Sat Sept 4, 2011
After a strong start with three days of gains, the markets closed with consecutive triple digit losses The culprit; more bad economic data including 'friday's report showing the US had failed to add any new jobs in August. The jobs report was the weakest in almost a year.
Weekend WSJ Page B5
And that is what the government actually admitted. But the culprit was not the news event of the jobs report. Indeed the Bullish percent index of NYSE stocks we posted Friday ran smack dab into its 50 bar MA resistance level, and reversed. All the bullish percent and summation index charts we have shown you since last November have been announcing the resumption of the bear market, it is here now. The media chose to link the downturn with the news, which is, well, hardly new.
Wells Wilder pioneered many technical tools that today's chartists use. One of his ideas was to always trade with the trend. If the main trend is up, only go long, the continued trend will bail you out if you entered at the wrong juncture. That was good advice then and still is today. We have now moved from bull to bear, so the main trend is now DOWN. That is the reason I finally decided to exit positions Friday. Clearly our entry August 8-9 was spot on. And last weekend I thought we were overbought, in retrospect we should have taken at least partial profits on Wednesday. I take responsibility for that. Some money slipped through our fingers but we were still in profits early Friday when I posted the notice.
My point here is that being long stocks is now a counter trend play. TLT never really backed off, and the VIX remains elevated, hence fear is high. The $2 collapse in oil further cemented the need for caution.
Important Warning
As I looked at the charts this weekend, the eery similarity to 2008 began to emerge, see our comparison of energy service and banks at the end of this post.
That comparison alone may be the most important contribution TMP has made thus far. We would rate the current investing environment as extremely dangerous. Note we have placed this warning in red so that readers will hopefully grasp the seriousness of our message.
Stocks Over 50 Day MA
Clearly I, and a lot of others, were expecting more recovery than this, I thought we would have a pullback and then advance into mid September.That may still happen but multiple indicators certainly turned down the last two days of this week.
It appears that a close under 1140 on the S & P would be a sell signal on the point and figure chart (not shown).
Parabolic SAR
We are still on a buy PAR SAR signal. So the fund managers may come back from the Hamptons and scoop up some stocks. INdeed, we could fall to 50.94 and still be on a buy signal. So will Tuesday be up or down, I don't know. But even then I would not expect more than about two weeks, we had previously mentioned the next option expiration Sept 16 as a possible top. I do know the oil chart looks awful.
Crude Oil
The 1930-32 bear market stair stepped down losing 90% of its total value by falling from DOW 390 to 41. Each subsequent rally encouraged buying, only to be turned back again. The pink lines in the above oil chart draw much the same picture, the market is slowly stair stepping "down. Each rally reaches resistance and is turned back again. Here the 34 day exponential moving average EMA has pretty well kept the market in check.
A strong economy can afford high oil prices, a weak on cannot. Note prices are getting weaker, case closed.
Correlation Coefficients
The lower panel represents a new indicator for stock charts. This is a Correlation Coefficient. The range for this well known statistic is from -1, an exact opposite, to zero, no correlation, to positive 1 for a complete correlation. I ran West Texas Intermediate Crude WTIC against the SPX for stocks. As you can see the correlation is near perfect at .88. So this puzzle piece is confirming a pullback in stocks. Most commentators on national television and particularly local television universally believe high gasoline prices are a bad thing. But high prices always correlate to a strong economy (strong demand for energy) and stocks. Recall the oil fell to $35 in the fall of 2008, in fact leading the way down from its high that July.
The DashBoard - VIX and TLT versus SPX
Now, you tell me, are the charts in the main and upper panel exhibiting bullish pattern?
Do we have higher lows, higher highs, successful re tests of previous support when the market pulls back, are the moving averages on the rise, is price over the MAs? The answer to all those questions is yes. INdeed the VIX re tested the high it set in March and is moving up again! At top the fund of long date bonds TLT is on a tear. There are numerous articles detailing what a mistake Bill Gross, the world's most quoted manger of bonds, made in dumping his long government bonds. For the record we bought TLT at or below 90 earlier this year, sold at 95, bought back and sold again from 105-109. Whoops, we got too confident of the stock rally thinking bonds would pull back to the mid 90s, that has not happened.
I ran a correlation coefficient between SPX and VIX above and it registers -.94. So VIX is a near perfect inverse correlation to stocks while crude oil is near perfect correlation.
WE now exhibit an all too familiar pattern from the past playing out at near the same price in the same time frame in the same stock which is closely correlated to US economic activity.
