Sunday, August 29th, is the fifth anniversary of Hurricane Katrina’s landfall along the Gulf Coast and all of us vividly remember the horrific images of that day and the days and weeks after.
Five years later, the Gulf Coast has come a long way but most would agree there’s still have a long way to go and many scars yet need to be healed.
In the world of money and investing, the Financial Katrina hit three years ago this month with the beginning of the sub prime meltdown that led to the “Great Recession.”
For the past year or so, we have been in what appeared to be a recovery but now looks more like the eye of the storm; today it is quite likely that the second wall of the hurricane is now rapidly bearing down upon us.
The news this week was intensely negative and the only bright spot came on Friday with Chairman Bernanke’s speech at Jackson Hole in which he essentially told us, “don’t worry, be happy” and that all would be well.
In spite of the Chairman’s calming tone, Wall Street Sector Selector remains in the “red flag flying” mode and we believe that an intense storm lies just ahead.
Looking at My Screens
On a technical basis, one can only be bearish and the two charts below tell a quick and scary story.
In the chart of the S&P 500 above we see the “death cross” highlighted by the downward pointing arrow wherein the 50 Day Moving Average crossed below the 200 Day Moving Average which is a widely followed indicator of lower stock prices ahead.
In the upper box we see the 14 day RSI pointing upwards from relatively oversold levels indicating that a short term bounce could be forthcoming, while the red horizontal line shows the support at 1040 which was tested and held every day last week.
From this display we can conclude that we are in a bear market, slightly oversold and near support that, if broken, could lead to a quick drop to the July lows of 1010.
The point and figure chart above paints an even more ominous picture.
A double bottom “sell” signal was generated on August 11th and the index has now broken through the blue bullish support line, indicating the onset of a new bear market in this major index.
Support and resistance lines in point and figure charting tend to act like firm walls and mark major turning points in direction, and this recent trend change is the first since March, 2009, when the lows were hit and last year’s unprecedented rally began.
The breach of this bullish support line is a major development and in my opinion is an unmistakable sign that it’s time to head for the storm shelters.
The View from 35,000 Feet
The fundamental news was equally shocking this week as existing home sales declined to 3.8 million units for July from a previous level of 5.26 million. This number is a record low and single family home sales were at the lowest levels since 1995. Truly we are in what could only be described as a housing market depression, and this comes in spite of historically low mortgage rates that people appear to be ignoring. Seemingly almost nobody wants to buy a house at any rate or any price.
New home sales fared no better, declining to record lows, as well, while 25% of mortgage holders are currently “upside down” in their homes, owning more than they’re worth, and 15% are in some part of the foreclosure process.
Beyond the dismal news from the housing market, the July Durable Goods report was dismal and points to an ongoing slowdown in capital spending and on Friday 2nd Quarter GDP was revised downward to 1.6% from a previous 2.4% in what could only be described as a terrifying result in light of the stimulus and Federal Reserve intervention required to generate this paltry number.
More and more analysts are pointing to further reductions in GDP for 3rd Quarter towards flat or even negative territory while the stock market seems currently priced for 1.5-2.5% growth and this creates a situation which is unlikely to have a positive outcome going forward.
Looking across the spectrum of noted analysts, we find Princeton economist and former Federal Reserve member Alan Blinder writing an article in the Wall Street Journal titled, “The Fed is Running out of Ammo” and noted Yale economist Robert Shiller appeared on the Wall Street Journal’s “Big Interview” and said that a double dip “may be imminent.” And finally Albert Edwards, the noted analyst from Societe General says to look for 450 on the S&P 500, a roll back to 1982 levels.
Fidelity reports that in the second quarter 25% of people took hardship withdrawals from their 401ks, a number that represents a 10 year high, to help them meet living expenses and the ECRI remained in recessionary territory with a -9.9% reading last week.
On Friday Intel cut their earnings and revenue forecast and across the Atlantic Ireland was downgraded and given a negative outlook by S&P. Also in Europe, interest rates and Credit Default Swap pricing continued to rise as their sovereign debt situation continues to erode confidence in the outcome of the European Central Bank’s historic intervention efforts of a couple of months ago.
The bond market remains priced for Armageddon, forming what many say will one day be the biggest bubble of all time and lead to a historic crash in the bond market somewhere down the road.
But on Friday, Dr. Bernanke cheered world markets when he told us that he expected no double dip, that growth would continue and improve and that he and his colleagues stood ready to do whatever it takes to avoid deflation and that he had the tools to lead the global economy to recovery.
This upbeat assessment comes after unprecedented government stimulus, interest rates lowered to near zero and $1.7 Trillion of asset purchases by the Fed since the onset of the Great Recession.
So one can only wonder how this is going to work. If the medicine hasn’t worked so far, why would a little more of the same medicine make a difference?
What It All Means
As we’ve been saying for weeks, a double dip looks highly probable with the odds growing daily, lower stock prices look likely and to make your chest feel even tighter, summer is almost over, traders will be back from the Hamptons, the kids will be back in school and we’re about to enter the dreaded month of September which is historically the worst month for stock market performance.
At Wall Street Sector Selector, we remain in the “Red Flag” mode, expecting lower prices ahead, and we forecast that the second storm wall of the Financial Katrina is about to hit.
The Week Ahead
To say that a major week lies ahead is a massive understatement.
Economic Reports:
A busy round of economic reports next week will give us a look at personal income and spending, home prices, manufacturing and what the Federal Reserve really thought at their recent meeting with everything leading up to the climactic Non Farm Payroll report on Friday.
Certainly all of this will be food for thought going into the long Labor Day weekend.
Monday:
0830: July Personal Income, July Personal Spending, July PCE Core Prices
This week we’re heading for Southwest Florida for a last week of R&R before school starts and reality strikes after the long Labor Day weekend. We hope to have a nice time on the beach and not see any tar balls between our toes.
Sadly, I’m sure this year’s Labor Day celebration won’t be a particularly happy occasion for the 14.6 million of our fellow citizens who remain unemployed and I can only wish them the very best and a speedy return to gainful employment and happier days ahead.
Recent market action and economic news points strongly towards the possibility of a double dip recession and the resumption or continuation of a bear market in equities and exchange traded funds.
