December 21st, 2008
We are amazed that people are purchasing short-term US Government paper that yields slightly more than zero. Is the world so scary that people are willing to park short-term money at near zero? Wouldn’t it be smarter to stuff it in the mattress until you find a better place to invest it? Banks are still sitting on their money and are not lending freely. Home owners are rushing in the doors of these financial institutions hoping to refinance their loans, not necessarily apply for new ones. The banks are playing the spread and should be getting healthier. The refis will bring in earnings derived from closing costs, application fees and the like, but will also act to reduce the income derived from the original loans. For example if you were paying 6% on a loan and now will pay 4.5% on the new loan, the amount will remain the same but the income from that loan will have been reduced, thus the bank makes less money. True they make money up front on the fees and there is the “time value of money” to consider. Is this activity going to add buying power to the consumer? Maybe yes and then again, maybe no. Would you increase your loan? Probably not, if you are worried about your economic future, you might just apply to reduce your monthly costs. This reduction in mortgage cost along with the reduction of energy costs should help to bolster the family bottom line. Will that be enough to encourage excess spending again? No, we believe that the consumer has learned a little bit about money management during this recession and that knowledge should act to dampen the appetite for unnecessary over-the-top items.
We continue to advise the investor to buy only the strong companies with good balance sheets, earnings from operation, insider ownership and dividends. We also advise the shareholders to sell calls on those issues and to buy protective puts. For the riskier in the crowd, you can always sell naked puts on issues that you would like to own. Remember when you sell a put, you are agreeing to buy the issue at a time and price certain, that is what you are being paid for. The bad news for the investor is that the company’s share rally leaving the naked put seller with the premium only and no shares. Say you wanted to buy Microsoft. You could sell the April 2009 16 puts on MSFT for 1.13. Each put obligates you to buy 100 shares of MSFT for 16 dollars a share. That obligation expires on the third Friday of April and settles on the following Saturday. Say MSFT is trading at 14 dollars a share; you will be paying 16 dollars a share for something you might have bought for 14 dollars. Actually your real cost would be 16 dollars a share minus 1.13 you received for selling the put. On the upside, say MSFT is trading at 19 dollars a share on the third Friday of April. You will not be exercised on your put and will not be long the stock. You will have made 1.13 on the trade and you could sell another put on MSFT.
As we approach the end of this year, the trading will become thinner and thinner as trading desks close down their operations for the holidays. Be careful trading thin markets they will exaggerate moves and are also know for lousy executions. Best to wait until the “A” team returns in January of 2009.
Tuesday: 3rd quarter GDP is released at 8:30, December Michigan Sentiment is released between 9:45 and 10:00, November existing home sales are released at 10:00, and November new home sales are released at 10:00. Wednesday: November personal income and consumption is released at 8:30, and markets close early in advance of the Christmas Holiday. Friday: Boxing day, many markets are closed.
The US Dollar index has a 9-count on the bottom printed on Thursday. The ensuing rally can take the US Dollar index to 84.055 and then 85.290. The Market Profile chart clearly shows that should the US Dollar index close above 88.71 the window will be open to much higher levels. The daily chart looks as though there was a head and shoulders top which lead to the sell-off recently seen. The low of 78.775 will be retested and breeched if, the head and shoulders completes the leg on the downside. So long as the US Dollar manages to stay above the 5-day moving average we will give the upside a chance. Further support is the 9-count which has led to a bounce. The 5-day moving average is at 81.561. The top of the Bollinger band is at 90.593 and the lower edge is seen at 80.498. The stochastic indicator, our own indicator and the RSI all are uniformly issuing a buy-signal. The Thomas DeMark Exert indicator is going sideways at neutral. We are below the Ichimuko clouds on the daily chart but above those clouds for the weekly time-frame. The weekly chart is not as positive as the daily chart. The weekly chart shows support at 78.029. The indicators are all pointing lower for the weekly time-frame. Remember it is the end of the year and few trading desks will want to do much more than close out positions for the year.
