Archive for October, 2010

Sunday, October 31st, 2010

Overview
Now that we are in the last two months of the year, the holiday spirits traditionally lift the markets at this time. Do we have the Santa Claus rally in our future? We will find out within the next two months. Many retailers have lightened their inventories levels making pickings for shoppers leaner than usual. This should bolster the retailer’s bottom line enough to insure that they will not have to use liquidation methods to sell their goods. “It’s a Wonderful Life” the old Christmas classic comes to mind when thinking about this economy. Where is Clarence when you need him? Here in the USA, in the middle class are having problems paying bills. Any price appreciation of things deemed as essential will only hamper people’s ability to pay for the necessities of life. Much of our discretionary spending will disappear because we do not have the funds available.

Housing will remain a drag
Will housing improve? We doubt it. We have a huge overhang of inventory caused by foreclosures and baby boomers beginning to downsize. It is the old supply/demand model. We will likely have a slight blip up in home purchases as interest rates on loans begin to creep higher. That will inspire the buyer who is sitting on the fence, waiting for rates to bottom, to get off that fence and lock in that home mortgage. Thus, our economy will likely continue to drag on not really improving greatly but not double dipping either. This is something that we will have to endure for some time. Yes, we brought it upon ourselves and we need to fix the problem and not put a band aid on a hemorrhage. The unfortunate result will be the decline of the US Dollar and continued hardship for the majority of the USA’s population.

Elections won’t fix anything
To be quite honest, it is irrelevant which party wins in this election. We need to redo some of our rules starting with the elected officials. Our elected officials should be removed from the Federal Government health care and Government pension system. We have a problem because the system is broken and that problem likely will never be fixed until and unless the lawmakers feel the same pains that their constituents feel. Social security recipients will not receive an increase in their benefits for a second year yet, health insurance costs will rise. Here is a good question for you to ponder; if there is no inflation, well not enough to increase social security payments, why is it that health insurance costs are appreciating about 18%? Which one is wrong, they can’t both be correct.

Markets
We have a series of doji-like candles on the chart of the S&P 500 mini December futures contract. The S&P 500 has been going sideways since October 13, 2010 will very little progress to the upside. Is this a distribution top? Are we going to stay above the support line at 1170? Please take note that margin levels are rising which tells the watcher of these things that speculation is alive and doing very well thank you. Mutual fund cash is near record lows which were seen in July. While stocks rise because the Fed is pumping money into the system, the US Dollar becomes depressed, in a way devaluating the currency. The results will be; an improvement in our balance of trade showing an increase in our exports, a temporary rally in the US stock market, a rally in dollar based commodities, a rally in gold, and eventually hyper inflation.

The problem that should stand out with a flashing neon sign is; unless wages can keep up with the increased costs of stuff, people won’t be able to afford to buy stuff and the economy will not pull itself out of its funk but will enter the worst of all world…stagflation. Remember, that if raw materials cost more, it doesn’t take very long for companies to pass on that increased cost to you, the consumer and that unless your pay check keeps up with that increase, you will have the same money available to purchase goods that will now be more expensive. When General Mills increases their prices on their products and your salary remains the same, you have less money to spend those items. It is true that many corporations have kept their prices steady in spite of the increased costs of raw materials, but that can’t last and, just as General Mills has done, they will step in and start ratcheting up prices. Again, we will recommend that investments in dollar based anything will be subject to possible drag because of the depreciation of our currency. We encouraging purchases of hard assets that can be easily liquidated and perhaps investment in other parts of the world where growth will continue.

Week to come
Monday: September personal income/consumption is released at 8:30, September construction spending is released at 10:00, and October ISM is released at 10:00.
Tuesday: Election Day in the USA.
Wednesday: September factory orders are released at 10:00, Challenger, Gray & Christmas issue job cuts survey, and the FOMC releases its interest rate decision and a statement following their two-day meeting at 2:15.
Thursday: the Bank of England and the European Central Bank release their interest rate decisions and give a short statement, 3rd quarter productivity is released and October chain-store sales are released.
Friday: October nonfarm payrolls and unemployment rate are released at 8:30 and September consumer credit is released at 3:00.

Futures
The US Dollar index continues to find support at 76.90. We have a doji candle as a result of the Friday trading session. A doji, means that the bulls and bears were equally matched and neither won the competition in the Friday session. Of note is that the bears entered this day with the advantage and in spite of that advantage could not push the market lower. This is why it a doji is called a transition candle. Could be that the bears will be overcome by the bulls in the next session. Unfortunately, the western indicators do not agree with the candlestick findings and indicate that we are going nowhere fast. All the indicators that we follow herein continue to issue a sell signal, albeit a weak signal. The Bollinger bands are becoming narrower. The top of the Bollinger band is at 78.511 and the lower edge is seen at 76.792. The 5-day moving average is at 77.71. We continue to worry that 76.475 will not hold the market and that we could test 76.335. A push below that level will open the door to much lower levels for the US Dollar index. We are below the Ichimoku Clouds for all time-frames. We feel that this index will bounce but that bounces should be sold not bought.

