Weekend April 21 2013
Weekly Newspaper Column This column appeared in the Odessa American and the Andrews County News this weekend.
Reasons for Concern
Last week we compared the construction craze of the 1980s boom era with what is happening today. The two eras look remarkably similar. As markets complete five years from the financial panic of 2008 there are reasons to believe a position similar to late 2007 and early 2008 now exists. Let’s take a look.
Every bull market has its tech darling like IBM in the 1960s. in the last ten years it has been Apple. Apple has sold over 50 million iPads, a feat that certainly eluded Dell and HP. Last September at $700, ‘analysts’ were arguing not whether but when Apple would hit $1,000. It closed Thursday at $392.05. Apple earnings are due next week . Once the social mood turns negative, whatever happens then seems to provide more negative fodder. I expect Apple will fall below $350.
Rackspace is another tech standout, or it was. It fell from $80 in February to $44.85 yesterday. Such reversals of fortune should serve as a warning sign to investors that the most popular stocks may be in fact the most dangerous. Once the mood shifts to negative, mutual funds drop a stock all at once.
Apple is a major component of the NASD 100. That index has begun falling from its recent high. Stock indexes typically peak around tax time and we have had quite a rally since last November. But this is also occurring as various internal indicators are peaking. Measures like the NASD and NYSE summation index are falling. Again this is typical of the time of year.
And then there is the price action of commodities. Gold and silver have just experienced massive free falls. That has turned the monthly charts on both to the bear camp. While gold bugs have numerous explanations, lower prices surely lie ahead there as well.
Copper managed a big move just yesterday. That ended the slide from $3.80 to $3.05. Perhaps the most nervous trade is the one important to Basin residents-crude oil.
Crude oil has experienced a $2 + range for each of the last five days. This morning June futures are trading at $88.31. . A close under $90.62 this week would be especially worrisome as that would turn the daily trend down. Unleaded gasoline has fallen from $3.35 to $2.70. It too needs to make a stand here.
Energy services represented by the XES ETF bounced yesterday on big volume, and that is just what it needed to do. Halliburton and Schlumberger have been in downtrends and also bounced yesterday.
As per usual the item overhanging all this is the US Dollar. While Ben Bernanke is madly printing Dollars ,they remain in demand world wide. It is the stronger dollar that helped topple gold prices. As crude oil is priced in US Dollars we need to watch the 82 level on the Dollar Index. An advance in the Dollar will likely pressure commodity prices lower.
Interestingly the Dollar Index is pulling back to the same sort of support we seen in crude oil. But I seriously doubt the markets can sustain a simultaneous rally in both crude and the buck. We will have a winner and loser but there can only be one winner.
Meanwhile nothing has changed in Europe. While there has been talk of austerity, all the talk resembles the famous analogy about re-arranging the deck chairs on the Titanic hoping to avoid the iceberg. Cheap money has continued to fuel rampant real estate speculation. The Wall Street Journal has renamed its Distinctive Properties section as simply, Mansions. That alone should give one pause as the glitterati swap multi-million mansions.
Did the bank balance sheets ever really change? What happened to all those bad home loans? And we have previously noted the trillion dollar student loan debt. Delinquencies rise and there is no collateral.
Stocks have doubled since 2009 and that has led to massive optimism. The sharp drops in gold, Apple, and Rackspace are warning signals that markets are exhibiting the kind of high volatility that accompanies a market top.
Investors and residents of the Oil Patch should be on high alert.
Follow Professor Elam at http://www.themarketperspective.com
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