Labor Day Weekend September 1 2012
Stocks rose for a third month. The Dow was up 5.6% over the three month period, capping August's gains wiht a rise of 90.13 points on Friday. Gold futures surged 1.9% (on Friday)
Weekend WSJ Page A1
The dollar fell against the euro and the yen on Friday after FED Chair Bernake indicated the Central bank could introduce a bond buying program if economic conditions warranted such action. 'The initial reaction was because there was no clarity on the timing or the form of easing, so the dollar rose and then fell because the deeper reading offered that the Fed is prepared to under writer risk,' said Richard Franulovich at Westpac.
Weekend WSJ Page B 5
This action follows the pattern we have laid our for you the last few weeks. TLT a fund of long term government bonds fell from 132 to 120. We bought puts at 132 and sold around 120. TLT has returned to our expected zone of 126-128. It should soon begin falling again, along with the dollar noted in the above quote. So the move out of the Safe Harbor of the Dollar and bonds has begun. The financial hourglass is turning on end as the sands of investment will move from risk off to risk on investments in stocks, gold, and oil.
Tax Hikes on Tap
Page B 9 of the WSJ details the Tax Hikes and Rate Shocks to arrive January 1, 2013.
Natural Gas Update
Manufacturers plan to release four new natural gas powered truck engines and several truck models over the next three years. Clean Energy Fuels Corp plans to cover major trucking routes with a network of 150 stations by the end of 2013. Shell and Travel Centers of America plan to offer natural gas pumps at 100 truck stops nationwide.
San Antonio Express News Sept 1, 2012 C1
As we have mentioned the entire interstate complex can be covered wtih 100-150 fuweling stops for big trucks. Clearly the move to that fuel will take place with the big rigs, espeically as diesel costs have soared versus cheaper and cleaner natural gas.
A Continuing Education Market Pointer for TMP Readers
Immediately following a 'news event' market will often move violently in both directions, up and down. Understand that traders will have placed orders to buy and sell both above and below the existing market price. For example, traders long the dollar might have stop sell orders if the dollar falls. They might have buy stop orders above the market to add to their long positions. But what most often happens is
that the market will move up and down, causing all those orders to be be filled, and then take the path to what was going to happen anyway, had the crowd just waited.
Note the big drop in the Dow and then the almost instant recovery right after 10 AM during the Bernanke speech. I would be many of those traders wished they had not put those orders in.
The Dollar Gives Way
Since TLT fell from 132 to 120 we have noted that the Dollar has been more stubborn. Still the high in late July is clear. Now the previous support at 22.4 in UUP has given way. As with the DOW shown in the first graph, note the frantic intra day moves in UUP on this past Friday.
So the template we have laid out really got underway this Friday. After pulling back from recent highs this week, the Dollar falls as Bernanke suggests he will buy bonds again. Actually all this would have happened if no one had gone to Jackson Hole and if Ben had not spoken but think what this one week did for the Jackson Hole economy! But we digress, based on the last QE 1 and 2 stimulus, what should we expect this time. Well as usual, let's hop in our Stockcharts Time Machine and take a look.
How TLT reccted to QE 1 and 2, Year 2010
Click to enlarge the chart. We detailed the start of QE 1 and 2. In both instances bonds surged for a day and then collapsed in price. I doubt this time will be different. My research indicates that QE 1 officially began August 27, 2010, and QE 2 Nov 30 that year. I highlight those dates with blue arrows. If you look closely you will see that the market popped up and then collapsed just as the FED started their bond buying, just as in the first two graphs we showed today. In short, the bond buying by the FED caused the price of bonds to fall rather than rise, once again the Federal Govt manages to pull off the exact opposite occurrence off what one would expect to happen. Indeed the total collapse from top to bottom ran about 15 points.
TLT Recent Action
As if on cue from QE 1 and 2, TLT popped over its 50 day MA Friday to complete the expected move to 126-128. I expect this to be the top of the move just as TLT topped in 2010 on similar announcements. Yes I said that already but just making the point. Given the fact that the US Buck has also finally dropped I this is a bit surprising but social mood can lag the more obvious reaction. I used the move up to buy back again into TLT October puts as they became cheaper.