If the bear is back, the average retail investor and mutual fund manager now face the possibility that they’re, once again, standing in front of a freight train.
But there is a special group of knowledgeable individual and professional investors who have been making gains since the market has turned south.
Here’s how they’re doing it:
By moving a portion of their portfolios to cash. Professional investors and managers routinely move assets to cash when the market heads south. The old adage, “Cash is King,” is particularly valid during bear market melt downs.
2 By using stop loss points to exit profitable positions and take profits home or minimize losses on losers.
3. By buying protective put options to hedge long positions and limit losses without selling positions.
The point is that investors who are winning during this difficult time understand that if they’re not losing money, they’re effectively making money because when things turn back up, they’ll be moving ahead with wealth accumulation instead of spending what could be years just getting back to break even.
Investors Can Actually Make Money During Bear Markets
Most investors will continue doing what they always do, sitting around wringing their hands and worrying and searching the financial press and television, looking for a nugget of hope from people who know less than they do.
But there is another group of individual investors, financial advisors and newsletter writers who have been able to capitalize on this recent decline in the market. It’s not rocket science and here are just three methods they’re using.
Buying stocks, ETFs or mutual funds that do well in bear markets. This is an obvious possibility, and, in fact, many investors have already figured this out. Possibilities include the traditional defensive sectors like consumer staples and utilities.
Buying bonds, mutual funds or Exchange Traded Funds that track widely followed bond indexes because bear markets are typically accompanied by a flight to quality that causes the face value of bonds to rise.
Buying “inverse” ETFs that move opposite to the underlying index and so the value of the investment rises as the underlying index declines. This has been made possible through the relatively recent development of these inverse funds, and one of the best providers of this product that I’ve found in my work at Wall Street Sector Selector is the ProShares Family of Exchange Traded Funds. They offer a wide variety of inverse ETFs that allow “shorting” of the market, that can be used in both qualified and non-qualified investments and that track the major indexes, sectors and international. Inverse ETFs are tricky and you need to understand how they work and have a proven tactical trading plan, but if you do, there is plenty of opportunity on the “short” side of the market.
Trading the VIX, the CBOE Volatility Index, also known as the “fear” indicator. The VIX tends to move opposite to stock prices, rising when prices fall and falling when prices rise, as fear and complacency enter and exit the market. Today two popular ETFs, VXX and XXV, allow traders and investors the opportunity to go “long” or “short” the VIX, depending upon their outlook for upcoming market moves. A position in VXX is designed to rise in value as stock prices fall and so offers another avenue for “shorting” the market.
(In my work at Wall Street Sector Selector, we use inverse exchange traded funds to take advantage of downtrends in the market and also use VXX and XXV to trade the volatility inherent in today’s environment. Currently, our Standard Portfolio is fully invested in inverse or “short” ETFs and we also hold a position in VXX, expecting that volatility will rise. Positions can change at any time.)
In summary, no one can say for sure if recent market action is the start of a new bear or if this is just a sharp correction. No one can tell you that it will or won’t continue. Sadly, there are no crystal balls, as much as we’d all like to have one. But even these days, some investors are making money and all investors have alternatives to watching the bear maul their portfolios.
Disclosure: Positions held in RWM, PSQ, SH, EFZ, SEF, SKF, VXX, SPY Put Options. Positions can change at any time.
With broad market indices showing a moderate loss of less than 1% on the week, it’s starting to look as though the next bubble may be in the Bond Market (Bloomberg). We did survive the first week out of the Hindenburg Omen intact, but with investors continuing to flood into bonds, if and when that bond bubble deflates, where to then? There would be few alternatives left outside of cash and high yield ETFs tied to equities and preferreds. Gold investing may have run its course, although there’s been a slight run in the past week – but battling a growing chorus deflationary hawks is going to be difficult.
With this backdrop, here are the top traditional and leveraged ETFs across various asset classes for the prior week:
Non-Leveraged ETFs:
THD – iShares Trust iShares MSCI Thailand – Up 6% – Thailand has been a top performing country with its own listed ETF, up 26% YTD. Shares were under some pressure of late with concerns over riots and protests within the country, but with some of those tensions easing, the flood gates opened last week.
MOO – Market Vectors Agribusiness ETF – Up 5%- The aptly tickered MOO had a strong week, with much benefit derived from the surprising BHP bid for Potash (POT) which has turned hostile, so shares may continue to rally. This has in turn driven up shares of some other players in the sector like Mosaic (MOS), up 11%, anticipating more merger or acquisition announcements. Prior to the announcement, Potash had comprised roughly 7% of MOO’s holdings and it spiked 35% on the week.
ECH – iShares MSCI Chile – Up 3%- With a major mining cave-in drawing international attention this weekend, it just illustrates Chile’s developing world struggles in trying to achieve the industrial output of its competitors and the safety and environmental downside that accompanies such aspirations. Chile has been one of the top individual country ETFs thus far this year, up 25% YTD.
Leveraged ETFs:
TMF – Direxion Daily 30 Yr Trs Bull 3X Shares - Up 11% – Treasuries were very strong, again, as mentioned above with the possible formation of a the next major asset bubble. On one hand, rates could continue to decline if we are truly facing a deflationary future. Even some corporate bonds are seeing historical low rates like the 1% bond issue from IBM, companies are also sitting on record cash hoards, and seeing dividend increases might spur a move out of Treasuries and into high dividend stocks. Some contrary indicators include a moderately steep yield curve and gold staying at a stubbornly high price though.
FAZ – Direxion Daily Financial Bear 3X Shares -Up 4% – Financials declined on the week, but given the higher beta the sector has seen since the financial collapse and the 3X leverage employed by this fund, there’s nothing out of the ordinary here. They were the rebound story of 2009 and now in 2010, new questions are being raised over whether they continue to mint the profits they did in the past few quarter and what surprise they could possibly have in store next. The inevitable loss of prop trading and increasing liquidity requirements combined with stubborn unemployment and no near-term home price rally in sight add up to questionable prospects for the sector in the intermediate term.
