Ingredients for a blow off top
The DJIA made a marginal new high last month at 15,709. That move was created in part to the response the FED getting cold feet and deciding to postpone the end of QE. Since the announcement and the September high the market has given everything back. We are today testing key support levels. The surge in the VIX over 20 and the massive concern about the government shut down and debt ceiling has led to the 900 decline in the DJIA over the past 3 weeks.
Technically, the DJIA has formed a triple top. A break above 15,700 would start this blow off top. Even if the DJIA breaks below today’s lows of 14,719.43 it should be short-lived. The line in the sand for a continued decline is the 14,377 level. Any close below that level for 2 days would indicate a triple top is locked in and a bear market.
As the title states all the ingredients are in for a powerful surge –
1. Continuation of printing money.
2. Janet Yellen becoming the next FED chairwomen and her dovish stance.
3. Bullish market tendencies for next 2-3 months.
4. The recent reduction in borrowing needs increasing the crowding out effect.
5. The perception that a 15.5 P/E is cheap and earnings will continue to grow.
6. Once the government either pushes out or fixes the issues the market will rally.
7. Rising real estate prices
8. Low/stable inflation
9. Relatively high VIX (22 level) suggesting a possible low although a number in the upper 20’s would be better. A move into the 30’s hasn’t happened since the 2011 and actually would be very bearish.
Of course a failure of our wonderful government to compromise in a timely fashion would set the seeds of disaster. A lasting effect of 3 months or more of gridlock would put the economy into a deep recession not to mention the long term effect on the credit rating. This scenario is highly unlikely. It was interesting to see all the government workers protesting the shutdown. Congress solved the bad press by given them back pay essentially giving the workers a paid vacation. Holding small parts of the government hostage in this stalemate will not be forgotten. For those currently holding office it’s a lose/lose situation.
Longer term all those concerns mentioned in previous blogs remain of great concern. The first to stumble was the consumer followed by the business sector. Our government has picked up the spending of the credit card. The problem now is there is nobody left to bail the government out of the massive debt and spending problems. Sure the government can print more money but that bonze scheme can only last for so long. At the end the majority are losers. The perception the FED can keep the ball rolling will end with the consequences to be felt for years. Just ask Japan how free money has been working out for them the last 20 years.
Gold made a low at $1186 in July. $1270 is very important support and if it fails a retest of $1146 at best is expected. A move over $1439 would be very bullish. As discussed in July a low is expected in the fall. One can start nibbling into gold at the current level. When scaling into a position use a certain dollar amount and buy every drop of $50-$100. Gold could still drop below $1,000 in the next year.
Bottom line is keep trailing scale stops. The market has rallied over 130% off the 2009 lows. Now is not the time to be super bullish but beware the ingredients for a blow off top are very possible. Right now the weak hands are selling especially in the momentum stocks. If the government does fail all bets are off. The assumption here is a deal will be struck. Just like 1999-2000 and 2007-2008 there was a big blow off top. Could the September top be it? It’s a triple top but worth watching however the ingredients for one move higher are still active especially if the Congress reaches some deal. The push the problems down the road and extend and pretend scenario is still very much the political case however next year’s election will change it. As we all know the market anticipates 6-9 months ahead, this blow off top if and when it happens will lead to every sharp minimum decline of 40-50%.
Thursday, October 10, 2013
Friday, July 12, 2013
2013 Mid-Year Update
2013 Mid-Year Update
Back on May 9th the thinking was a top would be made by the end of June. The market did make a peak at 15542.4 a few weeks later only to be followed by a slight pullback of just over 5%. Today we made a new closing high. Now what? Technically the market isn’t in bad shape. However when one takes a step back there is a strong case that this market is long in the tooth.
In the long run this secular bear market should end over the next 1-3 years. There is a chance it already has ended but there are too many questions that would indicate otherwise. When the next secular bull market starts it will last for 14-20 years. However there should be one more down leg in the market. Then one can buy and hold.
There have been too many Band-Aids used since the 2009 market bottom. Many houses are still caught in the foreclosure process especially in states like Nevada where they have almost shut-down the process. Thousands still live in their home for free and will continue to do so. Housing has recovered in many areas and would use this strength to sell. The real estate market has weathered round one. Higher interest rates, building costs and taxes will crimp the rebound.
While the world economies are looking for a way of growing their economy there still seems to be too much unemployment, rising costs and limited liquidity to kick start most countries. Take China, a few weeks back the liquidity in the secondary loan market caused short term rates to jump to over 10%. China is in deep trouble as they have food inflation, too many parked commodities from hoarding a few years back and too many vacant properties. These problems are spilling into India and other Southeast Asia countries.
The U.S. has kept rates low. The problem isn’t the low rates it’s that most people can’t borrow. Japan and Europe also have kept rates low and this experiment on the monetary side can only do so much when the overall debt levels are so high. Giving another beer to an alcoholic that’s passed out doesn’t result in more beer sales. Fiscal responsibilities have failed and been delayed. Bottom line is all the excesses created in the 2008 bubble have not been fully played out. Unfortunately they created a bubble in the bond and to some degree the stock market. As we saw in June the exit can be ugly and only getting a 5% correction is just a tremor before the earthquake.
As stated a few months back a bottom in gold isn’t expected until the fall. Gold stocks and other precious metal stocks could bottom sooner. Oil has shot up but longer term with natural gas trucks and buses being bought the price of oil in 3-5 years will be much lower.
The stock market is in high risk territory. The following are some of the reasons to be wary.
1. Bull move is over 4 years long. No correction of over 10% in a long time.
2. Margin Debt at record levels. Similar levels back in 1987 and 2000 were tops.
3. Revenue growth by corporations has stalled.
4. Benefit of low rates to refinance is over. Apple floated bonds at the bottom.
5. Triple top in stock market
6. Interest rates can still rise even while the FED is buying. The bond market is just too big.
7. Fiscal activity stuck which is actually good in the short term.
Once the June lows are taken out the acceleration to the downside will snowball. A drop below DOW 14385 leads to 13684. In any case keep stops close as volatility will surge. The choppiness seen since May is consistent with a topping formation. As for what event would lead to this sell off is likely an overseas shock either from China/Japan/Germany.
