Tuesday, November 23, 2010
Been on the Sidelines
I have been sitting on the sidelines in terms of this blog for the past few weeks. Will begin updates again probably after thanksgiving. Happy thanksgiving to you and your family.
Wednesday, November 10, 2010
Palladium on the Move
Years ago I traded the palladium futures for a client who was using them as a hedge against this physical inventories. The market back then was anemic as I was literally trading against one trader in the pit it seemed each time I called down to get a market (this before the globex system evolved for metals). On the chart, around the 1100 level, was the area I was unloading palladium futures for the client. Now 10 years later, the futures look like now they are gearing up for another move towards those highs. The breakout occurred last month in this metal and has continued into November. Interestingly, the platinum contract, not shown here, it not showing the same breakout pattern. In fact, it is lagging badly. Since these metals are mined together, the breakout in palladium contract might find some stiff resistance ahead. In the past when platinum has lagged the move higher, that has spelled trouble for palladium. It has also signaled taht the move in gold might be long in the tooth (the breakdown below 1400 today could be an indication of this). Nothing solid has occurred yet but I will be watching closely in the days ahead.
In looking at the trend models below, you can see that momentum A model is not yet overbought. The contract corrected on the first break through the bands but bounced off the 13 month MA (strong move) and is now moving higher. A climb towards the 900 level should break the band. If it climbs towards the previous highs, it will be overbought again arguing for a move downward. In the meantime though, the bulls control the ball. in terms of momentum B, it is quite extended but showing know signs yet of moderation.
Going forward, I will be looking for pullbacks to get into this contract. Call be bullish on palladium.
Tuesday, November 9, 2010
Bonkers
First and foremost, Silver is closing in on the $28 target that I mentioned back in September. Upon review of the chart though, i would argue that $26 would have been a better target (which has been taken out easily) followed by a move towards $30 next. Like the GLD support that I mentioned a few weeks ago at $119, which happened to be a target level from the breakout from lower levels, Silver now has major support at the $26 target. If it holds after this parabolic move, then the $30 level would be my next target. At the same time though, if you look at the bottom two charts and the circles shown, Silver is now overbought similar to 2004, 2006, 2008 and now 2010 (every 2 years?). Each time this metal has corrected hard and given the open interest levels that historically have been in this contract, it will not take much to knock it down if a few hedge funds get interested in doing such.
So I am probably a buyer on dips above $26 with a stop below that level to play the decline down towards the $22/24 area. I wish I had followed my original note and held the silver that I bought at the time but what can you do! Trend is higher and the CRB is not quite at its target just yet. Thus the bulls still have supports.
Monday, November 8, 2010
Crude on the Move
In the middle of last month, I was of the opinion that crude would have trouble with the 84 level and head back down towards 80 on the way towards the $72 level. However, I did not really take into account how strong the buyers were around the $80/$81 level and this rendered the $84 resistance somewhat less strong than it appeared. Sure enough as November arrived and the leaves fell off the trees, the price of crude smoked to the upside and hit $87.50s late last week and overnight. It has since retreated back toward the projection point - which if you do a simple extrapolation between $79.50 and $83, you end up with a target of $86.50 or roughly in that area. The daily chart found support today at $86.So what is my plan going forward? Well momentum turned up just as the chart was approaching resistance a few weeks back. The breakout then became a formality. The fact that that the market blasted through $86 like it was not there, argues that $89 is probably the eventual target before a meaningful correction follows. A failure around the $86 level though does argue for a retracement back to the breakout point around $83 and change. Momentum remains bullish at the moment so I will continue to play the long side with the trade. Breaks below $86 might encourage some short sales from this trader.
Just one more note. Fundamentals for the oil barrel at the moment are lousy. Thus this move is all about the weakness in the dollar and stock market strength. To find real support, the fundamentals for the distillate end of things must improve but for that to happen, we would need some very high industrial demand on the electricity side or a cold streak forcing everyone to jack up their heat. On the gasoline side, mall traffic was huge this past weekend so we could start to see some better alignment with the fundamentals there.
Sunday, November 7, 2010
Highs and Lows
Now at first glance of the chart, the first word that comes to mind is overbought, if you look at the oscillators. If you look at the smoothed index, you could say "almost overbought" is probably the best way to describe things. Each time in the past, when the index has pierced this upper level, the market has either slowed down its advance for a few months but or corrected. You can also see if the index starts to decline while the S&P continues to climb, that is a warning that the underlying fundamentals or strength of the market is waning. That is not the case now but it was in the lead up to the bubble highs in 2000 and again in 2007.
