Archive for August, 2013

Sunday, August 25th, 2013

Are we modeling our economy to resemble the French who retire at 60, work 35 hour weeks and have significant protections against layoffs and firings….is this where the USA are going?

French college graduates are worried about finding jobs and demand that nothing changes (speaking of benefits and social programs). French have five or six weeks’ vacation a year that would be great but not too good for productivity. Results are, unemployment in France is at record levels, growth….what growth….government spending is 57% of GDP, government national debt is 90% of GDP. The government employs “90 civil servants per 1000 residents.” (New York Times: A Proud Nation Ponders How to Halt Its Slow Decline by Steven Erlanger)

Which way do you want to vote: a taper because we are expanding which will lead to higher interest rates and eventually lower stock prices or a continuation of Q infinity which would indicate that the economy is not expanding and we are still stuck in the mud of lousy growth? Which way would you like? Okay here are the facts; if we had robust growth we would have higher interest rates that could be absorbed by the markets. Higher growth would result in growth in employment, wage expansion and even an expansion in housing albeit with higher mortgage rates. The key to success is employment and increased wages. Inflation which is wage based is good for the economy, but inflation that is caused by higher costs of materials is not. They both must grow together not to the exclusion of the other.

Here is what happens if you have material cost inflation without wage inflation. The cost of goods will increase but the manufacturers will have a difficult time passing that cost on because wages are stagnant, as they are today. This leads to smaller corporate profits because their margins contract. Stagflation is the result of this scenario. Now say we had moderate wage inflation, then increased costs could be absorbed and moderate inflation would exist. This would be healthy and likely lead to slightly higher interest rates. Today, unfortunately, we do not have wage expansion but do have some material cost increases. Basically, the entire process is at a push with little movement in any direction. This is what the Fed was trying to stimulate and have failed to do so. The banks are holding onto money and the velocity of money is stagnant. The Fed believed that if they made money cheap that the banks would lend and this would lead to an increase in the velocity of money….They were mistaken because the banks, burned by the mortgage mess which they were a party to, have pulled in their horns and raised their lending requirements which forces people to look for higher cost loans elsewhere like pawn shops, the legal lender of last resort or, money lenders who are part of an illegal group.

Thursday was an outside day for the S&P 500 and Friday followed through to the upside. The most recent retracement seen this past week did satisfy the 50% retracement and the 61.8% retracements and close above that level in the Friday session. These retracement levels are taken from the June lows to the August highs. We drew two sets of channel lines one steeper than the other. The S&P 500 is bumping up against the steeper downtrend line at 1663.06 with support at 1628.75. The more conservative channel line is at 1679.86 and 1634.75. All of the indicators that we follow herein continue to point higher with plenty of room to the upside. We are above the Ichimoku Clouds for all time-frames. The 5-period exponential moving average is at 1655.00. The top of the Bollinger Band is at 1717.42 and the lower edge is seen at 1635.72. The Market Profile charts show that there is little volume between 1662.72 and 1674.24 and if we step into that area we will likely move quickly either to the upside bulge at 1685 or the downside bulge at1655. The 60 minute 1% by 3 box point and figure chart continues to look positive. The 60 minute 0.1% by 3-box chart continues to look positive but does show a downtrend line that could become difficult for this index.

The NASDAQ 100 enjoyed another rally in the Friday session touching the downtrend line and closing close to that level. The downtrend channel lines are 3126.54 and 3050.40. The 5-period exponential moving average is at 3097.36. The top of the Bollinger Band is at 3153.95 and the lower edge is seen at 3051.54. We are above the Ichimoku Clouds for all time frames. This chart indicates that there isn’t that much of a push necessary for this index to print a new high for the year and if the market decided to do so could accomplish that task in a day or two. All the indicators that we follow herein continue to point higher as the approach overbought levels. There is no reason to believe that this market is going to fall out of bed because the public is buying the dips. So long as that continues, the rally will continue. We are entering the last week of the month and that usually causes some gyrations as portfolio managers adjust their portfolios for the end of the third quarter. The daily Market Profile chart looks positive and we closed at the high volume area of the trading where 15.0% of the week’s trades occurred. 15.2% of the Friday’s volume was seen at 3121.20. Remember that above 3125.79 it is likely that we will melt to the upside. The point and figure daily 1% by 3 box chart continue to look positive. We do have an upside target on the 0.1% by 3 box 60 minute chart of 3181.06 and it does look attainable.