Back on May 9th the thinking was a top would be made by the end of June. The market did make a peak at 15542.4 a few weeks later only to be followed by a slight pullback of just over 5%. Today we made a new closing high. Now what? Technically the market isn’t in bad shape. However when one takes a step back there is a strong case that this market is long in the tooth.
In the long run this secular bear market should end over the next 1-3 years. There is a chance it already has ended but there are too many questions that would indicate otherwise. When the next secular bull market starts it will last for 14-20 years. However there should be one more down leg in the market. Then one can buy and hold.
There have been too many Band-Aids used since the 2009 market bottom. Many houses are still caught in the foreclosure process especially in states like Nevada where they have almost shut-down the process. Thousands still live in their home for free and will continue to do so. Housing has recovered in many areas and would use this strength to sell. The real estate market has weathered round one. Higher interest rates, building costs and taxes will crimp the rebound.
While the world economies are looking for a way of growing their economy there still seems to be too much unemployment, rising costs and limited liquidity to kick start most countries. Take China, a few weeks back the liquidity in the secondary loan market caused short term rates to jump to over 10%. China is in deep trouble as they have food inflation, too many parked commodities from hoarding a few years back and too many vacant properties. These problems are spilling into India and other Southeast Asia countries.
The U.S. has kept rates low. The problem isn’t the low rates it’s that most people can’t borrow. Japan and Europe also have kept rates low and this experiment on the monetary side can only do so much when the overall debt levels are so high. Giving another beer to an alcoholic that’s passed out doesn’t result in more beer sales. Fiscal responsibilities have failed and been delayed. Bottom line is all the excesses created in the 2008 bubble have not been fully played out. Unfortunately they created a bubble in the bond and to some degree the stock market. As we saw in June the exit can be ugly and only getting a 5% correction is just a tremor before the earthquake.
As stated a few months back a bottom in gold isn’t expected until the fall. Gold stocks and other precious metal stocks could bottom sooner. Oil has shot up but longer term with natural gas trucks and buses being bought the price of oil in 3-5 years will be much lower.
The stock market is in high risk territory. The following are some of the reasons to be wary.
1. Bull move is over 4 years long. No correction of over 10% in a long time.
2. Margin Debt at record levels. Similar levels back in 1987 and 2000 were tops.
3. Revenue growth by corporations has stalled.
4. Benefit of low rates to refinance is over. Apple floated bonds at the bottom.
5. Triple top in stock market
6. Interest rates can still rise even while the FED is buying. The bond market is just too big.
7. Fiscal activity stuck which is actually good in the short term.
Once the June lows are taken out the acceleration to the downside will snowball. A drop below DOW 14385 leads to 13684. In any case keep stops close as volatility will surge. The choppiness seen since May is consistent with a topping formation. As for what event would lead to this sell off is likely an overseas shock either from China/Japan/Germany.
Thursday, May 9, 2013
I’m Back JUST in Time
With all the government regulation I felt being employed with a securities firm and writing a blog to all was not worth all the disclosures. Now that I’m a lone wolf it is time to inform all a few words of wisdom. What has happened since my last blog on many accounts on both the political and economic side is downright scary. Not that living in Illinois is adding to the worries but having our country run by those that contributed to running our state into the ground keeps me on edge. Here a few reasons why –
1. Currently U.S. and Japan are buying everything with goal of inflation rate of 2%..
2. ECB has just recently joined the insaneness.
3. China whose numbers are fictional are always manipulating their numbers
4. Margin debt in the U.S. stock markets is nearing an all-time high.
5. Housing inventory for sale will increase
6. Student loans default rates continue to increase.
7. Commodities are falling/crashing
8. US companies revenues are falling
9. OBAMACARE
10. Loans to small business shrinking
11. Taxes at all levels going higher.
12. Glut of energy but exporting will keep prices high in U.S.
13. Money supply velocity stagnate under 1
14. Government loans to high risk buyers
15. Banks/funds holding large quantities of housing on hold.
16. The great U.S./Japan experiment
17. Gold –still a commodity
18. Gas Prices manipulated
19. U.S. government wanting people to be dependent on government.
20. Coming currency war.
21. DEBT,DEBT,DEBT
22. The next Bull market in stocks- The Bear market WILL end
23. Political predictions
24. War
25. New laws
26. Inflation
27. CRASH
28. Dollar as a commodity
29. Remove reserves
OK maybe it’s more than a few reasons. Right now the U.S. and Japanese government have decided to spent/create money to buy everything from bonds/stocks/commodities. The governments are crowding out the investor into buying risky assets for HIGHER yield. Investors should realize that it’s the return of money NOT the return on money. Unfortunately the current trade is to borrow and LEVERAGE money to buy risky yield.
Who would have thought the savers of the world would be punished for saving. They are being forced to find higher yield without realizing its return of money NOT return ON money. Savers have been frustrated with the negative yield adjusted for inflation being negative. That’s what deflation does to savers in a perceived inflationary environment. Japan has been in a deflationary spyro for over 20 years. Now they are throwing in the towel and deciding to print more yen and in essence devalue their currency. It sounds like a great idea for exports and creating a cheap currency for export. Problem is every country in the world thinks exporting their way out will lead to growth. The bottom line is WORLD capacity is OVER capacity. There is too much deflationary world capacity to CREATE inflation which all the politicians want to achieve in trying to reduce all their debt to GDP not to mention all the banks holding underwater mortgages
Margin debt for equity purchases are at levels that preceded the 1987 crash and the 2000 top. It probably will make a new high before the market tops out but is clearly at a danger point. Everybody is looking to sell in May and go away. May will likely be an up month as will the most of June. A late June top is expected. It will be an important top. This bull market is in the latter stages of the final phase of the secular bear market that started in 2000. The good news is this bear market is near the end. The bad news is a sharp drop below DOW 10,000 and mostly likely retests the 2009 lows.
