Archive for August, 2009

S&P 500 vs. US Dollar – A Day Does Not A Trend Make (yet)

Monday, August 31st, 2009

spx-usd

For the first time in a long time, both the stock market and the dollar were down. For a long time, the two have been moving in opposite directions – on days when the stock market was up, the dollar was down, and vice versa.

I am not sure if this is some big change in the character of one or the other, but it bears watching.

Readers of this blog know that I believe the dollar is in a secular bear market. I don’t think today’s action impacts that, but this change in the relationship of equities and the dollar could be important if it continues.

Mark

Market Moves Higher Despite Sentiment

Thursday, August 27th, 2009

sp-bullish

Well, we had some negative movement early today in the broad market, but ended as the market rallied and the buy-the-dips group came in.

Sentiment is WAY bullish. That is just too negative (sentiment is a contra-indicator) yet all of the technical aspects of the market are pushing higher. We could be moving into a situation where we will consolidate over a few weeks in a sideways pattern with current levels being the upper end of the sideways range (much like we did in June before the July break-out. That could easily happen again as there are a lot of investment managers who have under-performed YTD and want to get into the market (they are the primary buy-the-dippers). A sideways correction is always a possibility, particularly if economic numbers start to come in better and show an improving economy.

Look at the On Balance Volume line on the graph above: it is in a strong up-trend.

Look at Volume itself: today it was right on the moving average line (not significantly below as some on TV are saying). Average volume does not discount the strong trend of the OBV line.

The MACD at a bit under 20 is strong, and with the black line above the red line (if you look close) that is also positve.

The ADX line is curling up and as its above 30 it shows the market remains in a strong uptrend.

The Accumulation/Distribution line is in a strong uptrend and is curling up. The Money Flow is strongly positive (although not as strong as a month ago) but it is starting to turn up, too.

The Stochasitics at above 80 is worrisome and indicates we are due for a consolidation. Maybe, it will be a sideways consolidation instead of a major pullback that clears turns the bulls to bears and reduces the danger of a pullback.

That said, we implemented the profit protection plan described in yesterday’s post. We booked profits on those partial positions and set stops as described – some of which hit in this morning’s selloff. I’m OK with that as we have a bit of cash on hand to put back into the market if we get a pullback.

Anyway, its getting late and I’ve had a very long day of meetings and investment activities, so I’m going to stop working and watch the season finale of Royal Pains (yes, summer fluff TV). As the market becomes clearer, I’ll keep you posted on what we see and what we are doing with our clients’ portfolios.

Mark

Implementing Our Profit Protection Plan

Wednesday, August 26th, 2009

Most of you who know me know that I have back up plans for most everything in my life, but in particular my investing activities.

Given the technical situation in the market, with so many of the indicators showing an overly bullish sentiment, we are implementing our profit protection plan as I write this.

We have reviewed all holdings of individual equities and ETF’s department-wide and any that have a >40% return year-to-date are subject to:

1. review to determine if we should sell 10% of the position immediately (may or may not be the case – we may add this 10% to the 15% below if there is enough positive momentum in the company stock to potentially keep it moving higher)

2. set a stop loss on 15% of the position below one of the following technical levels (13 day EMA, 34 day EMA, 20 day SMA, or two standard deviations below the 20 day SMA trend)

This whole market reminds me of the 1999 NASDAQ which continued to go up in the face of overly bullish sentiment. We sold early in that process and missed a lot of the ultimate upside – something I’d like to avoid in this market if it continues to move higher. But we also missed much of the big downward move as prices corrected and were able to have cash on-hand to identify the next big market mega-trend: oil and base metals.

The difference between this market and the NASDAQ in 1999 is that there are some changing fundamentals that should ultimately and positively move stocks up. Maybe they have temporarily gotten a bit giddy and are due for some sort of correction which we want to protect against. However, all of the monetary stimulus in the system will (at least for a while) continue to push stock prices higher – at least up to the pre-Lehman Bankruptcy level of 1250 on the S&P 500 Index.

Anyway, back to it…I just wanted to take a few minutes to let everyone know what we are doing and why.

More later!

Mark

Bernanke Reappointed

Tuesday, August 25th, 2009

The market definitely wanted Chairman Bernanke reappointed as head of the Fed.

However, the Youtube video compilation of his statements in error is making the rounds today. Its is pretty illuminating to think that someone on the inside of government could have it so wrong.

Check it out for yourself – just copy the link into your browser.

Mark

What’s Worrying Me

Sunday, August 23rd, 2009

1937-compared-to-today

Many thanks to the StockTock blog for the chart above. He updates it periodically and I check occasionally to see what it looks like.

The chart is a comparison of the Dow Jones Industrial Average during the 1937 Great Depression to the S&P 500 during today’s recession. It follows an uncannily similar path. The rally during the 1937 Dow ended up being a very strong bear market rally. Unfortunately, it ended up bouncing off a longer term downtrend line and ultimately heading lower as the economy did not recover until WW II brought the industrial machine of the USA back to life.