SCO – UltraShort DJ-UBS Crude Oil ProShares - Up 5% – Oil has been range bound for months now, highly correlated with equities returns, so this negative 2X leveraged oil fund rose slightly for the week. I always caveat leveraged ETF mentions with the leveraged ETF decay in value that occurs as a mathematical certainty in choppy markets that can’t sustain a constant trend.
Last week’s economic news and market action was decidedly scary; however, I’m feeling quite comfortable as we’re now positioned 100% to the “short” side in our Standard, High Conviction Trade Alert and Option Master Portfolios.
The Standard portfolio now holds 5 inverse ETF positions, while the High Conviction Trade Alert is focused on action in the VIX and the Option Master gained +20.8% in unrealized gains this week with our new position opened on Wednesday.
We expect more volatility next week, in spite of being in what’s supposed to be a calm time of year as summer winds to a close, and remain in the “Red Flag” mode, expecting lower prices ahead.
The S&P 500 closed solidly below its 50 Day and 200 Day Moving Averages this week and the “death cross,” the 50 day below the 200 day remained in effect, as well, indicating major weakness across this bellwether index.
My momentum indicators all point to continued slowing while investor sentiment remains neutral.
The only positive sign from a technical perspective last week was the fact that the index bounced off significant support at 1060 and so could find itself in a trading range until “Wall Street” returns from the Hamptons after Labor Day weekend.
Furthermore, there’s lots of chatter in the blogosphere and even the mainstream press about the “Hindenburg Omen” that was triggered on August 12th and apparently was confirmed this week with a second and even third occurrence, indicating an increasing likelihood of a significant sell off or even a potential crash.
As I mentioned last week, I’m only a casual observer of this “omen,” however, it does appear to have statistical validity, particularly when it’s confirmed by repeated events in which case a 5% decline has occurred approximately 75% of the time, major sell offs 41% of the time and market crashes 24%. Out of 25 confirmed signals, 23 were successful precursors of measurable stock market declines. Recent Hindenburg events were on August 20, August 19th and August 12th.
Like any technical indicator, this one has inherent weaknesses and I’m always looking for confirmation from my own measurements; today everything I see points to the probability of more downside ahead. I don’t know and actually don’t care if this indicator is valid or not but it makes for interesting reading and these widely watched indicators like “head and shoulders” tops, etc, can often become self fulfilling prophecies as the herd all looks at the same things. For a summary description of the Hindenburg Omen, check out Wikipedia
The View from 35,000 Feet
Last week brought a raft of economic news that ranged from the merely scary to truly shocking.
Oil continued its sharp decline, reflecting uncertainty about the global economic slowdown, and closed at $73.82, down from more than $80 at the beginning of August.
The two most dismal reports were the new unemployment claims rising to 500,000 compared to an expected 475,000 and the Philadelphia Fed manufacturing report dropping to a -7.7 from July’s +5.1 and an expected +7.5.
On the unemployment front, this was the highest reading we’ve seen since November, 2009, and indicates significant ongoing weakness in this important driver of economic activity. The Philly Fed report focuses on manufacturing in the eastern region including Pennsylvania and New Jersey and shows an unexpected drop off in manufacturing activity.
China’s economy continued slowing as new forecasts point to declining growth into single digits and the Euro was down sharply due to lingering concerns about weakness in Europe and he strength of their banks.
The New York Empire Index, also focused on manufacturing, came in below expectations, the NAHB Housing Index, Housing Starts and Building Permits all came in below expectations and so all in all it was a dismal week for economic news even as the Fed continued its efforts to prop things up with “QE2,” its continuation of its quantitative easing activities.
And, finally, 8 banks were closed on “Bank Failure Friday,” bringing the year’s total to 118. Thank goodness for the FDIC or this would be Great Depression 2.0, in my opinion.
What It All Means
In a word, slower growth is likely and scary times ahead for the stock market.
The Week Ahead
More news this week in the real estate market, GDP and consumer sentiment.
I’m running to catch a plane home from Shanghai today as we wrap up our China vacation. It has been a great trip and I’ve learned a lot. It was particularly interesting to be here as China surpassed Japan as the world’s number two economy. Even the cab drivers were excited. This is a big topic for another day and I look forward to discussing all of this in greater detail when I get home.
Dividend ETFs are beating the S&P500 handily and it appears as though they have the propensity to do so into the foreseeable future. There are some interesting happenings in both the broader market as well as the fixed-income space. Treasuries continue to break new lows leaving investors scratching their heads as to whether we’re truly headed into a a deflationary environment, whether government paper is really THAT much more attractive than risky assets or whether this is the beginning of a bond bubble of epic proportions. Common equities meanwhile have been pretty much range bound with good recent earnings news tempered by continued economic malaise in the US at large and last week, the dreaded Hindenburg Omen reared its ugly head. While there are only a handful of AAA companies left in the world, there are dozens upon dozens of very high quality outfits yielding 3-6% that have adequate cash flow to continue/increase dividend payouts at their current pace, especially in the face of their persistence during the recent financial collapse.
There are some key drivers for this performance and it’s also helpful to look back at the prior decade to take solace in the fact that value stocks actually did fairly well compared to the “lost decade” for the broader market indices.
Few Income Alternatives – Investors seeking income have very few choices that balance an acceptable yield with liquidity and risk. Savings and money markets are near zero, CDs have penalties and government bonds are at record lows. Even in the corporate bond space, IBM just issued a 1% note recently!
Future inflation and interest rate hikes? – If and when interest rates finally rise, and if inflation kicks in, that will not bode well for fixed income investments as they lose their buying power in that environment. Dividend stocks can continue to increase their payouts however.
The Dividend Cuts Have Already Occurred – The only direction seems to be up. Many companies cut their dividends in 2008 and 2009, but now we’re seeing increases and if a company survived the crash only to cut their dividend now, that would certainly leave shareholders scratching their heads. Most cuts have already occurred, so the propensity will be to increase rather than decrease payouts.
Cash Hoards with Nowhere to Spend it – Companies are sitting on record hoards of cash. On one hand, some may be choosing to hang on to these cash hoards indefinitely so they’re not priced out of credit during another crunch in the future, but short of acquisitions, what are some of these outfits going to do with $10 Billion or more on their balance sheets besides increase dividend payouts. It is likely just a matter of time.