There was an interesting stat about family wealth since 2008. 93% of households are still below 2008 levels. The remaining 7% have seen their wealth increase 28%. The free money policies are clearing not getting to the majority of people.
Another interesting stat is about 35% of corporate profits in the 1st quarter are due to the benefit of lower rates. This can’t last as the rates can’t go much lower. Corporations can’t get their interest expense much lower. This benefit of low interest borrowing to finance equity repurchases and stock buy-backs is a longer term problem when the debt becomes due in 5-7 years,
Gold’s recent sharp fall reflects how commodities trade when they sell-off. Years back oil fell from $145 a barrel to $45 in just 9 months!! Gold could easily fall under $1,000 or even $850 over the next 5-8 months. Even $500 could happen. I’m looking more for a time frame to purchase than a price. Once commodities crash they tend to over shoot to the downside and gold will not be any different. A move over $1800 would change the view.
The return of the bear market will heed the buy on the dip mentality. This is the opposite of the mentality just a few years ago. That’s what happens when market rally over 100% from the 2009 low. It’s funny how history repeats itself and how short people’s memories are of past selloffs in the stock market. That just reinforces the fear and greed theory.
The mentality of the U.S. government holding up asset prices through the purchase of bonds and mortgages in the tune of 85 billion a month. That’s about 90% of the mortgages each month. The FED is crowding out the investor into buying risky assets in search for yield. Japan took it a step further and will buy stocks directly. The ECB lowered rates last week. When is all this going to end isn’t an issue rather it’s how it ends. There is only one exit door and everybody can’t sell at once.
For every buyer there is a seller. If the FED slows or stops buying bonds who will buy the bonds? It would be a FED tightening as the public would be the buyer. Interest rates would rise before the natural level of buying and selling reaches a neutral state.
The way the markets are trading the upcoming bear market will end with a sharp drop that will happen quickly. The market could lose 30% in 1 month instead of 6-9 months. Computers and software has changed the game. Program trading which includes high frequency trading makes up a scary 80% of daily volume.
On the bond market side the treasury issues 80% of debt in short term paper. If rates move higher the treasury will have to pay higher interest and issue more paper assuming the U.S. budget deficit doesn’t reverse. Bottom line is the low debt service in the short run could easily backfire into a major problem if rates move up. Having the FED buy paper from the treasury will end up a disaster.
Corporate bonds including junk bonds are being issued at record levels. CEO’s are issuing bonds to increase or pay a dividend like Apple or buy stock back. If CEO’s are so bullish why are they dumping stock at such high levels? It could be that since March 2009 the DJIA is up 133%, SPX up 145% and COMP up $170%.
Over the past few weeks the market has seen the laggards rally, the high short-interest stocks rally and the cheap penny stocks rally. On the short term expect a pullback to SPX 1576-1600 but again a late June top is expected. A move below 1561 would be very negative.
Oil supplies remain at record levels while the cost of gas in the Chicago area hits $4.35. The only thought here is price manipulation. It’s true the summer blend cost more but even with that variable and a higher tax rate the prices are still .30-.40 overpriced!
In summary the market is at dangerous levels so keep stops close. Expect volatility to increase over the coming weeks but the market trend still should be higher until late June.
Saturday, September 3, 2011
YES WE WILL
There is a new slogan in town replacing the “Yes we can” it’s “Yes we will”. Yes we will replace the idiots in office which have slowly but surely put a wrench into the economy and capitalist markets. One can see it in the schools especially the sports programs as equal time and keeping no score in the youth ages is norm. It’s in the marketplace where some companies receive tax breaks and free money while their competitors suffer. It’s in the work place where some thought 20 years ago there was no money in that career is now having a retirement bonanza. It’s in the attitudes of the under and unemployed seeking jobs. When will this end? How about next year -2012?
Next year could be the turning point. As discussed last year there will be rioting in the streets and we already saw it in Europe. In 2012 it will move across the pond into the great old USA. Our current government wants the majority to suffer so they can go out and print more money to give it away and in the long run put those people down even further. All they want is the vote. It’s both parties doing it and people are realizing that there isn’t one party that is better than the other. It’s not a punch one and done type of ballot.
The ballooning of the deficit is rather shocking over the past 5 years. There is no doubt that QE3 is coming in some type of form especially with elections next year. For once people will figure it out that free money (only to some) is not the answer. It turns free capitalism to all into free profits to the large companies. Let’s face it that America has prospered due to the small businessman. Now that small guy is getting run over by the big players which have all the chips on their side. They have access to free money, tax breaks and less regulatory expenses than the small guy. The small owner can’t compete.
The markets will anticipate the upcoming economic disaster. A sharp drop is expected and could take a few years or a few months to get to their bottom. With all this electronic trading it’s more likely to be a quick collapse followed by a sideways bottom. The move off this bottom could start in late 2012 or sometime in 2013 and lead to a booming economy and stock market for years to come. What the markets and the economy need first is a good old fashion washout in stocks and some policy change in Washington. Hopefully it starts sooner than latter.
Our economy has too much regulation. Everything is a process of having to be registered or licensed. In most cases regulation does stop fraud. There is more than one way to steal the candy out of the candy jar. Setting up a lemonade stand in your front yard in most areas is regulated which sounds a bit sour.
If government can stop the idea of them trying to fix the problems and let the private sector take over capitalism in America we would be better off. Government’s role is to keep the borders secure and criminals out of the country or in jail. Try going into another country illegally and see what happens.
The idea of trying to inflate our way out of the housing mess for banks hasn’t worked. Inflation will re-emerge but not for years although in some areas like food and energy inflation has picked up over the past few years. Farmland is also inflating and booming but again the result is helping the big guys as many farms aren’t owned by individuals.