In looking at the oscillators on this chart, the top oscillator is basically at resistance - this one is a slow moving oscillator and thus argues at the moment that the market could run into resistance around the current levels. At the same time, a break above the 20 period moving average could technically argue for another leg up in the S&P 500. The bottom oscillator is another story. It is approaching 2003 level highs as well as 2000 and 1998. In each instance, the market corrected hard within 6 months. The highs for the 2003 post period was early 2004 before a 9 month correction followed. The 2000 signal confirmed the bear market. The 1997 signal was a precursor to the problems that fall as well as the issues in 1998. At the moment, with its overbought situation, it argues that the current rally could be long in the tooth.
On balance, I am not too concerned yet as the NYSE Highs/Lows index has not hit the top level yet that signifies overbought. I will be watching though when it happens and what the index does next. Bull market remains strong but some headwinds seem to be forthcoming.
Friday, November 5, 2010
Upward Momentum
A month ago I posted a note on the S&P, using this "P Momentum Model," arguing that there was some concern that the rally was petering out. Well, a month of solid gains followed up by a breakout to the upside over the first week of November has rotated each piece of this model to the bullish side - for the first time since the March 2009 lows. What followed during that time was a monstrous move off the lows. That is not to say we see the same thing but given the momentum is now solidly in the bulls corner, higher prices are probably in store for the S&P. By year end? That is a tough one given the weak retail sales numbers. While the jobs report was better than expected, we need another month of such to get a confirmation that the employment situation is improving (contrary to what I am seeing).However, when looking at a chart, rationalizing things is not always the best method for looking at where we are going. So lets review quickly the implications of all four models in bullish directions. As mentioned, the 2009 lows led to a monstrous move. Before that, the breakdown in 2007 was a leading indicator of the bear market to come (and the pain that followed). Before this period, we had the 2003 lows that also was a period of rising prices. Before that we had the confirmation of all four models downward in late 2000. In each case, the next 12 months were strong for stocks which argues two things: The market breakout is sustainable and the 1325 level is a possibility now. By year end? That might be pushing it but nevertheless, stock momentum is once again very bullish.
The one caveat is from the chart I posted earlier - showing the extreme condition that the Russell 2000 versus Russell 1000 chart currently displays. In the past a top has arrived when the indicator is overbought. Thus for the next leg of this bull market, the speculative names cannot lead - the large cap names need to. So overall I remain bullish but given the risks from the Russell 2k/1k model and the possible inflation storm around the corner, I am watching intently for any signals that the bull runs out of steam. However, as I mentioned, the P momentum model turns have all resulted in solid market performance in the year ahead. I guess we'll see what wins out.
Fourth Time is a Charm?
I am left wondering what this means. Does the ratio breakout to a higher high pushing speculation levels off the chart or does it move to higher levels but reverse violently sending the markets to a deep oversold state that it probably should have gone in the summer? I could honestly make the case both ways. The bullish story argues that the ratio find firm support and a higher low arguing for a higher high. The bearish case is basically the fact that we had the higher low and did not fully correct the excessive speculation that existed in the spring. History tells us that markets which do not have healthy corrections, have major corrections. We saw this in 2006/2007 with the markets moving straight up in the fall into Feb 2007 and crashing with the Shanghai comp. We saw such in the spring of this year and the flash crash and three months of pain that followed.
So as we proceed through the end of the month, I will be watching two things closely. First, what the S&P does with current levels. Second, what the Ratio here does; will it breakout to higher levels and hold; will it fail to make higher levels and reverse lower; or will it breakout to higher levels, move to overbought and then correct? I will be looking for clues in the weeks/months ahead.
Thursday, November 4, 2010
Breakout...Almost
Well if you look at the position of the current candle and look at the highs, they are basically sitting around the same point as the levels in the spring. A failure form this trading area will get the bears all over the screens selling futures, SPYs and anything else related to the markets as they will see a double top and a retest of the 1000 level next. I believe the jobs report will be a bit better than most believe so this should not come into play but the markets are extended and a correciton is overdue. From where is the key. I remain bullish but now concerned about the outlook for the markets with the Fed's error from yesterday. QE will be something we wished was never implemented.
