The Market Perspective

Markets Confirm SAR Sell Signals from Last Week

Tuesday June 29, 2010

 

All the things we have talked about in the past week have come to pass. 

• The Shanghai SSEC leads the markets, it was down over 4% last night. 
• Crude oil gave a sell signal last Wed
• Stocks confirmed the oil sell signal the next day
• the McClellan summation index peaked last fall, and is a leading indicator, how could stocks be this high with the internals crumbling

And so the market played catch up today, our comments and predictions are all posted here for everyone to see. 

The McClellan led the markets up and it is leading them down. Our point is that when the Summation Index was last here, the NYSE was 150 points lower. With the MACD about to curl over, we expect lower numbers to be seen on the major indices. We looked a Elliot Waves and such today, but this seems the most compelling argument for lower prices. 

Actually this chart surprised us. Support is either close by at 9500 or, way down at 8,000. Note the market never missed a beat between these two spots on the way up. Now if  that seems extreme, and we are using a weekly chart before the end of the week, note how far the MACD at bottom could fall before turing around, a long way indeed. 

Gold did very little, bonds hit a new high, stocks are very defensive, expect a mountain of sell stop orders if the SPX closes well under 1040 stop close basis. 

Welcome to the new bull market. Bonds are breaking to the upside on both deflationary fears and a sagging stock market. At bottom the MACD is just beginning to perk up. If our outside of DOW 8,000 happens, one could see bonds zoom back near their previous highs.  Again this is  a weekly chart but things seem to be moving along very quickly....

Tesla Sparks Some Interest

Tuesday June 29, 2010

Poverty is a state of mind, being broke is just a temporary inconvenience. 

Texas Saying

A lot of people were puzzled about why we were going public without profits," CEO Elon Musk, dressed in jeans and wearing a plaid blazer and a shepherd's checked shirt, told reporters outside the Nasdaq building in Times Square, near several Tesla Roadsters.

"The reason we are not profitable today is because we are in the midst of expanding with the Model S," Musk added.

But readers, it gets better. 

The serial entrepreneur, who turned 39 on Monday, previously sold most of his bigger ventures, including online payment company PayPal to eBay for $1.5 billion in 2002.

The Tesla IPO also provided much-needed liquidity for Musk who had declared in February that he was broke. The sordid details of his financial status came to light in court papers of an ongoing bitter divorce dispute with his estranged wife Justine Musk, the author of supernatural fantasy novels.

 ON  a big down day in the market, over 200 points, TSLA is up.  Perhaps President Obama should encourage more of the poor to simply go public, come to think of it there is even a folk song that recommends just that

Pack up all your sorrows, and give them all to me

Actually we have seen this before, remember the dot.coms, they didn't make any money either. For that matter neither did DMC, Delorean Motor Cars, ever. During 'energy crises' now as in 1980, all sorts of unreasonable and uneconomic ideas are floated, and taken seriously, this is the latest, see at left from the teslamotors.com website. A $1600 lease that 'saves' $131 a month, such a deal!

Just yesterday Isle of Capri Resorts ISLE dropped 14% on offering new shares. The market saw this as dilution and treated it accordingly. Like TSLA, ISLE is not making any money. We do however give the management of each company a stock timing award for getting the stock out just as the markets collapse again. 

We will have a longer analysis of Vegas casinos. There is serious reason to believe that collectively there is  equity the three large Vegas Public companies. More coming....

Market tops are coincident with insider selling, TSLA and ISLE are two examples of selling to the public at or near a top. We identified this as a top last Wed and Thursday on this blog using SAR Parabolic for crude oil and the SPX the next day. 

Accounting for Shippers

Sunday June 27, 2010

Cash will be and is king in the recession depression  now well underway. We will offer an accounting analysis of various industries from time to time. This analysis shows the underlying weakness that is being reflected in stock prices. The 1990s saw a boom time in China, Jim Rogers published his A Bull in China, he even moved to Singapore declaring China the new USA of the 1880s. Ships ply the Pacific brining containers of manufactured goods. Dallas Fort Worth has formed an Inland Port to handle the goods coming in. 

