and %D 97). It looks questionable whether the oil bulls can hold this but OPEC is likely to cut production again so we’ll see.

OVERHANGING RESISTANCE

From the technical side of things in the stock market, there are a couple points I want to mention today.

The first point is that once an old support level has been violated, the market often back tests the old support level, which in this case is the November low. Old support now becomes new resistance and for the S&P 500 this is at 741.

If the bulls can muster enough strength to break above this resistance, then I look at the Fibonacci retracement levels, which is also illustrated on this chart.

From what I see from the underlying technical picture I am skeptical that stocks can even break above minor resistance but we’ll see how much energy this short covering rally can muster.

MARKET TIMING VERSES PROTECTING CAPITAL

The traditional asset managers have taught us over the years that market timing is a losing proposition. They have drilled into the public’s mind that staying out of the market can be costly. We have heard that patience is more important than market timing.

In my perspective, I am not out to beat the market averages by market timing. Hey, you could be down half of what the market has lost and have easily beaten the market averages but you would have still lost significant money.

Our objective is to protect capital in bear markets. It is not about market timing, it is about protecting principal and profits you have built up over a life time of investing.

Our investment newsletter advice is in the top 5 performers over the last 10 year period according to the Hulbert Digest. We have that ranking largely by protecting capital in bad markets. This is our objective, winning by not losing, especially in bear markets.

The economy expands and it contracts. This just happens to be the worst economic contraction since the Great Depression. In early January the market’s P/E ratio was 11. Historically that would suggest the worst was over as many proclaimed. Then the S&P 500 plunged 23% since that time, only two months ago.

We listen to what the technical underpinnings of the market tell us and frankly, whatever you want to call it, risk management or market timing, as long as the market continues to make lower lows and lower highs---you need to protect capital.

This isn’t market timing, it is common sense! Protect your hindquarters.