Here Comes Inflation
Not much to say this am (since I am on the road this week) so this will be brief. The Fed said yesterday that inflation was tilted to the downside and this the $900 billion (includes maturity reinvestment) was necessary to facilitate growth. First, the threat is not deflation but inflation and it is here folks no matter what the CPI says. The CRB is climbing, General Mills and other food distributors are now passing prices through and profit margins are going to be squeezed. This is not stock friendly - the question is at what point it becomes painful to corporate america?
This is not to say I am not bullish on stocks. However this is a threat that could upend the stock market. Incomes and job growth are not rising quickly enough to offset the current levels of inflation...never mind 4 or 5 times! Also bonds now do not have fed buying support or inflation support. In other words, long rates are going to climb. And the dollar, well I would be looking for a test of the lows now no matter how much I dislike the Euro.
This is not to say I am not bullish on stocks. However this is a threat that could upend the stock market. Incomes and job growth are not rising quickly enough to offset the current levels of inflation...never mind 4 or 5 times! Also bonds now do not have fed buying support or inflation support. In other words, long rates are going to climb. And the dollar, well I would be looking for a test of the lows now no matter how much I dislike the Euro.
Tuesday, November 2, 2010
Aussie on the Move but....
BUT (and you new there was going to be a but), my favorite confirmation of the Aussie Dollars move, the price of copper, is not confirming as the chart shows as it remains stalled in the 250 to 400 range. In the past when the copper contract has confirmed the move by breaking beyond resistance (or breaking through support), the Aussie dollar has continued higher. However, when the copper contract fails to breakout, the Aussie dollar rolls over and then collapses downward - 2008 was an example of such though it fell much further than I thought it would. Now the Aussie is on the move higher yet again and copper is sitting right at the same resistance levels that contained the contract in the past. A failure at the current levels would be very detrimental to the breakout in the Aussie leading to at least a correction to the bottom of the previous range around the 80 level.
So in short, I can project the levels that the Aussie can trade to but if the copper contract does not breakout to the upside, my stops will be on the other side of 95 looking for a very swift move toward the 80 level.
Monday, November 1, 2010
Microcaps on the Run
In terms of the momentum models, A and B, momentum is generally rising though the "A" model has not made a higher high and the "B" model has leveled off for the most part since late September. This argues that with the leveling in gains, that the speculators are pairing back in this index. IN terms of the Oscillator, the index is close to the April highs in terms of momentum but given the slowdown lately, this sort of overbought state is unwinding some which in the grand scheme of things is bullish for the overall long term uptrend in the index. In regards to the Power and Force end of this index, the model remains solidly bullish even with the breaks of the trend moving average since early June. Lastly, in relation to the S&P 500, the index broke out above resistance in September only to back off as the S&P charged higher through the end of October. This argues that risk taking is falling which happens to be inline with my overall market model which showed a drop in risk taking as well (though a bounce back on Friday to the primary trend).
So overall this model is bullish as the volume confirms the uptrend and momentum models are both bullish at the moment. The fact that momentum A is still lower than the level in the spring bothers me a bit but given the strnegth of momentum B, the overall structure is still higher. The oscillator should unwind with this continued sideways action but if the GOP takes the house and the senate, you can bet the outperformance will pick up in the index versus the S&P and push the oscillator to overbought.
From a trading standpoint, I would probably be a buyer on further consolidation in the index. Ideally the index would backtrack to the trend MA of its relative performance with the S&P and then turn higher. That would give me the greenlight to add to microcap positions and look for a challenge of the previous years highs.
Markets on Hold
Sunday, October 31, 2010
Greenback on the Ropes
In terms of the two other metrics shown on the chart, the ultimate oscillator at the moment is holding the midline or basically the line that I use to help in defining an uptrend or downtrend. Below the 50 and the bears lead while above is the bulls time to shine. A break of the trendline to the downside would tip this model over - a bounce would obviously do the opposite. In terms of the B%, it is residing in a downtrend but also holding the 25% level. A support though the price action needs to turn strong to the upside to reverse the downward trend in the indicator. Taken together, these both reside at support along with the trendline.