I’ve been posting a chart showing that volume may be signaling an extension of our current rally – our target is 1050 on the S&P 500. However, I have also noted that we have several severe headwinds that could keep any advance contained: continued deleveraging by the consumer, bank failures, deteriorating quality of the Federal Reserve Bank’s balance sheet, record foreclosures and loan delinquency, high levels of unemployment that will likely persist for some time into the future, FDIC special assessments needed to keep it afloat, a projected commercial real estate crisis similar to the housing crisis, weak-to-non-existent corporate top line earnings growth, potential inflation in coming years due to unprecedented monetary stimulus.

In my normal weekend reading to prepare for the coming week, I note that there is a new Merrill Lynch survey of mutual fund managers which shows that cash levels are at near historic lows and bullishness is at near historic highs. This, quite frankly scares me. So, I decided to take a look at an oldie-but-a-goodie indicator, the Bullish Percent Index.

bullish-percent

The Bullish Percent Index is a breadth indicator. When the “Close” is a reading above 50 but below 80, this indicates a bullish market. As you get above 80, this indicates the market is likely over extended and due for a pullback. If you scan the “Close” column, you will note that several of the market sectors are above 80 with technology above 90. My gut feeling is that we are likely in for some consolidation to shake the bullishness out of the market.

If you refer back to yesterday’s post, I noted that we have a short-term consolidation on low volume then four rally days with slightly higher and increasing volume, but not up to the green trend line. Given the readings on the BPI, it seems that we are probably going to be stuck in a consolidation range for a while as we work off the excess bullishness. If we do hit our 1050 target, I’d expect a pullback toward the lower end of that range (975-ish).

Does that mean this rally is over? Not necessarily – much will depend upon coming economic outlooks and prospects for top line revenue growth (remember, even given the headwinds, revenue growth is a comparison to previous quarters and year-over-year, which are fairly easy targets to beat). These two things can keep investor psychology improving and keep volume increasing during rallies – a strong sign of positive things ahead.

Caution is warranted near-term, but as long as volume shows positive psychology, intermediate term is likely good for the market – with maybe a run up to 1250 on the S&P 500 Index (the level of the market before the Lehman Brothers bankruptcy that precipitated last Fall’s crash). However, it is too early to be looking for that level – volume speaks volumes, and the low volume consolidation is our current challenge to be overcome.

Enjoy the rest of your weekend.

Mark

Market Update

Saturday, August 22nd, 2009

sp-bear-mkt-view1

In an earlier post, I showed this chart and explained how we may have had a change in market psychology as we were for the first time during the bear market showing increasing prices and increasing volume. I noted that we were looking for a low volume consolidation that would let buyers from the sidelines into the market.

You can see on the chart that we did have a very short-term low volume pullback. I would have expected it to be a longer short-term (pardon the oxymoron) but it could mean that the demand to get into the market is so high that the buy the dips strategy is being implemented on any small dip. Or, it could just be a head fake bull-trap to draw in more buyers before it pulls back in a bigger way – if you look at the up volume over the last couple of days, it was higher than the down volume in the low volume consolidation, but it was not as high as the increasing volume of the green trend line.

I also noted that the overhead resistance is minimal at this point (see the comment on the chart near the horizontal volume-by-price bars).

There is one major event on the horizon that could derail everything in both the stock and bond market: Wall Street wants Federal Reserve Chairman Bernanke reappointed when his term ends in January. So far, the administration has not made up its mind. Markets do not like uncertainty, and if an announcement is made that removes him and appoints someone else, that uncertainty would likely send both the stock and bond markets down several percentage points.

So, we are in that wait and see mode: ride the market up but be prepared to raise cash if the bull trap comes to fruition. The most likely scenario is the market head up to our 1050 target, but we have to be prepared for anything.

Enjoy your weekend.

Mark

Scary Chart

Tuesday, August 18th, 2009

gov-receipts-less-expenditures

This chart originally appeared on the Zero Hedge website with compliments to energyecon who produced it.

The chart gives a visual of the growing chasm between government receipts and expenditures with a view of the deficit.

Nothing in this chart tells me that the dollar can rally more than just a counter-trend rally against the primary downtrend.

Mark

From MSN Money: Social Security Bailout on the Horizon?

Monday, August 17th, 2009

Here is an article by Bill Fleckenstein, one of the people that correctly called last Fall’s stock market crash and its sources.

He writes about Social Security being the next big financial shoe to drop and its implications.

Social Security crunch coming fast

Here’s a frightening prediction: The public pension system’s trust fund could go into the red in the next year, far sooner than expected. Will it get the next huge bailout?

By Bill Fleckenstein
MSN Money

The debate over health care has captured everyone’s attention, but it appears the next big government program that needs to be addressed will be Social Security. That’s the focus of the July 30 article “The next great bailout: Social Security” by Allan Sloan, Fortune’s senior editor at large.

History of Social Security
Those who’ve been paying attention have long known there is no money in the Social Security Trust Fund — it’s all been spent. Thus, former Vice President Al Gore’s famous assessment that Social Security receipts should be placed in a “lockbox” was actually correct.

