Archive for April, 2011

Sunday, April 24th, 2011

What happens when the value of the US Dollar drops? There are several things that will immediately happen. First of all, our country will look like a terrific bargain for tourists, thus tourism will flourish. Then of course, our export will be very competitive and it is likely that multinationals will enjoy an increase in trade. Another result is that the cost of raw materials priced in the deflating US Dollar, will rally and we, here in the USA, will feel the results of the increases in costs of raw materials. Companies are already passing along these increased costs to the American consumers. We will also find that the cost of imports is rising. Unless US workers are paid more money for their work, they will feel as though they are in a monetary vise. Increased costs, stable income and you have a problem.

Almost on a daily basis we hear of the bubble in gold. We do not believe that there is a bubble in gold; rather we believe that it has demonstrated a stead uptrend and that uptrend is based on demand. Why would gold rally, because it is viewed as an alternative to a currency as well as a hedge against inflation. Gold is easily traded and is highly liquid. It is a hard asset not paper money but can be used in the place of paper money. Another attractive point is that a government cannot print gold nor flood the market with gold and thus there is a finite amount of gold coming to the market. You know the equation: limited supply higher demand and the price of gold rallies. As interest rates begin to ratchet higher, the glitter of gold will fade because although gold is pretty, it pays no dividend. When interest rates are near zero, there is little reason to direct cash into debt securities and gold and stocks become the investment choice.

“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.” The Option Queen Letter March 27, 2011.

As we enter in to re-election campaigning years, they seem to start earlier and earlier much as Christmas shopping season does, we should hear some jaw-boning about deficit reduction. Remember folks, this is talk, and talk is cheap. We need to elicit more than talk because so far, for many year, it hasn’t worked. Somehow these elected officials need to fix some of the deficit mess that has been created. The big problem with deficit decreases is that it slows the economy, which is just beginning to improve. The government has been trying to stimulate the economy for several years now. The Fed has told us that it wants the stock market to rally and the people to feel better and spend more money. The problem is that with all the stimulation put into the system the result has been an anemic expansion, still needing life-support. When the banks were bailed out after the Bear/Lehman debacle, only the executives of those banks benefited. The public continues to live on life-support.
The Russell 2000 is underperforming both the S&P 500 and the NASDAQ 100 futures contract. Perhaps the NASDAQ 100 has outperformed because it is loaded with tech stocks and they have been favored and have had a very positive outlook for their short to medium term future. Just think about the tax incentives that the US has given corporations for capital improvements and you can understand the positive outlook for the future. Remember also that once these product upgrades and purchases are completed that the need will not be there in the coming year so we are seeing purchases today literally stealing from purchases in the future.

Monday: March new home sales are released at 10:00.
Tuesday: April consumer confidence is released at 10:00.
Wednesday: March durable goods are released at 8:30, FOMC will release its interest rate decision and the Federal Reserve Chairman Bernanke will hold a televised news conference.
Thursday: 1st quarter GDP.
Friday: March personal income/consumption is released at 8:30, April Chicago PMI is released at 9:45 and April Michigan sentiment is released at 9:45-10:00.

The US Dollar index removed the low of November 2009 in the Thursday trading session. We have been bearish this index for a while. On March 6, 2011 we wrote; “The market has broken below the 77 support level and has opened the door to the 74-75 area. 77 should become a resistance level for future rally attempts. The longer we stay below that level the move difficulty we will have breaking above it. At the moment it looks as though we will be testing 75 on or about March 13-14.” (The Option Queen Letter March 6, 2011) The market is totally oversold, that said, we can remain oversold for a lot longer than you think. This is a picture of bearishly oversold. The downtrend line is now at 75.673. The only good news we can give you is that the stochastic indicator is beginning to curl to the upside, no signal yet. All the other indicators that we follow herein are pointing to lower levels. The 5-day moving average is at 74.95. The top of the Bollinger band is at 76.918 and the lower edge is seen at 74.29. We closed below the lower edge of the Bollinger band and we are going to see a bounce from this level. We are below the Ichimoku clouds for all time-frames. Although the US Dollar is going to rally in the coming days, we do not believe that this market is turning around.

