Market Commentary:
What we need to understand by the market action over the last ten days is that the market is preparing to see confirmation that the second quarter GDP report will show a marked improvement for Q2.
The numbers we’ve seen this week in the earnings reports are still very poor, but I think we are likely to see a GDP report of about -1.8% to -1.5%, reflecting the government’s fiscal stimulus efforts this summer.
The stock market from March to present has now factored this improvement into it price.
The government has spent about $300 billion in stimulus efforts in this stage of the fiscal package and that will show up in the improved GDP report here at the end of next week.
The next round of government stimulus starts in another six months or so, when another shot in the arm will be given.
Now the stock market will begin to focus on the second half and this is where it gets tricky from several perspectives because it is very likely the first fiscal stimulus will begin to wear off by August.
Then there is this problem with a falling dollar and soaring crude oil prices, which has no relation anymore to supply but is a hedge against the dollar.
Every day the US consumes about 20 million barrels of oil. At $75 a barrel, this is about $45 billion a month. A 25% increase in oil prices is $11 billion drain per month. You can carry on the math and you can see how this can quickly offset any fiscal stimulus package if the Fed allows the dollar to fall and oil prices to ascend.
I don’t really have to sell you on this concept as we all saw what happened to the economy when the Fed allowed commodity hedge funds like Goldman to drive up oil prices to $140 a barrel.
I can’t comprehend the Fed would be so stupid as to allow this and honestly, I think oil prices will self adjust in the September/October time period, along with the stock market.
SEC INVESTGATES GOLDMAN
It appears the public is so upset about the issue of program trading known as “high frequency” trading at Goldman Sachs and the market manipulation this year, the SEC is now investigating Goldman Sachs.
http://zerohedge.blogspot.com/2009/07/so-it-begins-sec-commences.html
Some how after watching the following video by Glen Beck, you begin to really wonder if maybe Goldman Sachs might really have a man or two sitting on the board of the SEC.
STRATEGY
I want investors to just grin and bear this situation and remain on the sidelines for a bit more and not chase this market. This is still a traders market as volume is very7 low. This is about buying the rumor and selling the fact (GDP report) ahead of the unemployment report in the first week of August.
After that we’ll see what kind of picture we have.
Every investor needs to understand that we remain in a secular bear market, which began in 2000 and will continue as long as the US dollar is allowed to descend. We may experience cyclical bull markets that may last a few months or perhaps longer, but until core problems change the secular bear market remains in place and we all have to respect risk.
Monday, July 27, 2009
Tuesday, July 21, 2009
Market Commentary:
The stock market once again had a good day and is now challenging its June highs. In just 6 days, the S&P 500 came within 3 points of taking out the May lows to now coming within 5 points of challenging the June highs.
This is quite a reversal. The bulls have managed to keep the trend above the weekly middle Bollinger Band lines and now appear to be getting ready to challenge the long-term primary indicators.
If momentum can hold here we are not far from seeing the 50-day EMA exceeding the 200-day EMA for the S&P 500 index.
I see Goldman Sachs today boosted its forecasts for the S&P 500 Index, saying improving earnings will spur the steepest second-half rally since 1982.
I don’t disagree with Goldman on this call if long-term indicators are triggered into buy signals – as this is sure to bring a marked improvement in volume and bring into the market some big money waiting for the long-term measures to turn bullish.
The longer the S&P 500 can trend above the 200-day EMA, the 50-day EMA will soon catch up with the 200-day and a “crossover” will occur and trigger a long-term buy signal.
Also, notice that we are also very close to seeing a buy signal based on the 12 month moving average of the S&P 500 as well.
We are not quite there yet but it wouldn’t take much to trigger a buy signal now from the long-term indicators.
GDP FIGURES ON JULY 31ST
On July 31st, the second quarter GDP figures will be released. It looks like the market is gearing up for a good report – the White House Budget Director has indicated that second quarter GDP will come in at -1% to -1.5%.
If this proves true it would mean a number of things.
For the first time ever, the US economy will have contracted for four consecutive quarters. That would be the strongest decrease in real GDP in more than 50 years and, at the same time, the second largest cumulative decline since the end of World War II.
On the positive side it would mean this recession may be about to end, perhaps as soon as September. That would be welcome news for all of us.
Should the GDP figures at the end of the month turn out to be worse than expected, say perhaps -3% to 4%, the notion of a recovery in 2009 gets postponed into 2010.
I wouldn’t think the market would react well to that news.
TECHNICALS
From a short term perspective, the market remains strongly overbought. So some sort of a short term pause is anticipated to clear out this condition. I suspect a pullback to the daily middle Bollinger Band line at 909 or to the 50-day EMA at 905 could be on tap.
