Intraday update

Sorry for the late intra-day update, I have a meeting early morning so I am taking off early today.
I do think we are going to make fresh lows today and bounce up once the lower trend line is hit on the DOW

Buy signal on gold and gold stocks

Bears Strike back

Market Commentary:

Even though the markets are in highly oversold territory, another bit of poor economic news and another advance by the dollar hit equities as hard as any day since the rally began – only matched by a strong down day in early July.

Small cap stocks were hit the hardest with the Russell 2000 ending at -3.51%, the Nasdaq Composite at -2.67%, the S&P 500 at -1.95% and the DOW at -1.21%.

It is fair to say that the decline was broad based and continual all day long with indexes closing at or very near the lows of the day.

Investors have been giving credit to companies for their cost cutting measures during this entire rally. But I think things are starting to change. Even though several companies reported better than expected today, it had no effect on their share prices as a worried pale hung over the markets.

During this Q3 earnings period companies have bested analysts estimates for 82% of the companies reporting in the S&P 500, which would represent a record percentage going clear back to 1993, according to Bloomberg data.

So why the gloom and doom the last couple of weeks? (I can hear you saying “the dollar”).

I think investors have finally reached that point where better than expected is yesterday’s news and if you can’t bring in a better top line and an increase in profits, then you probably can’t going forward, either. As if this needed any confirmation, profits on these companies who have reported have decreased 19% on average. Sales have slumped almost 6% and consumer sentiment leads anyone to realize that Q4 is likely to be even worse for real profits.

“ The stock market has gotten ahead of itself and to sustain those values going forward we’ll need to see real economic growth,” said Peter Jankovskis, from Oakbrook Investments. “The weakness in consumer spending is still the key issue to be resolved.”

But the real pressure on the stock market today was an unexpectedly poor New Home Sales report, which showed a 3.6% drop this month, versus a 1.0% increase last month.

If you were a new home builder you would probably be real careful in 2009 about building a new spec home. Builders have approximately 251,000 houses on the market, the fewest since 1982. And with sales levels this low it would still take 7.5 months to sell these homes.

The fact that actual housing starts are at historic lows should be evidence that builders do not see future demand increasing enough to gamble on putting very many new homes up.

Let’s think about why we have a sudden reversal in what was looking like a housing bottom and/or new growth environment. We don’t have to look far to realize that this drop in sales should have been “expected” rather than “unexpected”.

The home buyer credit program is due to expire in November, suggesting that the growth in new home sales this summer was nothing more than an effort which brought what little demand there was forward a couple of months.

This is the problem with many stimulus programs that most analysts and every government official somehow seem to overlook. Often these programs are not actually creating any new demand. They are just re-locating the demand, and at a heavy cost to the taxpayer.

When the stimulus runs out then the demand runs out as well. Perhaps a “real” growth at a “real” rate is more conducive to a recovery than a fake demand that has done nothing more than move demand forward.

I have a bet you can make, though. I guarantee that this sudden drop in new home sales will be incentive enough to convince our congress that they must suddenly act to extend and even expand the housing credit program … perhaps for a very long time. They know now that once you take the bottle away, the baby is going to cry and public officials do not like crying babies.

There was other economic news, it just took a back seat to the housing data. Durable goods were up 1% in September, in line with expectations, but of little significance on a day like today.

The big elephant in the room continues to be the dollar. It was up again today:

As you can see, once the markets opened (9:30am) the dollar began another relentless climb throughout the day, only to drop back in after market hours. From this chart you can see that the dollar climbed from around 76.22 near the market open to 76.68 just before the close.

Why would such a small rise in the dollar create such a large move in the markets? Let’s look at it from a larger perspective.

Before this 6-month rally began the dollar was very close to $90. At the high for this rally on October 19th the dollar had fallen to a low near $75. This represents a 16.6% drop in the dollar.

During that same time frame the S&P 500 has seen a 62% increase (low to high). The ratio of the S&P 500 price change versus the dollar price change was just under 4 to 1 (4:1), suggesting that a four to one average is to be expected, and oftentimes much greater and much smaller ratios will be seen.

