Weekend Jan 18, 2015
Tom McClellan makes the point that recessions begin when total Federal Tax Take exceeds 18%. We are on track for that to happen later this year.
Are the markets going up, down, or sideways? The answer is all of the above depending on which market you examine. Wells WIlder attempted a solution to this vexing question with his directional movement indicator
Directional Movement is explained at this link. Bottom line is that direction is down when red exceeds green and up when green exceeds red. The trend is down and needs a break under the 10,400 area to really turn negative.
The same is true here. No doubt the FED rode to the Oct Low rescue but the market is failing once again. It needs a weekly close under the 4050 area to turn the tend really negative.
A feture of all three indexes is that the 13 bar EMA is crossing over to the downside. John Murphy believes this 13/34 EMA combination is quite telling. Granted this is daily and it hsa not happeend on the weekly charts yet. But this has been quite the bull bear tug of war the last month.
Cullen Frost Two Hour
Comerica CM, Prosperity PB Cullen Frost CFR and Tx Capital Bancshares TCBIL are all Texas based banks. The headline to day is Banks Brace As Crude Prices Fall. As usual the headline is a bit dated and appears just as Texs Banks may be showing first signs of a bottom. Comerica had a big bounce Friday and then settled back down. Flash buy anyone? This rounded bottom is starting to look positive.
We can track oil on a two hour basis with USO in the lower panel. both charts look like some sort of near term recovery is in the making.
Performance chart of Frost, Prosperity, Comerica versus Crude Oil
There have been academic studies linking the cover of Business Week to near exact highs and lows of market. In short, when you see the worst headline, th market in discussion has probably been falling for weeks and just now garnered attention. I suspect this is the case for banks and the price of oil.In an interview Dick Evans CEO Frost said energy was only 15% of total loans and 75% of those were to producers. Producing oil is a much more stable business than energy service which is notorious for its boom and bust cycle.
USD versus Crude Oil
Last wek we reported 98% buls on the Dollar via Investor Intelligence. But the buck is even higher a week later. This will be a vicious correctionwhen it happens. All the more reason to start nibbling on Texas banks and USO, the oil fund, now.
Like the buck, Govt bonds and closed ended munis have soared above their moving averages. The blue arrows identify inside days, whn price is above and below the previous day's trade. That led to short corrections the last two times. If the dollar ever corrects it will be a larger correction for bonds but then maybe not. At least four European countries now sport negative bond yields. This is a stimulus running out of gas.
this past week the Swiss Central Bank uncapped the France at 1.2 to the Euro. the Euro collapsed as did all the bets on the spread. As noted in the FXCM, a major currency exchange in the US nearly went toes up. This sort of thing is the reason for our continued caution in these markets. Who knows what counter party risk might have resulted form a FXCM bankruptcy. Remember how long it took clients to recover funds from Corzine's IMF Global?
This wold be a good time to go back to our previous post and get a copy of Flash Boys from your local library as I did or download from Amazon. High Frequency Trading is legalized front running. This is the process of knowing a customer trade in advance and then using the knowledge to benefit personally and harm the customer. I know you want to buy CFR at 62, I buy at 61.9 and then sell it to you pocketing a dime. Do that on tens of thousands of shares and after a while, it all adds up.
Mike Lewis notes several flash crashes and unexplained momentary rise and falls in various stocks. It all relates to HFT. Here the Swiss did not tell the Euro CB what they are going to do for fear of a leak.
Recall that so called portfolio insurance in the 1987 crash made it worse accelerating the selling on the downside. With trillions of derivatives floating around the world and new exchanges as noted in Flash Boys, now operating in the US, the potential for meltdown is greater than ever.
In the old days, brokerages were partnerships. The partners were gambling with their own money. THis kep risk in check. Now that Exchanges are all publicly owned, everyone's money is no one's money.
Central Fund has dropped from a 9% discount to a bit over 5.6% in USD. Gold is a buy for now. The actual buy signal was triggered in early December. But I wanted a better signal. Again, if the Dollar corrects we should see a surge in this market.
The Bottom Line
I continue to think stock markets are rolling over. The majority thinks the weakness is limited to the energy sector. But the weakness in the retail sales report this past week was another Distant Early Warning Indicator DEW Line. Connect the dots
Euro collapse against the SF
FXCM near collapse
the PIGs are back
Russia and Brazil in trouble
The smart money has probably moved to the exits The potential for real volatility lies ahead. Just couple HFT with a real breakdown in the major stock indexes. I would guess we are no more than 2*3% from a intra month reversal.
Caution is warranted.
A Forty Year Remembrance - Social Mood Now and Then
Forty years ago when I was attempting to be a broker in the worst market slowdown since 1929, here is a time travel picture of the Way We Were
Then - the market bottomed at Dow 577
Now - One day this past week the DOW had a 424 point intra day move
Then - the tape of the NYSE would literally stop moving as there were no trades for short intervals. The NYSE closed early two days a week though scrambling to handl the paperwork for even ten million share days.
Now - It is impossible to relate all the trades on one ticker. Trading now takes place in milli seconds. Flash crashes occur wihtout explanation
Then - Bank stocks were all OTC listed so their prices were NOT on the NYSE Tape. That was for fear of a run on a bank if the event the stock price dropped. Seats were bought and sold on the NYSE.
Now - Bank stocks are on the Big Board.Exchanges are publicly traded, leveraged,and subject to panics and potential collapse.
Thanks for reading TMP
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