The intermediate-term picture is now setting up constructively after last week’s advance, with %K at 31 and %K at 33. Though still not positive, it could derail again given our short term overbought condition.
So what should investors do?
For now remain cautious until our long-term indicators turn positive. Either they turn positive or they fail and in the next few days we are about to find out.
This is quite a reversal. The bulls have managed to keep the trend above the weekly middle Bollinger Band lines and now appear to be getting ready to challenge the long-term primary indicators.
If momentum can hold here we are not far from seeing the 50-day EMA exceeding the 200-day EMA for the S&P 500 index.
I see Goldman Sachs today boosted its forecasts for the S&P 500 Index, saying improving earnings will spur the steepest second-half rally since 1982.
I don’t disagree with Goldman on this call if long-term indicators are triggered into buy signals – as this is sure to bring a marked improvement in volume and bring into the market some big money waiting for the long-term measures to turn bullish.
The longer the S&P 500 can trend above the 200-day EMA, the 50-day EMA will soon catch up with the 200-day and a “crossover” will occur and trigger a long-term buy signal.
Also, notice that we are also very close to seeing a buy signal based on the 12 month moving average of the S&P 500 as well.
We are not quite there yet but it wouldn’t take much to trigger a buy signal now from the long-term indicators.
GDP FIGURES ON JULY 31ST
On July 31st, the second quarter GDP figures will be released. It looks like the market is gearing up for a good report – the White House Budget Director has indicated that second quarter GDP will come in at -1% to -1.5%.
If this proves true it would mean a number of things.
For the first time ever, the US economy will have contracted for four consecutive quarters. That would be the strongest decrease in real GDP in more than 50 years and, at the same time, the second largest cumulative decline since the end of World War II.
On the positive side it would mean this recession may be about to end, perhaps as soon as September. That would be welcome news for all of us.
Should the GDP figures at the end of the month turn out to be worse than expected, say perhaps -3% to 4%, the notion of a recovery in 2009 gets postponed into 2010.
I wouldn’t think the market would react well to that news.
TECHNICALS
From a short term perspective, the market remains strongly overbought. So some sort of a short term pause is anticipated to clear out this condition. I suspect a pullback to the daily middle Bollinger Band line at 909 or to the 50-day EMA at 905 could be on tap.
The intermediate-term picture is now setting up constructively after last week’s advance, with %K at 31 and %K at 33. Though still not positive, it could derail again given our short term overbought condition.
So what should investors do?
For now remain cautious until our long-term indicators turn positive. Either they turn positive or they fail and in the next few days we are about to find out.
Monday, July 20, 2009
July 20th
Market Commentary:
If it weren’t for options expiration today, this flat trading could be considered bullish after so much buying this week, whether it was short covering or not.
But with options expiration as part of the equation this weekend, we may have to wait until next week to see if there are any real fireworks on the heels of this weeks impressive reversal out of a 2 ½ month confirmed bearish pattern.
Conditions are ripe for a pull back, but with the strength of buying that we saw this week, there may be too much forward momentum to see very much consolidation next week, especially if trading remains as calm as what today brought.
On a normal short covering spike rally, which I still believe much of this week’s gains were, the indexes will retreat back to the gap of the spike rally. But with the injured bears on vacation now, prices could consolidate in a mostly sideways pattern, setting up another advance after a few days of pause.
On the other hand, significant resistance is very close overhead, i.e., at the June highs, where this March rally appeared to peter out. For the S&P that resistance level is 956. The S&P 500 closed at 940 today on mostly sideways trading following the impressive spike rally.
All kinds of short-term indicators suggest that the market is at extreme overbought conditions. When combined with strong overhead resistance only a few points away the setup is almost perfect for a retreat now. Almost as perfect as the bearish head and shoulders pattern that existed when this week began.
The odds on a confirmed bearish head and shoulders pattern predicting that S&P 500 prices would decline to the low eight hundreds were very high. Everyone knew it – and that may have been part of the problem.
When too many line up on one side of a bet, the winner can often be found on the opposite side – especially when they are big boys who control at least 50% of all NYSE trading. I suspect the chance to beat the bet and help the Fed at the same time was just too delicious for Goldman and crew.
And with a whole lot of technical analysts now lined up to bet that the June resistance will hold, a similar wager could be easy for these big market movers to chew on.
The DOW chart below illustrates the resistance dilemma the bulls face and the bears cling to:
You can see that the DOW closed at 8744, just under resistance at the 200-day EMA (green line, 8763) and nearing the June high at 8878. These are two valuable barriers that the bulls want in their grasp. They are often formidable measures, though, and I am sure the bears are just as encouraged by that fact.
