Rising Dollar Spells Trouble for Stocks

Last week we mentioned that the spring rally had reached completion.The major averages were coming up against major resistance at a time when an oversold rally was losing momentum. Admittedly, our call was a couple of days early but today looks like a key reversal day. If the selling continues into tomorrows close, last week will mark a market top.

Buying of the US dollar has increased putting pressure on stocks and commodities. The chart below illustrates the relationship between the dollar and stocks. Notice that the dollar reached a peak in March around the same time stocks reached a bottom.

Below is a longer term picture. The 2002-2007 “Bull Market” had more to do with a devaluing dollar than economic expansion.

Always watch the volume! The spring rally, though large in % gains, was moving up on decreasing volume which indicates a lack of buyers. Volume seems to have picked up towards the top.

Trend change in effect for the market

This is an intra-day update.

Major indices have broken down below the bearish rising wedge. A intermediate top has formed and we should see lower prices ahead. With the S&P projected to pull back to 780-800 level.

Bank Stress Test Leak!

"Turner Radio Network" cited in our 7.51ET/11.51gmt update is not associated with Turner Broadcasting. The "Turner" in question is Harold Turner, who has off and on hosted an internet radio show and run a weblog, and was associated with one of Pat Buchanan's presidential campaigns. Turner's history as a public figure is more that of a provocateur than a journalist, and we have no way of verifying the correctness of his assertions regarding the results of the bank stress test, though they are within the realm of credibility

Monday, April 20, 2009

Stress Test Results Leaked

Posted by Tyler Durden at 8:08 AM

Turner Radio Network out with a shocker on what they claim are the leaked Stress results. We paraphrase:

The Turner Radio Network has obtained "stress test" results for the top 19 Banks in the USA.

The stress tests were conducted to determine how well, if at all, the top 19 banks in the USA could withstand further or future economic hardship.

When the tests were completed, regulators within the Treasury and inside the Federal Reserve began bickering with each other as to whether or not the test results should be made public. That bickering continues to this very day as evidenced by this "main stream media"

report.

The Turner Radio Network has obtained the stress test results. They are very bad. The most salient points from the stress tests appear below.

1) Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent.

2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all or any further deterioration in non-paying loans.

3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.

4) Of the top 19 banks in the nation, the top five (5) largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.

5) Five large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with four in particular - JPMorgan Chase, Goldman Sachs, HSBC Bank America and Citibank - taking especially large risks.

6) Bank of America`s total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank`s was 278 percent; JPMorgan Chase`s, 382 percent; and HSBC America`s, 550 percent. It gets even worse: Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital!

7) Not only are there serious questions about whether or not JPMorgan Chase, Goldman Sachs,Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, can continue in business, more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts!

The debt crisis is much greater than the government has reported. The FDIC`s "Problem List" of troubled banks includes 252 institutions with assets of $159 billion. 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in prior quarter.

Put bluntly, the entire US Banking System is in complete and total collapse.

And today makes six!

Market Commentary:

And today makes six!

The probabilities of six consecutive weeks of advance were low, yet it happened anyway. You could have gotten some pretty good odds against a 6-week rally even just a week or two ago, if you were a betting man. I’ll bet a lot of you feel like “betting” is what it has come to these days – roll the dice and put your money down.

To be honest, I expected this rally to end at four or five weeks, at the most, but I was proven wrong as today’s minor advance kept the consecutive weeks of advances in tact – and now at six.

During this week many banks released earnings and some banks gave guidance. While their earnings are dropping, the media continues to emphasize that the earnings are better than expected. They should be for crying out loud!

With the change in the mark to market rule, banks can pretty much re-write their balance sheets. Given that most of them have seen a significant increase in capital with the distribution of the TARP funds and the fact that their toxic losses can now be stated at dart-board value, the banks should be showing profits, not losses that are suddenly better than expected.

Bottom line – the banks are still losing money and it hasn’t gotten better. The information you hear is better, but the facts are still the same.

However, the current stock market is anxious to see any good news be confirmed, in any possible way. And since the banks are now doing better than they were expected before the change in the method of reporting toxic assets, then that is all the market needs to hold on to the precious gains created over the last month.

But will it last?

I know you must be tired of me harping that a bearish pattern is still in play and I know that many of you want to get back in the market, feeling that the train might have left the station and that the biggest gains following the bear market may now be over.

Not so!

Take a look at the intermediate chart (weekly prices) for the S&P 500 below. It contains several points of view you need to understand.

This chart clearly shows what I mean by a “Left Translation”. You can see the lower lows and the lower highs right up to this closing week. While this final 6th week is getting close to setting a higher high, it has not done it yet.