The Russell 2000 traded narrowly in the Friday session leaving a small-bodied candlestick on the chart. The high of the session kissed the short term down trending channel line which is 1038.8, the bottom of that channel line is 1002.1. There is a better steeper channel line, also down trending which is 1048.8 and 1008.35. All the indicators that we follow herein are pointing to higher levels although the rate of the ascent is slowing. We are above the Ichimoku Clouds for all time frames. The high volume area of 16.9% for the Friday trading session was at 1032.2. Above 1038.0, we will melt to the upside and below 1029.6, likely drop to the downside. The 5-period exponential moving average is at 1030.62. The top of the Bollinger Band is at 1067.30 and the lower edge is seen at 1013.84. The weekly Market Profile chart shows us that above1059.0 there is almost no resistance on the upside. The daily 1% by 3 box chart has some mighty high upside targets with absolutely no current downtrend lines. The 60 minute 0.1% by 3 box chart has some attainable upside targets and some very steep internal downtrend lines.

The US Dollar index suffered a loss in the Friday session losing 0.14% on the day. We are below the Ichimoku Clouds for the daily time-frame but we are above the clouds for both the weekly and the monthly time frame. The indicators that we follow herein are rolling over and the RSI is pointing lower. The stochastic indicator and our own indicator are not issuing a sell-signal as yet but will likely do so in the next session should the market continue its retreat. The 5-period exponential moving average is at 81.37. The top of the Bollinger Band is at 82.27 and the lower edge is seen at 80.84. Not only is 81.37 the 5 period moving average but it is where 13.8% of the Friday volume occurred. The weekly chart tells us that under 80.586 this market gets into trouble. The daily 0.2% by 3 box chart shows us good reason for concern for the upside. We have closed below the uptrend line. The 60 minute 0.1% by 3 box chart has a downside unfilled target of 78.95 and several internal down side lines. The chart does have an internal upside line as well. There are no upside targets.

Crude oil rallied in the Friday session up 1.32%. Was the rally due to the weakness in the US Dollar or a function of the troubles in the Middle East? Actually we do not know. As we enter the heating season we generally see an upward bias in the energy market. The stochastic indicator and the RSI are both pointing higher. The 5-period exponential moving average is at 105.69. The top of the Bollinger Band is at 108.46 and the lower edge is seen at 103.11. We are above the Ichimoku Clouds for all time frames. The downtrend line is at 107.98. The chart seems to be coiling. The down trending channel lines are 107.88 and 103.44. The uptrend line is at 105.52. The chart almost looks like a very large pennant. The pole is very clear the pennant may be a bit too large. The Market Profile chart shows a somewhat neurotic market with two bell-shaped curves made in the Friday session. The high volume was at 106.40 where 7% of the day’s volume was seen. Above 107.92, we will move to the upside but below 102.60 we should drift to the downside. The daily 1% by 3 box chart has an unfilled upside target of 110.66. We do have an uptrend line on the chart. The 60 minute 0.25% by 3 box chart has an upside target of 113.48 and a downside target of 101.67. We have both internal upside and downside trend lines.

Gold bugs delight you are back……well you were on Friday, right back into the resistance area. We are above the Ichimoku Clouds the daily and the monthly time frame and it seems likely that we rally above 1400 where we will find resistance. We are below the clouds for the weekly time frame. The up trending channel lines are 1314.51 and 1420.68. We are overbought as measured by the stochastic indicator but continue to point to higher levels. The RSI is also approaching overbought levels. The 5-period exponential moving average is at 1376.28. The top of the Bollinger Band is at 1398.36 and the lower edge is seen at 1271.68. The Market Profile chart is a double bell with 13.5% of the volume at 1394.8. The 60 minute 0.3% by 3 box chart is very telling and clearly shows the change in direction of this market to the upside. Although we continue to like gold we must warn you that should the equity markets take a large spill, that gold will be the contract of choice to sell for margin money so, be careful and save some buying power for that time, should it appear.