Here we have the banks that received all the free money after taking on huge risk and leverage so the American dream can be had by all even if one has no income. The economy prospered until we overbuilt and owners stopped paying their mortgages. Our government pushed for housing for all then bailed the banks out and NOW wants to sue them for fraud. In reality the government is suing itself. This must have been dreamed up by lawyers so they could get both sides of the action.
Housing is in the final dropping phase maybe another 10-20% to the downside (inflation adjusted) and will enter into the bottoming phase which then could take years to develop into a bull phase. Those buying property in the next few years might not get rewarded in the short term of 2-4 years but down the road it will turn out to be a great investment. Just as getting into the teaching sector 20 years ago wasn’t thought as being a good paying career; builders will emerge as a good career down the road. There will be a huge need for replacement as houses deteriorate over time.
How low can the markets fall? Retesting the March 2009 lows or even breaking them is likely. This time unlike 2009 the rally won’t be a “V” pattern but rather a “U” shaped bottom. From the current 11240 the DOW dropping to under 10,000 should happen in the next 2-3 months. Dow support 1150 level then 10,700. A breach of those levels takes the market to 9634 although we could churn at the 10,000 level.
There already has been a lot of pain in the market in steel stocks for example as they have been shaved in half over the past few months. Of course the banks have been acting badly for most of the year. How is it that companies like Bank of America say they are sound and the next minute they are giving Warren Buffet a big chunk of the company for 5 billion? Is Warren Buffet’s money any greener or did they reconsidered their market to model accounting method and realized they are in trouble?
There is not much left in the hat to pull out over the next few years. Interest rates are zero, companies aren’t hiring and the dollar is weakening. Government spending has sharply grown the deficit with no positive response to the economy. Something has to give the next year and the markets are anticipating this economic earthquake. Right now there are tremors but down the road the big one kicks in.
Here’s a scenario from an old blog which the drunk keeps getting helped back to the stool and fed(no pun) more drinks only to stand up and thank everyone for their help(our government) then takes a slow step like everything is all right only to fall flat on his face and pass out. When the drunk wakes up sober only then did he realize what caused the bump was all the free drinks he received the night before but in this case when he feels into his pocket to find what money he has left he unfolds an IOU for 13 trillion and then precedes to bump the other side of his head when he realizes those drinks weren’t FREE.
Monday, July 4, 2011
The Big Picture
The Big Picture
The Dow Jones broke above the 12,500 level but didn’t quite make it up to the 13,000 level. On Friday June 10th it broke a key support level of 12,080. The transports topped out at the 5500 or 5565.78 to be precise. The SPX made it in between our numbers of 1345-50 then 1400 with a high of 1370.58. The question now is if these are the highs for the year? The rally from the recent lows made on the 23rd will determine if the next BIG move (10% or more) is up to new highs or lower lows.
With the printing press on ice packs waiting in the wings to be called upon with any sign of a struggling economy re-emerging the FED must realize the problems are more fiscal in nature. This brings us to 2012 and the elections. There needs to be some fiscal stimulus in some areas but cutting in others. The credit card has been overused. So far nobody has any answers. They all talk about and know what the problems are but they don’t know how to fix them. Since 1973 our country has been talking about a need for an energy policy and yet nothing has been done.
Natural gas is one of our major resources after the recent discoveries. If we put all the trucks and buses on natural gas our oil dependency would drop by 25%. The T Boone Pickens plan does have some very good ideas but for some unknown reason we end up with government not changing direction on our thirst for the stuff.
Since the 1980’s our deficit has been moving vertically with only a slowdown during the 1990’s when President Clinton cut back on state’s funding. It only took 10 years for some states to sink into big deficits. It might be 10 or 20 years but sooner or later the budget deficit will cause major problems on the federal level. I thought it was going to happen last year but the “extend and pretend” attitude continues the masquerade party.
The markets bounced near their 200 day moving average. There will be some support at or just below the 200 MA. The current rally which isn’t expected to take out the May highs could last 2-3 months but end up going not much higher than current levels (12,600). Instead be a choppy summer market that is in a range of 12,600 to 11,900. A move to new highs for a week would change the bearishness. Conversely a break of the 11,900 level would be a huge danger signal for a steep decline.
Statistically the current year being a pre-election year is usually a strong one. Also with the January indicator showing an up year there are many who feel 2011 will be a strong one. So far the market is up slightly and only time will tell but I remain on the bearish camp.
There still have not been many issues addressed regarding the “flash crash”, debt ceiling, budget, housing, foreclosures etc. I could go on and on. The past blogs have been very cautious and continue to worry that until we get a wash out of all the excesses of the past 20 plus years the market will be vulnerable to the downside. Once the wash out occurs that will set-up for a new bull market phase that can last 12-15 years or longer. Since 2000 the market has been a dud and in a long term bear phase. The band aid approach only pro longs the inevitable. It is a slow motion train wreck.
The economic pain will be a world wide affair but won’t be another lost decade. If voters decide to vote in those that will get rid of the band aids and limit spending to reasonable levels and rid the system of excess regulation maybe real growth and prosperity can return.
Over the past few weeks there are major signs of deflation returning. The government’s goal of inflating our way out of the deficits and declining house prices has failed. Their results only increased oil and food prices. Higher commodity prices have cut into demand which seems to be happening. China’s thirst for commodities has slowed and their monetary tightening could turn into a hard landing. The declining value of the dollar has put pressure on china. Their cheap imports strategy has stalled with the weaker dollar.
Greece is on its way to a pure washout. It will be the model many countries will follow down the road. If they extend and pretend by pushing out the outcome and putting a band aid on the problem it will only prolong the strikes, inflation and job problems. Greece will continue to suffer short term but down the road they will in much better shape once they implement fiscal responsibility. The question remains will that happen?
