Archive for August, 2011

Sunday, August 21st, 2011

The good the bad and the ugly is a good description of the market action. The good, the bond market, the bad the US Stock market and the ugly the European markets. Actually, if not for the expiration of options this past week the US stock market could have joined the ugly crew. Here is the problem that most investors have at this time. If you invest your money in the short-term bond market you will have a negative return on your investment. By that we mean that when you factor in costs and inflation, you are actually paying money to invest in bonds. Some investors are finding value in high dividend paying stocks. We agree with that approach especially with the preference treatment that the IRS gives dividends. The yields on these stocks range from about 14%, with companies with some risk and moderately safe balance sheets to 4.9% for companies with very safe balance sheets. To balance the portfolios we are look at the Asian markets. While the Euro zone and the USA are struggling, Euro more than USA, the Asian countries are thriving. Yes, we are including Japan in the mix.

Seriously, we have a market in a funk. While commodities are higher, the US Dollar, lower bonds higher, and well we are sure you know about gold, we all feel poorer. Stagflation is all around us. The poor do not feel much different, they continue to feel oppressed, the rich could care less, but the middle-of-the-road earners are having a really difficult time just getting their bills and living costs under control. When factoring in inflation, the middle class earner hasn’t seen a raise in income in years, while inflation has continued to modestly gain ground. It is time to rescue this group at least let them think that somebody out there cares.

With only half of the US population’s working class paying taxes is there any wonder that we are having problems? We must do something about taxing those working off the books or in illegal jobs. We have a choice here; make everything legal that includes drugs, hooker’s et al and tax everybody or add a VAT tax. We can hear you screaming already what about the rich. Well we could levy a tax on all those making more than $250,000 per year. That would help. Under the current plan of taxing the rich, we get nowhere fast and just annoy those who toil and pay tax, except for Warren Buffett who only pay 17% tax anyway. Take the current tax code and throw it out. It is long, cumbersome and isn’t fair. Tax those making over $250,000 a flat 25% no deductions. Tax corporations that make money, give the corporations a tax break for hiring Americans. Give corporations a break for producing products here in the USA. Do not add a tariff on imported products that will only have our exports assigned a similar tariff. We believe in free trade. Corporations that make money should pay tax. Loop holes should go. This is a simplistic view but at least it is a suggestion that likely would bring money in rather than send it out.

We do have to make cuts in spending and we would suggest that we start with entitlements that elected officials enjoy. We have said many times that the elected representatives should be subjected to the same retirement (social security and not a government pension) and health care (not government health care) that the public (who elected them as representative) are subjected to. We understand this is a minuscule cost but we also understand that if our elected representatives had to live with the system that those who elected them to office lived with, they would likely fix it. They have no reason to fix it because they don’t have to live with it. While on that subject, we believe that elected representative should have term limits and that those limits would remove the inclination for the representative to campaign instead of doing the people’s business. Also they might actually get some work done. Senators and Representatives should be limited to one term. That would clean up some of the mess.

Tuesday: July New Home Sales are released at 10:00 and the Richmond Fed Survey of regional manufacturing is released.
Wednesday: July durable goods are released at 8:30.
Thursday: The Kansas City Fed Survey of regional manufacturing is released.
Friday: Fed Chairman Bernanke and Jean-Claude Trichet speak at Jackson Hole Fed Confab.

The US Dollar Index closed lower in the Friday session. The range seen in that session extended the previous day’s range buy making a slightly higher high and then removing the previous day’s low. When reviewing the chart, it is clear that we are stuck in a trading range bound by 73.51 and 72.86 on the downside and 75.64 and 76.59 on the upside. The inside numbers represent the current trading range the outside number represent a larger trading range. We are below the Ichimoku Clouds for all time-frames. All the indicators that we follow continue to issue a sell-signal all. The 5-day moving average is at 74.04. The top of the Bollinger band is at 75.26 and the lower edge is seen at 73.56. Until or unless we move out of this range, we will expect to see the market see-saw between the boundaries. Looks like a really dull market and, remember the saying, never sell a dull market short.

The good news regarding the S&P 500 future’s contract is that we seem to be losing some steam on the downside. The bad news is that we have more room on the downside. We are below the Ichimoku Clouds for both the daily and the weekly time-frames but are above the clouds for the monthly time-frame. The 5-day moving average is at 1169.50. The top of the Bollinger band is at 1351.99 and the lower edge is seen at 1080.20. The danger point will appear should the market trade below 1102.50. We likely would see and immediate test of the 1077 level seen on the overnight trade on August 9, 2011. Under that level oxygen gets thin and we would likely see a fast move to the downside. On the upside, if the market could remove 1208.25 it would be a good start for a rally to the 1289 area. The point and figure chart is telling us that it is important for this market to stay above 1119-1118. We are looking for the market to undercut the previous low and we are looking for divergences. So far, neither has occurred.

The tech heavy NASDAQ 100 futures contract had a very difficult time in the Friday session. All the indicators that we follow are pointing lower all and there is plenty of room to the downside. The 5-day moving average is at 2140.75. The top of the Bollinger band is at 2468.26 and the lower edge is seen at 1990.48. We are below the clouds for the daily time-frame, in the clouds for the weekly time-frame and above the clouds for the monthly time-frame. Should this market trade below 2030 +/- the door will open to the 1972.25 level. This market is difficult and we would not run headlong into it until we see some technical reasons to do so. At this time although we will bounce, we would avoid this market until it, the market signals a change in direction.

The Russell 2000 closed lower in the Friday session but stayed within a narrower range than was seen in the Thursday session. This market is slightly more oversold than the S&P 500 or the NASDAQ 100 market is but still has plenty of room to the downside. The 5-day moving average is at 688.40. The top of the Bollinger band is at 846.59 and the lower edge is seen at 616.68. All the indicators that we follow herein continue to point lower. Market Profile warns us that below 638 there is very little to support this market and we will likely test the low 623.70 and then fall below the 600 level. We are below the Ichimoku Clouds for all time-frames. Caution is advised.

Crude oil rallied in the Friday session more in line with a declining US Dollar than any real demand based buying. We are below the Ichimoku Clouds for the daily time-frame but are in the clouds for both the weekly and the monthly time-frame. The 5-day moving average is at 85.43. The top of the Bollinger band is at 101.78 and the lower edge is seen at 76.73. We are getting fresh buy-signals from our own indicator, the stochastic indicator and the RSI. We need to see a close above 89 for the bears to begin to get scared. Should we close above 89, we believe that we will see 94-96 quickly. This market is a play on the weak US Dollar and Asian demand. The US and Euro zone appear to be slowing and are not likely the source of fresh buying seen in expansions. We continue to like crude oil on pull-backs.

Gold is beginning to look like a bubble. Until recently, it had been slowly plodding higher with no real extremes but within the past two weeks, we have seen what looks like a speculative bubble. As with other bubbles, they can last longer than anybody might expect. The 5-day moving average is at 1802.90. The top of the Bollinger band is at 1861.26 and the lower edge is seen at 1550.60. Although we are at very overbought levels, we do have any sell-signals. The stochastic indicator is curling over and will likely issue a sell-signal but that could easily be a temporary signal. We are above the Ichimoku Clouds for all time-frames. If long, keep your stops tight. We like trailing stops for markets like this one. We continue to like gold but only on pull backs or consolidations. The uptrend line is at 1695.30 and a steeper, less reliable line is at 1781.70. These are levels where we would likely step in and purchase more.