But while the chart is very compelling, I have to ask how much of a bounce would follow if it successfully holds. In short, if the Fed does not come through with the $1 trillion of bond purchases as the market would prefer (essentially monetizing the entire deficit in 2011), then the market is likely to take the dollar higher and attempt to take out the 80 level. Each bounce off this trendline has lead also to a challenge of the previous high. That would imply then a 10%+ move in the dollar and probably a nasty correction in risk assets.
via StockCharts.com
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Renko has Resistance
I noted last week that the S&P was at a key junction on the chart. Momentum had slowed and the price action needed to accelerate to the upside to reverse this downward trend. So far, the markets have responded "so so" since the note. Now the renko chart, is showing a momentum slowdown as well as resistance in the current range. A breakout above 1200 will nullify this I believe but if I were a bear looking to short the market, I might find suport in this chart, regardless of how the elections end up on Tuesday or what the Fed says on Wednesday.Overall the trend of the equity markets remains higher and teh bulls have the ball but of late the warnings signs have been popping up all over the place. Also the fact that October basically did not see a correction of any sort worries me a bit about how November plays out. However, in terms of seasonality, December looks like we will be strong so we'll see how this plays out.
Saturday, October 30, 2010
Stocks vs Bonds...go with Stocks
In looking at the current view of the chart, things are sort of rolling over following the crash in early May. However, as things are drawn, you can there is a double bottom which argues for a move to the top of the range. If it is moving to the top of the range and stocks are bullish, then bonds will suffer as a result. Thus this chart supports my bullish stance on stocks and bearish one on rates.
In looking at the components, momentum A and momentum B both argue that bonds are in favor. The oscillator A, used both as a trend indicator as well countertrend model, has been bullish since late 2009. So of formatting of the chart is bullish with a double bottom off the trading range and the oscillator model is bullish. Thus basically the model is neutral. However, given the current formation of the model, I expect it to trade toward the previous highs.
Wednesday, October 27, 2010
Rates are Going Up
If stock earnings continue to climb along with a rise in inflation pressures, then rates could be moving beyond this range towards the 6% range. I remain bearish on bonds with the 2 year currently overvalued by roughly 150 basis points relative to fair value. Just as a side note, when TIPS are auctioned at negative rates, one has to believe there is a frenzy in the sector.
Tuesday, October 26, 2010
For the VIX, "I Fallen and I can't get up!"
This is where the rubber meets the road so to speak. A break on average through the 20 level could send stocks much higher than the 1300 level limit that I think is possible for the year. During the 2000-2002 period, the average never broke through the 20 level for the most part with fireworks showing up each time. As we approach the end of October, a month historically known for fireworks, perhaps things are now setting up for that break lower. A break lower could create a more methodical move higher for stocks than the one we saw from September onward - or participants are pricing such a fall in volatility in based on the constant buying in the markets? Tough call. All I can say at this point, when combined with my NDX/VIX Model, volatility is trending lower.
In terms of positioning, I unloaded some VXX last week on the dive lower and sold the rest today on the rally. I continue to hold some VIX futures positions but I have shifted my hedges to shorts in the indexes outright.
Gold Update
In regards to the rest of the model, lets review the other parts. First, in terms of the momentum A end of the model, it has hit overbought for the first time since November of last year. Following that time period, the metal backtracked to the 20 month MA. If the same repeats this time around, then the supports at 130 will give out and a test of the breakout point, around 122 will come into play. In terms of momentum B, it is not in the same position as a year ago - this implies then that the contract is not fully overbought and thus there is more upside momentum left to push this metal higher. The oscillator below momentum B though is tilting to a breakdown which supports momentum A overbought stance. And the PF model, showcased at the bottom is extended and some selling would do it good to bring it back into line.
So this is how I am playing things. I took a long in gold today in the futures around 1334. This happens to go against my long dollar viewpoint at the moment but I am holding the trade to see if it can trade up to 1350. Any trouble in that area and I will jettison the position. A break by the GLD through 129 and I will probably join the short side of the trade looking for 122. A break above 1350 solidly in futures and I will be looking for the 1400 target to come into play.
China on the Run
In terms of the technical support, that has not really stepped up yet. The two momentum models at the moment are showing some promise but momentum B is still really range bound. Momentum A bounced from major support around the 40% level and now looks like it is setting up a date with the 60% level. The next major hurdle comes with the price action itself - a move past 3400 argues for a sprint higher. Based on a simple range projection of the technical formation shown on the chart, 4400 would be my target.