What do the US Dollar index and the S&P 500 June futures have in common? Easy it looks as though every move down in the US Dollar index is accompanied by a move up in the S&P 500, thus confirming the linkage between the two. As the US Dollar index becomes weaker, the market rallies. For foreigners, this is a non-event. Just think about it, say you are buying the S&P 500 June future in terms of the euro; you will notice that there is no real change in value when you state the index in terms of euros. Simply put, the euro, Swiss Franc et.al. are strong and therefore it takes less of the foreign currency to buy the index thus, it really isn’t moving when calculated in terms of a different currency. Yes, it is moving in terms of US dollars. Same with gold and same with all the other commodities priced in US dollars. The S&P 500 June futures contract is approaching the highs seen in February of 2011. We are above the Ichimoku clouds for all time-frames. The 5-day moving average is at 1317.50. The top of the Bollinger band is at 1337.67 and the lower edge is seen at 1299.62. All the indicators that we follow herein continue to point higher. As we have said in the past, this market will continue to plod higher until it doesn’t. It could retreat at any moment and it is likely that the majority of the upside thrust has been seen. That said, we certainly do not advise shorting this market but would certainly consider buying wing puts on the market so if the market spills we make a profit on that retreat. These puts are generally cheap and have little likelihood of every making you a pile of money. They are simply short-term insurance on the possibility of aggressive retreat. Look at them like term-life insurance, good for a short term to remove some of the risk. When they expire, it is over and you have to put them on again.

The NASDAQ 100 futures contract advanced in the Thursday trading session. The chart has a series of three very bold green candles. We are in position to challenge the February highs. The indicators we follow are beginning to reflect some exhaustion. The stochastic indicator is curling over as is our own indicator. The RSI and the Thomas DeMark Expert indicator continue to point higher. We are above the Ichimoku clouds for all time-frames. The 5-day moving average is at 2328.25. The top of the Bollinger band is at 2363.30 and the lower edge is seen at 2279.94. Seriously, we are setting up for a run to 2403 and beyond. Remember above 2403 there is no resistance just open space. Again, we would recommend that wing puts be purchased just in case something bad happens. This chart shows a more mature rally than is seen in the S&P 500 futures chart. Enjoy the ride but don’t forget to adjust your stops.

The Russell 2000 June futures contract left a doji candlestick on the chart as a result of the Thursday trading session. A doji tells the viewer that both bulls and bears were evenly matched and neither won the day’s battle for dominance. This index is not overbought as measured by the indicator that we follow. Remember that both the S&P 500 and the NASDAQ 100 are overbought. The 5-day moving average is at 831.38. The top of the Bollinger band is at 856.23 and the lower edge is seen at 811.79. The volatility on this index is also compressing slightly. This index made a new high for the year on April 6, 2011. Since that high, it has failed to keep up with the other indices. We are above the Ichimoku clouds for all time-frames. So long as we stay above 813.40 we will give the benefit of the doubt to the bulls. We are not comfortable with the action in the index and will avoid it until it becomes clear which way the winds will blow.

Crude oil continues to rally. We have not removed the high of 113.46 seen on April 11, 2011 but we certainly are near enough to remove it. The indicators that we follow are all pointing higher with plenty of room to the upside. The 5-day moving average is at 109.73. The top of the Bollinger band is at 112.97 and the lower edge is seen at 103.21. So long as we do not remove 105, all looks well for crude oil.

Gold is overbought and continues to point higher although, it seems to be losing some of its upside thrust. We are above the Ichimoku clouds for all time-frames. The 5-day moving average is at 1497.20. The top of the Bollinger band is at 1514.26 and the lower edge is seen at 1403.21. As we have said in the past and say again, we will not chase after this commodity but will wait, watch and buy on pull-backs.