I recently read an article indicating that the falling dollar has actually reached an undervalued state. The inference in the article is that the dollar is likely undervalued to the tune of at least 7-11 percent.

If the dollar rises to correct this undervalued condition, it could mean that the dollar will end up somewhere around $80 to $82. Based on a 4:1 ratio, that means that the stock market could easily fall 30-40% from the high seen in October. This is easily in keeping with traditional Fibonacci retracement percentages, as well.

While all this may sound very depressing, and it might be for the longer term outlook, the markets are highly oversold right now and the potential exists for a significant spike rally.

Like I have explained in the past, when short positions begin to dominate any buying brings out a huge short covering effort so those short oriented gains can be pocketed. This usually requires buying securities to cover the short position, and the end result is a strong advance.

We may very well be looking at a strong advance in the short term, but a challenging environment in the longer term. I have a lot of evidence to support this thinking and will offer it as the days go by.

Here is some technical evidence of why a sharp advance could occur anytime:

This chart shows that the prices for the S&P 500 have reached a significant support point. The headlines will show that the S&P 500 has broken below its 50-day moving average, and that does not bode well for the longer term picture.

But if you look closely at the dark black line I have drawn you will see that the S&P 500 landed precisely on this line, suggesting that a bounce could be next.

Another indicator strongly shows oversold conditions and suggests a strong bounce, too. It is the Nasdaq McClellan Summation Oscillator:

The line to the far right has reached a low that is actually much lower than it reached last March or November of 2008. While the chart does not show it, the only lower value set in recent years was set in October of 2008.

When this indicator is at this low of a value it usually means that a spike rebound or at least a decent short-term advance is queued up.

The problem with this indicator reaching such a low level is that for the long term is means that there is great potential weakness in the longer term picture.

So, in summary, a short-term advance could be sparked on any positive excuse while a longer term decline seems to now be in the cards, as well.

Our headline event for tomorrow is the preliminary Q3 GD, which most analysts have pegged to come in at 3%. Goldman announced earlier today that their research suggests that the number will be lower, around 2.7%.

Did Goldman lay a goose egg down today so they could profit from their short positions, which they could easily cover tomorrow and gain on the long positions (calls) they are likely to make tonight?

Be ready for a volatile day tomorrow. It may set the tone for the next week or so.

Remain cautious. This is not a time to take on short positions – you are likely to get killed in a spike advance rally. This is also not a time to buy the dip – this is too big a dip and there is strong evidence that equities are going to struggle in the coming months. If you buy, be ready to sell just as quickly.

The best advice might be to get ready to shed whatever long positions you have in case this next advance quickly fizzles out.

Market should bounce here

Fan pattern (bearish)

now that the 60 min fan chart lost the 4th uptrend line, if the market can bounce back to retest that trendline, it would be a great low risk short.

for educational purposes, fan charts are bearish, especailly the 3rd retest, which was at about 1100 this time, that was a great short. Anyway, when the market does bounce, let's see if it can make it back up to the 4th trendline

Commercial Real Estate could go BUST

If you missed the movie "Money as Debt" yesterday, here's the link. http://tinyurl.com/yjkxdel

Inflation Nation...

Who is the inflation nation? All nations. You see, the US prints like crazy, and then the US dollar drops, naturally. Then the governments call each other, and the US tells the other countries to print also, so that trade can stay "normal". So, whoever has the strongest currency is the country that prints the least.

Is that insanity. Yes, actually, it is. However, there is no rational way to figure out how to control the monetary system since the system itself is unsustainable. So, if you are a person or you know people who are all about sustainability, then what they really need to do, is focus some effort on the monetary system. That's where the Green parties always get it wrong. They don't understand Finance. I've seen debates. It's not good for the Greens in Finance. If the Greens wanted a 100% metals backed currency to compete with the paper money, then there'd be a new paradigm shift. However, other parties would steal the idea, but who cares?

Commercial Real Estate

It looks like a new trend. That is, commercial real estate to go lower. If you actually own some funds that specialize in this, I would suggest getting out NOW!

Backyard BBQ, and Home Grown Veggies

This year, more Americans have gardens in the backyards than at any time since WW2. This is soon going to be a new trend as inflation takes affect on everything. Food inflation starts it off.