The idea of trying to inflate the world out of debt and into prosperity will end badly for those countries that keep extending and pretending it will eventually have a day of reckoning. The big picture shows a slow motion train wreck. It seems to me most see it coming and will get out of the way. Other will be caught in the downward spiral. Once the wreck occurs we can pick up the pieces and move on and realize we were on the wrong track for much too long. We should have cut the track short.
Here is one stat that is still on the track. Banks reported last quarter that 19.7% of their mortgage loans are LATE/FORECLOSURE. Banks are hoping for inflation to take them to the Promised Land or are they happier now that they can mark to model their portfolios? I think the latter. This guarantees them showing a quarterly profit.
The Dow Jones broke above the 12,500 level but didn’t quite make it up to the 13,000 level. On Friday June 10th it broke a key support level of 12,080. The transports topped out at the 5500 or 5565.78 to be precise. The SPX made it in between our numbers of 1345-50 then 1400 with a high of 1370.58. The question now is if these are the highs for the year? The rally from the recent lows made on the 23rd will determine if the next BIG move (10% or more) is up to new highs or lower lows.
With the printing press on ice packs waiting in the wings to be called upon with any sign of a struggling economy re-emerging the FED must realize the problems are more fiscal in nature. This brings us to 2012 and the elections. There needs to be some fiscal stimulus in some areas but cutting in others. The credit card has been overused. So far nobody has any answers. They all talk about and know what the problems are but they don’t know how to fix them. Since 1973 our country has been talking about a need for an energy policy and yet nothing has been done.
Natural gas is one of our major resources after the recent discoveries. If we put all the trucks and buses on natural gas our oil dependency would drop by 25%. The T Boone Pickens plan does have some very good ideas but for some unknown reason we end up with government not changing direction on our thirst for the stuff.
Since the 1980’s our deficit has been moving vertically with only a slowdown during the 1990’s when President Clinton cut back on state’s funding. It only took 10 years for some states to sink into big deficits. It might be 10 or 20 years but sooner or later the budget deficit will cause major problems on the federal level. I thought it was going to happen last year but the “extend and pretend” attitude continues the masquerade party.
The markets bounced near their 200 day moving average. There will be some support at or just below the 200 MA. The current rally which isn’t expected to take out the May highs could last 2-3 months but end up going not much higher than current levels (12,600). Instead be a choppy summer market that is in a range of 12,600 to 11,900. A move to new highs for a week would change the bearishness. Conversely a break of the 11,900 level would be a huge danger signal for a steep decline.
Statistically the current year being a pre-election year is usually a strong one. Also with the January indicator showing an up year there are many who feel 2011 will be a strong one. So far the market is up slightly and only time will tell but I remain on the bearish camp.
There still have not been many issues addressed regarding the “flash crash”, debt ceiling, budget, housing, foreclosures etc. I could go on and on. The past blogs have been very cautious and continue to worry that until we get a wash out of all the excesses of the past 20 plus years the market will be vulnerable to the downside. Once the wash out occurs that will set-up for a new bull market phase that can last 12-15 years or longer. Since 2000 the market has been a dud and in a long term bear phase. The band aid approach only pro longs the inevitable. It is a slow motion train wreck.
The economic pain will be a world wide affair but won’t be another lost decade. If voters decide to vote in those that will get rid of the band aids and limit spending to reasonable levels and rid the system of excess regulation maybe real growth and prosperity can return.
Over the past few weeks there are major signs of deflation returning. The government’s goal of inflating our way out of the deficits and declining house prices has failed. Their results only increased oil and food prices. Higher commodity prices have cut into demand which seems to be happening. China’s thirst for commodities has slowed and their monetary tightening could turn into a hard landing. The declining value of the dollar has put pressure on china. Their cheap imports strategy has stalled with the weaker dollar.
Greece is on its way to a pure washout. It will be the model many countries will follow down the road. If they extend and pretend by pushing out the outcome and putting a band aid on the problem it will only prolong the strikes, inflation and job problems. Greece will continue to suffer short term but down the road they will in much better shape once they implement fiscal responsibility. The question remains will that happen?
The idea of trying to inflate the world out of debt and into prosperity will end badly for those countries that keep extending and pretending it will eventually have a day of reckoning. The big picture shows a slow motion train wreck. It seems to me most see it coming and will get out of the way. Other will be caught in the downward spiral. Once the wreck occurs we can pick up the pieces and move on and realize we were on the wrong track for much too long. We should have cut the track short.
Here is one stat that is still on the track. Banks reported last quarter that 19.7% of their mortgage loans are LATE/FORECLOSURE. Banks are hoping for inflation to take them to the Promised Land or are they happier now that they can mark to model their portfolios? I think the latter. This guarantees them showing a quarterly profit.
Sunday, April 24, 2011
More QE ?? But different results.
More QE ?? But different results.
As the market enters the Easter weekend there are many clouds on the horizon that need to play out. With QE2 scheduled to end in June will the market drop as it did after QE1? Will the dollar continue to decline pushing oil to $125 or higher? Will housing and unemployment improve? Will our fiscal policies and large deficits FINALLY be resounded? Will extend and pretend still be the name of the game or will enough be enough? The next 6-9 months will answer some of these questions.
One big concern is what happens after the FED stops buying all the treasuries in June. Interest rates will trend higher giving the stock market some competition. So far the drowning out effect of FED buying has kept real short term bill rates negative forcing yield to take on more risk. When the crowd is on the same side of the trade in the long run it will tip over even with the Bernanke (crazy Eddie) attitude of buying everything and anything. QE3 is a question of when not IF it will happen.
Ever since housing took the plunge the FED has been trying to find a way to re-inflate them. Inflation in housing boosts not only consumer wealth but also confidence and bank balance sheets. Unfortunately the boom and bust in housing has only inflated things that consumers use a lot – food and energy. It’s amazing how the national average for gas is $3.83 while in all the major markets the price is over $4.20. Even though the national average is $3.83 the majority of the US population pays above $4.20. Back in 2008 with oil at $140 gasoline was where it is currently. What will happen if we get back to $140? Five or $6 per gallon is not out of the question. Technically $115 is strong resistance then $125.