Monday, October 25, 2010
TSE 60 On the Move
In terms of the momentum ends of this model, accompanying the breakout in the candles above, both momentum indicators also also making cycle higher highs. In terms of momentum A (top model), the move past the 60% level argues that the more impulsive end of the move is about to arrive. With the momentum B model below regaining momentum, overall momentum is picking up steam.
In terms of a target, I am looking for the index to trade now towards the 13,200 to 13,700 level next.
Housing Shaky
It has been a month since my last report on the housing market. Yesterday morning I gave an update of the housing end of things via my economic model - one that was not too strong a support, via the numbers, for the housing market with production for new homes remaining weak and the supporting factors to buy a home, earnings and job growth, remaining stalled out and losing momentum for the most part. Falling momentum does not remove the problem that plagues the real estate market as a whole; too much supply and not enough demand. The Fed can go ahead and print all day but if nobody wants the money, then that money is useless.As the chart here shows, housing, from the stock market perspective is equally weak. If you notice the housing indexes bounced pretty good from the first QE in the spring of 2009 (along with the rest of the markets). Since the bounce though and then the crash following the markets disintegration last spring, housing has not recovered. In terms of the economic model, I mentioned that the flash crash and the high volatility in the marketplace was not helpful to the economy as a whole and from looking at the charts here, the evidence is very clear. The shock that the flash crash brought us has also tipped downward the relative performance of the HGX (Philly Housing Index) versus the S&P. The last time this occurred so violently (and not shown on the chart) was in 2006 right before the housing market and the economy went into a dive. However, back in 2006, the lower chart was also falling lower in a very steep fashion. This time around, the HGX is basically stalled out. This counters the first chart in essentially saying that the rest of the economy is growing but the housing market is not.
So the story for housing basically remains this; stability with some warning signs. If the HGX starts to break to new lows, then the Fed will probably have no choice but to dome some more things to prop up housing. Conversely, perhaps the housing market needs to just crash and then we can work off the excess supply that has overwhelmed demand for 4 years now....and counting.
Sunday, October 24, 2010
Euro at the Junction
In terms of the components of the model, lets review. First, if you look at the candle chart, when a given security is overbought via the oscillator on the bottom (currently turning lower from the 80 level as you can see), I look for other variables to confirm. First, if you look at the Pforce model, there has been an enormous volume spike over the past 2 months leading to an almost opposite move of the downward move in the summer. The major assertion to take from this is simple - The Euro has climbed hard to the upside but it took 6mm shares to get it to 1.40 but took 7.5mm shares to fall from the highs in the 1.50s to the lows in 1.20s. In other words, relatively speaking the volume is telling us that there is a majority that are willing to drop this bullish viewpoint and go back to the short side given the amount of volume just to get back to these current levels. Thus volume is telling us that the market is susceptible.
In addition to this, if you look at the momentum models, they are both residing at resistance. Momentum A is important because as part of the "trender model" that I showed earlier with the S&P 500 because it argues if a market is nearing resistance from a trend perspective or has more room to run. Based on the current view above, the Euro is right at resistance and a failure here argues that it moves to the bottom of the range of this trender model. Momentum B as you can see also supports the resistance story and a failure here would support heavy selling in the Euro. So on balance, momentum while rising on the A side is at resistance and B is stalled as well at resistance.
Taking the momentum, volume and oscillators together, I would argue that the Euro is stuck at major resitance and due for at least a correction to lower levels. I think dollar bearishness is way too high anyhow and a bounce back by the greendback is looking more likely to this writer than a breakout to the upside in the Euro. Thus I am bearish on the Euro in the short term.
S&P at Key Junction
So is this move going to happen? Well, that is a very good question young man. The momentum at the moment, via my "market momentum model" has actually rolled over for the first time since early September. Generally speaking that means we are in a correction zone and given the close proximity to the end of October, this would put the overall breakout posture in trouble. At the same time, since this momentum turned down last week, the S&P has only risen higher - basically moving against the rubber band. The only way for this condition to unwind is two ways. First, the market sells off violently as the rubber band shoots backward or the market stalls out and does nothing (very similar to 2006). Given the very close movement between this market and that market in 2006, I think it will be the latter and from November onward, the markets will be very strong through year end.
