The Market Perspective

The Business Cycle

Sunday August 7, 2010

A talking head on television noted that either 48% of the public blamed Bush or 47% blamed Obama   for the recession. Of course the properly framed question was not asked, how many blame the inevitable Business Cycle?   Even if it had been, no doubt few to any would, I do of course. And the Business Cycle is not running for office and has no advisors to argue with in interviews.

We remain in the middle of an 18 year cycle of business stagnation. These cycles as we note in our introduction on the blog, are characterized by huge rallies and then sell offs in the stock market. The rationale for such rallies is rarely clear. For example Friday the employment report was seen negatively yet the market closed down a mere four S & P points, apparently deciding it was about right on the Thursday close. So much for fundamentals. This is why an examination of the internals of the stock market, what are real traders doing with their money, is more liable to be helpful than ‘the news.’

Deflation continues as interest rates continue falling. As we noted, Newsweek magazine sold for $1. The latest Kindle E book reader is $139, well down from $400 a year ago. Autos are available for nothing down and no interest. Barnes and Noble apparently wants to go private.  These are not signs of an improving economy.  Yet the stock market ended the week higher.

We report to the best of our ability where the markets are liable to go. We have reported since July 11 that the direction is  up, and it still is.   We also have shown five different years when the markets made highs in August followed by lower numbers in October, 1987, 1998, 1999, 2992, 2008.  We read other blogs and letters that are focusing on various dates. Our policy will be to report what happens and what is likely to happen.   As we noted, forming various scenarios causes one to adhere to the scenario often in disregard for the facts. 

 

 

 

The Weekly Summation Index closed up 231.19. It closed over its 50 week MA, 749.96 versus 664.27.  At bottom the MACD is turning up after descending for  over a year.  At the moment there is no sign of a top in the Summation Index.   The pink lines depict  a triangle that is forming. We suspect the triangle will be resolved to the downside.

  The daily chart managed to stay in the buy zone with the late Friday rally, the SPX  at 1121.64 is about 18 points above a daily reversa of 1103.89. But the Weekly Chart  just turned up with a new buy signal. Not surprisingly it looks much like the chart on the first page.

This occurs against the back drop that August is a seasonally high month. A centerpiece of the Administration policy is the renewal of GM, and it is playing coy about its stock offering. A stock market plunge in the fall would certainly not frame the recovery of GM very well would it?  As we said Thursday, there are many looking for another V style crash. Frankly that would just be too easy. We expect a move that will cause everyone to jump to the conclusion of a big move in one direction which fails to materialize. Remember the bull market just went up, the bear is much more clever in separating people from their money.

 The green resistance line is drawn at the Fall 2008 Crash low in yields. There is no question that deflation now grips the country and the world. That crash low which occurred amid world wide panic into low yields, has now become a top!  The demand for one year money is now brining only .25% at auction. This flies in the face of Bernanke’s belief that pumping up demand is as simple as throwing money from helicopters. Corporations and banks have plenty of cash, but what to do with it?  There is no money to be made at interest, retail sales are stalled, and credit card debt is being paid down. Yet the Administration wants to raise taxes and impose ever more requirements to hire workers.  It is not just that we are Rome, now we are Japan. Japan went down the same path, refusing to write off bad loans. The result has been 20 years of Japanese stagnation and low interest rates. Bernanke is only  kidding himself that ‘he’ Is keeping rates low.  Rates are decided in world markets like the Chicago Board of Trade.  As Jimmy Rogers says, the FED is ‘a’ player, not ‘the’ player. Low interest rates  the leading indicator for the economy, make no mistake.

 

The bond market is much more sophisticated than the stock market.  By that we mean bonds are a better early warning indicator than stocks. For example, in 1987 bonds began falling in price in March, stocks fell all in one day in October.  It appeared that the markets made a high April 26, 2010 and reversed. Yet stocks have staged quite a rally this past month. But the economic data is no better. What is the real story?  We have hundreds of charts cataloged by industry. Yes energy prices have soare

d back to the $80s but that was on a weak Dollar. We suspect the real story is here, the Electric Power and Natural Gas Infrastructure Index.  A very real measure of economic strength is the demand for power. In fact that demand has been decreasing both in China and here.

Bollinger Bands create outlying bands formed by standard deviations.  The dotted mid line is a moving average. The bands expand when volatility increases. Note that as the markets collapsed in mid 2008, the bands expanded. As the market recovered in 2009, the bands contracted. Now price has fallen below the mid line and the bands are expanding, again. The index failed at the 200 bar MA. I suspect this is the real story of the economy.  In examining scores of charts, we see this battle at the 200 day MA. Yes, stock indices which feature heavier weighted large caps have exceeded their 200 bar MAs. But that is more a feature of money finding a home somewhere than real economic demand.  Think of this as a  Baltic Dry Index for landlubbers. A slowing economy will demand less energy. People cut back on driving, industry uses less energy. Thermostats are turned up in the summer.