But, has Wiley Coyote run off the cliff again in search of the elusive Road Runner?  

The Indirect cash flow method combines net income in operations with net cash flows in investing and financing. Investing means capital expenditures, here cargo ships and maintenance which is substantial in salt water. Financing consists of raising capital with stock or borrowing, inflows, or paying it back, often new bonds for old bonds or stocks to pay off debt. So how is GNK doing. Not so good, here is why. 

Operating activities for the last three years were dwarfed by necessary investing or capital expenditures. But the investing requirement must be paid. And so the firm had no alternative but to borrow money each year, see Net Borrowings. Dividends were not paid this last year, another casualty of the New Normal and a necessary belt tightening. This is why classic bottom in the stock market are not seen until Dow Jones Indus dividends average about 6%, for those companies that are still paying dividends that is. IN addition in 2008 and 2007 more stock had to be sold. Now we have the worst of all worlds,more stockholders, no dividend, more debt. 

Below the market has registered this information. Note the all the same market look of the graph. The recovery rally from March 9 has ended. GNK topped in April with the overall market. We present this large shipper as emblematic of what is happening. The operations will not support the fleet, dividends are being cut, debt piled on, more stockholders sought. It is difficult to pare back such a large capital consuming operation. Of course one can hope that the 1990s will quickly return, but we doubt that. The bear is out of his den, and taking prisoners. 

  

Bonds, On the Defense

Sunday June 27, 2010

Bonds in the red black bars are pretty much the same graph at the US Dollar below, they have been defensive measures. They rise as the stock market falls. Bonds are now up against the resistance formed on the way down from the crash in stocks shown by the orange line. But the bond rally looks good, it is also being fueled by deflation, the collapse of asset prices. There is no demand for money or interest rates would not be so low. Well we take that back, there is little demand for more borrowed money, there is plenty of demand for dollars to pay existing debt, this is precisely why the Dollar has been rising. Bu this dollar euro thing has been a capricious thing, check out the last four years. 

The values of the Dollar and Euro have crossed no less than four times in the last four years!

We suggested earlier this week that Europe would emerge from the G 20 meeting looking stronger, and preaching austerity. This seems to be the case as I write. That argues for more rally for the Euro. 

The dollar/euro ratio chart suggests that the euro should rally more. We are at the top of the ratio for the last three years. RSI is overdone at top, as high as ever, and the MACD is curling over at bottom. Coupled with some fundamental headlines we are liable to see, like, Obama Rebuffed at G 20 as Ministers Embrace Austerity,   it seems reasonable to look for more dollar pullback. 

Gold and Silver

Sunday June 27, 2010

 

Let's continue our 'theme' this weekend of looking at comparisons with the summer of 2008. This chart presents several relationships at the same time. The red black bars are the ratio of the price of gold to silver. When the bars are rising, gold prices are outperforming silver. This can occur if gold rises faster or if silver just falls in relation to gold. In July of 2008, the ratio was such that it took 50 ounces of silver to buy one ounce of gold. By October it took 90 ounces of silver to buy one ounce of gold. The market has never returned to the 50 ounce level, see right scale. The ratio made a higher low this past Oct above 55 and has been creeping up again, as it did throughout 2007. AS the SPX fell through 1300 the ratio sensed something, and it rose quickly as investors fled to gold. 

Now, the ratio rose as stocks collapsed, the flight to safety so to speak. The move in both stocks and gold silver ratio in the summer of 2008 was certainly parabolic, in both directions. From the start of the move, it all lasted from July 2008 to March 9, 2009, about nine months. The gold action preceded the stock collapse. The drumbeat to buy gold on cable tv really got going, purchases by ETF funds like GLD and CEF have certainly kept the gold price higher. 