According to JEREMY SIEGEL AND JEREMY SCHWARTZ in this week’s Wall Street Journal Opinion piece,
Those who bought “value” stocks during the tech bubble—stocks with good dividend yields and low price-to-earnings ratios—have done much better. From December 1999 through July 2010, the Russell 3000 Value Index returned 35% cumulatively while the Russell 3000 Index of all stocks still showed a loss.
The spread in performance between Dividend ETFs and the S&P500 (SPY) has been impressive year to date:
(SDY) – SPDR S&P Dividend ETF – up 3.4% (DVY) – iShares Dow Jones Select Dividend – up 3.3% (PEY) - PowerShares High Yield Dividend Achievers – up 4.8% (VIG) – Vanguard Dividend Appreciation ETF – flat 0.0%
vs. SPY at -2.2% (S&P500 ETF), not to mention, these dividend ETFs have higher dividend yields than SPY as well.
It was a rough week for equities this week, falling 4%, as the bad news continues to pile up with little end in sight for the slow growth, stagnant unemployment picture. There were some interesting data points out this week, including a surprisingly high savings rate in the US, the notion that consumers are using their holdings for things like paying down debt and cash-in refinances instead of consumption, and an unsettling feeling starting to set in that we may in fact be headed for a double-dip Recession, which nobody in a position of prominence in the administration wants to admit for fear of creating a panic. In fact, the press may just be helping this prophecy along by jumping all over the story about the Hindenburg Omen which was triggered last week (note, because of the selloff).
With that backdrop, most of the winners for the week were short ETFs, so here’s how some of the traditional and leveraged winning ETFs (and ETNs) shook out and what to watch for next week:
Non-Leveraged:
VXX – Volatility Index ETN – Up 11% - The best performing of the non-leveraged ETFs was the volatility index ETN which is reasonable to expect. VXX tends to spike during market downturns and then falls during flat or rising markets. Note that there’s a new way to short volatility with the anti-VXX as well if you sense the end of the downturn.
SGG - Barclays iPath Sugar ETN – Up 5% – Sugar’s been on a run of late and I’m not sure which hypothesis is most plausible. There hasn’t been a severe change in either supply or demand but one theory out there goes along with the story of the “Fall of the West, Rise of the Rest” in which case, with the emerging markets starting to acquire western preferences for foods, on a secular trend basis, we may see meaningfully higher demand for sugar in the future which could oustrip supply at current prices.
PFF - iShares Preferred Stock ETF – Up 1%- You might be wondering how an index comprised primarily of financial companies could rise when the broader market tanked; well that’s due to the beauty of Preferred Stocks (PFF profiled in more detail) in that they act as a hybrid of conventional stock and a high yield bond and continue to pay out as long as the underlying corporation remains solvent. Investors have been hungry for yield in this low-rate environment, so Preferreds have benefited as a result.
Leveraged ETFs:
TZA – Direxion Daily Small Cap Bear 3x – Up 20% – Small caps took it on the chin given their high Beta compared to broader market issues, as well as the fact that recent fears over a double dip recession and another round of restricted access to credit would crimp earnings and threaten the solvency of small caps especially hard. Of all leveraged ETFs to be holding during a market crash, TZA is a top choice, although I don’t recommend holding any leveraged ETF for an extended period of time given the value decay over time that occurs.
TYP - Direxion Daily Technology Bear 3x – Up 19% – Tech stocks were walloped last week due to bad news out of key names. Between Cisco’s (CSCO) disappointing earnings release and the resignation of Hurd from (HP) over a seemingly immaterial scandal, some of these heavily weighted large caps brought down the Tech indices, not the mention the broader market decline we saw elsewhere.
SCO - ProShares UltraShort Oil (2X) – Up 14% – Oil prices dropped significantly last week given the overall global market decline. There tends to be a relatively strong correlation between oil and equities during intense moves since industry and consumers utilize more oil in good times and less in bad times. With fears of everything from deflation to another global recession, some fear we may see oil in the low 30s again like the last oil crash and don’t want to be holding oil at these levels.
Disclosure: No position in any ETFs/ETNs covered in this article.
Last week was difficult, at best, for global stock markets as the S&P 500 dropped more than -3% and the bond market surged as investors continued their “flight to quality.” Fear spread around the world with global markets shedding recent gains. It was definitely a “risk off” week and the beginning of what I believe will continue to be a “risk off” period as we move through the closing days of summer.
The macro news was mostly poor, as we’ll discuss in a moment, and the technical picture deteriorated, pointing to lower prices ahead.
In our portfolios, we moved to “Red Flag Flying” mode, expecting lower prices ahead, and moved from our remaining cash positions to inverse ETFs in the Standard Portfolio, while keeping our option portfolio positioned for more downside ahead.
Our new “High Conviction Trade Alert triggered its first ‘buy’ signal and I’m looking forward to reporting more details on this to our Pro members in the weekly Position Update. The High Conviction Trade Alert is designed to identify high conviction/low risk opportunities and so won’t trade very often but should offer excellent risk/reward opportunities.
On a technical basis, significant damage was inflicted last week to equity markets around the world. As we’ve been saying for several weeks, it seemed that an imminent decline in U.S. markets was upon us, and it appears that last week’s action could have been the beginning of that move.
In the chart above you can see that the S&P 500 has dropped below its 200 day moving average and also below its 50 Day Moving Average, indicating that the long and medium term trend is down. These significant moving averages now become resistance rather than support and we see the next support levels at 1060 and then near 1020 at the June lows.
The 50 Day Moving Average remains below the 200 Day Moving Average, forming the widely watched “death cross,” which typically accompanies significant trend changes. Additionally, the 12 month moving average of the S&P 500 was also violated which is another bearish indicator for major markets.
As if all of this isn’t gloomy enough, last week’s stock market action triggered a “Hindenburg Omen,” named after the German zeppelin that crashed and burned in New York in 1937. I casually watch this indicator that was triggered on August 12th because it has a fairly reliable track record and you don’t see it very often; when you do, it usually portends negative stock market action ahead.
In summary, it seems clear from everything I watch that the path of least resistance is down for the intermediate term and momentum suggests more downside ahead.
