Archive for October, 2010

Sunday, October 17th, 2010

Year End Changes
As we close in on the end of October we should begin to feel some slight pressure on the equity markets as mutual funds arrange their portfolios to take losses and change their positions for the end of their year. Have you noticed that small capitalization stocks have been underperforming large capitalization stocks? This is not unusual for the end of year tax sales. Expect to see these stocks rebound by mid December and into January.

November Elections
The stock market has been anticipating a sweep by the Republicans in the upcoming elections. It seems to be the old story of “buy the rumor sells the fact.” While we agree that there will be changes in the composition of Congress, we do not believe that this will offer the solutions that most Americans long for. We continue to believe that Congress should have to live by the same standards that the general population has to live by. That means that Congress should not have government healthcare but rather should be subjected to the health care that, We the People, that they represent, have to live with. Further, Congress should not have government pensions but rather be subjected to the same social security checks and retirement income that We the People have to live with. In other words, if you want a system to change, the only way to accomplish that change is to force those who vote on the change to live by the rules that they force (by their laws) the public to live by. You rule on law, you should live by that rule and not have special status. That is only one thing wrong with the government. There are a myriad of other problems that need to be fixed. Neither party seems inclined to fight for a better America so, although you will be voting for change, it is likely that there will be no real change and that nonaction is the crime of the century.

Inflation vs. Deflation
We have a problem here, as Dr Bernanke spoke on Friday of too little inflation in the system and perhaps some QE (quantitative easing) it dawned upon us that encouraging inflation in an economy that is weak might look like a good idea from the outside of the Petri dish, inside the Petri dish, most families are having great difficulties financially. It seems that their incomes are stagnant and not appreciating, that their real-estate taxes are increasing and the costs of healthcare are out of control and in an upward spiral. So if we encourage inflation, where are we going to get the money to pay for the increases?

Commodities
Buy your cotton now before you can’t afford it! Other commodities are in rally mode. There is a twofold reason for that, one is that the US Dollar is dropping like a stone and most commodities are priced in US Dollars and secondly, there are unusual weather forces that have pushed the prices of some food commodities. What that tells us is that the US is going to have inflation, while the rest of the world….not so much. We, here in the USA, will have less money left to pay our bills and it is likely that the middle class family will really have a more difficult time surviving. What can we do? Get rid of entitlements for those who have not paid into the system and curb the insurance industry, that would be a good start.

Boomer Generation
While on the depressing subject of our future, has anyone calculated the drag on the economy that the baby boomers will have? How about when all those houses hit the market, how about the downsizing of that generation? On a happier note, we noticed in Europe, many families live together in the same building, each family having its own apartment. That could be in our future as well, a rather good idea for what to do with the McMansion.

The Week Ahead
Monday: September industrial production/capacity utilization is released at 9:15
Tuesday: September housing starts are released at 8:30, Bank of Canada releases its interest rate decision and Dallas Fed President Fisher speaks.
Wednesday: Beige book is released.
Thursday: September leading indicators are released at 10:00, October Philly Fed is released at 10:00 and Kansas City Fed President Hoenig speaks.

Futures
The US Dollar index rallied in the Friday session after having printed a 9-count in the Thursday session. The candle seen on the daily chart is interesting because although the US Dollar made a lower low, it rejected that low and closed high than the previous day’s high. That, is very constructive for a continuation of this rally. We certainly would not be surprised to see the US Dollar trade up to 79.25 before resuming its downtrend. The stochastic indicator, the RSI, and our own indicator are all pointing higher. The Thomas DeMark Expert indicator continues to point lower. The 5-day moving average is at 77.337. The top of the Bollinger band is at 81.201 and the lower edge is seen at 76.121, which is a level we need to hold. The US Dollar index is in a downtrend channel with the upper edge at 77.535 and the lower edge at 75.855. Obviously, the market needs to rally above the downtrend line to turn the trade from a mere dead cat bounce to something of greater significance. At the moment, the daily and the weekly price action is below the Ichimoku clouds. The monthly chart is in the clouds. The monthly chart looks like a sine wave and shows continued downside liability. The weekly chart has a doji like candle and looks as though we could see some more of a rally before the bounce fails.

