Thursday, August 20, 2009

Morning Update/ Market Thread 8/20

Good Morning,

Yesterday the S&P finished just below the 1,000 level, an important area of resistance. As is this manipulated market’s custom, key areas are often jumped overnight and that occurred again last night in the midnight hours. The release of higher than expected jobless claims, however, sent prices back below that level and they are now very close to even:

The Dollar is mostly flat, bonds are up again, gold is down and oil futures are down.

One of the few people I pay to follow, Jim Shepherd, has an economic model that he uses that takes in all sorts of inputs (proprietary) from things like the PPI, velocity, money aggregates, interest rates, etc. and his model BOTH when back tested and in operational use has been nearly perfect with its calls. It is looking for the big picture things that will trigger market crashes or will trigger inflationary spirals or deflationary spirals. He confirmed yesterday that indeed, the latest PPI release WAS SUFFICIENT TO TRIGGER A DEFLATIONARY SPIRAL.

There’s a fly in the ointment, though, from his perspective, and that is how much of the historic drop in PPI that was attributable to energy. He is carefully examining the ramifications in his model to be certain that the energy component is not sending a false signal. My personal belief is that oil was driven higher by speculation and rose on demand caused by the largest credit bubble in history. The credit bubble burst, and thus, so too did the price of oil. It’s what was and is expected when shipping and trade throughout the world collapse at a historic pace – as they have.

During this trumped up hot money rally, however, oil and energy in general have been very strong with oil just yesterday producing a technical breakout above resistance. I think that anyone shorting the market needs to be careful and look for oil to break back down, which I believe it will eventually do. However, at this stage during the Great Depression, it was not long before equities continued their descent following the point at which the deflationary spiral signal was triggered.

Here is the latest weekly chart of oil. You can see that it is in the $73 range and that a break above will not encounter much resistance until its back above the $90 level. Maybe it gets there, but I’m doubtful as of right now.

And this is the latest P&F chart of oil, you can see that it triggered a bullish price of $87 just yesterday:


And to contrast with the deflationary spiral signal, McHugh believes that we still have large chunks of wave c up of B up to come! So, we have oil sending a breakout signal, a market that can only move sideways (with a little help from Ben’s friends) but at the same time we have a Deflationary spiral signal in Shepherd’s model.

Getting the market right at this stage will not be easy, but it is my belief that the deflationary forces are going to win that battle. It may take a little bit of time, but it won’t be THAT long.

In fact, just this morning we had weekly claims for unemployment jump again. Gee, I thought we had already run out of workers to lay off! The weekly number rose from 558,000 to 576,000 when the consensus was saying 550,000. Here’s Econoday’s take, this time with no excuses, now that’s a surprise:
Jobless claims data are a disappointment, showing increases in both initial claims and continuing claims. Initial claims for the Aug. 15 week rose 15,000 to 576,000 with the Aug. 8 week revised 3,000 higher. The result is well above expectations for 550,000. Continuing claims for the Aug. 8 week rose 2,000 to 6.241 million for a second increase in three weeks. There are no special factors skewing the data. The four-week average for initial claims rose for a third straight week and is now trailing the latest week at 570,000. The four-week average for continuing claims offers some good news, at 6.266 million for a 3,000 improvement in the week and well down from 6.548 million a month ago. The unemployment rate for insured workers, unchanged at 4.7 percent, also offers some good news. But the headline rise in initial claims is a disappointment pointing to no improvement for August payroll data. Stocks and commodities dipped in immediate reaction to the news.

Both the index of Leading Indicators and the Philly Fed Survey come out at 10 Eastern. I’ll bet the Leading Indicators will be cheered, and it may be just enough to produce yet another move to suck in more fiat dollars that will ultimately be destroyed.

I’m thinking the manipulators just can’t wait for the midnight hour! This could be Goldman’s new theme song…

Wilson Pickett – In the Midnight Hour: