Archive for March, 2011

Sunday, March 27th, 2011

What do the stock market and the post man have in common? Well, they deliver in all sorts of weather, in rain, snow, sleet or earthquakes. When you think about the facts, the stock market does not ever stay down. Even when absolutely awful disasters occur, the market sells off and then within a pair of years, returns to the prior levels. Just think about it, in 1981 the stock market was at 1200, dipped to 700 and change, and then rebounded all in the face of double digit interest rates. Today, a decade after the 9/11 attacks, the financial disasters and the current global unrest, we are higher. No, not as high as we once were but certainly higher and approaching that high. The Russell 2000 is within a stone’s throw of the 2007 highs (862.20 in July 2011). That said, we are not including the statistics from the Tech Bubble which drove the NASDAQ 100 market to all-time highs (4884 in March of 2000).

We are in an inflationary environment whether the government agrees to it or not. If you have to feed a family, pay utilities, real-estate taxes etc. you understand the pain that every middle class family in America feels. Discretionary income has gone the way of the Dodo bird. Naturally the wealthiest of Americans do not feel the pressure that increased costs cause and they never will. For them it is but an annoyance that can easily be dispatched in the next payment. For those of us who have to find the funds to pay these increased costs, not so easy.

The difficulty the FOMC faces is twofold; first if they apply the brakes to the loose money policies too soon they could destroy any recovery that might be beginning, the second problem is that if they don’t tap the brakes very soon, inflation will be totally out of the bottle and will cause massive hardship for the economy’s work force. Either case is a problem. The solution is to tap the brakes without destroying the economy. At the moment, the increase in energy prices and raw materials is like an extra tax on the populace. The question we all must ask is, can they actually pull this juggling act off and for how long.

We believe that we could see the rebirth of manufacturing here in the USA. The UK is asking their citizenry to buy UK made brands and we have done the same sort of advertising. What will really help is that the manufacturers have learned that one source for a needed “just in time” part is not going to work anymore. They have also learned that perhaps ordering parts from different parts of the globe would be smarter than just one-stop shopping. We have also learned that sadly, when people are underemployed or not employed, they tend to riot and cause chaos masquerading as political revolt. You might say that this can’t happen here, our answer is, yes it can. Remember the riots of days gone by and you will understand that it can happen here.

Monday: February personal income/consumption is released at 8:30.
Tuesday: March consumer confidence is released at 10:00 and S&P/Case-Shiller index is released.
Wednesday: Challenger Gray & Chriistmas March jobs report is released, Richmond Fed Reserve President Lacker testifies on the “hill.”
Thursday: March Chicago PMI is released at 9:45 and February factory orders are released at 10:00.
Friday: March nonfarm payrolls and unemployment rate is released at 8;30, February construction spending is released at 10:00, and March ISM index is released at 10:00.

The US Dollar index enjoyed a powerful rally in the Friday session. We are not convinced that the US Dollar index has turned the corner and will continue to view this activity as an oversold bounce. We would need to close above 77 to convince us that this rally has some teeth. All of the indicators that we follow herein continue to issue a buy-signal with plenty of room on the upside. The 5-day moving average is at 75.949. The top of the Bollinger band is at 77.723 and the lower edge is seen at 75.56. We are below the Ichimoku Clouds for all time-frames. Take a look at the point and figure chart and you too will not be impressed with this rally. As to Market Profile, we continue to worry that should we trade below75.366 that we will likely melt to the downside. These certainly are very interesting times.

The S&P 500 will feel the forces of month end window dressing this week. Will they be dressing (we think that they will) or undressing portfolios? Margin debt is on the rise, and investors are euphoric about the markets. Bad news is good and good news is better and the market has been on an upward trajectory. When reviewing the Market Profile chart you see a beautiful bell-shaped curve. We note that above 1330-1335 we will melt to the upside and below 1241 we will be pulled lower. That is our trading range and unless and until one of these levels is removed, we will live somewhere in the middle. Interestingly, the point and figure chart indicates that a removal of 1315 will lead to much higher prices. We are above the Ichimoku Clouds for all time-frames. The 5-day moving average is at 1297.70. The top of the Bollinger band is at 1332.36 and the lower edge is seen at 1260.75. The stochastic indicator, the RSI and our own indicator are all pointing higher and are approaching overbought levels. The Thomas DeMark Expert indicator is pointing lower at overbought levels. The rate of change shows us that we are gaining momentum to the upside. We see resistance at 1321, yes it is different for the point and figure and Market Profile resistance levels. The uptrend channel lines are at 1320.81 and 1289.88. Interesting!

The NASDAQ 100 rallied in the Friday session breaking above the downtrend line. We are inside the Ichimoku Clouds for the daily time-frame but are well above the clouds for both the weekly and the monthly time-frames. The 5-day moving average is at 2280.45. The top of the Bollinger band is at 2382.04 and the lower edge is seen at 2202.35. All the indicators that we follow continue to issue a buy-signal. That said, we are approaching overbought levels on some of these indicators. The rate of change continues to accelerate which is good news for the bulls. Everything looks good until you review the point and figure chart which shows that we are in congestion area and that there is nothing special about this rally, well so far there isn’t.

The Russell 2000 is within 50 points of the July 2007 highs in this index. This index has been on an upside tear in recent days. The action in this index has been much better than that of the other indices that we follow. Actually, this behavior is that of a bull market where the investors are foregoing dividends for growth. When we look at the Market Profile chart we notice that 833 we will likely see a melt to the upside with 862 within its sights. That said, we must tell you that in the unlikely event that we remove 768.40 we will melt like the ice cap would melt in Hawaii.
The 5-day moving average is at 812.52. The top of the Bollinger band is at 833.04 (imagine that) and the lower edge is seen at 778.76. We are above the Ichimoku Clouds for all time-frames. If there are any shorts left in this market, they have to be really concerned right about now. A further rally will cause their concerns to grow and their actions will be to cover. As to the bulls, they should begin throwing money at this index which just could spell trouble ahead.

Crude oil has two doji candlesticks on the charts from the Thursday and Friday sessions. This is concerning for the bulls because it shows indecision and an evenly balanced market. The indicators are rolling over to the downside but have not issued a sell-signal as yet. The 5-day moving average is at 104.96. The top of the Bollinger band is at 108.13 and the lower edge is seen at 97.78. Should this market trade and close below the 97 level, we will have formed a “M” on the chart. There are a few rules that go along with this particular pattern. First, you cannot trade higher than 107.73 and second; you must go down to the 97 area and close below that level. There is a long way to go before that should occur. What is interesting is that we have traded and closed above the upper Ichimoku level of 101.84. The point and figure chart looks as though we are in a congested area on the chart. Time will tell the story here.

Although the price of gold looks expensive, if you consider the value of the US Dollar which is the currency in which gold is traded, you will see that gold’s ascent has been very reasonable. As the US currency depreciates in value gold goes higher. Then gold goes higher as people fear inflation or sovereign risk. All of these factors are playing into the rally seen in gold. Yes, silver has outperformed gold but we continue to like gold on the inevitable retreats. All the indicators that we follow herein are issuing a sell-signal. The 5-day moving average is at 1431. The top of the Bollinger band is at 1447 and the lower edge is seen at 1398.72. The intermediate term uptrend line is at 1400.9. Should the market trade below 1380, we believe that we could see a retreat to 1366 or so. We are above the Ichimoku Clouds for all time-frames. Both the weekly and the monthly indicators continue to issue a buy-signal. Should this market trade above 1449, we will see a melt to the upside. The point and figure is telling us the same story.