Saturday August 11, 2011
Investors bought and sold a daily average of 7.76 billions shares in NYSE volume for the week, the highest level since the week of May 2010 Flash Crash. In one sign of caution, volume was heavisets on teh amrket;s down days.
Weekend WSJ Page B1
More on that a bit later but this is what we mentioned in our update Friday, On Balance Volume has to really pick up from here to get prices higher.
I think a lot of what is happening in the market now is emotional.
Karen Wong, Mellon Capital Management
Well Karen, close but no cigar, what happens in markets is nearly always emotional, which is why we report on socionomics.
Okay, we admit to getting rather micro focused this past week, but our objective was to attempt to show you that the moves exhibited a pattern rather than the 'sheer chaos' you heard from the media. Indeed it may be that the best buys were at the bottom of Wave Three mid week. This was the case in the larger frame of reference in November of 2008. That was a Wave Three low even though the final Wave Five did not end until March, 209. Let's take a look at the short term.
Hourly SPY Chart Overlaid with MACD
Again this is a sixty minute chart. I put the MACD indicator behind price so that readers could appreciate the huge amplitude of the move in the MACD even though price is well below where it has recently been. This in itself is a divergence of sorts. In the bottom panel one can see volume as the opening quote indicates, receding. Yes the big volume was on the down days. This picture causes me to believe that we will see additional pullbacks before a substantial advance sets in, see yesterday's On Balance Volume chart, OBV has to pick up for buying volume to exceed the overhead resistance.
New High New Low
As one can see we did not make a V Shaped bottom last summer. The net new high low re enforces my suggestion in the first chart that it would seem reasonable to experience some retests. Notice that the markets are experiencing a much lower low than last summer.
NOTE by the way that the look of this entire chart is one of lower highs and lower lows. As I have suggested, this has been a Trend Change not a mere correction. I did stop by a Major Discount Brokerage House this week and the 'Advisor' (who has been doing this since 1996) assured me it was a correction. I felt a lot better about my forecast since then.....Which is to say the mainstream advisors are still in the Denial Phase of the Bear Market.
Why I Believe This is a a Trend Change, You Should Too!
Broker Dealer XBD Main Panel , Bank XLF at Top
I positioned this both ways with the Broker Dealer XBD in the main panel and with the Banking XLF in the main panel. I settled on this presentation with more focus on the Broker Dealers. Here is why.
First the break down is worse in broker dealers than in XLF, and the latter is bad enough with bankruptcy rumors swirling on Bank of America.
Second, the real panic in 208 was caused by brokers acting like bankers courtesy of the Gramm Rudman repeal of Glass Stegall. Glass Stegall was the 1930s legislation that kept commercial banks (loans and checking accounts) out of the investment business ( sub prime mortgages). And of course being brokers who had sold their shares to the public, the brokers went in whole hog leveraged to the hilt financing long term low quality debt with short term paper. When the mortgages failed to pay, the commercial paper brokers issued failed to pay, and bingo. Hank Paulson was on television demanding $700 B.
Third, most ascribe the break down in 2008 to letting Lehman fail after rescuing Bear Stearns. Whatever, it would have broken down but, the brokers all took refuge in claiming to be banks and were rescued after that.
Fourth, we probably would not be in this predicament today except that Greenspan rescued bad bank decisions amid the crash of 1987. he then compounded his error by rescuing Long Term Capital Management in 1998. This led all the brokers and banks to conclude that indeed they were too big to fail. The best scene in Wall Street II is Frank Langella playing the head of Bear Stearns observing that everyone in the room had done the same thing he had done, he just fell first, whoops.
Okay enough history. The blue line is the 200 week moving average. XLF and XBD both failed below the 200 week moving average.
5. Note that both indices have broken their pink uptrend lines, decisively.
6. Note that XBD is already below its 2009 recovery low! This erases two years of sideways recovery, such as it is.
7. At bottom the MACD turned down at the internal market high we spotted for you this past February.
8. Conclusion, the entire financial sector has entered a bear market. Thinking the overall market can survive that occurrence is truly whistling past the graveyard. We have a world wide debt crisis. The banks are holding the debt. We can safely assume the debts are real but the collateral is not. And in the case of trillions of dollars of unfunded pensions liabilities by federal, state, local governments the world over, there is no collateral.
And note that both closed down Friday.
Discretionary Goods - Cruise Lines
Cruise lines have built ever larger ships to reduce fixed cost per passenger. In South Carolina groups are suing Carnival alleging that the ships are so large as to resemble buildings which violate local height codes. This is an example of a sort of Wal Mart approach to luxury spending.
But it struck me that this chart perfectly summarizes this past year of last ditch FED efforts. The FED initiated QE I last July, RCL doubled in by February. That as we have noted was the internal high for the year. On Balance Volume in the lower panel tells the story, net selling has ruled the day since taking RCL right back to last summer's lows. In a recession, consumer discretionary spending will hit cruise lines hared, and the market seems to know that. A cruise line is really just a casino put to sea, so this sector is collapsing just as the casino industry.
Summary
Stocks
The most positive indicator is massive insider buying, you can track this for free by registering at
http://www.j3sg.com/.
The negative thing is the apparent end of Wave 2 up from March, 2009 to now. This suggests we are starting the largest of the series, a huge Wave 3 to the downside. It has kicked off with record selling volume. I would not expect a rebound rally until OBV turns positive across multiple indices. However there is no doubt the FED will try any and everything to goose the markets.
Weakness in brokers and banks foretells lots of trouble ahead.
Bonds
TLT topped in a vertical flight to quality (despite the downgrade). We sold 7/10 of our position. I sold my puts and re bought the calls for about a $400 profit this week. I still hold 300 TLT.
JNK, the high yield bond fund, collapsed along with stocks, this is another puzzle piece falling into place. Such funds do poorly in downturns and have been a favorite among small investors on the way up.
The FED decision to keep rates at zero for two years only makes life more difficult for banks, their spread is low while their loan portfolios are terrible.
Emerging Markets, SOX
Both continued their falls which we have tracked for months.
Energy
Just like the summer of 2008, crude oil broke first along with energy services. The bounce from the high 70s appears to have saved crude for now. It is typical for crude to make a low before the overall stock market, that appears to have happened.
Gold Silver
Silver at $40 is twice its 20 week moving average which is about $20. Several have noticed that it looks just like the NASD after its top in 2000, divide by 100 and the chart pattern is the same. We think silver is topping now. Gold is $1800, its 200 week MA is 1087, how high did Jack's beanstalk climb? Gold continues as the cyber alternate currency.
The Dollar
The least reported event on the planet this week is that the US Dollar needs a weekly close over
76.46 to flash a buy signal. It remains above its May low.
We will have some buy recommendations as the week unfolds, remember the main trend for the next two years is now DOWN!
Socionomics
I doubt there is a single leader in the world that would be ready to stand for re election. The riots in Britain are reflected in curfews in Philadelphia. Lt Col Bill Cowan just commented that he did not see a way out in Afghanistan. The market sell-off is in itself a negative comment on US leadership for both the President and Congress. The comparisons with the Jimmy Carter era mount every day, though we have pointed this out for the last year. No President was re elected from 1966-82, Nixon had to resign after his re election.
dennislelam@gmail.com
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