Archive for September, 2011

Sunday, September 18th, 2011

There will be no Option Queen Letter next weekend. We will be in Sarajevo for the International Federation of Technical Analysts (IFTA) convention.

What does the “joint action” which is what central banks did this past Thursday mean? It was a joint action by central bankers to lend dollars to European banks. In this new and different world of global economies the downfall or liquidity squeeze of one bank can lead to major problems; this is the global fix for that situation. This was done in an effort to avoid a bank failure or another Lehman type problem. We do suspect that one or more banks in the Euro zone are in trouble and this action will help to avert that problem…..for now. Remember if the money market fund managers, the guys who lend short term money to entities, pull in their horns and refuse to lend to the banks, there will be a liquidity squeeze. Additionally, money market fund managers who lend to failing banks likely won’t be paid. Remember the concern regarding breaking the dollar in the last crisis. Another crisis could break the dollar on money market funds which is a huge deal and a big problem that needs to be avoided.

This action of “printing more money” reduces the value of paper money and boosts the value of hard assets. Think of it this way, if you are in China and have a great deal of US Dollars and also have a need for commodities or supplies to make whatever it is that you are making, wouldn’t you put the paper money into a product or asset that you will need to use rather than keeping it in the currency? You need coal, or cement or perhaps food stuff, why not use the currency to purchase the raw materials? You know you will need the raw materials and you don’t want to take a gamble on the currency so why not convert something you are unsure about into something that you are sure about that is your need.

This week the FOMC will host a two-day meeting ending on Wednesday with the customary statement and interest rate decision. Now, we all know that no interest rate decision change will be made; after all, the FOMC told us that rates will be steady for the next two years. We can anticipate a change in the statement and that should be of great interest. There are those who worry about inflation. Our answer to that is that to some degree we do have inflation. A little inflation is good for the economy, however; wages need to keep up with inflation or people will not be able to purchase items and will cut back. That has a very bad effect on the economy because producers will not be able to sell their items and thus will cut back on production cutting jobs at the same time. With belts tightened and winter approaching, higher prices will be paid only for things that are musts and not things that are wants. Thus we move back into defensive mode. Turn down the thermostat, revitalize old outfits, buy only when thing are worn out mode. That is not good news for an economy which, at best, is stalling.

We are believers in the Austrian Economic way insomuch as we believe that all this fixing and fooling around with interest rates and floats is wrong. We believe that Greenspan’s free money era exaggerated the housing bubble and has not helped ease the pain but rather prolonged the pain. As businesses go through cycles, we should allow the normal business cycle rather than trying to adjust policies to avoid the normal busts in the boom bust cycle of business. Had we left things alone, laissez-faire, they likely would have been over faster and with less pain than the current drawn out Fed adjusted business cycle.

You might wonder how this all plays into the stock and bond markets. Well if business feel the cut back in spending, naturally, their earnings forecasts will have to be adjusted lower and that is what we believe will happen. Further, as the US Dollar regains strength, out exports become less competitive in the global arena. The bottom line is that we are going nowhere fast. The good news is that as the markets adjust to these global situations, we are able to find assets that are fairly valued and will return more to the investor than a CD, treasury, or the money market.

We noticed that Mayor Bloomberg agrees with our thoughts that riots can and will happen here on our streets. Why, because people cannot find jobs and are frustrated by that fact. Just think of the recent college graduate who, after spending all that money on higher education and enjoying student loans, now, cannot find work. The unemployment rate for college graduates is almost 17%. This fact does not appear anywhere because these individuals were not employed…they were in college and do not show up in the unemployment rate. Mayor Bloomberg is correct with his warning! August 14, 2011 we wrote: “As to the riots in England; many people here on our shores do not believe that it is possible for that to happen in the USA. Our comment is; think again. When people are unemployed, hungry and angry they do strange things. The people are getting more and more upset and something will trigger the event yes, even here in the USA. We are not isolated; it happened in the Middle East and now in Europe why don’t you believe it can happen here?”

Tuesday: August housing starts and building permits are released at 8:30.
Wednesday: FOMC statement at 2:15 and August existing home sales are released at 10:00.
Thursday: Leading indicators for August are released at 10:00.