There are some other things to take from this chart.

Look at the Weekly Stochastic Indicator, illustrated below the pricing chart. If you carefully inspect the chart you will see vertical red and green lines. The red lines represent intermediate highs and the green lines represent intermediate lows.

In the last year the market has seen the following advances and declines:

An 8-week decline during May-July of 2008, a 5-week advance during July–August of 2008, 14-week decline during August-November of 2008, a 6-week advance during November-December of 2008, a 9-week decline during January-March of 2009, and the most recent 6-week advance during March-April of 2009 (with nary a single down week).

Also note that the intermediate tops almost perfectly line up with the peak values of the weekly stochastic black line. This indicator is at the highest value reached in the last year and by all rights should start heading down, suggesting that another multi-week decline will follow.

While technical indicators like this weekly stochastic are not fortune tellers or even perfect market trend indicators, they are right far more often than they are wrong.

Pay attention to the smooth blue line on the chart, too. It is a 10-week moving average line, often used to represent a value similar to the 50-day moving average, i.e., a popular mean value that prices regularly oscillate around. One way or another prices and this blue line are going to come together again, probably over the next several weeks. Prices are likely to decline and the blue line is likely to rise a bit.

The bottom line is that a more confident buying entry point is ahead of us. This is not the time to enter, even if a bullish trend is developing.

We will have the initial confirmation of a bullish trend when either a higher low or a higher high develops. When that can be determined, then the best entry point is at the higher low. Hope this makes sense to you.

There is one more thing I want to draw your attention to, and that is another technical indicator called the Bollinger Band. The Bollinger Bands are represented by the light grey lines. The upper grey line is referred to as the upper Bollinger Band and the lower grey line is referred to as the lower Bollinger Band. The dashed grey line in the middle is referred to as the middle Bollinger Band.

waiting somewhere off Somalia

Stocks drifting higher... could drop on a dime

Market Commentary:

Investors are growing more confident that the bruised economy is starting to heal.

Whether that is really the case or not is very much up for debate but for the last six weeks, the Fed’s strategy of getting investors back into the stock market is working.

Investors chose to focus on JPMorgan Chase & Company’s stronger than predicted results today.

In truth, JPMorgan's first-quarter profit actually fell 40 cents per share from 67 cents per share a year ago, but the spin that the company beat estimates of 32 cents was enough for the crowd to cheer.

That ladies and gentlemen is how you turn lemons into lemonade. You are still losing money, but you beat arbitrarily lower estimates.

Goldman Sachs Group Inc. and Wells Fargo & Co. also had upbeat earnings news in the past week, so the hype is that the economy is mending and it is obviously sucking in investors who are betting on a recovery dead ahead.

There is so much deception these days and misleading information.

For example, Wells Fargo reported last week that its first-quarter net income rose 50 percent to about $3 billion in announcing preliminary results that topped the most optimistic Wall Street estimates and sparked a 32 percent jump in the stock.

It now turns out that much of the positive news in the preliminary results at Well Fargo had to do with merger accounting, revised accounting standards and mortgage default moratoriums and buried losses rather than improving underlying trends.

Bloomberg.com wrote a very informing article explaining why investors need to be wary of Well Fargo’s misleading numbers.

In fact, it seems that Wells Fargo & Co., the second- biggest U.S. home lender, may need $50 billion to pay back the federal government and cover loan losses as the economic slump deepens, but who wants to believe that?

Next week the government will release the bank stress test and quite frankly I don’t know what to expect, given how much misinformation we have seen. The government wants us to believe that the economy is getting better, so who knows what the bank stress test will reveal.

Please don’t get me wrong – I am all for an economic recovery, just a “real one”. The sooner the better, but if hype and misleading information is at the heart of stock manipulation you better watch your wallet.

SO MUCH FOR A HOUSING RECOVERY

As we talked about yesterday, before we can see an honest economic recovery housing prices have to stop falling and stabilize. Remember how much hype there was last month on increased housing starts, especially with spring on the way?

Today it was announced and largely ignored by the market that housing construction plunged to the second lowest level on record in March, providing a sobering sign that the worst housing slump in decades has not ended.

Housing starts fell 10.8 percent in March and building permits, a sign of future construction fell 9 percent. This is the second lowest construction pace in records that go back 50 years!

A glut of unsold properties is pulling home prices down across the U.S., prompting builders to scale back projects.

The number of homeowners facing foreclosure surged in March as lenders lifted temporary moratoriums and resumed legal actions against delinquent mortgage payers.

Foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 341,180 properties in March, 46% more than a year ago and 17% above February's total, RealtyTrac reports today.