Supporting this posture is the two components of the trender model. Range momentum is close to breaking out and I think will breakout if the markets successfully close above 1190. A a breakout in the range momentum adds sustainability and support to the move. On the trend momentum side, that has already broken out to new highs. When combining the two, the bulls have the ball and all the control. IN other words, the bears fighting this trend might be on the wrong side of the ledger, even though the economic variables are weak. And that is where the "compelling" bearish story resides; in variables that are not necessarily correlated to PE expansion or dividend yield growth - both key drivers of stocks at the moment.
Overall, my stock model remains bullish - both on a fundamental basis and from a chart perspective. While I have argued for a correction over the past week (fighting it unfortunately in the S&P), these markets are moving higher over the longer term. The continued unwind of the "bubble in bearishness" continues.
Running Through the Numbers
Each weekend I will take some time to review my very long term models. They are nothing revolutionary but do give me an idea of what is occurring in the "long term" for the markets as well as the economy. I learned a long time ago that in determining my economic viewpoint, I should stick to a limited amount of stats because the more stats I viewed, the more confused I became! So lets call this the first installment of the "economic view of the financial markets."
Before delving into the numbers, one phrase can describe things at the moment - slowing down. If one looks across the variables which include some manufacturing surveys, some employment indicators and some retail metrics, the slowdown is in full force. Meanwhile, on the monetary side, it appears that a pickup is occurring with lending and credit both expanding. So to use an analogy, the runner is still moving along in the race but his pace is slowing. At the same time, his metabolism and his heart rate are pumping strong and improving. Does this imply then that the foundation for the economy is now building because it appears that the body is now finding support? Could be. Lets look at the stats.
- On the earnings side of the ledger, the current earnings yield of the S&P 500 is around 6.5% using trailing variables. This level is the highest that I can find since late 1994 right before the markets exploded to the upside and ended in a ball of flames in 2000. If you add in dividends, it is around 8.5%...a level last season in you guessed it, 1994. So on balance, the markets have not been this cheap in over 16 years. Perhaps, as I tweeted this past week, PE expansion is now in the cards with predictable falls in both of these yield levels to follow. In looking at corporate profit levels, while rise, those seem to be leveling a bit which argues that while PE expansion can occur, it might be limited to 13x (earnings plus dividends) or somewhere in the 1300 range. Overall I would argue though given the upward trend in corporate profits plus the relatively healthy levels for the yields, the stock market is in good shape and a positive leading indicator for the economy.
- In terms of the economic indicators I follow on the services and manufacturing side, the stock market crash in May through June definitely disrupted things in the economy as the surveys I follow all turned down following the may problems from a momentum standpoint. As of September, they have not changed this downward momentum. Now if the stock markets were to continue higher, perhaps sentiment would change. However, these shocks that we have had, in May as well as the fall of 2008, are not helping the economy. Also not helping things is the stagnation on the small business side - without small business expanding, innovation will not expand and this will be a pressure on profit margins and essentially growth for the economy. Overall, I would then argue that these measures are a negative for economic growth at the moment.
- On the employment side, this picture is ugly with some signs of improvement - offset by some signs of deterioration. First in terms of improvement, the labor force is again expanding which is bullish and the participation rate has leveled off around 64.7% and has basically remained here for 4 months. This argues that the conditions for employment are not worsening but since they are not rising meaningfully, this also argues that employment growth is stuck in a rut. Services employment is improving on balance while manufacturing employment is weakening though still above the growing line. Average hourly earnings are rising but the momentum has not been this low since 2004 and before that 1987. The median duration of employment bounced back upward this past month which is troublesome and generally leads to a shrinking of the workforce as people give up looking for jobs. On balance, these measures overall are weak and I would argue a negative growth factor working against the economy.
- On the retail spending side, the net consumption levels are rising indicating an improvement in momentum on that end. Retail sales ex auto is also continuing to rise which is a positive as well. If you taken into account the moribund wage growth as well as anemic employment growth, they are offsetting factors. In terms of the numbers on the market side, net revenue figures for the retail companies that I follow are in a rising trend with the discounters actually slowing (arguing people are moving back up the Leger). This is bullish and argues that confidence is returning to the consumer. So outside of the anemic employment end of things, the consumer is spending again and this is a positive support for the economy
- The last variable, but not least, is my housing models and they remain weak with one major caveat. If housing demand rises, there is a very good possibility that there will not be enough housing supply out there in a few years based on the fact that permits remain weak and new home starts are just dire (with NAHB confidence lousy as well). When trying to find a happy medium for prices, one must balance supply and demand; if the future supply is not rising, then we only need to work off the current supply. The opposite side of this is simple though - is there enough demand to work through the current inventory problems at current price levels? I don't believe so and this as a result is a negative headwind for the economy.