This leaves traders in that gray area we call “doubt”. Doubt about whether the bulls can really push much higher without a correction. Doubt about whether prices will consolidate sideways or downward. Doubt about whether resistance can actually turn the market back down now. Doubts about which side of the fence one ought to be on.
When in doubt … (you know the rest).
If the markets are able to power above these resistance levels and hold them then there will be a very large bullish head and shoulders pattern that could easily be confirmed with a little more buying, one that would mostly erase the bear market and get prices back to 2007 levels if it completely plays out.
But … as we learned this week, these usually reliable head and shoulders patterns are not always so reliable. Check out the chart, anyway:
This kind of a rally would have the media claim that the bears have been shot and stuffed by taxidermists and put in the cooler for future generations to look at.
But closely look at the potential advance. While impressive it would be, it would be a traditional 61.8 Fibonacci retracement from the bull market highs seen in late 2007 – and likely be followed by a contraction.
This advance would undoubtedly require undeniable success in the government’s stimulus spending, with measureable job recovery, improved retail spending, and a rebound in the housing market – all big deals. At least I think it should require this kind of economic consensus.
With the chances for a second huge stimulus plan growing, the probability of a government health care system close at hand, and lots of higher taxes in the coming years to pay for this largesse, it becomes difficult to reconcile a new bull market with an underlying economic base that is so fractured and weak.
In spite of the huge disconnect, one cannot argue against the bulls this week. They won this week’s battle handily.
Trust me though, the fight will go on.
If it weren’t for options expiration today, this flat trading could be considered bullish after so much buying this week, whether it was short covering or not.
But with options expiration as part of the equation this weekend, we may have to wait until next week to see if there are any real fireworks on the heels of this weeks impressive reversal out of a 2 ½ month confirmed bearish pattern.
Conditions are ripe for a pull back, but with the strength of buying that we saw this week, there may be too much forward momentum to see very much consolidation next week, especially if trading remains as calm as what today brought.
On a normal short covering spike rally, which I still believe much of this week’s gains were, the indexes will retreat back to the gap of the spike rally. But with the injured bears on vacation now, prices could consolidate in a mostly sideways pattern, setting up another advance after a few days of pause.
On the other hand, significant resistance is very close overhead, i.e., at the June highs, where this March rally appeared to peter out. For the S&P that resistance level is 956. The S&P 500 closed at 940 today on mostly sideways trading following the impressive spike rally.
All kinds of short-term indicators suggest that the market is at extreme overbought conditions. When combined with strong overhead resistance only a few points away the setup is almost perfect for a retreat now. Almost as perfect as the bearish head and shoulders pattern that existed when this week began.
The odds on a confirmed bearish head and shoulders pattern predicting that S&P 500 prices would decline to the low eight hundreds were very high. Everyone knew it – and that may have been part of the problem.
When too many line up on one side of a bet, the winner can often be found on the opposite side – especially when they are big boys who control at least 50% of all NYSE trading. I suspect the chance to beat the bet and help the Fed at the same time was just too delicious for Goldman and crew.
And with a whole lot of technical analysts now lined up to bet that the June resistance will hold, a similar wager could be easy for these big market movers to chew on.
The DOW chart below illustrates the resistance dilemma the bulls face and the bears cling to:
You can see that the DOW closed at 8744, just under resistance at the 200-day EMA (green line, 8763) and nearing the June high at 8878. These are two valuable barriers that the bulls want in their grasp. They are often formidable measures, though, and I am sure the bears are just as encouraged by that fact.
This leaves traders in that gray area we call “doubt”. Doubt about whether the bulls can really push much higher without a correction. Doubt about whether prices will consolidate sideways or downward. Doubt about whether resistance can actually turn the market back down now. Doubts about which side of the fence one ought to be on.
When in doubt … (you know the rest).
If the markets are able to power above these resistance levels and hold them then there will be a very large bullish head and shoulders pattern that could easily be confirmed with a little more buying, one that would mostly erase the bear market and get prices back to 2007 levels if it completely plays out.
But … as we learned this week, these usually reliable head and shoulders patterns are not always so reliable. Check out the chart, anyway:
This kind of a rally would have the media claim that the bears have been shot and stuffed by taxidermists and put in the cooler for future generations to look at.
But closely look at the potential advance. While impressive it would be, it would be a traditional 61.8 Fibonacci retracement from the bull market highs seen in late 2007 – and likely be followed by a contraction.
This advance would undoubtedly require undeniable success in the government’s stimulus spending, with measureable job recovery, improved retail spending, and a rebound in the housing market – all big deals. At least I think it should require this kind of economic consensus.