The supply of oil in Cushing OK. is almost at capacity. Even the Saudi’s are cutting production because demand is not there. The old economics’ 101 supply and demand vs. price curve is not working. The speculators aren’t totally to blame because they don’t normally take delivery they have to sell or roll their positions. The problem lies deeper and more political between the Middle East and 9/11 and rising oil prices. Our energy policy or I should say lack of a policy has been around since 1973 and will hit a major crossroad in the upcoming year. True the decline of the dollar has led to some of the price increase but the price/demand equation should kick in at some point. Gasoline prices are at a breaking point to the economy. Any further price rise will bring down the economy and consumer.
Eventually housing will rebound but prices won’t keep up with inflation. The supply of housing and the lack of giving anyone a loan without a good down payment will hamper housing from outpacing the inflation rate. On the positive side for existing housing the sharp increase in construction costs will push more buyers into buying existing homes. The number of homes in the foreclosure process is far from over. The banks have just put an “extend and pretend “tag on them.
Another worry that is sweeping across the world is not only higher inflation but world unrest. The riots that were predicted last year are starting to spread across the oceans. It will only get worse with riots occurring in the US by the end of next year. From Chinese truckers complaining about rising costs to Middle East countries trying to overthrow the rich dictatorships to the European countries run against socialistic principles unrest will remain a focal point. Unfortunately the end result will be war. Wars do lower the unemployment rate but at what cost?
Here we are facing mounding budget problems. The road to disaster remains and will come to a crossroad of no return over the next 12-18 months. Promises from the politicians to lower the deficit have failed since our deficit first hit the trillion dollar mark under President Reagan. Now 14 trillion later nothing has changed to address the spiraling budget deficit. The tax code is abused so badly now that any law comes with so many asterisks attached giving tax breaks or exemptions to whoever controls Congress. The tax code is like Swiss cheese. The lobbyists and congress think Americans are naïve or just plain stupid. Once the riots in the streets occur they will realize otherwise. The government can’t give special status or exemptions to everyone.
Have a complaint about paying higher health care costs as McDonald's is doing no problem they get an exemption. In General Motors those 50 billion in tax credits which are not available to any bankrupt company picked up an exemption. Ford complained about it and they ended getting some 10 billion in credits. GE pays no tax thanks to their good lobbyists and crafty accounting. Bottom line is the free market system has been compromised. Don’t even get started on the banks marking to model their assets. Their creativity blows away the concept of accounting all together.
Unfortunately it seems that our FED wants to inflate its way out of the deficit just as they did back in the Carter era. Add in the record budget deficit, the ratio of GDP to the deficit and all the special tax breaks and exemptions and that spells out trouble down the road. The consumer not only has to deal with higher taxes and inflation but the decreasing value of the dollar. What will happen when foreigners slow down buying all our paper assets? Currently QE2 is helping squeeze the supply but that ends in June or will it? There is no doubt that government intervention of asset buying will continue until the cleansing process of all the excess that extend and pretend has produced the past 20 years gets rung out. QE3 will likely be announced later in the year or early next year. You can fool someone once or twice but the third time usually doesn’t work as the markets are much too smart. The markets positive reaction to QE1 and QE2 will be different when QE3 is announced.
As the printing machine is in full throttle in an effort to inflate an investment strategy that takes advantage of the situation should be sought. Commodities, precious metals, foreign currencies and dividend (income) stocks work well in this environment. Also rentals would work but don’t expect a big rise in the underlying as housing appreciation will under perform the inflation rate. Of course the former have already have had a big rise and are do for some type of shakeout soon. Always scale into positions.
As for the stock market it has responded well to QE1 and QE2. In the belief we are in the last third of a cyclical bear market which started in 2000, the last flush out should be a dozy. The two declines so far have been sharp declines and with electronic trading things now happen faster the 3rd wipe out should be the worst decline. Short term there is resistance in the DOW at the 12,500 level then around the 13,000- 13,240. The transports have resistance at 5405 then 5500 level. There are many signs of a possible major top occurring in the next couple of weeks but the trend remains higher until the DOW breaks 12,080 and the transports 5110. The SPX has resistance at 1345-50 level then the 1400 level.
The bottom line is the stock market keeps rising, commodity prices keep rising and the dollar keeps falling. There is no doubt the manipulation of the markets will end badly. It’s only a matter of time. Keep the trailing stops for the Cinderella story does have an ending and in this case it won’t be good. With 2012 being an election year all the stops will be pulled out. This election will be one of the most important in US history. The details why will come out in the next blog. Most of the stuff is plain as day.
As the market enters the Easter weekend there are many clouds on the horizon that need to play out. With QE2 scheduled to end in June will the market drop as it did after QE1? Will the dollar continue to decline pushing oil to $125 or higher? Will housing and unemployment improve? Will our fiscal policies and large deficits FINALLY be resounded? Will extend and pretend still be the name of the game or will enough be enough? The next 6-9 months will answer some of these questions.
One big concern is what happens after the FED stops buying all the treasuries in June. Interest rates will trend higher giving the stock market some competition. So far the drowning out effect of FED buying has kept real short term bill rates negative forcing yield to take on more risk. When the crowd is on the same side of the trade in the long run it will tip over even with the Bernanke (crazy Eddie) attitude of buying everything and anything. QE3 is a question of when not IF it will happen.
Ever since housing took the plunge the FED has been trying to find a way to re-inflate them. Inflation in housing boosts not only consumer wealth but also confidence and bank balance sheets. Unfortunately the boom and bust in housing has only inflated things that consumers use a lot – food and energy. It’s amazing how the national average for gas is $3.83 while in all the major markets the price is over $4.20. Even though the national average is $3.83 the majority of the US population pays above $4.20. Back in 2008 with oil at $140 gasoline was where it is currently. What will happen if we get back to $140? Five or $6 per gallon is not out of the question. Technically $115 is strong resistance then $125.