Three Stages of Truth

"All truth passes through three stages.

First, it is ridiculed.
Second, it is violently opposed.
Third, it is accepted as being self-evident."

There is something however, that isn't mentioned here. A lot of the time, to be successful in trading, there is another concept, "Perception is Reality". False beliefs can often lead to temporary "truths" in the marketplace since perception becomes "truth" So, "things are great" or "buy real estate" when surely it's a bubble. You can actually trade false belief systems, since if you always try to trade what you believe is the correct assumption, you may miss a trend. HOWEVER, when your correct assumption is about to match up with the charts, then you can do exceptionally well. Always check the charts. If your assumption doesn't match up with the charts, then wait the trade out. Then, you'll be the first person who gets it right when the charts are matching up.

Good Trading

Here's an interesting chart

Click to enlarge

MID-DAY MINUTE BY MIKE PAULENOFF:

By Mike Paulenoff, www.MPTrader.com Although the equity markets really are not doing much, I feel very uptight right now. Why? Take a look at the enclosed daily chart of the S&P 500. Let's notice that today marks the third session of weakness, and the decline has pressed slightly beneath the rising 20 DMA (now at 1070) AND, more importantly, is testing -- perhaps leaning against -- the Jul-Oct up trendline (1061.80). So why am I so uptight? Well, in such circumstances, given the juxtaposition of the SPX and the above-mentioned important support factors, the market EITHER will ricochet off of the lines with power, or BREAK BELOW THEM, thereby triggering a potentially nasty decline (another 20 S&P points for starters). I really do not know which scenario to expect right now, but the bears have control of near term market direction, so I will go with a BREAKDOWN that violates the Jul-Oct trendline on the way to 1045/40 next. MJP 10/27/09 1:25 PM ET (1062.56)

Interest rates & Bond charts

regarding Louise Yamada, she basically says the same thing as us for the long term. The markets entered into a secular bear in 2000 and she expects it to last until about 2016 or so. Secular bears last 15 - 18 years on average.

Regarding her comments about long term interest rates, she is right about that too, they have yet to break their long term secular trendlines from 1980. Here's some charts of TYX and USB, 30 year rates and 30 year bond

The Greatest Lie ever Perpetrated

People tell you to get out of debt and save money.

Money is created out of debt. When you get a loan, it is brand new money, created form absolutely nothing. If you get it all in cash, then those notes are paper debt obligations, in which you must pay back. But, after only a few seconds, if you handed it back over the counter again, you'd owe a little more, wouldn't you? So where does that extra money come from? Someone else's paper debt obligation certificate.

So, when you have a lot of debt and then you're out of debt and saving money, what you are actually doing, is now hoarding other peoples' paper debt obligation certificates. This is why if new loans aren't continuously made, the entire system doesn't work.

If everyone tried to pay off their loans, there would be no money at all, yet there would be a lot more money owed than even exists!

This is a pyramid scheme. They are illegal. But not for the banks.

The colonies used Colonial Scrip. It was interest free money. http://en.wikipedia.org/wiki/Colonial_scrip

Other Money

Here are some examples of non-debt money

House
Wine
Gold
Silver
Collectibles

You may be wondering why the money supply is expanding so much. It is because then, the debt is easier to pay in real terms, since the debt doesn't inflate. Your taxes might even go down. But one thing is for certain, and that's that savings will erode. Prices will go up. There will be no such thing as "Saving for something". Why save? You can't beat inflation really. If saved for something like a car for a few years, then that car's price is now 10% higher a few years into the future. So, you're better off getting a loan, and paying interest to the banks immediately, than saving for a car.

This is the system we live in. There is actually not a lot of sense to teach saving (sorry) since you can't out-save inflation. It's a pay as you go approach.

If we were on a gold standard, then of course you'd have to save, because borrowing 20 or so ounces of gold isn't easy. If you don't pay the bank back, they'll shut their doors, and people will be covered by the FDIC insurance if they had their electronic debt obligations there, but even the FDIC doesn't save. Banks pay into it, but the government doesn't actually keep that money. They just create new money to bail people out if banks fail. They borrow from the Fed, and pay interest and inflation the money supply even more, and cause inflation.