 

So what actually happened to cause the ratio to act the way it did?  Well gold did not have the drop that silver experienced. Gold dropped from $1,000 to $750, see the gold line. Silver in red gray  was cut in half from $20 to $9. But since the bottom, gold has not doubled rising from 750 to 1200, silver did double from 9 to 19. The bottom line is that panics offer good opportunities for silver. Earlier this week we commented that the blow off in gold and silver in the early 1980s was violent and short lived. These charts show just how violent things can be. No doubt the silly season lies ahead, only the public watching Glenn Beck and reading gold bug letters appears to be buying gold now, that is not a derisive but a factual comment. At the top of the mania I recall one of my economic professors saying he did not know how his wife would ever complete her silver service (knives and forks). All she had to do was wait for the price to collapse from 20-50 to 3.50. 

The bottom line is that timing gold or silver purchases is critical. Small miners seem to be doing better, we suspect they will become takeover targets for their reserves as the mania increases. 
 
 

Social Mood in the Gulf and AZ

Saturday June 26, 2010

The Gulf Disaster

This editorial from the Mobile, AL Press Register reflects both a perfect storm in the Gulf and in social mood. This op ed in the same paper traces legislation to raise liability limits to annual profits or $150 B. One elected rep suggests putting BP reps in jail until 'they figure it out. ' Our point is that conditions in the gulf, sad as they are, reflect what we can expect as entire markets collapse. As more evidence comes out that companies have done little to prepare for such an eventuality, expect more articles like this one in the New Orleans Newspaper. 

And the anger cuts both ways, consider this article reporting that the Federal Judge has lifted the ban on drilling. This quote caught my attention

“It’s a small victory for the industry, but clearly the administration has dug in its heels and is going to try to keep this moratorium, come hell or high water,” Bailey said yesterday in a phone interview. “Investors, as it relates to the drillers, are for the most part staying away. There’s too much uncertainty, too much headline risk.”

The Government is going to appeal and of course uncertainty rules the day. Markets hate uncertainty. The result is that nothing happens. So adding to the job losses of rig workers, support workers, tourism, and bank loans on such equipment, now plan to add real estate in the area as tourists stay away and workers may have to eventually move elsewhere. 

While Gulf Coast residents cheered Judge Feldman's ruling, how negative was the other side?  With the Dow at 10,000 the other side issued death threats against Feldman.  Our point here is that a ruling which was certain to be appealed by either side, has sent someone over the edge. Bear markets are human manifestations of negative emotion. By the way, to get a feel for where emotion / social mood is on this, read the comments posted to the article, they speak volumes about the ANGER his has produced. The New Civil War continues. 

The ultimate negative emotion is war and death.  So, if this sort of thing is happening at Dow 10,000, brace yourself for what might happen on a return to Dow 6, 666. 

And Where is Sky King when you Need Him?

For younger readers, Sky King, immortalized in Pencil Thin Moustache, was a tv hero from the 1950s. He lived in Arizona, flew a twin Beech, drove a   Chrysler Station Wagon about the size of today's Suburbans, and indeed had a niece named Penny.  But things were never like this back then. Here AZ Governon Jan Brewer speaks to the President of the United States on You Tube.  Again our point is that open hostility between a sitting President and a governor is in the open. My last recollection was the line drawn between then Governor Wallace and President Eisenhower, another tumultuous era when mood was strong. Her comments speak volumes about the mood out there. 

Social Mood as an Indicator

In technical analysis, we look for divergences. We look for one indicator turning before the overall index.   Two posts back we showed how the summation index had peaked months before the NYSE.  The summation index was diverging from the actual underlying index.  Here social mood has turned down or diverged while the markets are still within 10% of their post crash highs. This is divergence. A Governor excoriates a President after a White House visit. Federal Prosecutors 'dig in their heels.'  A Federal Judge requires armed Federal Marshals to appear in public. All these events are a forecast of things to come as this negative mood becomes more evident in the market. 