The supply of oil in Cushing OK. is almost at capacity. Even the Saudi’s are cutting production because demand is not there. The old economics’ 101 supply and demand vs. price curve is not working. The speculators aren’t totally to blame because they don’t normally take delivery they have to sell or roll their positions. The problem lies deeper and more political between the Middle East and 9/11 and rising oil prices. Our energy policy or I should say lack of a policy has been around since 1973 and will hit a major crossroad in the upcoming year. True the decline of the dollar has led to some of the price increase but the price/demand equation should kick in at some point. Gasoline prices are at a breaking point to the economy. Any further price rise will bring down the economy and consumer.
Eventually housing will rebound but prices won’t keep up with inflation. The supply of housing and the lack of giving anyone a loan without a good down payment will hamper housing from outpacing the inflation rate. On the positive side for existing housing the sharp increase in construction costs will push more buyers into buying existing homes. The number of homes in the foreclosure process is far from over. The banks have just put an “extend and pretend “tag on them.
Another worry that is sweeping across the world is not only higher inflation but world unrest. The riots that were predicted last year are starting to spread across the oceans. It will only get worse with riots occurring in the US by the end of next year. From Chinese truckers complaining about rising costs to Middle East countries trying to overthrow the rich dictatorships to the European countries run against socialistic principles unrest will remain a focal point. Unfortunately the end result will be war. Wars do lower the unemployment rate but at what cost?
Here we are facing mounding budget problems. The road to disaster remains and will come to a crossroad of no return over the next 12-18 months. Promises from the politicians to lower the deficit have failed since our deficit first hit the trillion dollar mark under President Reagan. Now 14 trillion later nothing has changed to address the spiraling budget deficit. The tax code is abused so badly now that any law comes with so many asterisks attached giving tax breaks or exemptions to whoever controls Congress. The tax code is like Swiss cheese. The lobbyists and congress think Americans are naïve or just plain stupid. Once the riots in the streets occur they will realize otherwise. The government can’t give special status or exemptions to everyone.
Have a complaint about paying higher health care costs as McDonald's is doing no problem they get an exemption. In General Motors those 50 billion in tax credits which are not available to any bankrupt company picked up an exemption. Ford complained about it and they ended getting some 10 billion in credits. GE pays no tax thanks to their good lobbyists and crafty accounting. Bottom line is the free market system has been compromised. Don’t even get started on the banks marking to model their assets. Their creativity blows away the concept of accounting all together.
Unfortunately it seems that our FED wants to inflate its way out of the deficit just as they did back in the Carter era. Add in the record budget deficit, the ratio of GDP to the deficit and all the special tax breaks and exemptions and that spells out trouble down the road. The consumer not only has to deal with higher taxes and inflation but the decreasing value of the dollar. What will happen when foreigners slow down buying all our paper assets? Currently QE2 is helping squeeze the supply but that ends in June or will it? There is no doubt that government intervention of asset buying will continue until the cleansing process of all the excess that extend and pretend has produced the past 20 years gets rung out. QE3 will likely be announced later in the year or early next year. You can fool someone once or twice but the third time usually doesn’t work as the markets are much too smart. The markets positive reaction to QE1 and QE2 will be different when QE3 is announced.
As the printing machine is in full throttle in an effort to inflate an investment strategy that takes advantage of the situation should be sought. Commodities, precious metals, foreign currencies and dividend (income) stocks work well in this environment. Also rentals would work but don’t expect a big rise in the underlying as housing appreciation will under perform the inflation rate. Of course the former have already have had a big rise and are do for some type of shakeout soon. Always scale into positions.
As for the stock market it has responded well to QE1 and QE2. In the belief we are in the last third of a cyclical bear market which started in 2000, the last flush out should be a dozy. The two declines so far have been sharp declines and with electronic trading things now happen faster the 3rd wipe out should be the worst decline. Short term there is resistance in the DOW at the 12,500 level then around the 13,000- 13,240. The transports have resistance at 5405 then 5500 level. There are many signs of a possible major top occurring in the next couple of weeks but the trend remains higher until the DOW breaks 12,080 and the transports 5110. The SPX has resistance at 1345-50 level then the 1400 level.
The bottom line is the stock market keeps rising, commodity prices keep rising and the dollar keeps falling. There is no doubt the manipulation of the markets will end badly. It’s only a matter of time. Keep the trailing stops for the Cinderella story does have an ending and in this case it won’t be good. With 2012 being an election year all the stops will be pulled out. This election will be one of the most important in US history. The details why will come out in the next blog. Most of the stuff is plain as day.
Sunday, January 2, 2011
Some ideas for 2011
Some ideas for 2011
The markets ended 2010 with gains in everything from the stock market to most commodities to bonds. As we turn to the New Year for short term traders there is a set-up in the making that has a high probability of profitability. The direction for this trade has yet to be established but will show its hand in the coming days. The main point to take away from this set-up is that the market will move 500 to 1200 points in a time frame of 3-13 trading days.
The set-up has occurred because the following conditions have recently developed.
1. Trading compression
2. VIX rises 20% with no move in market in either direction
3. Number of up/down days consecutive or over at least a 20 day period.
4. Market in oversold or overbought territory
5. Extreme pessimism/optimism
6. Technical patterns
7. Historical patterns
8. Time cycles
The past 20 trading days have NOT produced a daily trading range of more than 100 points. True it’s a holiday period but nonetheless a trading range of less than 100 points over a long period of time is setting up for a sharp directional move. This compression is ready to explode.
The VIX recently hit yearly lows at 15.40 and quickly jumped almost 20% with no ensuing move in the averages. The VIX is low compared to the past few years but that doesn’t mean much. Rather the quick 20% move in a day or so in either direction sets up for some type of sharp move.
The past 22 trading days has produced only 6 down days for the comp, 5 down days for the SPX and 8 down days for the DOW. When there is a steady move with many consecutive clusters justifies the out set for a sharp move and that move can be in the same direction. Back in March and April the DOW was up 30 of 40 days but did however move sharply and in this case it was lower.