Patterson PTEN Now
Patterson PTEN Summer of 2008
As Cowleen Rowley of FBI fame might say, let's connect the dots or similarities of the two time frames
PTEN tops at 33-35 in both years
PTEN breaks both MAs in the following month of trading
PTEN attempts a rally back in August in both time frames, the rallies fail
PTEN falls below its 200 day MA moving average
While we cannot complete the chart for this year we can for 2008, here it is and this is why this analogy is so potentially important
PTEN 2008
PTEN managed to hold the $20 range until the end of September, and then everything fell apart.
Lehman filed for bankruptcy Sept 15, 2008. Hmm, I find this truly interesting, so much so that I decided to look at some other comparisons. the entire crisis was a banking crisis led by the March 2008 collapse of Bear Stearns, which was 'saved' in a fire sale purchase by J P Morgan. Most articles now link the failure to 'rescue' Lehman that September as precipitating the crash. Note, Lehman had issued short term commercial paper and then made highly leveraged purchases of sub prime mortgages. Once the long term paper, ramped up to 10x leverage, failed to pay, Lehman defaulted on its commercial paper. That locked up the entire commercial paper market bringing the financial markets to a halt.
So are the banks better off now, after a trillion dollars of stimulus? No, in fact...
Philadelphia Bank Index
This is a genuine horror show. The bottom of July August 2008 are now the tops for July August 2011!
I checked and the XLF Bank ETF exhibits the same pattern, here it is below, a weekly close below 12.5 would find little or no support all the way to the previous bottom,.
XLF Bank ETF
I was not present at the Jackson Hole WY FED meeting, was this graph displayed? I left identifying marks off so that one could clearly see just how precarious this has become. Finally let's check on our reliable NYSE Summation Index. Again we go back to the summer of 2008.
NYSI
By late summer 2008, the NYSE Summation Index had fallen to just about where it is now. Then as now there was a rally in August which elevated the NYSI level to -250, right where it is now! But MACD was headed down, just as it is now!
Fundamentally, 2011 is rather like 2008. Recall that Warren Buffet was apparently the last capital resort for Bank of America just two weeks ago. As I write Greek one year debt is quoted at 70% yield indicating default is expected. We noted that whatever happened in the mid east it would only result in more supply of oil, further depressing its price. That too has happened as Libya's government has failed. So we have a potential American bank crisis and the EU is falling apart with strikes and riots from Spain to Russia. The price of oil and energy service stocks and bank indices are falling now just as they did in the summer of 2008.
Summary
The technical indicators are as negative now as they were in 2008.
We have attempted to demonstrate this using a combination of Energy Service (a very sensitive economic indicator), Banking, and Internal Indicators, the NYSE Summation Index. All are flashing waring or sell signals.
Seasonally the market is entering the weakest period of the year, Sept and Oct. DOW 9500 would be half way back to the March 2009 lows from the highs this year. So a Fall 2011 collapse would not have to take us all the way back to the lows of 2009, but half way would be a good start. After all we have been saying the markets actually topped internally last November (emerging markets) and February (US Markets).
Fundamentally the political atmosphere is a disaster. The President's ratings on handling of the economy are 64% negative according to the Rasmussen poll last night. Congress scores even worse.
All the King's Horses and Men have not been able to cobble a rescue plan for Europe. Greek debt quotes indicate imminent default. That's a problem for their bond holders in France and Germany not for the party animal Greeks of course. Similar problems loom in much larger Spain and Italy.
Real Estate values are sky high in countries that depend on a never ending Chinese economic boom. Scan these headlines on real estate from this weekend Sydney Australia newspaper.Distress Sales on the Rise caught my attention. This is the same situation as in the USA in 2008.
We posted articles on the $2.6 B debt pyramid that is Atlantis in Dubai and the Bahamas on our site for students. A local horse race track here in San Antonio is in similar dire straits. These articles demonstrate the situation and are at Professor Elam.
The entire Pacific Rim is one big bet on China. The SSEC Shanghai Exchange has dropped from 3150 last November, the top for emerging markets, to 2528, breaking both MAs. THe BRIC index collapsed this past month.
BRIC Brazil Russia India China
So, our advice is to get 100% out of the stock market, period. At best Friday may turn out to be one of those low volume pre holiday Fridays, the fund managers are out of town, the locals ran the sell stops days. And the market might rally another week or two. Fine, that would be a good opportunity to sell at higher prices.
The Bear Market is under way. All surprises will be to the downside.
Thanks for reading The Market Perspective, we hope it has aided your investing results.
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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 and 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.
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