The S&P 500 finished the week with a decline. It was a lightly traded Friday session which, for much of the day, was a positive day. The market retreated in the afternoon closing near the lows of the day. Since late November the daily volume has been decreasing. Perhaps that is because we are nearing the end of the year or for some other reason. The chart is forming a pennant which should resolve on Tuesday. The 5-day moving average is at 892.35. The top of the Bollinger band is at 931.42 and the lower edge is seen at 812.68. Three of the four indicators that we follow are issuing a sell-signal. Only the Thomas DeMark Expert indicator continues to issue a buy-signal, albeit at overbought levels. We are below Ichimuko clouds on the daily, weekly and monthly time-frames. The weekly chart seems to be stair-stepping lower. We need to close above 919.25 to scare the shorts and spur on fresh buying. On the other side of the coin, we need to say above 872 and certainly above 850 to avoid a bear raid. Good tidings and peace on earth should keep the bears in hibernation for the coming week. After that, it looks as though we could test the low to discover if there is good support under the market.
The NASDAQ 100 is forming a pennant or coil. The downtrend line is at 1233.12 for the Monday session the uptrend line is at 1184.31. The stochastic indicator, our own indicator and the RSI are all issuing a sell-signal. The Thomas DeMark Expert indicator continues to issue a buy-signal, albeit at overbought levels. The 5-day moving average is at 1220.20. The top of the Bollinger band is at 1265.35 and the lower edge is seen at 1098.28. We are below the Ichimuko clouds for the daily, weekly and monthly time-frames. The uptrend line for the weekly chart is at 1219.00 for this coming Friday. The uptrend line translates from the daily to the weekly without any problem thus, it is an important line for this market to respect and stay above. When reviewing the Market Profile chart it becomes clear that should we retreat below 1062.50, the NASDAQ 100 will have a rather painful decline, without much support. On the other hand the chart demonstrates that as this market rallies, there is supply overhead.
The Russell 2000 has outperformed the other equity indices. Is it the early arrival of the January effect or something else? We have been seeing higher highs and higher lows which describes an uptrend. The only fly in the ointment is that on Friday we saw a doji. A doji candle tells us that the market is in transition which could lead to a change of direction. Since the previous direction was up, it would stand to reason that we could see some profit taking in the next few days. The 5-day moving average is at 476.96. The top of the Bollinger band is at 501.49 and the lower edge is at 411.09. The weekly chart indicates that it is important for this index to remain above 457.08. The stochastic indicator and our own indicator are issuing a fresh sell-signal. The RSI is simply going sideways at neutral. The Thomas DeMark Expert indicator is issuing a buy-signal at grossly overbought levels. The indicators on the weekly chart are flattish yet positive. The Market Profile chart tells us that should the market trade higher to 507.50, shorts will cover and longs will become more aggressive taking the market to 525 and 560. Above 560 we have very lightly traded areas which are not terribly stable. On the downside, below 420 we start to have real trouble which could lead to a quick tumble.
Crude oil looks as though it has been in a steady organized decline for a long time. Naturally, we are below the Ichimuko clouds for the daily, weekly and monthly time-frames. The 5-day moving average is at 44.56. The top of the Bollinger band is at 57.34 and the lower edge is seen at 39.86. We believe that we will see a buy-signal within a day or so. The buy-signal is simply a signal that tells us that we are going to bounce not change the trend of the market from down to up. The Market Profile chart tells us that there is plenty of overhead supply. Below 40.00 we get into trouble and have thin air supporting the price. This, naturally, could lead to a brisk sell-off. Be very careful trading this product. Don’t fight the trend until and unless you have really good cause to buck it.
Gold is above the Ichimuko clouds for the daily and the monthly time-frame, but below the clouds for the weekly time-frame. We expect to see the retreat continue and find support at 829.70, 812.80 and 795.90. The 5-day moving average is at 849.14. The top of the Bollinger band is at 871.75 and the lower edge is seen at 744.86. The stochastic indicator, our own indicator and the RSI are all uniformly issuing a sell-signal for the daily time-frame. The trend seems to be stair-stepping higher. The retreats have been larger than would have been expected yet, we do see gold rally following those retreats. We find ourselves in the middle of the chart with ample supply overhead and good support below. Although we believe the 795.90 should be good support, we continue to see 744 as a possible area where we would go long.