- Gold exhibits a pattern of higher lows from late May, with that low occurring just slightly above the low in late December
- Volume at bottomin the bottom panel vaulted over the 1650 resistance
- Price bounced right at the 200 day MA on friday
- And this occurred as the Dollar gave way and TLT provided a 2010 repeat performance
- The Euro rose as the Dollar fell
- The gold price exploded 2% or $33 in one day.
I am amazed at the number of analysts looking at these same charts and concluding that the top is in on gold and stocks. Their errors will also fuel the shift back into risk assets.
Silver Miners SIL
Here is another view of the correction in gold and silver since April of 2011. The US Dollar is shown at bottom. Note that its rise since August 2011 is the inverse of the SIL in the main pane. Now that the USD is bending over to correct its rise, SIL has broken out above its four MAs. Let the party begin. A return to the 31 area is quite realistic here.
I finished reading Boomerang by Michael Lewis this past week. Lewis details the bets that Kyle Bass made that the Club Med countries would fail. He then visits Iceland, Ireland, and Greece. Greece is a ccomplete basket case. It makes little or not attempt to collect taxes while dozens of professionas have been grated lavish pension promises. Greeks deal in cash so it is difficult to track their real income. This allows even the well to do and corporations to under report income and pay a fraction of the actual taxes owed. My point here is that the talk talk talk about bailouts or whatever will continue while the Euro recovers to probabaly 1.40 or so. Then reality sets in again.
We have noted that most computerized trading programs focus on where the markets are versus their 50 and 200 cay moving averages. We prefer the use of internal indicators to the actual price index for most markets but the point is the same. Notice that the lows highlighted by the pink arrows all occurred below the red 200 day MA. This is how most of the programs and analysts are fooled into thinking the market has broken down and headed lower when in fact each low as a buy point.
Notice the pattern of higher lows. Markets top out well above their MAs. From that standpoint the real fireworks still lie ahead. Recall that extreme social mood occurs at the end of a move. Investors are still attempting to cling to bonds, the move out of the dollar getting underway, gold and silver really getting underway, the move back into stocks will be quite amazing the next few weeks.
NYSE A/D Volume
The same graphic for the NYSE indicates a stronger market. The mania for dividend paying stocks has meant that this indicator is trading above its MAs, while the NASD is still fighting throught its MAs. Still the trend of higher lows is clear. It is just a matter of time as to how long it takes for the move out of bonds and the dollar to really get underway once the markets open again on Tuesday.
A Look Back at the Last Two Big Tops
Year 2000 Re Print from TMP August 14 2012
Year 2007 - 2008
Notice that all three stock indexes topped together in early October, exactly five years ago. As those prices dramatically fell, commodity prices rose until crude oil peaked at $145 in June 2008. It then dramatically collapsed to $35 by December 2008. Since most believe that Bernanke, the FED, the administration will hold the markets up until the election, that will probably not happen. When Carter ran for re election the Administration managed to get interest rates down from double digits, into that August. Those lows did not hold until the election and rates went right back up.
We have no way of knowing exactly how this will play out but the surprises will be to the upside.
The Bottom Line
We expect stocks, gold and silver as well as othe commodity plays like Copper and Steel to rise over the next few months. This move back to risk assets will likely see stock indexes move to new highs for the year. Meanwhile the US Dollar and bond prices will fall, providing funds looking for a new home. They will likely find it in stocks after the stock advance is well underway.
Terrorist attacks have given politicians a new rationale for snooping on everyone. Now there are cameras everywhere, well at least for government use. Individuals however are finding that taking photographs can lead to being arrested. It's a short political stroll from being harassed in NYC by the police to what the citizens of Moscow face, which is to say jail sentences for public demonstrtaions. This is typical lf the sort of authoritatian movements that accompnay proloinged periods of stagnation.
Social Mood Improves Ask the Sommelier
Last week we noted the daring fashions and upbeat colors that are evidence social mood is strong enough to support a vigorous rally. We ran across another anecdotal example this week on a walk through the wine department at our nearby upscale HEB grocery store. I asked and yes they have sold some at these prices, the bottles were locked in the display case....The willingness to spend disposable income on luxury items is a sign of a very positive social mood which will as we say help support a rally in markets, well, beside the three digit wine bottle market.
Thanks for reading The Market Perspective
The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks. Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned. Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital. No guarantee can be made to the accuracy of text or charts.