Searching for the Next BubbleToday, the
USA is stimulating markets without any regard for the chaos that will be born of the next bubble. Where is the next bubble and how can we get a piece of it? The next bubble could be born from the TOXIC paper mess left behind or perhaps the foreclosure market which looks to be offering good value for yield starved investors. Are we herding investors into the next mess or offering them good value?
We will soon see an avalanche of refi’s flood into the market stimulated by the home owners’ fear of not getting that absolute bottom of the market. As this progresses, banks and mortgage lenders will make scads of money on fees and charges associated to those refis. The banks and mortgage originators will also be making money on the first time home buyer entering the market looking for bargains. All this should stimulate the economy enough to expand marginally. The market has reflected this optimism with its aggressive moves to the upside regaining all of the declines seen in March. We have now returned to the early February levels.
The markets will be stimulated by the improving refi market. The difference today will be seen once the initial buyer hunger is satiated the bargains will disappear along with many buyers. We need to see a continuation of buyers. This will happen naturally as generations mature and get older, however; we will not return to the levels seen say two years ago. The creation of jobs will be key to this growth. Without jobs the buyers will fade. Remember even if the mortgage rate is 4.5% you need to have an income to support that cost. Without an income, the mortgage rate could be 1% and you would not be able to afford a purchase. We need to expand our ability to manufacture at a reasonable cost and we must begin to build and make things. In other words we need to make stuff so that we can employ our population so that they can buy houses and stuff to put in those houses.
Is the Chrysler bankruptcy a trial balloon for a possible GM bankruptcy? If the market doesn’t tank on the Chrysler deal will the GM deal be safe to allow? What other related industries will be put at risk with these actions and how will Ford benefit? Go questions that will be answered in the coming weeks.
This past week we attended a Financial Planning Association Forum in NYC. Extreme optimism was voiced by the “experts” telling the group to have their clients invest now while things are relatively cheap, this was the apparent theme of this convention. We are concerned that the financial community is again pushing investors into speculation without education. We believe that while the market is indeed in rally mode, that extreme caution should be taken. Remember things that go up quickly tend to retreat quickly. So long as the pull-backs are shallow, you can feel secure with the rally but once volume and depth return, head for the hills.
Monday: March construction spending is released at 10:00, March pending home sales and Kansas City Fed President Hoenig speaks. Tuesday: April ISM non manufacturing report on business is released at 10:00. Wednesday: Challenger Gray & Christmas releases April’s index. Thursday: 1st quarter productivity and costs are released at 8:30 and at 3:00 March consumer credit is released. Friday: April nonfarm payrolls and unemployment rate is released at 8:30 and March wholesale inventories are released at 10:00.
The US Dollar index retreated in the Friday session but failed to remove the low seen in the Thursday session, the Friday session was an inside day. So long as the US Dollar index does not remove 84.035, we will give the bulls a chance to prove that the decline is just temporary. We are oversold enough to see a bounce, within a day or so. The only indicator issuing a buy-signal is the Thomas DeMark Expert indicator. The other indicators, although close to oversold levels, continue to look as though they could be renewing their sell-signals. The downtrend line is at 85.677. The uptrend line is at 84.050. If we do remove the 84.035 number, expect to see a retreat to 83.816, where it should bounce. We are below the Ichimuko clouds for the daily and the monthly time-frame but above the clouds for the weekly time-frame. The 5-day moving average is at 85.076. The top of the Bollinger band is at 86.924 and the lower edge is seen at 84.0653. The US Dollar index broke the uptrend line for the weekly time-frame and looks as though we could retest 83.145. Proceed with caution.