The S&P 500 left a doji candle as a result of the Friday trading session on the daily chart. The indicators that we follow are grossly overbought. Both the RSI and the stochastic indicator continue to point higher. Our own indicator and the Thomas DeMark Expert indicator seem to be going flat at overbought levels. The 5-day moving average is at 1169.90. The top of the Bollinger band is at 1179.82 and the lower edge is seen at 1148.80. If you look at the US Dollar index and then at the S&P 500 chart, they will look like opposite yet similar charts. The top of the trend channel line is at 1189.08 and the lower edge of the channel is at 1163.08. The downtrend line is at 1179.75. If this market can close above the 1179.75 downtrend line, it will rally to 1216. We are above the Ichimoku clouds for the daily and the weekly time-frames but remain below the clouds for the monthly time-frame. The indicators on the weekly chart are pointing lower at overbought levels. We must add that the RSI continues to point higher on the weekly chart. The formation seen on the weekly chart is one of a “W” which projects a high of 1283. We shall see, frankly although the pattern indicates that robust rally, we are concerned that this market has gone too far too fast and that it will retreat of, at best, go sideways.

The NASDAQ 100 is overbought and shows signs of exhaustion. All of the indicators that we follow are overbought, some more than others. Only the Thomas DeMark Expert indicator is turning to the downside. We are above the Ichimoku clouds for all time-frames. The NASDAQ 100 has achieved its upside projection. There is only air above and that offers very little resistance. We have to go back to November of 2007 to find resistance which is at 2256.25. The 5-day moving average is at 2055.10. The top of the Bollinger band is at 2073.17 and the lower edge is seen at 1954.02. We are far above the upper Bollinger band and either we will retreat back inside the bands or the volatility will expand to accommodate this market. The Market Profile chart shows that we are in the single print area.

The Russell 2000 retreated in the Friday session after inching out a new high for the move. The candle shows that the market rejected the high and closed lower on the day. All the indicators that we follow herein are overbought. The stochastic indicator, RSI and our own indicator all are issuing a fresh sell-signal from extremely overbought levels. The Thomas DeMark Expert indicator although overbought is going sideways and not giving us a signal. The 5-day moving average is at 699.96. The top of the Bollinger band is at 711.09 and the lower edge is seen at 646.82. We are above the Ichimoku clouds for the daily and the weekly time-frames. Both time-frames show the market as extremely overbought. Should this market trade above 708, there will be nothing but air as resistance to our assent. This is a seasonally weak time of year for this index and we expect that it will underperform its larger capitalization siblings.

Crude oil declined in both the Thursday and the Friday sessions. The downtrend line is at 84.19 and the uptrend line is at 80.74. The indicators that we follow continue to point to lower levels and are on the negative side of neutral. We are above the Ichimoku clouds for the daily and weekly time-frames but remain below the clouds for the monthly time-frame. When looking at the weekly chart, you clearly see that crude is trying to break out of its trading range. The 5-day moving average is at 82.16. The top of the Bollinger band is at 86.05 and the lower edge is seen at 72.90. It appears that the Bollinger bands are beginning to contract. This indicates that crude oil just might retreat back into its trading range.

Nice rally in both gold and silver! The 5-day moving average is 1363.26. The top of the Bollinger band is at 1384.33 and the lower edge is seen at 1262.10. Although gold retreated in the Friday session it has enjoyed a robust rally. Naturally, we are above the Ichimoku clouds for the daily, weekly and monthly time-frames. Gold is overbought as measured by all of the indicators that we follow herein. We do have a sell-signal on gold but continue to look to purchase on dips. At this time, gold has gone too far too fast so, a pause that refreshes would be desirable.