So on balance, we are looking at a weakening industrial and services sector, an improving market perspective given high yields on earnings and dividends, a flat employment picture, retail spending that is rising and housing that is stalled out to lower. Overall, I would argue that the picture is weak and while I have argued against the merits of QE2 which is the rage these days, I would be very careful to argue the economy is growing at any sustainable rate at the moment, given the variables.
Sunday, October 17, 2010
Wednesday, October 13, 2010
Risk Aversion Wavers
Yesterday on the close, as I added shorts in the S&P 500 futures, my risk averse measure fell into negative territory - more specifically, risk taking on balance broke out yesterday. Shorting on the turn in one of these indicators is not always a bad thing as the market will normally correct a bit before resuming the drive higher. As I write this am though, the market is ignoring the correction mindset as the futures rise almost 10 points. So with the risk taking measure on balance now rising, what does this mean?
Well, first and foremost, the market very well drive well beyond the highs from this spring. Using a simple range projection, 1250 would not be unreasonable. The support for such will be the declining interest in risk averse assets though on balance, I think gold continues to move upward. As I mentioned yesterday, I am firmly in the higher rate camp supported by a turn in the money momentum, the breakout in the CRB and the breakdown in the long bond. With the break from 134 yesterday, 132 does not look unreasonable. Further, as I showed yesterday, the bond did not make a lower low in yields which argues now we should see a higher high.
So in summary, I am probably on the wrong side of the trade in the long term. A correction though would not surprise. Also and this is a big also, if 1150 is taken out in cash, the 1250 level comes off the table. That would imply a false breakout and a return to the bottom would not be unreasonable. Based on the available evidence and all the bullish charts I have shown in the past few months, I put a low probability on such a breakdown occurring.
Well, first and foremost, the market very well drive well beyond the highs from this spring. Using a simple range projection, 1250 would not be unreasonable. The support for such will be the declining interest in risk averse assets though on balance, I think gold continues to move upward. As I mentioned yesterday, I am firmly in the higher rate camp supported by a turn in the money momentum, the breakout in the CRB and the breakdown in the long bond. With the break from 134 yesterday, 132 does not look unreasonable. Further, as I showed yesterday, the bond did not make a lower low in yields which argues now we should see a higher high.
So in summary, I am probably on the wrong side of the trade in the long term. A correction though would not surprise. Also and this is a big also, if 1150 is taken out in cash, the 1250 level comes off the table. That would imply a false breakout and a return to the bottom would not be unreasonable. Based on the available evidence and all the bullish charts I have shown in the past few months, I put a low probability on such a breakdown occurring.
Tuesday, October 12, 2010
A turn up in INTC?
First in looking at the price action, I put on the chart a trading range of the past 6 years where the stock has gyrated about. The stock took a dive in August following the guidance but inline with the market it has bounced higher as the value players jump in on the picture pushing the stock up. If you notice, the turn occurred right on the trendline, actually drawn from the 2004 lows. That period of time saw the stock move higher through 2004 peaking out at the top of the trading range near $26 - a period that has contained every rally since. So on balance, this argues that the stock has put in a turn higher which is bullish.
On the trender side of things, both elements of the model were ready to roll over following the dive in August only to be saved. The bounced in model A towards the 60% level argues that resistance is directly ahead. The model b level is right on the cusp of moving lower. In other words, for Intel to hit the top of the range, it must start moving higher at a quicker rate than the past. If not, model b is going to roll over and this very well could lead to a turn in the stock through the supports of August.
Going back to valuation, it is trading at 10.5x earnings....not really that expensive. But that does not always figure into the trading.
Crude Reality Down?
via StockCharts.com
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CRB Breakout Continues
The downside of course to a skyrocketing CRB and bond yield is probably some downward pressure on stocks. At the same time, given the abnormally low PE of the S&P on a forward basis, perhaps this move upward in bonds is now priced in.
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