The S&P 500 futures contract is trading inside a box. The top of the box is at 1193 and the bottom of the box is at 1155.50. If you want to get really fancy, you just might call it a diamond, to us, it is a box. It is likely that we will stay in this box until or unless we can break out to the upside or break down to the downside. The action once either action occurs should be violent. However, until then, we are stuck in a trading range. We remember that some of our worst trades ever were entered into because of this sort of boring pattern. If you are going to trade the pattern keep your stops tight. The 5-day moving average is at 1182.60. The top of the Bollinger band is at 1193.70 and the lower edge is seen at 1145.12. The top of the channel line is at 1209.78 and the bottom of the uptrend channel line is at 1172. If you want to go short, use 1185.25 as a warning that you are on the wrong side of the trade. The indicators are of no particular help in this market. Most are going sideways and really not giving us signals. We are above the Ichimoku Clouds for the daily and the weekly time-frames but we are below the clouds for the monthly time-frame. The weekly chart shows a doji candle and warns us that in less than a week, on November 3, 2010, something big is going to happen. Our rules on that are don’t fight the trend just go with it.

The NASDAQ 100 futures contract left a doji like candle on the chart as a result of the Friday trading session. The day was an inside day. All the indicators that we follow herein are issuing a sell-signal from overbought levels. The point and figure chart does not look especially bullish although the candlestick chart does look sort of bullish. The 5-day moving average is at 2119.20. The top of the Bollinger band is at 2155.42 and the lower edge is seen at 1978.14. The top of the channel line is at 2174.79 and the lower edge is seen at 2113.13. We are above the Ichimoku Clouds for all time-frames. The indicators on the weekly chart are overbought and are issuing a sell-signal. We would advise you to proceed with caution. We have signs of exhaustion on the weekly chart and we believe that some backing and filling will be necessary before another assault to the upside is seen.
Although the Russell 2000 rallied in the Friday session in the face of a declining NASDAQ 100 and an anemic rally in the S&P 500, the price of the index stayed within its box. The Market Profile chart tells us should this index trade above 714, that we will be in the single print area and likely will move either quickly higher or back to the bulge of the chart at 700.40. We are getting mixed signals from the indicators. The stochastic indicator, the RSI and our own indicator are issuing a buy-signal from the overbought side of neutral. The Thomas DeMark Expert indicator is issuing a sell-signal. The action in the Friday session shows a lower low and a lower high yet, this index closed positive on the day. The 5-day moving average is at 703.10. The top of the Bollinger band is at 716 and the lower edge is seen at 677.16. The top of the box or diamond pattern is at 716.10 and the lower edge is at 688.10. Any move either above or below these levels should lead to some aggressive buys, if we break to the upside, or aggressive sells should we break to the downside. We are above the Ichimoku Clouds for both the daily and the weekly time-frames. We do have a doji candle for the weekly chart which indicates that we could be in a period of transition. The rule for this index is to stay very nimble and go with the trend.

Crude oil retreated in the Friday session with a long tailed candle. We are on the oversold side of neutral and the stochastic indicator and RSI both continue to point lower. We are above the Ichimoku Clouds for the daily time-frame but remain below the clouds for both the weekly and the monthly time-frames. We have a downtrend channel with the upper channel line at 82.37 and the lower channel line at 78.10. The 5-day moving average is at 82.12. The top of the Bollinger band is at 84.41 and the lower edge is at 80.46. Remember when trading crude oil that some the action will be attributable to the weak or strong US Dollar, because crude oil trades in dollars. Also important for crude oil is the perception of the recovery and possible expansion of the global community. Right now, crude is telling us that the expansion story isn’t really being bought but then, neither is the recessionary story. Crude oil reflects not only the perception of the USA but also of places like India, China and the rest of Asia. Should our trading partners grow, crude oil will be needed to fuel that expansion.

Gold is the beneficiary of currency instability, inflation fears and just plain investor neurosis. As such, it rallied in the Friday session. The chart looks as though the low of 1315.6 leaving a classic doji candle on the chart and then the market proceeded to back and fill until Friday when the market broke out of the consolidation to the upside. The indicators that we follow are issuing buy-signal and have plenty of room on the upside. We are above the Ichimoku Clouds for all time-frames. The 5-day moving average is at 1340. The top of the Bollinger band is at 1379.49 and the lower edge is seen at 1311.45. This market is not in a bubble and has enjoyed a nice uptrend. We continue to like gold and silver and will be buyer on dips.