Archive for February, 2014

Sunday, February 16th, 2014

It is totally amazing how quickly the market turned form doom and gloom to sunshine and green shoots. Two weeks ago, the pundits were calling for a minimum of a 10% retreat in the markets and today, they are all looking for new highs and brighter days in the future. This isn’t a commentary as to the direction of the market or a statement regarding market seers. It is a comment regarding how quickly the market mood shifts. To quote the Wizard of Oz; “I’ve a feeling we’re not in Kansas anymore.” The feeling of being swept away and plunked down in another place is exactly how the markets felt following the retreat and the ascent all within a microsecond in time, well not exactly a microsecond but really quickly. (Dropped on January 31st and a much larger drop on February 3rd for a total correction of what…..two days?) Many pundits, the same pundits that called for a minimum of a 10% and perhaps as much as a 20% correction after the February 3rd retreat, are now suggesting that the market is clearly going to make a new high and begin another leg up. Another quote from the Wizard of Oz fits really well here: Dorothy: “How do you talk if you don’t have a brain?” Scarecrow: “Well, some people without brains do an awful lot of talking don’t they?”

We believe that the markets will retreat either in the Tuesday or the Wednesday session. That said, we are not projecting the thrust of that retreat. Remember the buy-the-dips crowd has been encouraged and rewarded by the action of the markets to continue buying the dips. We wouldn’t be surprised to see sentiment turn heavily bullish again. The current readings show that while the bull camp lost a few devotees, they migrated to the correction camp leaving the bearish camp steady and unchanged. It still makes little sense to keep your money at zero interest rates while the markets pass you buy. We would encourage people to be very careful with their investments and to guard against the excess euphoria seen as the markets rally. We are not bears but we are concerned that this market has not purged itself of its excesses and will likely drop again. The problem can be solved by hedging your portfolio or by keeping your stops tight. For those with deeper pockets, there are private equity investments you can find that will boost your income. Think about becoming a loan shark without the heavy muscle techniques seen in the moves. People still need to borrow money and if banks aren’t willing to loan that money well, maybe you should look into that possibility so long as you have hard assets to secure that loan.

We were excited to hear some commentary on the news networks regarding the costs we ordinary Americans live with. It is about time that the media became aware of this. These costs are not reflected in the government studies on inflation and these costs seriously impact the middle class earners ability to survive. When the cost of food is rising, we have no choice but to pay these costs. There are double digit cost increases in dairy, meat, fresh vegetables, fruits etc. Naturally the government neither eats nor heats and thus that measure of inflation is beyond ridiculous.

Chairman Yellen spoke this past week to our elected officials and the take away from her statement and answered questions is that the FOMC isn’t going to raise rates anytime soon. It does make sense in that if they did raise rates, the cost to businesses would flow to the purchasers and again prevent further hiring. Even if we have inflation, which we do in our living expense, unless employment and wages keep up with that inflation, it is not likely that the result will cause interest rates to rise. We have stagflation and that is why businesses are reluctant to hire anything but low cost employees. Discretionary income for the middle class is severely impacted by the increased costs of survival and by the fact that our incomes have not kept up with these basic needs.

Our interests were peaked by the way inflation is measured generically by the US government. Upon examination of inflation of durable goods (cars, televisions, computers) vs. the inflation of energy, food, education (mainly compulsory costs of living, things you are forced to pay more for and that you can’t live without, maybe not education) the results show durable goods to be in mild deflation to stagnant while compulsory costs are inflating. This is just speculation, we have no data to back this up but we think if that’s the case it’s really telling an interesting story. We don’t need to buy cars (in Cuba they’ve been using the same cars for 50 years and watching the same televisions). If these prices are deflationary to stagnant while things we need to leave are inflating its telling you there is inflation, things cost more money, there is stagflation, we make less money, and the consumer is being pressed and as a result not buying things that are viewed, in their eyes, “a luxury.”

The US Dollar Index gave us a powerful signal two weeks ago. Our intraday Point and Figure chart showed us an unfulfilled upside target, a new downside target, and failure to reach a former high. Unfortunately, hubris got the best of us, we doubted our X’s and our O’s and we thought this market was going higher. Alas, down she went, the US Dollar Index closed the Friday session at 80.17, disappointing us for sure. The 20-period simple moving average is 80.81, the 5-period exponential moving average is 80.46 and the index is currently below both. The Bollinger Bands are currently expanding and the index lies just below the lower bands limit. Both indicators that we follow are issuing sell signals and, in fact, the RSI has broken out of consolidation and has moved to the downside.

The daily candle chart shows the Index is resting on an uptrend line that goes back to May of 2011 (granted this hasn’t been the most reliable trend line). Below we see support at 79.90 and with a break of that level, 79.64. On the upside, 80.50 is the next logical stop followed by 80.81. The weekly candle chart shows the same resistance lines above, however; on the downside we can see 79.85 and 79.71 should contain the market. The 30 minute .05 x 3 point and figure chart shows the index is in a down trend and has formed internal down trend lines. There is still an activated target of 81.50, however; last week the index failed to achieve this and further, failed retesting a high. We currently have a freshly activated downside target at 79.95. Moral of the story, don’t fight the point and figure chart! The index will likely pull back to the 80 level, however; we will be due for a bounce soon as we start to pull close to longer term up trend lines.