Over the past few weeks even with the market having a strong upward bias as the advanced/decline line made a new high the 10 day closing tick has been stuck in negative territory throughout. A move back into positive territory has proven to be a good buy signal 4 out of the past 5 times it has occurred in 2010 but more importantly the market had a sharp move in every event.
Now we are in the 3rd year of a presidential cycle there has been a strong upward bias dating back to 1940. But on the flip side getting double digit returns for 3 years in the row (2009 and 2010 both up) is unlikely. We also have to wait for the January indicator which states a higher January has a better than 70% chance to produce an up year although the past 2 January’s were down while the market was up.
The percentage of bull/bear newsletter writers is nearing the October 2007 level which marked an important top. This indicator is a warning sign but near term the market can thrust higher as can the current readings. It’s something to pay attention to in the longer term.
Technically, the Transports close above 5120 it looks like a breakout to 5325. In the SPX 1260 gives way then 1310-1315. For the DOW a break above 11646 resistance leads to 11920 then 12055. The above averages and index need to stay above their resistance levels for at least 2 consecutive days thus hoping to avoid a fake out.
Cycle-wise there are 2 important ones namely the 149 and 232 day cycles that point to an important top happening this week- January 6th and 7th.
Reading the above paragraphs should leave one confused as to what will happen in the first quarter of 2011. One thing for sure that will emerge in the next few days or by the end of the week will be the beginnings of a sharp directional move of at least 500 points but more likely in the 800-1,000 point range in the next 3-12 trading days. There could be a big fake out so I would wait till the market moves 200 points and a few days. (Trail the stops)
In the transports if we trade above 5120 for 2 consecutive days stay bullish but if they fail watch out below. With the DOW it would be 11,646 and the SPX 1260 as the line in the sand or swing points. Gathering all the info doesn’t make one lean bullish or bearish so let the market tell you what it wants to do as the trend established after the first 200 DOW points should remain intact. Being back spread should also work but once the trend is established stay with the move.
With Mutual fund Monday and the beginning of the month and year trading should start with an upward bias. Longer term not withstanding the next move the market’s return of the bear will resurface. The financial mirrors that have been used for the past few years are about to crack.
Good Luck to All in 2011 and keep the stops close.
The markets ended 2010 with gains in everything from the stock market to most commodities to bonds. As we turn to the New Year for short term traders there is a set-up in the making that has a high probability of profitability. The direction for this trade has yet to be established but will show its hand in the coming days. The main point to take away from this set-up is that the market will move 500 to 1200 points in a time frame of 3-13 trading days.
The set-up has occurred because the following conditions have recently developed.
1. Trading compression
2. VIX rises 20% with no move in market in either direction
3. Number of up/down days consecutive or over at least a 20 day period.
4. Market in oversold or overbought territory
5. Extreme pessimism/optimism
6. Technical patterns
7. Historical patterns
8. Time cycles
The past 20 trading days have NOT produced a daily trading range of more than 100 points. True it’s a holiday period but nonetheless a trading range of less than 100 points over a long period of time is setting up for a sharp directional move. This compression is ready to explode.
The VIX recently hit yearly lows at 15.40 and quickly jumped almost 20% with no ensuing move in the averages. The VIX is low compared to the past few years but that doesn’t mean much. Rather the quick 20% move in a day or so in either direction sets up for some type of sharp move.
The past 22 trading days has produced only 6 down days for the comp, 5 down days for the SPX and 8 down days for the DOW. When there is a steady move with many consecutive clusters justifies the out set for a sharp move and that move can be in the same direction. Back in March and April the DOW was up 30 of 40 days but did however move sharply and in this case it was lower.
Over the past few weeks even with the market having a strong upward bias as the advanced/decline line made a new high the 10 day closing tick has been stuck in negative territory throughout. A move back into positive territory has proven to be a good buy signal 4 out of the past 5 times it has occurred in 2010 but more importantly the market had a sharp move in every event.
Now we are in the 3rd year of a presidential cycle there has been a strong upward bias dating back to 1940. But on the flip side getting double digit returns for 3 years in the row (2009 and 2010 both up) is unlikely. We also have to wait for the January indicator which states a higher January has a better than 70% chance to produce an up year although the past 2 January’s were down while the market was up.
The percentage of bull/bear newsletter writers is nearing the October 2007 level which marked an important top. This indicator is a warning sign but near term the market can thrust higher as can the current readings. It’s something to pay attention to in the longer term.
Technically, the Transports close above 5120 it looks like a breakout to 5325. In the SPX 1260 gives way then 1310-1315. For the DOW a break above 11646 resistance leads to 11920 then 12055. The above averages and index need to stay above their resistance levels for at least 2 consecutive days thus hoping to avoid a fake out.
Cycle-wise there are 2 important ones namely the 149 and 232 day cycles that point to an important top happening this week- January 6th and 7th.
Reading the above paragraphs should leave one confused as to what will happen in the first quarter of 2011. One thing for sure that will emerge in the next few days or by the end of the week will be the beginnings of a sharp directional move of at least 500 points but more likely in the 800-1,000 point range in the next 3-12 trading days. There could be a big fake out so I would wait till the market moves 200 points and a few days. (Trail the stops)
In the transports if we trade above 5120 for 2 consecutive days stay bullish but if they fail watch out below. With the DOW it would be 11,646 and the SPX 1260 as the line in the sand or swing points. Gathering all the info doesn’t make one lean bullish or bearish so let the market tell you what it wants to do as the trend established after the first 200 DOW points should remain intact. Being back spread should also work but once the trend is established stay with the move.
With Mutual fund Monday and the beginning of the month and year trading should start with an upward bias. Longer term not withstanding the next move the market’s return of the bear will resurface. The financial mirrors that have been used for the past few years are about to crack.
Good Luck to All in 2011 and keep the stops close.
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