Oil, Shippers, Real Estate

Saturday June 26, 2010

 

In our update Wed June 23, we noted that crude oil had issued a daily sell signal using the Stop and Reverse parabolic indicator. And we noted that it was still under a weekly sell signal, this would seem to be an indication for a market turn. Well, thanks to indecisive summer time, the oil market jumped sharply on Friday as shown at far right. This is the daily again which is less than a buck away from a buy signal. Will one be generated?  It is impossible to tell at this juncture. The idea of tech analysis is to use the information provided by thousands of market participants who know more than any one of us could know. It is useless to speculate that the Gulf crisis has to mean this or that for oil prices or that the state of the economy or whether Israel will bomb Iraq, because, well, this is mere conjecture. We put the orange line is as a previous support now resistance area. 

We checked the stock charts and the Dow Industrials, NYSE, QQQQ, and Russell 2000 all got daily SAR sell signals the last day or two. Can these be quickly undone, you bet, just look back at his chart for whipsaws now and then, this is why the weekly charts which move slower are better determinants. 

Shanghai SSEC has bounced around 2550 after its 25% decline in a few months. Mish, see link on our sidebar, continues to look at the Chinese housing bubble. Chinese property is priced far beyond anything the average Chinese could afford. The latest kink is that potential wives, remember there are many fewer women than men in China thanks to their one child policy, are demanding a home and an automobile of a potential husband. Consider this social mood comment from a Chinese single woman, I would rather cry in a BMW than smile on the back of my boyfriends bicycle. Gee greedy capitalism caught on fast didn't it?

 The Baltic Dry Index reflects the cost of ocean shipping. Note it follows most of the stock index charts. Here it remains rangebound but the direction would seem to confirm out negative outlook for stocks, see previous post. Here it decisively dropped below the 50 week MA, the 200 is a distant memory, note it never crossed on the recovery. What is happening is simply. The US imports from China. The US has dropped auto purchases from 16 M to about 10 M.  While China does not supply our cars, that purchase drop is typical across the board, WMT is still dropping prices. And so the demand for cargo space drops. Which means the high home prices in China are unsustainable. 

The weekly charts of Genco, Dry Ships, Diana all look just like the Baltic above. Here the daily chart of GNK suggests that shipping peaked last November, and headed south thereafter Note the April 26 high, and then the downtrend increased its geometric collapse. This company has lost near half its value since November?  Shipping is pretty basic to economic health, of the world.  Notably these are dry cargo ships carrying steel, iron ore, coal, rather than container ships. Genco's cash flow for the last few quarters suggests it had to sell more shares to generate cash to pay the bills. Mark our words, the cash flow statement will take on increasing importance in the next two years.    

  Real estate has not broken down, yet. Here the Dow Jones Real Estate index remains above its uptrend line. A triangle is forming. The 2x reverse SRS fund is in black. While it is easy to fantasize about buying SRS at 25, left scale, and seeing it return to hundreds of dollars, see our cautionary note on such bear funds in our previous post. Still, accumulating small amounts of SRS now should be akin to buying gold and silver in 2000. 

Weekend Update June 26

Saturday June 26, 2010

 

Let's begin with a comparison of the 'real thing' the $VXX or volatility index with the ETF for that index the VXX. The real thing, the index itself, is shown in the solid black line. The ETF is the red and black bars. Immediately one sees that the real thing is much more volatile than the artificial construct, why?

The answer is that fund manager for such intangible derivatives have to re purchase their positions daily given the amount of money on hand. So the ETF can trade higher or lower depending on compounding and on the R correlation with the underlying derivative. Now the prospectus make this clear, that overall long term results may not match actual fluctuations of the underlying index. 

Here is a comment from Pro Funds description of its 2X reverse Dow Jones Real Estate Index SRS.

This ETF seeks a return of -200% of the return of an index (target) for a single day. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Investors should monitor their ProShares holdings consistent with their strategies, as frequently as daily. 

