Archive for January, 2012

Sunday, January 29th, 2012

This week’s bottom line is that the Fed is going to keep interest rates near zero for an extended time; at least until 2014 and that the Fed does not see inflation in the economy. The Fed also hinted that Q3 might be in our future. So, let us ask you this, what good has Q1 and Q2 done for the economy and the job seekers? We would tell you that the results envy the current prevailing interest rates…… zero. Yes, our economy is stable but it is not growing very much if, at all. Businesses are not hiring because they are scared that the economy will roll over and play dead anytime now. Businesses would prefer to hoard cash rather than to risk expansion which they perceive as too much risk. Bottom line is that businesses need to expand and to create jobs for this economy to grow. Right now, that is not happening, and until businesses feels comfortable about the future, they will keep their wallets on their hips.

The market continues to rally, in part helped by those seeking yield. So long as this continues, and nothing blows up like a bank or something, the market will meander higher. Our concern is future earnings for many of the reporting companies. Yes, we had a surge of business purchases before the end of 2011 because the purchasers enjoyed a 100% write-off in the 2011 tax year instead of the customary depreciation of the asset over a period of years. What did that do for the economy, nothing; it simply stole the orders from 2012 and placed them in 2011. The same amount of orders just front-loaded for the tax benefit. No surprise here.

Our surprise is with the Fed, it seems that there are far too many academics on that team and not enough people who actually had to live life in the real world. Perhaps if more of the Fed Presidents were out there, they might see the unrest brewing.

A continued result seen from the FOMC announcement is that the US Dollar index has been sliding. Before you jump on that short position, remember that not only is the FOMC throwing money at the markets and by extension devaluating the currency but the ECB has been on a similar path, although not overtly stated as such. The US Currency is, for now, the generally accepted reserve currency so it will continue to enjoy value vis a vis that honor. That said, both the euro and the dollar are firing up printing presses and flooding the market with cash. The result is that the currency will be worth less and gold and things that can be used will be worth more. Gold has been a default currency as a result of the instability of global currencies which began with the liquidity crisis of 2008 (Lehman and AIG). We believe that this will continue. As to the weak dollar, it is good for exports but only if the countries exported to can afford to buy the product. That is the fly in the ointment here. We have cheap products but if the buyers don’t have the cash to buy, they will stand back from the sale.

We now have the candidates slinging mud at each other and saving the current administration work in destroying credibility. This always happens; too bad these candidates don’t think things out. By the way, although Romney and Gingrich are filthy rich, so are the Obamas, just making that point here.

Monday: December personal income/consumption is released at 8:30.
Tuesday: January PMI is released at 9:45, January consumer confidence is released at 10:00 and November S&P Case Shiller home prices are released.
Wednesday: December construction spending is released at 10:00, January ISM index is released at 10:00, January US car sales are released, and Federal Reserve Philadelphia President Plosser speaks.
Thursday: Q4 productivity is released at 9:30, January results from retailers, Fed Chairman Bernanke testifies on the “Hill.”
Friday: January nonfarm payrolls and unemployment rate is released at 8:30.

The US Dollar index has been declining for the past two weeks. The down trending channel lines are 80.091 and 78.477. We closed inside the Ichimoku Clouds for the daily time-frame and remain above the clouds for the weekly time-frame and below the clouds for the monthly time-frame. The 5-day moving average is at 79.640. The top of the Bollinger band is at 82.283 and the lower edge is seen at 79.011. Both the RSI and the stochastic indicators are oversold but continue to point lower. The Thomas DeMark Expert indicator is pointing higher at neutral and our own indicator continues to point lower with room to the downside. We believe that there should be some very good support for this index at the 78.329 level. The point and figure chart continues to warn us that we could go lower. Here is some good news, if this market can manage a rally to at least the 82.00 level, it likely will cause the shorts to cover and propel this market higher. That was a very big if!

The S&P 500 remains in the up trending channel. Well, for now it does. The channel lines are 1337.65 and 1307.12. So long as we stay above the lower channel line we should be safe. If you draw a longer uptrend line, you will notice that we would have to drop quite a bit to cause some concern. The 5-day moving average is at 1314.10. The top of the Bollinger band is at 1328.91 and the lower edge is seen at 1256.08. We are above the Ichimoku Clouds for all time-frames.
The point and figure chart is in an uptrend. The market profile chart is very telling and indicates that if this market can break above 1329.65 it likely will move higher. The stochastic indicator is issuing a continued sell-signal and is at a level where either the market will rally or, the market will see a deeper sell-off than has been seen for most of January. The Thomas DeMark Expert indicator is flat at overbought levels. Our own indicator continues to issue a sell-signal and the RSI is pointing lower from overbought levels. The bottom line is that this market is due for a correction. The question is we can move sideways and correct or could move lower and correct. We believe that we could move lower but that the retreat will not be that awful and will be less that is expected.

The NASDAQ 100 has been one of the best performing index. On Friday we have an inside day on the chart. The market did close up from its open but left a doji like candlestick on the chart. The 5-day moving average is at 2448.50. The top of the Bollinger band is at 2486.86 and the lower edge is seen at 2285.17. We are above the Ichimoku Clouds for all time frames. We are showing signs of exhaustion on the weekly chart and have just seen a sell-signal issued from the stochastic indicator. More interesting is the monthly chart which shows a high in price but declining highs in the stochastic indicator and the RSI. This is a classic divergence. Naturally with divergences these signals put us on alert do not issue a buy or sell signal. They just tell us something could be wrong with this picture and tells us to keep a close watch on the index. The upper channel line is at 2490 and the lower channel line is at 2428.50.

The Russell 2000 continued the rally in the Friday session. Although the stochastic indicator is overbought, there is no sell-signal and as a matter of fact, this indicator has just given us a new buy-signal. The Thomas DeMark Expert indicator is pointing lower and our own indicator is issuing a buy-signal. The RSI is overbought and pointing higher. Guess there was a January effect this year! We are above the Ichimoku Clouds for the daily time-frame but are in the clouds for the weekly time-frame. The upside channel lines are 802.99 and 780.92. The 5-day moving average is 789.66. The top of the Bollinger band is at 801.90 and the lower edge is seen at 733.01. Notice that the 801-802 number appears both at the upper edge of the Bollinger band and the upper channel line, therefore it is an important resistance level. Above 796.25 on the market profile chart there is clear sailing for the bulls to press this market higher. That number is confirmed by the point and figure chart. The bottom line is that there is little to stop this market on the upside. We have come a long way quickly and a little pause would be enough to remove some of the overbought condition.

Crude oil is in a downtrend and needs to close above 101 to turn the trend from down to up. The down trending channel lines are at 101.05 and 96.08. The 5-day moving average is at 99.70. The top of the Bollinger band is at 103.19 and the lower edge is seen at 97.81. The RSI and the stochastic indicator are flat at neutral and do not seem to have a direction. We are above the Ichimoku Clouds for all the time-frames. The market looks dull and boring so remember the old adage; never sell a dull market short!

Gold broke the weekly downtrend line this past week and look like it is on its way to 1804.40. We are overbought on the daily chart but the indicators continue to point higher. Gold is above the Ichimoku Clouds for the all the time-frames. The 5-day moving average is at 1702.40. The top of the Bollinger band is at 1729.38 and the lower edge is seen at 1569.90. Notice that we closed above the upper edge of the Bollinger band and it is likely that we will retreat back inside the band. We continue to like gold on pull backs and view gold not only as a precious metal but also as a currency given the current environment.