The View from 35,000 Feet
While the technical picture is poor, the fundamental picture might be even worse.
Last week’s news was fairly grim as downgrades of estimates of consumer spending and GDP continued to pour in and the 10 year US Treasury yield dropped to its 16 month low.
The economy in China continues to slow and Europe continues to percolate on the back burner as Spain teeters on the edge of recession with a GDP growth rate of 0.2%. Farther down the Mediterranean, Greece has returned to recession as its economy has already started to contract.
At home, JC Penny calls the current consumer climate “uncertain,” and across the board, consumer spending looks anemic with no sign of an imminent rebound as consumers continue to deleverage and worry about their jobs. Last week did nothing to alleviate those concerns as unemployment applications rose and the unemployment rate remains at quarter century highs.
Finally, the Fed had their monthly meeting last week and did little to improve the overall mood by saying the recovery was going to be “more modest than had been anticipated” and deciding to stick to their quantitative easing policies of buying back Treasuries and not reducing their balance sheet below the current $2 Trillion.
What It All Means
What it all means is that the global economy continues to slow in spite of enormous central bank intervention around the world and that the entire stimulus appears to have failed to have jumpstarted the global and US economy as was hoped.
We’ve been saying this for sometime and the ongoing data again indicate continued deterioration in the economic environment which also is confirmed by our technical indicators. The Fed has been the major force behind the recovery and equities rally thus far and Dr. Bernanke and his colleagues, along with the US Congress, now seem to be just about out of ideas and assets for doing anything more.
We remain in the “Red Flag” mode, expecting lower prices ahead and are positioned for gains if that should occur.
The Week Ahead
Next week brings another blizzard of economic reports, particularly on Tuesday, that should set the pace for the next few weeks’ stock market activity.
Economic Reports:
Monday:
0830: August New York Empire Manufacturing Index
1000: August NAHB Housing Index
Tuesday:
0830: July Housing Starts, July Building Permits, July Producer Price Index
0915: July Industrial Production, July Capacity Utilization
1000: July Leading Economic Indicators, April Philadelphia Fed Report
Sector Spotlight:
Leaders: Gold, Coffee
Laggards: Gasoline, Sweden
I’m traveling in China this week and it’s a truly fascinating place as the dragon continues to make its presence known on the world stage. It’s almost like two countries, with the cities being showplaces for the world and the rural areas still looking very much like emerging economies. Reports say the economy here is slowing but that certainly isn’t evident in the streets of Beijing.
Daily Technical Sentiment Indicators: Pessimistic (bullish short term)
Short Term Market Condition: Oversold (short term bullish)
Short Term Trend: Down
Medium Term Trend: Down
Long Term Trend: Down
Commentary:
I’m traveling in China for about 10 days and so won’t be able to do the daily ETF update but will update on days when significant market action occurs.
We’ve been saying for sometime that we were on the cusp of a serious downtrend and it seems that today could very well have been the start of that activity.
Global markets were routed as the reality of slowing economic growth finally hit home and fundamentals began to catch up with sentiment as they invariably do. Economist Robert Shiller says odds of a double dip recession stand at even now while the Fed basically acknowledged that things aren’t going as well as they had anticipated even a few weeks ago and so they remain in the easing mode.
As we discussed recently, the options they have to “fix” things are now quite limited. Growth in China is slowing (I hope to be able to issue some first hand reports) and U.S. GDP appears to be in a downward spiral of revisions to the 1% level, which is truly scary.
Cisco had a huge miss on their earnings announcement today and with the Fed meeting out of the way, the rest of the week brings more weekly jobs news on Thursday and retail sales and consumer sentiment on Friday.
Technically, the S&P failed to reach new highs and fell back below its 200 Day Moving Average and now rests on support at the 40 Day Moving Average. A sustained break below here could lead to quickly cascading prices.
Today we switched to the “Red Flag,” mode, expecting lower prices ahead and believe the wisest course is to brace for impact.
I mentioned last week that we had to assume there is a 1,000-point tether between the Dow and the Nikkie and, in general, we can usually count on that relationship holding and we had several day (overnight) trades on EWJ that went well using that logic. Today we should get a proper test of our connection as the two indexes are reaching their maximum gap once again with the Nikkei closing this morning at 9,572, 1,081-points below Friday’s Dow close at 10,653. Europe seems to think it’s the Nikkei that needs to catch up to the Dow as the EU markets jumped 1.5% this morning – pretty much gapping up at the open and holding it through 8am, so far – that will lead us to go back in on EWJ for a catch-up trade if our markets make a similar move (with our target levels as easy indicators of a “real” rally).
Maybe Europe is right as the Yen was jammed all the way up to 85.8 to the dollar in our 3am trade and only fell back to 85.55 before being turned back up. Both China indexes jumped 0.5% this morning as investors were happy with the Central Government’s decision to order 2,087 companies in 18 sectors to shut down obsolete plants in a decision aimed at streamlining industries that were polluting, energy-intensive and had excess capacity.
This kind of makes me laugh at the talking heads on TV, whos think they are being clever when they call GM “Government Motors” as any fool reading the papers can see what real government intervention looks like – and the investors in China LOVE IT! “This is very good news for the steel and cement sectors, as it will foster the development of these industries,” said Chen Jinren at Huatai Securities.
Japan will close for a vacation next week and, of course, we have the FOMC rate decision tomorrow. While no one is expecting a rate change, EVERYONE is now expecting some form of quantitative easing to pump more money into the US economy and we moved on and ignored Meredith Whitney on Friday afternoon – on the same day that we ignored some terrible jobs news:
China is not just managing their economy, they are managing ours as they risk their own growth in order to pull up the slack we were beginning to see as Factory Orders tapered off in July. China is lagging behind a target for reducing the amount of energy used relative to gross domestic product, with only months to run in Premier Wen Jiabao’s five-year plan. It must be nice to live in a country that has a plan… “If the government has true resolve, then investors, especially overseas investors, may have not fully comprehended the implications of such policies on China’s heavy industry and demand for commodities,” UBS’ Beijing-based economist Wang Tao said in a note last month.