The best measure of employment is the actual number of people working drawn from payroll deposit data. If the government wanted us to know the truth, it would form a National 941 report of deposits made for those employed. It would be easy enough to see if deposits were increasing or decreasing, indicating expanding or shrinking payrolls.  Instead we have talking heads ‘guessing’ what some  imaginary number of job creation takes place, when in fact the real numbers are right there in the Department of Treasury computers. In similar fashion, the demand for energy, rather than say the price of energy, is a better gauge of what level of economic activity we are experiencing.

 

And so the pieces of our puzzle start coming together. No matter what Ben B. does, he cannot push the string, there is no demand for money. Now there is less demand for energy. And it is energy that powers an economy. There is less demand for everything.  No wonder car loan rates are zero with nothing down; someone please come take these cars off the lot!  While these early warning signs are clear, again note RPE has rolled over after a year of rally. The casino gamblers at the NYSE are still speculating ot the upside.  Decades of recommding buy and hold, the rich own stocks, expectations of double digit returns of the 1990s still dance in the average person’s head. The prospect that all prices for all asset classes have and will continue to fall has still not dawned on most participants. This is occurring  despite not one but two collapses since 2001!

 

 

 

 

 

 

 

 

Gold

Wed August 4, 2010

Gold has dropped $100. Interestingly it has dropped along with the Dollar, I thought they guys on cable tv said Gold was a defense against a lower dollar, hmm... At this point we lack adequate information to discern whether this is a correction or some sort of a top.

We do know that 

• the uptrend was broken
• the three EMAs have turned down
• the five waves are certainly not textbook so the pattern is something else
• MACD is suggesting at least a bounce
• RSI is below the half way point

this market was overdue for a correction.If markets tank this fall, gold should be falling first as it did in 2008, oh it already is falling, is this a warning sign?  Stay tuned. 

The Approaching FIscal Crisis

Wed Aug 4 2010

If the markets hit  a Tipping Point and start to slide surely this will begin in beleaguered spots like CA. 

The Governor has extended furloughs, the Comptroller may issue IOUs again in Sept or Oct. Other wise this would be known as a default in kind, the employees cannot be paid, the bills cannot be paid, how long before the bond holders get nervous?

Note that CA bonds are trading 265 basis points above Treasuries. That is a pretty good risk premium, it if widens the bond holders are getting nervous. 

Similar woes hitting New York.    A bill to 'rescue' various cities and states failed in Wash DC this week, we draw closer to the Tipping Point. Remember  in 1976 Moodys rated New York City Baa the day it defaulted. 

Here is an example of why analyzing the markets during this Fall rather than relying on fundamentals will be important. 

Scenario One

After reading the above articles, one will learn that financial chaos can no longer be kicked down the road, it is here, now. And it is increasingly doubtful that it will stay under wraps until after Nov elections. So a trader might conclude that a default to employees or bond holders will occur which might tumble the markets. But not so fast.

Scenario Two

Bernanke and Geithner can read the same articles and are well aware of the fragile situation. Perhaps Ben arranges to 'open the FED Window' allowing big banks to borrow as much as they need to stave off default by various cities, at least until after the elections. And much of that money also finds its way into the stock market, I mean as long as Goldman is borrowing for say Sacramento, why not borrow some for the Goldman High Frequency Trading program, indeed..and so more money pours into stocks lifting the market making it appear that the economy is indeed just fine. 

We have no idea which of these or some other scenario that might occur. We will continue to be vigilant in monitoring the markets. 

Market Internals Improve

Tuesday August 3, 2010

What is the Market Message?

The stock market is the composite vote of millions of participants around the world.   With global participation,  some get to vote while we sleep. The purpose of technical analysis is to analyze data without opinions and show what the market participants are doing with real money.

Now, the purpose of THIS market letter, is to attempt to stay opinion neutral and report the results.  Our reading of numerous letters over the years shows that this can be a serious error. Even formulating an opinion gives one an emotional attachment to it.  Emotional attachments can argue with the facts, often to a fault.  After the collapse and rise of the market, and then the drop from April 26 this year, many advisors have turned decidedly bearish. Many have declared Wave Three Down to be underway. And with high unemployment, cities and states in de facto bankruptcy, that is an easy conclusion to reach. It does not however, mean that the stock market has to do this or that this month or next. The market will go where it wants. If the FED is about to unleash another torrent of money, and Bernanke has indicated that may be the case, perhaps that money  will go to work on stocks rather than creating jobs. That has been the case thus far, higher stocks, fewer private sector jobs. Is the market telling us that?  The Dollar is down, bonds have stopped climbing, stocks are up, hmmm, is the money supply about to expand short term?