Interest in the short side of the markets, betting they will fall rather than rise is growing again. Beware that returns as explained in such short instruments may not reflect actual events. And beware that bear markets are subject to sharp bull rallies. And frankly a lot of great bear possibilities, like the casinos, are rear view mirror events in that the collapse of 2008 will not be duplicated again from current dollar levels. Now to the markets

From Stockcharts.com

The McClellan Summation Index is a popular market breadth indicator that is ultimately derived from the number of advancing and declining stocks in a given market. It is derived from the McClellan Oscillator by tracking its daily accumulation or "summation".The McClellan Summation index generally oscillates between 0 and 2000 although it can move outside of this range during extreme or unusual market conditions. Historically, major market bottoms occur after the index falls below -1000. Readings above +1600 often indicate a major top is near.

Again a theme of this blog will be underlying strength or breadth of the market. We hope this chart makes it clear that internally, the markets measured by the NYSE peaked in Sept of 2009. Indeed many tech analysts called for a top then. They were right as to participation but the overall indices held on until late April 2010. Note that the McClellan readings are on the left scale. And as the above mentions, it looks like the Summation index topped near 1600!  It has already fallen to a negative 400, we are on our way to the bottom.  Also note that the actual index is back where it was when the Summation Index topped. 

See the similarity in the two boxes?  The NYSE index poked above the multiple ribbons of MAS in April May of 2008, it did the same thing in the same months of 2010 ! Now the index is dropping below all those MAs just as it did then. The summation overlay in the preceding graph shows you why this is the case, the internals are deteriorating well in to the bear zone. AT bottom the MACD on this weekly chart has broken over, peaking in late 2009. Interesting how the various indicators top at different time, eh?  A glance at the CNBC tickers hardly tells the whole story. 

 Let's pull into that same chart for a closer look. We emphasize that the weekly charts are much more important than dailies. Here the crop below all the MAs is clear. in June the market struggled to come back, and failed badly this week, note the 6763 close is below all the MAs. Coupled with the summation index above this is a powerful argument that the bear market is well underway. Before one gets too bearish now however, note that the MACD has fallen quite a bit, again the fifth wave low as we discussed earlier this week lies ahead.  

Let's look at bit closer at how 2008 unfolded, here is 2008 in all is disastrous glory.

Then as now it made a clean break below all the MAs by end of June but gee what's 500 MYSE points in a lazy hazy summer, eh?September lived up to its reputation letting everyone enjoy the Labor Day weekend and then, everything started falling apart. Again look at our second chart on the summation index. The internals were deteriorating much worse than the index would suggest, finally the wheels came off. 

As always there are no guarantees, markets love to trick and fool, like the Sirens luring Ulysses onto the rocky shore, but this is an interesting analog, eh, we will continue to follow it and other breadth indicators for you.  

Stocks Slide on WTIC Sell Signal

Thursday June 24, 2010

Stocks Slide After WTIC Sell Signal

 

Yesterday we said that the sell signal in West Texas Intermediate  Crude was usually closely tied to the performance of the stock market, well bingo!. Today we got a sell signal from the same indicator, SAR parabolic, in the SPX. QQQQ and Russell are very close to the same sell signal. Another thing one notices about the parabolic, they line up somewhat with an Elliott Wave Count. As we have said there are many sites that specialize in minute, excruciating Elliott Wave counts, this is not one of them. But from the April 26 top, it is easy to see that four waves are complete from the top, we are starting the fifth down.

 

Okay here is a suggested count using the SAR patterns. Now the big question, let’s look at possible consequences. All over the internet and blog world and in various tech letters, the 1040 level is spotted as important. No doubt there are numerous sell stop orders below 1040. A sell stop order becomes a market order when the price is violated or hit. For example, one might have a sell stop to initiate a short position or sell a long position at 1038, even as a stop close only. It is easy to imagine massive sell orders being initiated once that happens. And so I would expect a pretty good downdraft when that happens. But, if the count is right, I would guess we will then have a pretty decent bottom. After all, everyone that wants to sell will probably do so on a violation of 1040, if that exhausts the sellers, it would be reasonable to expect a strong reaction back to the upside. So, best to watch from the sidelines or if you are initiating a sell, remember the make up of the trading landscape.