The S&P 500 has rallied for seven sessions in a row and is approaching the end of that string of rallies. We would expect to see this market retreat in the next session, after opening higher, or the session after that. This market is overextended and will correct that by going sideways, backing and filling or by retreating. Three of the four indicators that we follow herein continue to point higher. Only the stochastic indicator is at overbought levels. Our own indicator will likely issue a sell signal in the one of the next two sessions. The RSI is at 68, not yet overbought and continues to point higher. The Thomas DeMark Expert indicator is issuing a sell-signal at overbought levels. The 5-period exponential moving average is 1816.59. The top of the Bollinger Band is 1858.62 and the lower edge is seen at 1728.92. We expect to see support at 1801.25, and at 1764.50. There were multiple failed attempts to get to the high of December 31st and thus there is a good amount of overhead supply as we approach the 1840 plus level. It is important to note that should the market make a run for the highs and remove that high, it is likely a wind of buys will inflate the market higher, as any remaining shorts reverse their positions and as trend following algorithms jump on board. We are above the Ichimoku Clouds for all time-frames. The 0.0% by 3-box daily point and figure chart has a downside target of 1565.48. That said, when we look at the 1% by 3-box daily point and figure chart we have no downside target and an upside target of…..2278.81. The 60 minute 0.1% by 3-box chart has an upside target of 1874.75. Bottom line is that the market is due to correct for one or two days then, we will see if it takes off to the upside again. The volume on this rally has been disappointing and the index needs to regroup and gain enough energy to try to assault the highs. We feel that a correction is due but caution that we cannot tell you exactly when that will occur. Remember the stimulus could come from outside the market.

The NASDAQ 100 closed the Friday session at highs for the year. We have a 13 count on the chart and have advanced for the past seven sessions. There are signs of exhaustion in this market. The stochastic indicator, our own indicator and the Thomas DeMark Expert indicator are all issuing a sell-signal. The RSI continues to point higher at 71.99 in overbought territory. We are above the Ichimoku clouds for all time-frames under investigation. The assent has been so steep as to resemble a pole, which is troubling. The 5-period exponential moving average is 3621.99. The top of the Bollinger Band is 3689.34 and the lower edge is seen at 3406.35. The 3 by 3-box daily chart has an upside target of 3777. The 0.2% by 3-box 60 minute point and figure chart has an upside target of 3691.5 and continues to look very positive. There are no downtrend lines on this chart. The 1% by 3-box daily chart looks very bullish with no downtrend lines for this time-frame. This index is due a rest and we will likely see that happen this week.

Although the Russell 2000 has rallied for the past seven trading days and all most indicators are overbought, not a single indicator is curling or bending to the downside telling us that further gains are possible. This index has not made a new high and the record high set on January 23, 2014 still stands. The Russell 2000 emerged above the Ichimoku Clouds in the Friday session and remains above the clouds for all time-frames. The 5-period exponential moving average is 1133.78. The top of the Bollinger Band is 1183.58 and the lower edge is seen at 1077.74. Although this market looks very robust, we caution you that it has gone too far too fast and some digestion will be needed before the next leg, in earnest is seen.

Crude oil barely budged in the Friday trading session and left a doji like candlestick on the chart for both the Thursday and Friday sessions. The market, as measured by the stochastic indicator, RSI and our own indicator is overbought. Our own indicator has issued a sell-signal as has the stochastic indicator. We are above the Ichimoku Clouds for all time-frames. It is interesting to note, that in the Wednesday session, we took out a horizontal line but closed below that line by the end of the session. This action was a failure for the bulls that clearly had control of the market at that point. The 5-period exponential moving average is 100.08. The top of the Bollinger Band is 101.59 and the lower edge is seen at 94.06. The upward trending channel lines are 101.99 and 98.79. The 0.25% by 3-box 60 minute chart has a downside target of 96 and then an upside target of 103.2. We do have a troubling internal downtrend line which could spell trouble for the bulls. The 1% by 3-box daily chart is neutral at the moment.

Gold has been rocking and rolling higher trading above the upper Bollinger Band for the past four trading sessions. We are overbought as measured by all the indicators that we follow herein yet only the stochastic indicator is beginning to curl to the downside. The pattern could be an inverted head and shoulders pattern which would take the price to about 1360 or slightly higher. It is an iffy pattern at the moment. The ascent has been too steep for this market to maintain and we expect to see some backing and filling if not a retreat in the next few sessions. The 5-period exponential moving average is 1297.59. The top of the Bollinger Band is 1306.87 and the lower edge is seen at 1223.51. We are above the Ichimoku Clouds for only the daily time-frame and are below the clouds for the weekly and the monthly time-frames. The 0.75% by 3-box daily chart of gold has an upside target of 1384.26. This market looks positive for the moment, we shall see. The 60 minute chart has a very positive look to it. Bottom line is this, keep your powder dry and wait for an opportunity to buy gold. Do not chase markets.