This is the best movie I have found that explains it all: http://tinyurl.com/yjkxdel

Good Trading,

Trend, S&P500, Gold and the US Dollar

Chart by Matt from BBT

Oct 26th market Update

Market Commentary:

Earnings news was extremely upbeat today, as giants Microsoft, Amazon and Capital One easily out performed expectations on all fronts, posting higher top line and bottom line figures (revenues and profits) and with positive outlooks, to boot.

For the day Microsoft was up 5.38%, Capital One was up 6.84%, and Amazon was up an astounding 26.8%.

To go along with today’s unbelievable earnings releases the existing home sales numbers released earlier today came in much better than expected, surging 9.4% versus a consensus of 4.9%, with the National Association of Realtors noting that the jump in sales was mostly due to first-time homebuyers entering the market via the government’s $8,000 rebate program, a program that congress is now considering to extend and expand.

In addition to the improving headline home sales numbers, distressed properties, which has accounted for around 50% of all home sales this year declined significantly – now representing only 29% of total sales.

Yet despite all this very good news, stocks gave up yesterday’s gains on selling that started early and continued to increase all day long.

Why?

When there is finally some good news to trump, you would expect the market interventionists to use this good news to ramp the markets to new heights … it has happened so many other times this year.

I think many of you know the answer. After all, I have been harping on this subject for a number of weeks now. Check out the following chart. It represents the trading in the dollar today, with each candlestick representing a 15 minute period.

As you can clearly see, today was the dollar’s day again. The dollar was supported steadily all day long. If the dollar gains a footing here the equity market is going to be in real trouble.

I suspect there are a huge number of dollar short positions that have grown steadily over the last 6-7 months. Many investors have been long the market and short the dollar.

Should the dollar gain a bit more support those who have seen dramatic gains by being short the dollar will be forced to cover short positions to pocket the gains. This means that to book their profits they must do the equivalent of shorting a stock. They must buy the shorted security and essentially go long to benefit from the previous short position(s).

If too many dollar shorts head for the exit at the same time you will see the dollar rocket skyward, as it did last year, when it jumped from the low 70’s to the 90’s.

Guess what that will do to the equity market?

A huge amount of money will move from equities over to the dollar side in hopes of gaining on a new rally in the dollar. And the stock market rally that investors have come to love and appreciate will vaporize overnight.

What leads me to believe that this represent a real risk?

Since I base much of my analysis on technical perspectives, the dollar appears to be carving out a bottom and crude oil appears to be carving out a top. But there are some fundamental reasons that give me concern as well.

Several banks have issued credit card change notices in the last few weeks, stating that their APRs are shooting up to 30% in November. This means that despite the impressive re-capitalization that has occurred with many big banks, there is still a huge credit crisis hidden under the cover of mark-to-whatever-the-banks-want.

These banks must know that a huge number of credit card accounts are about to default and so they are taking this action to create new capital as either (1) irritated customers decide to pay off these absurdly high interest rate debts or (2) uninformed customers will continue paying their payments, unaware that 30% APR is being applied to their balance, thus generating a huge increase in interest earnings for the banks.

I have also read that a large number of home sales in the distressed category are being done under strange circumstances. Many foreclosed properties have multiple offers at the asking price, but with caveat of pending new financing.

In lieu of the banks accepting these offers (with financing) for the asking price, the banks are accepting cash offers at prices significantly below the asking price. Accepting prices much lower suggest to me that the banks know that new financing will become very hard to come by … maybe not at all!

Both of these recent steps taken by the banks suggest to me that the bank insiders know that another big credit crunch is on the horizon and there is no way in @#$* that new financing is going to become available – nor is credit going to be available on credit cards even with astronomical interest rates being tacked on.

Another financial scare will lift the dollar into a safe haven for cash and will create huge short covering in the dollar – the likes of which has only been seen when this last bear market hammered home in October, 2008.

Today was unnerving in the sense that economic news and housing data were about as good as any bull could have ordered up. And yet, the markets sold off on what appeared to be minor support for the dollar.

Caution is the by-word. Watch the dollar and crude oil like a hawk over the next couple of weeks. They are your canary to the stock market.