The elections are three months off. The Administration can see the charts, as well as their declining ratings.   With the literal control of Congress at stake, we would not discount the possibility of any sort of behind the scenes maneuvering. After all, Presidents come and go, but Goldman remains at the White House.

 So, as the proverbial man from Mars, let’s look at the Market with an objective eye.

 

 

The FACTS

The percent of stocks above 200 day Moving averages has risen from less than 30% to 61.6%. Over the summer It has not vaulted this barrier to the upside. But the price of SPX at top has quite an up day Monday. That was no doubt a 90% up day, 90% of price and volume trades up for the day. Such days, up or down, usually see three days or so consolidation afterwards.  This internal indicator has risen above its 50 bar Moving Average MA. AT bottom the MACD is way up, but as pre April shows, it can stay up for some time.

The Opinion

Many, in fact most of the sites I monitor are saying, see, the rally is losing strength at a prior resistance level this is the usual August head fake, prepare to go short. After all…. and then they cite the usual litany of bad economic statistics. That may be but, if the FED is about to unleash another helicopter load of money, the market will be delighted especially if it comes though the ‘banks.’ If it does, we expect the money will be ‘employed’ in the stock market. That is quite a bounce off the July lows. And one can make a case for an inverse head and shoulders pattern, our green red resistance line is a  neckline to be broken.

 

This is a newer indicator on stock charts but an easy one to understand. This is a plot of the new highs versus new lows in the S & P. That indicator went negative, literally, in the post April 26 sell off. But, it has now vaulted over the resistance line. It has crossed both MAs to higher ground. It has repeatedly pulled back, see the three blue arrows, found support, and moved up again.

Suppose this was, say, a chart of the blood pressure of a patient in the emergency room ( I have no medical expertise, this is just hypothetical.)  It seems that the blood pressure, after giving us quite a scare, (Maynard, we nearly lost you!) has come back to at least a low normal. Note it has risen above both MAs. At top the RSI has risen to over 50%, a bullish indicator. Taken together the first chart suggests there is reason to wait and see, let the market tell us what it wants to do. This chart suggests there is reason to reassure the worried relatives in the waiting room, or would you tell them to call the funeral home? Seriously…..We think many advisors  are more  bearish for August than the facts support, ready to call an August top. We will wait until the market tells us that a top is in place. So far we do not have that announcement.

Still skeptical, I thought so, read on…..

 

The Summation Index on the NYSE is somewhat like the Hi Low chart on the previous page. This is a weekly and it is not the end of the week, but…Note the reliability, after the March 9 2009 low, this indicator took off and stayed positive, until April 26.  I had taken the drop below the 200 bar MA as a change of pattern to the bear side, but now look what happened. As with the previous graph, the patient has improved. This could still fail at the descending 50 bar MA but the price action is causing that MA to improve. At top the RSI has climbed over 50, again. It is unusual for the weekly summation index to reverse in this fashion.

Bottom Line  We think far too many traders are ignoring signs that we could have a replay of last fall when prices did not sell off. When we warned caution a few issues back we meant that both ways, do not fall into bull or bear  mode until the market shows its hand. 

The Action of the Dollar does bear watching here.

After stocks hit their low July 4 weekend, they rose with the Dollar weakness, shown in the red black bars. We count five waves down on the dollar, the media negativism is increasing, the Dollar Low approaches. This 81 area, note a squared number is where we wanted to buy the buck. Copper and crude oil have rallied nicely given the weaker dollar. 

The media is ignoring riots in Greece, again, the stress tests there were  a joke, we think the Dollar is at or near a low. Note the MACD as well as what looks like  a final sort of capitulation low in the price on the graph. This may be the reason stocks have done so well but….we remain vigilant for signs of continued stock rally. We are not personally short or long the stock market. We are long UUP.

 

 

August, A Month of Mixed Signals

After Market Close of Friday July 30, 2010

NOTE the first chart is 1998, the second is 1999, these are not current data!

We understand that readers have enjoyed our portrayal of 1987, 2002, and 2008. We continue the look back today. Here is 1998, while the market was still headed up to its eventual 11,500 high just two years later!

1999 did not disappoint in the August high Fall low department either!  August rallied a solid 700 points in a mere ten trading days, count the bars!  Our point is that  1998, 1999 all saw big moves up in August followed by October crashes. 2002 and 2008 did the same in a bear market. So there is reason to be suspicious of August rallies in bull or bear markets. 