The S&P 500 enjoyed another rally-filled week making this week’s rally the 7th rally seen in the past 8 weeks. Although, this rally is “long in the tooth,” there are no sell-signals from any of the indicators. Actually we are overbought but continue to point to higher levels. We did have a 13 count this past week which is a warning shot so, if long, keep those sell stops tight. The 5-day moving average is at 864.70. The top of the Bollinger band is at 880.94 and the lower edge is seen at 816.48. We are above the Ichimuko clouds for the daily time-frame, but below the clouds for the weekly and monthly time-frames. If this market can close above 877.00 and then 885, we will see a run to 909. From 918 we will rally to 929 and then 958 on the upside. On the downside, the market needs to stay above 823 and then 816 or risk a return to 792, 768, 744 and 726. When looking at the stochastic indicator and the RSI, you will notice that we have not retreated below 50 on the %k level for the stochastic and the 50 level for the RSI. This is very bullish action. We are losing momentum on the upside and appear to be rounding out a bit. Remember, we have the “Jobs Data” on Friday and so long as the perception is that the number isn’t worse than expected, although it is a lousy number it will be an excuse to rally. If, on the other hand, the market becomes depressed by the number, a retreat will result. For you to judge how deep that retreat can be, look at the indicators look at the depth of the retreat don’t forget to look for volume.
The NASDAQ 100 rallied in the Friday session. The market is very overbought but continues to point higher. We do see that this momentum is waning. The market can and will retreat but it is the quality, volume and action of that retreat that we need to watch. So far, retreats have been met with the “buy the dips” mentality and thus the market hasn’t had anything throw it off its winning ways. The 5-day moving average is at 1380.70. The top of the Bollinger band is at 1401.31 and the lower edge is seen at 1275.58. Both the stochastic indicator and the RSI continue to point higher. Our own indicator and the Thomas DeMark Expert indicator are both issuing a sell-signal. If long, keep your sell stops tight. When looking at the market Profile chart we notice that absolute absence of over-head resistance. Once we get thru 1415.25, there is little to stop this market. We shall see. The weekly chart is also overbought and for this time-frame we are getting a sell-signal from all of the indicators. We are above the Ichimuko clouds for the daily time-frame but below the clouds for the weekly and monthly time-frames. The market is showing signs of exhaustion on the weekly chart. Just remember above 1415 there is no resistance until 1665 and then 1748.
If the Russell 2000 can climb above 558, it will run another 80 to 100 points without much trouble. That said this index is the weakest of the three that we cover. All the indicators that we follow are issuing a fresh sell-signal. The 5-day moving average is at 480.62. The top of the Bollinger band is at 493.66 and the lower edge is seen at 434.56. We are above the Ichimuko clouds for the daily time-frame but we are below the clouds for the weekly time-frame. The uptrend line is at 470.25 for the Monday session. Should this market close above 503, we would expect a rally to the 518 60 level.
Crude oil is trading as though we are going to have a real turn-around in this economy. We would agree that with all the amount of financial stimulus flooding this market that a pick up in activity and growth seems to be inevitable. With that pick up in economic activity, we would naturally expect to see a pick up in usage and demand for crude oil. Crude oil needs to close above 54.66 to begin to turn this market higher. The 5-day moving average is at 51.07. The top of the Bollinger band is at 53.73 and the lower edge is seen at 46.62. We are above the Ichimuko clouds for the daily time-frame but we are below the clouds for the weekly time-frame and in the clouds for the monthly time-frame. Resistance for crude is seen at 54, then further resistance at 62, above which there is some resistance at 68 and then 74. Should we rally above that level, expect to see a run back to the century mark or 100.
The good news for Gold is that it is above the uptrend line of 880.32. The bad news is that all the indicators that we follow herein are pointing lower and continue to issue a sell-signal. The 5-day moving average is at 896.02. The top of the Bollinger band is at 913.90 and the lower edge is seen at 867.93. We are below the Ichimuko clouds on the daily chart and above the clouds for the weekly and monthly time-frames. The market needs to close above 909.90 to convince the bears that a rally to the highs or, at the very least, mid 950 is likely. If by Friday we are above 890, it will be positive for this market. Friday is going to be an important day for gold because the lines cross indicating that there will be a point of inflection.