Never doubt the true resolve of the Chinese government and that means commodities may be getting far ahead of themselves. We’re watching that $3.40 line on copper as what kind of rally do we have if Copper can’t even get back to it’s April highs? Oil also isn’t looking too impressive under $82.50 and we sure aren’t seeing the kind of US demand that supports that level and China wants to consume LESS, not more oil and is taking DRASTIC steps to do so so what makes us think we have enough momentum to get through the roof (Dow 10,700, S&P 1,155, Nas 2,300, NYSE 7,350 and Russell 666) – where we had plenty of trouble last week?
Before we get too excited about Europe’s 1.5% gain at the open, let’s keep in mind they fell about that much on Friday and they are only changing their minds based on our ”stick-save” close, as indicated on David Fry’s SPY chart:
That’s all Europe is doing this morning – getting back to where they were before they saw the jobs data we all seem to have decided to ignore as of about 2:30 on Friday. We had been fortunate enough to select a couple of lovely day trades in Member Chat and Mr. Stick closed out our week with a bang but we went neutral into the weekend as we think the ENTIRE rally is based on nothing more than expectations of QE2 and expectations like that are very easy to disappoint – especially if investors think the answer to their prayers will be twitted by the Fed in between their normally tight regular policy statement.
I’ll believe in QE2 when it’s matched by a big-gun stimulus program that creates JOBS FOR THE MIDDLE CLASS – a situation we discussed in detail over the weekend in “The Crisis of Middle-Class America.” We are not taking any positive moves in the markets too seriously until we see some improvement in the lot of the bottom 90% of our people. We are bullish – in that we are betting the rich (Big Business) will get richer under current market conditions but the foundation of this country is still crumbling and that makes it kind of hard for us not to take all of these moves with a Lot’s wife-sized grain of salt.
Speaking of how we are greedy, immoral bastards who are dooming ourselves: Saudi Arabia agrees to lift the ban on RIMM’s Blackberry and, as a bonus, they get $30Bn worth of F-15s (84, made by BA) in the biggest arms deal ever! When asked if there were any security threats to the US by giving Saudi Arabia our most advanced fighter jets – an official said: “Of course not, everyone knows that Saudi Pilots are very accurate with jets!”
Overview: Risk assets showed resilience Friday, recovering much of losses following bad US monthly jobs reports, SP 500 still closes above key resistance of 200 day sma, agricultural commodities soaring, gold and oil also doing well over the past week, forex trends looking to continue. Risk on but rising US bond prices is a significant bearish divergence.
STOCKS: US: Down on poor jobs reports but recover most of losses to hold gains for the week-but bearish divergence with bonds noted below is troubling for stocks.
US Bonds: Up as stocks fall: Benchmark US 10 year bond prices rose, yields down from 2.9520% to 2.8240%. NB: NOTEWORTHY DIVERGENCE: Benchmark 10 year T-bills have continued to rise during the rally in stocks that began in July – suggesting that bond markets do not believe the stock rally is justified. Historically bond markets have been more accurate market gauges, thus this is a very bearish divergence with stock trends.
Asia Stock Outlook: Mixed: Asian stock markets were mixed Monday after a poor U.S. jobs report added to evidence the economic recovery is weakening.
European Stock Outlook: Up – opening higher, rebounding from Friday’s sharp losses, after Wall Street pared losses on Friday, Europe adjusts for the late US rally, mining firms higher on rising metals prices.
Crude Oil Daily Outlook: Up in early Monday trade after it backed down from $82 resistance Friday but held above key $80 support.
Gold Daily Outlook: Up: Gold futures higher, after breaking above key $1200 resistance on fears new QE from Fed would hurt USD, also likely rising Chinese demand after China eases gold trading regulations. China’s gold holdings are proportionally lower than other Asian nations, suggesting official demand as well.
Ag Commodities: Wheat, coffee, sugar recovering some of Friday losses thus far Monday.
FOREX Daily Outlook Friday and early Monday trade GMT: Overall bias
US Dollar Daily Outlook: Up vs. CAD, NZD down vs. JPY, EUR, GBP, CHF, AUD. Some of these reversing in mid day trade Monday, but gaining on the JPY after Japan hints at intervention.
Euro Daily Outlook: Up vs. the USD, JPY, CHF, NZD, CAD, AUD (but dropping vs. AUD Monday) unchanged vs. GBP. Helped by German Current Account Balance beating forecasts on strong exports from Asia and the ME.
Yen Daily Outlook: Up vs. the USD(but dropping Monday) down vs. the EUR, CHF, GBP, AUD, CAD, NZD as Japan hints at intervention as JPY strength expected to hurt exports, current account.
British Pound Daily Outlook: Up vs. the USD, EUR, JPY, down vs. the CHF, little changed vs. the commodity dollars.
Australian Dollar Daily Outlook: Up vs. the USD, NZD down vs. the CHF, EUR, GBP, JPY, CAD
New Zealand Dollar Daily Outlook: Down vs. all except up vs. the JPY, gaining on the USD
Canadian Dollar Daily Outlook: Down vs. all since Friday on poor CAD, US jobs ( USD, EUR, GBP, JPY (but gaining on the Yen today), AUD, CHF, ] as rate increase hopes drop.
Swiss Franc Daily Outlook: Down vs. the GBP, EUR, up vs. the USD, JPY, all commodity dollars
Multi-Day Trade Ideas From Daily Charts
EURUSD: breaking above strong resistance of its 200 day SMA around 1.3283, next major resistance not until 1.3373 – enter long around current area, stop loss no more than 20 pips below entry point so can exit just before the 1.3373 level, for 4:1 reward/risk
Daily Trends To Watch – Caution ahead of ECB, BOE rate comments today, US NFP Friday
-Rising: Most USD crosses, Gold, oil, coffee, sugar wheat
-Watching For Reversal: S&P 500, as it struggles to sustain a move above its 200 day moving average around 1116 AND avoid confirming BOTH a bearish ‘head and shoulders pattern’ from January to mid-June AND a double top from June 16th and August 8th tops. Same goes for other major indices. NZDUSD will also be good short when risk reversal comes.
As poor economic news continued to pour in last week, punctuated by Friday’s dismal Non Farm Payrolls report, the chatter regarding “QE2” or “QE Lite,” some sort of additional quantitative easing by the Fed, rose to nearly hysterical levels by the close of business Friday.