If you think housing is getting better, you might want to listen to this.

We are still in the midst of a credit crunch, despite the spin and misinformation and accounting gimmicks being used now by the banks.

Market testing resistance

Market Commentary:

Intel’s cautious outlook put a bit of pressure on the tech stocks today but in the last hour, programmed trading kicked in to lift stocks on the final day when taxes are due.

In most years, this marks the end of the seasonal cycle that runs from October to mid-April.

On a side note, the Fidelity Select Family Stochastic Oscillator that measures this cycle is now at a peak level with %K at 91 and %D at 89, warning the next several months are likely to put pressure on the equity markets as is typically seen in the months May to October.

The stock market will now have to decide how worthy the Fed’s spin is about the merits of a second half recovery verses the risks of a more prolonged recession.

Before we get into these merits, step back and understand we can’t trust the Fed’s spin. If anything they can’t be honest with you.

This is a game of psychology. They knew we were heading for a whopper of a recession, perhaps a depression and yet they feared if the truth was known, a crash would occur, so we keep getting an optimistic spin out of the boys at the top.

When this recession started, the spin was this would be a typical recession, lasting about 8 months or so and to expect a V-shaped bottom. How many times have we heard this is the bottom, only to see this was just another suckers’ rally that ultimately led to lower lows?

We are now in the sixteenth month of this recession/depression and to be honest with you while there are a few signs hinting of improvements we are far from being out of the woods. Take today’s numbers.

Consumer prices fell unexpectedly in March -0.1% and recorded their first annual drop (-0.4%) since 1955. Can you image how severe things must be to record the first deflationary number in 54 years? It is the trend that is disturbing and it is getting worse, despite trillions of dollars of stimulus. No signs of improvement here!

With unemployment heading higher and consumer purchasing power and business labor costs under pressure, deflation will remain the bigger price-stability worry over the next few quarters.

Industrial production is down 13.3% since the recession began in December 2007, the largest percentage decline since the end of World War II, when production of military equipment ground to a halt and production fell 35%. What does this tell us about consumer demand?

Factory production dropped 1.7% in March. Factory output has fallen 15.7% during the recession, also the largest decline since 1945-1946. Underscoring the trend in manufacturing, factory output has dropped 15% in the past 12 months and has fallen for five consecutive quarters.

The Fed said capacity utilization fell by a full percentage point, to 69.3%, the lowest since the data series began in 1967.

There were some positives in the numbers today. The NY Empire State Manufacturing Survey came in at -14.7, climbing 24 points. With the Fed promising a turnaround in the second half, some are gearing up for a economic recovery – but is this a result of hype or real demand?

Although there is reason for cautious optimism, a number of conditions must be met for the economy to recover: Improvement in financial markets must be sustained, job losses must moderate, and house prices must halt their free fall.

What are we to make of the Fed’s decision to delay the results of the stress tests for the larger financial institutions? Why delay this news if it is good news?

There are no signs that job losses are about to moderate, quite to the contrary.

While the bulls are excited about new home sales, home prices continue to fall at a very rapid pace. There is just not enough economic confirmation that an economic trough is developing.

Whenever you see a bear market, there will be a number of resistance levels that must be overcome in order to sustain a durable uptrend at the conclusion of the bearish run. For example, the bulls have to overcome short-term resistance levels, such as the 50-day moving averages, which they have been successful at doing so far.

They have overcome intermediate-term resistance levels and of course for a new bull market to begin we have to reach a level of upside momentum strong enough to break out of a left translation pattern and start producing a pattern of higher highs and higher lows and get the price of the major indexes trending above the 200-day moving averages again.

We are now testing intermediate-term resistance levels.

In this chart of the S&P 500 index, we have “back tested” to the old support line, which is now intermediate-term resistance.

As you can see we are now testing the old wedge support line. Notice that trading is now highly compressed and narrowing. This is a developing bearish continuation pattern. I would like you to also note that volume was highest in week two of this rally and has been declining over the last several weeks (and will likely continue to decline the closer we get to May). Clearly, the probability of a correction/break down and a new intermediate-term down leg looms large.

This is why it is dangerous to chase this bear market rally. It still remains within a left translation, or lower lows and lower highs for the broad market indexes from one intermediate-term cycle to the next (refer to the chart’s upper black resistance line).

Let me repeat myself – I want to see what the market looks like at the next intermediate-term bottom. Will we see a higher intermediate low and then climb back to set a higher intermediate high?

We won’t know the first part of this question for another six weeks or so. But I can assure you if we do go back and test the March lows, you are not going to like it if you are thinking of going long in the market right now.