 

 

A few comments on gold, The best interview and summary was in Barrons a few weeks back with the manager of the Tocqueville Fund. He surmised there would be four phases in the gold rush. The first was at the bottom in 2000 when it was in the 300s and should have been bought, The second has been in the 500-1000 range as more institutions picked up on it. The next is liable to be a public interest, the third phase, this is evident now on cable television. GLD is, in a May 31 2010 Barrons article, page 38, the sixth largest holder of bullion on the planet. Purchases of Gold ETFs are forcing the price of gold higher as those funds acquire more of it.  The last phase will be the blow off parabolic phase. We would also recommend that May 31 2010 article, pointing out that it is another currency now in vogue as the Euro this year is out and the Dollar last year was out, of vogue that is.

Above gold shares in black led the metal to the peak in early 2008. Both collapsed in the sell off. Since then golf has outperformed the shares, this should not be happening, shares should lead. It may be that the purchase and existence of the gold and silver ETFs has skewed this traditional relationship. Elsewhere one can read of allegations of continued manipulation on the commodity exchanges. While we cannot comment on that, recall the Hunt corner the market attempt in the early 80s in silver. The Hunts acquired many silver contracts. Instead of closing them out, they demanded delivery. The counterparties found there was not enough sliver to do that and the price briefly soared to $50. Irritate, the Exchanges changed the margin requirements to hold the contracts. The Hunts could not meet margin, had to sell the contracts, and the price collapsed never to see $50 again to this date. Our point is that the time to buy is certainly not now, it was several years ago. There will be other opportunities, if one is not in, to make money without the worry of manipulation and whether this is the upside or downside of the parabola or how many multiples of $1,000x gold will hit. And recall that FDR outlawed gold ownership. Caveat Emptor

And so the fifth wave down begins in stocks. Oil weakens, bonds are strong, and Washington DC fells more like Viet Nam in 1972 every day.

We are not a political blog but Tom Friedman sums up the Afghan situation here.

it is important to grasp the socionomic implications of differing points of view and the historic perspective to our 1968-1982 timeline. Then as now there were complaints on the rules of engagement.

US Lags China SSEC, WTIC Generates Sell Signal!

Wed June 23, 2010

 

The SSEC Shanghai Index led the way down as well as up in the last meltdown 2007-2008. Here it peaked last December, the US SPX took another five months to top out April 26. At right the SPX followed Shanghai down but has shown some rally since, unlike the Chinese equivalent. Five months from now would be September, the seasonal melt down month. The 3300 to 2500 drop is 24%, certainly qualifying for bear market status. 

We mentioned earlier this week that the weekly crude oil chart was on a sell signal but the daily looked much better and that the two were close in price. Well we have the verdict, the daily stop and reverse parabolic gave us a sell signal today. This is particularly ominous. We hope to do a more academic study about oil prices linking to stock prices as well as popular culture. We believe oil is the most emotional commodity on the planet. Its price moves have no (realistic) relation to the supply and demand for oil but the emotional irrationality surrounding it.  But I digress, at top, note how close the SPX tracks oil. AT bottom MACD looks ready to curl over. WE may be setting up to challenge that S & P 1040 level. 

Okay so what to do?  We checked, the stop and reverse level for the weekly chart is $80.69; the daily SAR  shown is $79.70.  Now to our investing philosophy. One should be looking for a least risk investing opportunity. To have two indicators for daily and weekly this close is a strong indication of a top in crude oil. And it would afford an opportunity to short this market with a close and reliable stop provided by the SAR. This is what intelligent investors are seeking-least risk opportunities at market extremes. 

The fundamental background is simple economic weakness and reduced demand for oil. Anecdotally, the Willis Report on Fox Business  this afternoon featured a seafood supplier on the Gulf commenting that they needed a lot of psychologists down there, people were literally lost about what to do. Talking heads on television decrying high oil prices just don’t get it, high oil prices means the economy can pay for the oil, and demands it. Low oil prices almost always parallel or predict lower stock prices.