Quote of the Week

There may be no plausible and near-term alternative for the world but to continue transacting its business and holding its reserve assets in dollars, but this is no excuse for a shortsighted U.S. attitude that ignores the international consequences of inflationary domestic policies. At a minimum, the U.S. needs to restrain its oil imports by one means or another, expand its agricultural and high-value technology exports as systematically as our Japanese competitors, and adopt tax measures and investment incentives to restore the productivity and competitiveness of American industry.

Richard J. Whalen

"Defending the Dollar: After the Burns Era" July 1978

Since Mr Whalen wrote that, the American car industry has become dominated by non-American players. The US came to dominate personal computers but I suspect MSFT systems days are numbered. I doubt Apple iPod and iPhone can support us all though that stock is clearly the ‘new’ IBM. Actually the one booming industry since 1978 is gambling, in state lotteries, in Nevada, in thirty plus states that abide river boat gambling, and now, internet gambling courtesy of Barney Frank.  

 The USA looks more and more like post 1990 Japan. We will have more to say on that in future issues. We are half way through an expected 18 year cycle of business stagnation, the government can only make it worse through ill conceived policies which divert money from productive purposes. 

Dennis Elam

We used the SPY which is an ETF of the S & P so that we could put the Chakin Money Flow indicator on it.   The conclusions are

• a potential five waves up completed April 26, 2010
• it appears a somewhat significant first move down occurred this summer, we label that a Wave A or 1
• the exponential MAs moving averages are teasing us, it looked like they would collapse to the downside but like Chloe calling Jack Bauer, the 13 week EMA turned up off the 34 week EMA, gee, another cliffhanger!
• At bottom the Money Flow into this ETF appears to have peaked months ago, we now have indecision and the low volume of summer months
• frankly this appears to be the August rally that we have shown in five separate previous years, and the seasonal that makes August famous
• See the monthly chart of the same index a few pages further on before drawing your final conclusion

Our record for the summer is turning bearish after April 26, suggesting prices would be up around the July 4 weekend, and this past thursday 7/29, noting that our weekly SAR issued  a buy signal as well as several of our point and figure charts. Our policy will be to tell you when we have technical indicators that change in what we believe to be a significant fashion. The entire perspective of technical analysis is that the charts are a literal vote of millions of participants of what will happen. Ignoring that vote is risking the fall into rationalization for a strategy that does not work.

Above the summation index for the NYSE indicates that the net number of advances is improving. Note the higher low in the index from June to July. This bears out our comment this past thursday that the path of least resistance appears to the upside. 

IN our PDF sent to subscribers we show that the weekly and monthly SAR gives both buy and sell indications depending on the market and whether it is a weekly or monthly view. Again this is typical August behavior.

 For those not as familiar with this indicator we went back to the start of this expected 18 year period of stagnation we are in now, ie, we are have way through it. The Monthly SAR got one out of stocks in 2001, the re entry in 2002 was a wash, but by the time another buy was generated, one was right back at the 2002 level. Such is  the nature of a slow moving indictor, it lags the daily and weekly. One was long from about 1000 but missed the first 200 points in 2003. This indicator really pays off in waterfall declines s it did in 2008, exiting at about 1400. The subsequent purchase was not until the 900s. 

Now another sell signal has been generated, This is only the third signal since 2008, hence it needs to be respected. 

Our bottom line is that we are in a seasonal August rally. We would like to see the monthly indicators turn which would be another 114 points. The S & P is battling over both monthly and, see earlier chart, various weekly averages. These conflicting signals are all part of such junctures. The hard truth is that the markets are generating conflicting signals in a period known for tops that tend to reverse in the fall. So, we expect an up month in August. The story for the fall will have to wait until after Labor Day when the next monthly charts are updated. In the meantime we will keep you informed on the weeklies. 

We have stated that we are not wedded to on particular indicator. Thursday we used both SAR Parabolic and point and figure charts. Please do not be put off at our comparison tables, we are not going to become a mind boggling laundry list of numbers or ‘proprietary indicators’ either. But this is a difficult point with many cross currents. We are attempting to demonstrate the conflicting signals. 

Other Indicators as of close  Friday 7/30/2010
 

The SOX semiconductor index fell below its 200 day moving average.

The Baltic Dry Index of Shipping Prices is back at its March 2009 level of 1942. 

India, Brazil, and China ETFs outpace the SPX in this country. 

The bond market continues to outpace the stock market in returns. When interest rates fall, zero coupon bonds really soar, here is the EDV zero fund which has just corrected a bit. The stock market continues to ignore the fact that the bond market sees no inflation. We are at the near opposite of the 1981 peak in yields at 14% with the thirty year yield at only 2.87%. Yet FED officials still dither about inflation and deflation. There is no demand for money and no expectation that there will be, hence rates fall. We are not at the bottom for rates yet as Japan has come to realize.