We’ll talk in a moment about how terrible last week’s data really were, however, it’s important to look ahead to Tuesday’s FOMC meeting and why it’s “D-Day” for U.S. and global markets. The rumblings from various Fed members, including Dr. Bernanke himself, seem obviously geared towards preparing the markets for some level of additional intervention by the Federal Reserve; it also seems obvious that the market has managed to avoid a severe downdraft by hoping and planning for that action to take place next week.
The big questions of course are will they do it, when will they do it and will it work?
Considering “will they do it,” In my opinion, I think there is no doubt that Dr. Bernanke and his colleagues will do everything and anything they can to restart this economy and particularly avoid deflation.
Regarding when they do it, major market players seem to be betting that it will be this Tuesday but I would suggest that isn’t a foregone conclusion based on Dr. Bernanke’s comments in a recent speech and the fact that it’s August and nobody is really paying attention and he might be better off saving these last bullets for September or October when it might have a greater impact on social sentiment and optimism going into the election.
Will it work is a tougher question and the answer holds the most important ramifications for the economy and markets going forward. Since the crisis started in late 2007 with the sub prime meltdown, the Federal government has dumped more money into this rat hole than the combined total of major events like World War I, the New Deal, World War II, and the Korean, Viet Nam and Iraqi wars.
And what have we gotten for our money? Unemployment has barely budged. The economy has mounted a weak recovery, at best, and now appears in danger of slowing down as the stimulus wears off, while the stock market, home market and commercial real estate market are nowhere near to their old levels of health.
To understand if it will work, one has to consider what bullets the Fed still has left. Much talk about QE2 revolves around the Fed not paying banks interest on money they park with the Fed, the buying of more Treasuries or mortgage backed securities as old ones mature or some sort of universal refinance/forgiveness plan for government backed mortgages that are underwater.
There appears to be no appetite for taking on more government debt or even extending the “Bush Tax Cuts” and so, in reality, Dr. Bernanke has a couple of small caliber hand guns left in his arsenal compared to the bazookas he has already fired.
Simply put, he’s warming up the last couple of helicopters remaining in his fleet of “money dumpers,” and it’s easy to conclude that QE2 won’t make much of a significant difference long run and that we have a long, hard road ahead of us as individuals and as a nation.
Looking at My Screens
Markets remain overbought on a short term basis and subject to a quick and dirty correction. As I’ve stated recently, we’re setting up for a rather harsh trip south but that there could easily be another “up” leg here, particularly if Dr. Bernanke starts shooting from the hip next week.
Looking at the chart of the S&P 500 above, we see several interesting things. First off, the red horizontal line marks significant resistance at the 1120-1130 level on a pattern basis as well as the 100 Day Moving Average sitting at 1126.
Also you’ll notice the similarities in the chart pattern within the boxes as prices bunched up around the 1120 level and just above the 200 Day Moving Average in mid June and again today. The mid June congestion was resolved by the nearly 10% correction that took place during the last half of June.
And finally, the red descending line in the bottom graph represents the decline in volume over the last three weeks, even as prices have shot upwards. Volume has been low on a relative basis for quite sometime now as many retail investors have left the building, but still we’ve seen heavy volume on down days and light volume on up days over the past several months. This indicates lack of commitment ito this rally and fragility in its continuation.
Another particularly bearish situation is found in the action of the bond market compared to the stock market. In recent days, the stock and bond markets have been rallying simultaneously which is very atypical behavior since bond prices usually move opposite to stock prices.
At some point these two markets will return to “normal” behavior, as divergences always do, and that means that the stock market must come down or that interest rates must rise.
We remain in the “Yellow Flag” mode, expecting choppy prices ahead. If the S&P 500 is unable to break above 1130 and sustain that level, I believe that the current stalemate could very likely be resolved with a substantial move lower. I think this resolution could begin as early as this week or next unless Dr. Bernanke refills the punch bowl of easy money at Tuesday’s FOMC meeting.
The View from 35,000 Feet
The economic news was mostly tilted to the negative side last week as personal income and spending in the U.S. remained stagnant while record low pending home sales were reported for June. Factory orders were down -1.2%, twice as deep as forecast, Durable Goods Orders were down, new unemployment claims were up and the real shocker was the huge miss in the Non Farm Payroll report on Friday.
On the upside, the ISM report remained above the all important 50 level, indicating continued expansion while the Economic Cycle Research Institute’s annual index turned positive, indicating an improvement in the rate of economic slowdown.
The elephant in the room was the Non Farm Payrolls report on Friday which showed job losses of -131,000 compared to a -65,000 forecast, or a huge, serious miss, while private payrolls rose just 71,000 compared to a forecast 90,000, another gaping shortfall. To make matters worse, last month’s readings were revised downward from a -125,000 jobs lost to -220,000 which indicates almost unbelievable weakness in the employment market at this stage of a “recovery.”
With 70% of the U.S. economy being driven by the consumer, these numbers can only be described as truly terrifying, particularly when you consider that it takes 100,000 new jobs per month just to stay even and 200,000 or more new jobs per month to actually reduce unemployment. No matter how you spin this, we have a long, long way to go to get out of this hole and return to some level of “normal” employment and the corollary consumer spending.
What It All Means
What it all means is that we’re in deep trouble when it comes to our economic future. A historic bailout and stimulative monetary policy has done virtually nothing to jumpstart the real estate or employment market and deflation is coming to be a household term with ugly ramifications. When you add this all up, we very likely have more difficult days ahead in both the stock market and the U.S. economy and that more punch in the punchbowl might not do the trick this time around.
The Week Ahead
As we discussed earlier, Tuesday is “D-Day” but there are other important reports later in the week, focusing on retail sales, the ongoing employment watch and consumer sentiment.
0830: July Consumer Price Index, July Retail Sales,
0955: August University of Michigan Consumer Sentiment
1000: June Business Inventories
Sector Spotlight:
Leaders: France, Agriculture, Germany
Laggards: VIX, U.S. Dollar
My second son wants to be a Navy pilot and this weekend took a huge step in that direction with his first solo flight on the way to his private pilot’s license. The whole family was at the Bend airport watching him “fly around the patch” by himself and then we dunked him with the traditional bucket of water. My wife cried, and it took me back to 1968 and the day of my first solo, 42 years ago. Like then, first solo remains a red letter day in every aviator’s life.