Given that so few people really understand the Ponzi nature of the current Social Security financing scheme — created in 1983 by a commission chaired by none other than the world’s greatest serial blower of bubbles, Alan Greenspan — I decided to reprise Sloan’s article. (The Social Security problem is especially important because it likely will put additional pressure on the dollar and on bonds, and exacerbate the funding crisis down the road.)

The story begins: “In Washington these days, the only topics of discussion seem to be how many trillions to throw at health care and the recession, and whom on Wall Street to pillory next. But watch out. Lurking just below the surface is a bailout candidate that may soon emerge like the great white shark in ‘Jaws': Social Security.

“Perhaps as early as this year, Social Security, at $680 billion the nation’s biggest social program, will be transformed from an operation that’s helped finance the rest of the government for 25 years into a cash drain that will need money from the Treasury. In other words, a bailout.”

Could Social Security’s number be up?
As I’ve already noted, there is no money in the Social Security Trust Fund — just IOUs from the government to itself. What is liable to spark debate and grab headlines is that instead of producing its biggest surplus ever in 2009-10, the trust fund could start running deficits in the next year, primarily because the weak economy is generating less tax revenue.

That’s years earlier than expected. Social Security wasn’t supposed to go into the red until around 2015.

Past projections were for a cash-flow surplus of about $87 billion this year and $88 billion next year. But new projections show those figures may drop to around $18 billion or $19 billion, which could easily go negative. And once the red ink starts spilling (a temporary bounce into the black in the next couple of years notwithstanding), that deficit will grow for the next 20 or so years unless something is done to halt it.

In order to better illuminate what has transpired and how misleading government accounting is, I would like to use the example from Sloan’s article to explain what has happened: “The cash that Social Security has collected from my wife and me and our employers isn’t sitting at Social Security. It’s gone. Some went to pay benefits, some to fund the rest of the government. Since 1983, when it suffered a cash crisis, Social Security has been collecting more in taxes each year than it has paid out in benefits. It has used the excess to buy the Treasury securities that go into the trust fund, reducing the Treasury’s need to raise money from investors.”

In other words, the government spent it. Throughout all those years in the 1980s and 1990s, when folks worried about the budget deficit, it was reported to be lower than it would have been had the Social Security Trust Fund’s money not been going into government coffers, thereby reducing the size of the deficit. Also untenable is the projected worker-to-retiree ratio, which will jump from 30 Social Security recipients per 100 workers in 1990 to 46 per 100 in the next 20 years.

The next (orthopedic) shoe to drop?
And Social Security funding isn’t the only time bomb. Sloan notes that “when it comes to problems, Medicare makes Social Security look like a walk in the park, even though at about $510 billion this year, it’s far smaller. Not only are Medicare’s financial woes much larger than Social Security’s, but they’re also much more complicated. . . . Medicare is more convoluted, because the health-care system is much more complex than Social Security. Which, when you think about it, involves only money.”

Social Security facts
Summing up, Sloan cautions: “Social Security may not make it onto the agenda until next year. But it’s going to show up sooner or later, and probably sooner, because the numbers are so bad that something’s got to be done.”

All of these future funding issues will come under scrutiny in the next couple of years as the budget deficit explodes and worries about how it will all be financed take center stage.

A Fed follow-up
Turning to last week’s main event, the Federal Reserve’s Open Market Committee meeting, here’s what I wrote ahead of the release: “There is just too much pressure on the Fed (not the least of which is Bernanke’s view of the 1930s) for it to do anything that even remotely resembles tightening.”

The Fed did not contradict me, as it chose to continue pursuing the policies it had previously articulated. That must have put a smile on the face of Paul McCulley of Pimco, who recently stated in an interview on Bubblevision that he wanted the Fed to avoid raising interest rates too soon and that the economy needed to see more inflation.

That, ladies and gentlemen, coming from the country’s largest holder of bonds. In the old days, bondholders were thought to be inflation vigilantes. But as we can see from McCulley’s statements, they are now really just liquidity hogs.

Commodities primed for higher prices?
As for the ramifications of all the money printing the feds are doing and the recent growth spurt in China, it’s worth passing along the conclusions reached by “Government Sachs” in a report headlined “Commodities in the Crosshairs” (not available online to the public). That report described the moves we’ve seen so far this year in commodity prices as “just the beginning” of a new bull market that “ultimately would likely be even more extreme” than what we saw in prior commodity rallies.

Goldman Sachs (GS, news, msgs) noted: “The reality is that the commodity problem is one of supply shortage due to years of under-investment. . . . This chronic problem has been exacerbated during the financial crisis by tight credit conditions and large price declines, which impact producers.”

Goldman says that when the global economy recovers, we’re likely to see severe price constraints and some wild action, just as we did in mid-2008.

I pass that along as food for thought, and it jibes with the view of a friend of mine that I find intriguing: that as crazy as commodity prices seemed to be last year, they could get even crazier, just as tech stocks’ wild ride from 1995 to 1998 paled in comparison to what occurred in 1999-2000. I’m not saying that’s going to happen, but given the amount of money printing that has gone on (and will go on), anything is possible.