The new range for the US Dollar index is 2.24 points. The low border should be 75.645 and the high border should be 77.885. The stochastic indicator has just issued a buy-signal near overbought levels. Our own indicator is going sideways and the RSI is pointing slightly higher. The Thomas DeMark Expert indicator continues to point lower nearing oversold levels. The 5-day moving average is at 76.879. The top of the Bollinger band is at 77.896 and the lower edge is seen at 72.771. As you can see the volatility has blown out on this index. We do have signs of exhaustion and had an inside day in the Friday session. When looking at the Market Profile chart, we noticed that any price above 78.15 should cause a flurry of buying to appear. On the other side of the coin, any activity below 76 should cause some selling. As this market was tilted to the short side of the trade it now it tilting to the long side of the trade. Tilted boats rarely float and traders look as though they will be corralled into the slaughter house continuing to follow the leaders. We are above the Ichimoku Clouds for the daily time-frame but remain below the clouds for the weekly and the monthly time-frames. The downtrend line is at 77.197 and the uptrend line is at 75.347.

Yes, we still are in a rectangle for the S&P 500 futures contract’s chart. We know it doesn’t feel like it but unless or until we remove the double top seen on August 31 and September 1, at 1228-1229 we will remain in the rectangle. More simply put, we are range-bound. The good news is that this week we did break above the downtrend line from July 22, 2011. No we are not hedging our words and we continue to believe that we are in a box and haven’t broken out of that box at this time. The 5-day moving average is at 1190.15. The top of the Bollinger band is at 1229.95 and the lower edge is seen at 1129.22. A red flag appears at the 1229.75 level because not only is it the top of the August 31 market high but also the upper edge of the Bollinger band. We close just above the Ichimoku Clouds in the Friday session. We are in the clouds for the weekly time-frame and above the clouds for the monthly time-frame. We seem to have a good deal of volume at the 1202-1208 area which can be clearly seen on the monthly chart. Until or unless we break out of this range, it would be prudent to be very careful.

The NASDAQ 100 futures contract did break out of its range to the upside. The upside trend channel is 2150.20 and 2346.85. We did see high volume on this run to the upside. The 5-day moving average is at 2248.55. The top of the Bollinger band is at 2310.44 and the lower level is at 2061.85. We are above the Ichimoku Clouds for all time frames. The stochastic indicator is very overbought and beginning to curl over and remains issuing a buy-signal. Our own indicator is doing much the same. The RSI is at overbought levels and continues to point higher. The Thomas DeMark Expert indicator is approaching overbought levels and continues to point higher. Will this index lead the S&P 500 higher? That is the question. What we do see is that the high tech sector of the market is in rally mode and this index is loaded with high tech large cap companies. The market is overbought and we would not chase this trade. If this market is going to go higher, it will have to back and fill to relieve some of the overbought condition and we would step into the trade at that point. The daily Market Profile chart is telling me that this market will melt to the upside above 2308.20. The point and figure chart shows that we clearly broke out to the upside.

The Russell 2000 continues to trade inside the box, or in a rectangle trading range. The candle seen in the Friday session was a small bodied candlestick that indicates that this rally may be running out of gas. The indicators are not overbought and continue to issue a buy-signal. We are below the Ichimoku Clouds for the daily time-frame and closed just inside the Ichimoku Clouds for the weekly time-frame. The 5-day moving average is at 696.96. The top of the Bollinger band is at 730.02 and the lower edge is seen at 651.73. The Market Profile chart tells us that above 720 this market will likely melt to the upside. The point and figure chart tells me the number is 716. Interesting. As we move into the last quarter of the year, you might expect to see some pressure on this index as portfolio managers and individuals clean up their portfolios and take the tax losses for the year. It is the “ole” January effect. This week should help resolve the directional problems of both the S&P 500 and the Russell 2000.

Crude oil is trading in a rectangular trading range. The high volume area is at 88. The up trending channel lines are 86.37 and 94.01. We are inside the Ichimoku Clouds for all the time-frames that we follow. The 5-day moving average is at 88.84. The top of the Bollinger band is at 91.02 and the lower edge is seen at 83.60. If the trade gets above 90.30, it is likely to belt to the upside and return to the 98 area. The indicators for the daily time-frame are issuing a sell-signal, however; for the weekly time-frame the same indicators are issuing a continued buy-signal. The downtrend line for the weekly chart is at 92.50. This tells us that should the market close above that level for two days; the bears and the shorts will become very upset and likely will cover their positions.

Gold is making lower highs and lower lows that is the definition of a downtrend which is the direction of gold. Gold is trading in the high volume area and is above the Ichimoku Clouds for all the time-frames we review. The 5-day moving average is at 1814.72. The down trending channel lines are at 1825.10 and 1711.35. We continue to like gold but will not buy it until or unless it is able to stay above 1707.30. Gold has broken the medium term uptrend line so; caution is needed in this trade. We would like to buy it in the 1650 area should we get that chance. The indicators have just issued a buy-signal for gold. Remember even gold will drip should the globe feel the pressure of a financial crisis.