The U.S. Labor Department yesterday announced that non-farm payroll employment declined by 131,000 as the dismissal of census workers contributed to a reduction of 202,000 in government payrolls. The jobless rate was unchanged at 9.5% as hundreds of thousands of workers left the labor force. Click through for two worrying charts.
The latest GDP-weighted PMI is suggesting that US GDP growth in the third quarter could be running at approximately 3% on a year-ago basis compared to my previous estimate of 2% to 2.5%. Read on …
Protective put options in the SPDR S&P 500 fund were a favorite among traders after a larger-than-expected drop in U.S. non-farm payrolls in July fueled worries that the economic recovery was faltering. According to whatstrading.com: Eight of today’s top 10 most actives are puts on the SPDR S&P(…)
Read the rest of Traders Look To SPDR S&P 500 ETF Puts As A Hedge
At 8:30 we get the Non-Farm Payroll report and the whispers are all positive while the “offical” expectation is that we drop another 100,000 jobs so are expectations too low or too high? We are also almost dead center between late April’s 1,220 top on the S&P and late July’s 1,020 bottom with the S&P closing yesterday at 1,225. We had a huge “gap” as we flash-crashed from 1,200 to 1,100 in just 4 sessions in early May and we jumped off the July 1st spike at 1,010 all the way back to 1,100 in the next 7 sessions. So we are at the 1,100 middle of the range we’ve been tracking all year but we got here VIOLENTLY from both directions, establishing neither a proper bottom or proper top on the 10% outside edges of our range.
The bulls will be pointing out that 150,000 of today’s job losses will be census workers whose jobs ended and the bears will be pointing out that we need to gain 300,000 jobs a month for the next 3 years before we even rehire the people we’ve lost over that past two years so who the hell cares about any jobs number under 200,000? If the payroll report is weak, then we are more likely to get QE2 (and maybe QE3 and QE4) and the Fed will remain on hold so the Banksters should be happy too. If we get a “strong” report it will be harder to push through more stimulus and scary for the Republicans as it may give people the impression that the Government is accomplishing something so good is bad and bad is good today from that perspective.
None of this matters because Andy Zaky says we are all doomed - and he makes a pretty good case fo it too! We’ve certainly had a boring and generally bearish week as we have been protecting our gains off all those crazy bullish bets we made back when I called the dead bottom of the market on on June 6th in “Turnaround Tuesday – Will CNBC Apologize to America?“ Of course, that was a rhetorical question because, rather than apoligize for their non-stop end of the World proclamations, to listen to, for example, Cramer now – you would think he was chasing people INTO stocks at the time, rather than out of them.
Oh well, what can you do? At the time I had published “5 Plays That Make 500% if the Market Rises” and those are already done, well over 300% (why wait just to make 200% more?) and, of course, I put up our Q2 Buy List with my top 20 picks on June 7th so, all in all – we can’t complain and we’re not greedy so we took the money on our unhedged positions and ran and we don’t really care what happens today, although we, as I said, generally bet short – simply because the odds favored us on the short side for reasons I’ve been outlining all week.
By the way, this is THE last Weekend that subscriptions to PSW will be offered at the current prices. We finally finished moving and upgrading our servers and we’ll be launching new products in September but we are no longer going to be accepting Basic and Premium Memberships as those, as well as our newsletter fees, will be very different (and more expensive) products in the fall. We’ve mentioned this since June – this is ACTUALLY the last 3 days at the old prices.
8:30 Update: Woopsie! We LOST 131,000 jobs. Worse than the worst expected and so far below whispers that my 2.5% drop prediction from yesterday (10,450, 1,095) is looking on the money. As I said above, bad news is really good news so we’ll be taking the short money and running this time and getting neutral into the weekend.
Looking at the NFP numbers, it seems that another 181,000 people dropped out of the labor force altogether, which explains how unemployment stayed at 9.5% in July despite the additional loss of jobs (and don’t forget we need to add 100,000 jobs a month just to keep up with population growth!). Private payrolls were up 71,000 jobs, also a disappointment while government payrolls fell 202,000 jobs so you’d think the Conservatives would be out celebrating the shrinking of Government they’ve been whining for… Manufacturing was up 36,000 but service sector payrolls fell a disturbing 164,000 – which makes no sense in light of a positive ISM report so maybe the data is flawed (no big shock if it is).
We still have Consumer Credit data at 3pm to slog through today and we should get some false support at the open as the dollar drops like a rock on expectations of more money drops from the Fed should punch the Yen back down to 85 with the Euro back to $1.33 and the Pound testing $1.60. Will that be enough to get copper back to $3.40 and oil back to $82.50? If not, then there’s no real strength to the market. Fortunately, we stayed away from EWJ longs yesterday because a strong Yen will send them back to 9,500 very quickly and, once again, we are testing that 1,000-point tether between the Nikkei and the Dow.
So woo-hoo on our shorts – what a fantastic way to close an otherwise boring week. Now let’s see what there is to buy on the dips and we’ll see if 1.25% holds to the downside or if we punch down the full 2.5% today (which would be more bullish if we hold that and recover). Fun, fun, fun!
“Near term the seasonal summer strength and the oversold rally continuation are the main trading themes. Many believe the rally is predicated on a secondary stimulus package being tossed around Washington. Either way, the path of least resistance for now remains up and dips have been shallow,” said technical analyst Kevin Lane in this quest post..
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It’s all about the Nikkie and the Fed this week.
Before we get too excited about Europe’s 1.5% gain at the open, let’s keep in mind they fell about that much on Friday and they are only changing their minds based on our ”stick-save” close, as indicated on David Fry’s SPY chart:
Protective put options in the SPDR S&P 500 fund were a favorite among traders after a larger-than-expected drop in U.S. non-farm payrolls in July fueled worries that the economic recovery was faltering. According to 
We are in a very interesting spot this morning. 
None of this matters because Andy Zaky says we are all doomed - 
Red Flag Flying