With the chances for a second huge stimulus plan growing, the probability of a government health care system close at hand, and lots of higher taxes in the coming years to pay for this largesse, it becomes difficult to reconcile a new bull market with an underlying economic base that is so fractured and weak.
In spite of the huge disconnect, one cannot argue against the bulls this week. They won this week’s battle handily.
Trust me though, the fight will go on.
Thursday, July 16, 2009
Impressive day
Market Commentary:
This was an impressive day – in my mind, far more than yesterday, as the S&P 500 closed above its 200-day EMA (936) at 940.
I don’t know if prices will be able to hold above the 200-day EMA, as this will probably depend on whether we really are seeing a meaningful recovery in corporate earnings, but this was certainly a big achievement for the bulls today, even if it was manipulated higher.
I think a big part of the reason for this breakout is attributed to a late in the afternoon article from Bloomberg which said economist Nouriel Roubini now believes the economy will bottom this year, which appears to have spurred late day buying.
After the close, Roubini said he was misquoted.
“ It has been widely reported today that I have stated that the recession will be over 'this year' and that I have 'improved' my economic outlook. Despite those reports - however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.
“ I have said on numerous occasions that the recession would last roughly 24 months. Therefore, we are 19 months into that recession. If, as I predicted, the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010. Simply put I am not forecasting economic growth before year’s end.
“ Indeed, last year I argued that this will be a long and deep and protracted U-shaped recession that would last 24 months. Meanwhile, the consensus argued that this would be a short and shallow V-shaped 8 months long recession (like those in 1990-91 and 2001). That debate is over today as we are in the 19th month of a severe recession; so the V is out the window and we are in a deep U-shaped recession. If that recession were to be over by year end – as I have consistently predicted – it would have lasted 24 months and thus been three times longer than the previous two and five times deeper – in terms of cumulative GDP contraction – than the previous two. So, there is nothing new in my remarks today about the recession being over at the end of this year.
“ I have also consistently argued – including in my remarks today - that while the consensus is that the US economy will go back close to potential growth by next year, I see instead a shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential is probably closer to 2.75%.
“ I have also consistently argued that there is a risk of a double-dip W-shaped recession toward the end of 2010, as a tough policy dilemma will emerge next year.”
In any case, whether the Roubini misquote was the reason why the stock broke above the 200-day EMA on late-day buying or if investors are expecting solid earnings from Google and IBM on Friday, the bottom line is that prices closed above this key technical measure.
Now we get to see if prices can, indeed, hold above this mark.
I have made it clear what I want to see to see from a technical perspective for a confirmed bull market:
1) We need to see the 50-day EMA trend above the 200-day EMA for the S&P 500.
2) We need to see the S&P 500 close above the 12 month moving average EMA on a closing month basis.
3) We need to see the indexes begin trending above the monthly middle Bollinger Band lines.
4) We need to see the McClellan Summation Index expanding well above zero for both the NYSE and the OTC.
5) And … it would be nice if volume was expanding too!
We may be close to seeing these achievements reached but we aren’t there yet.
The next couple of weeks may hold the answer to this riddle. There is still a clear pattern of lower lows and lower highs on month end prices. So, stocks need to take out the June highs to power into bull market territory.
Let’s put the last few weeks into context.
I think most investors have been very skeptical, including myself about what kind of growth we would see in the second quarter corporate earnings, given soaring unemployment, very little consumer demand or spending, home prices that are still falling and extremely tight lending conditions.
Today, for example, we saw foreclosures jump 4.6% in June. The Philadelphia Federal Reserve's general business conditions index declined 5.3 points in July to -7.5. While stocks go through periodic spike rallies, we just aren’t seeing much a recovery in the economic numbers.
This uncertainty showed up as technical weakness in the stock market, producing a head-and-shoulders formation and triggering a number of technical sell signals and once again aligning investors negatively towards the stock market, ahead of second quarter earnings.
A lot has been made about the confirmed bearish head and shoulder’s pattern that did not play out as many technical analysts had been illustrating over the last week or two. In fact, the last two days have clearly stamped “failure” on that bearish head and shoulders pattern. See the chart below:
Prices took out the lows of June. So going into this week, the market was bracing for weaker corporate earnings and further selling. This week was quite a head fake.
I think we have to accept that the Fed, regardless of earnings, is protecting the stock market with all of its monetary powers. Whether through Goldman Sachs which can borrow at the Fed window at no interest or through its plunge protection team, the Fed can force a short covering squeeze at will – and they likely did it this week.
Fundamentals do not justify the prices we are seeing in the stock market, but the Fed has the power to punish the bears (short positions) and that was painfully obvious this week. It is hard to argue with the Town Hall!
I think once the stock market can confirm a new bull market in the technical terms I have discussed, volume will return.
That hasn’t happened yet … but we’re close.
This was an impressive day – in my mind, far more than yesterday, as the S&P 500 closed above its 200-day EMA (936) at 940.
I don’t know if prices will be able to hold above the 200-day EMA, as this will probably depend on whether we really are seeing a meaningful recovery in corporate earnings, but this was certainly a big achievement for the bulls today, even if it was manipulated higher.
I think a big part of the reason for this breakout is attributed to a late in the afternoon article from Bloomberg which said economist Nouriel Roubini now believes the economy will bottom this year, which appears to have spurred late day buying.
After the close, Roubini said he was misquoted.
“ It has been widely reported today that I have stated that the recession will be over 'this year' and that I have 'improved' my economic outlook. Despite those reports - however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.
“ I have said on numerous occasions that the recession would last roughly 24 months. Therefore, we are 19 months into that recession. If, as I predicted, the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010. Simply put I am not forecasting economic growth before year’s end.
“ Indeed, last year I argued that this will be a long and deep and protracted U-shaped recession that would last 24 months. Meanwhile, the consensus argued that this would be a short and shallow V-shaped 8 months long recession (like those in 1990-91 and 2001). That debate is over today as we are in the 19th month of a severe recession; so the V is out the window and we are in a deep U-shaped recession. If that recession were to be over by year end – as I have consistently predicted – it would have lasted 24 months and thus been three times longer than the previous two and five times deeper – in terms of cumulative GDP contraction – than the previous two. So, there is nothing new in my remarks today about the recession being over at the end of this year.
“ I have also consistently argued – including in my remarks today - that while the consensus is that the US economy will go back close to potential growth by next year, I see instead a shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential is probably closer to 2.75%.
“ I have also consistently argued that there is a risk of a double-dip W-shaped recession toward the end of 2010, as a tough policy dilemma will emerge next year.”
In any case, whether the Roubini misquote was the reason why the stock broke above the 200-day EMA on late-day buying or if investors are expecting solid earnings from Google and IBM on Friday, the bottom line is that prices closed above this key technical measure.
Now we get to see if prices can, indeed, hold above this mark.
I have made it clear what I want to see to see from a technical perspective for a confirmed bull market:
1) We need to see the 50-day EMA trend above the 200-day EMA for the S&P 500.
2) We need to see the S&P 500 close above the 12 month moving average EMA on a closing month basis.
3) We need to see the indexes begin trending above the monthly middle Bollinger Band lines.
4) We need to see the McClellan Summation Index expanding well above zero for both the NYSE and the OTC.
5) And … it would be nice if volume was expanding too!
We may be close to seeing these achievements reached but we aren’t there yet.
The next couple of weeks may hold the answer to this riddle. There is still a clear pattern of lower lows and lower highs on month end prices. So, stocks need to take out the June highs to power into bull market territory.
Let’s put the last few weeks into context.
I think most investors have been very skeptical, including myself about what kind of growth we would see in the second quarter corporate earnings, given soaring unemployment, very little consumer demand or spending, home prices that are still falling and extremely tight lending conditions.
Today, for example, we saw foreclosures jump 4.6% in June. The Philadelphia Federal Reserve's general business conditions index declined 5.3 points in July to -7.5. While stocks go through periodic spike rallies, we just aren’t seeing much a recovery in the economic numbers.
This uncertainty showed up as technical weakness in the stock market, producing a head-and-shoulders formation and triggering a number of technical sell signals and once again aligning investors negatively towards the stock market, ahead of second quarter earnings.
A lot has been made about the confirmed bearish head and shoulder’s pattern that did not play out as many technical analysts had been illustrating over the last week or two. In fact, the last two days have clearly stamped “failure” on that bearish head and shoulders pattern. See the chart below:
Prices took out the lows of June. So going into this week, the market was bracing for weaker corporate earnings and further selling. This week was quite a head fake.
I think we have to accept that the Fed, regardless of earnings, is protecting the stock market with all of its monetary powers. Whether through Goldman Sachs which can borrow at the Fed window at no interest or through its plunge protection team, the Fed can force a short covering squeeze at will – and they likely did it this week.
Fundamentals do not justify the prices we are seeing in the stock market, but the Fed has the power to punish the bears (short positions) and that was painfully obvious this week. It is hard to argue with the Town Hall!
I think once the stock market can confirm a new bull market in the technical terms I have discussed, volume will return.
That hasn’t happened yet … but we’re close.