Friday, April 16, 2010

Morning Update/ Market Thread 4/16

Good Morning,

Equity futures are down, the dollar and bonds are up, with oil and gold down. The chart action over the past two days has produced a pretty clear head & shoulders top in the indices. Below is a 5 minute view of DOW futures on the left and S&P on the right:

It’s not a large pattern, but is signaling that a fall back beneath 1,200 is possible on a break of the neckline.

More than 17,000 flights have now been canceled across the Atlantic and in Europe due to the volcanic ash emanating from Iceland. The upper level winds are blowing straight at the financial centers of Europe, I can’t help but laugh at the irony of that – karma comes to mind.

Housing permits improved in March, wow, who would have thought that permits would increase in the spring? Econoday’s still talking about the weather, but to be fair, this report is a sizable increase and it is an increase over March of last year. Just remember what was occurring March ’09.

Housing in March made strengthened from snow bound February-with permits pointing toward even better improvement than starts. Housing starts in March rebounded 1.6 percent after a snow storm damped 1.1 percent rise in February. The February number was revised up from an original estimate of a 5.9 percent drop. The March annualized pace of 0.626 million units came in above analysts' projection for 0.605 million units and was up 20.2 percent on a year-ago basis. The boost in March was led by an 18.8 percent jump in multifamily starts, following a 21.6 percent fall in February. The single-family component edged down 0.9 percent after a 5.7 percent boost the month before.

The impact of weather on February's numbers clearly was seen again in March as the latest surge was entirely from a rebound in the South which was battered by snow storms the prior month. By region, the March boost in starts was led by an 18.2 percent rebound in the South after an 11.8 percent drop the month before. For the latest month, declines were seen in the Midwest, down 28.4 percent; the Northeast, down 8.3 percent; and the West, down 2.1 percent.

Permits were even more positive, jumping 7.5 percent, following a 2.4 percent advance in February. The March pace of 0.685 million units annualized was up 34.1 percent on a year-ago basis.

Today's numbers indicate that housing is not slipping back into recession although this sector is still getting support from homebuyer tax credits that are about to expire. On the news bond yields firmed slightly and equity futures nudged up.

Not slipping back into recession? Are they joking? Permits below the million level are recession prints, we have a very long way to go to get back to those levels. There is still a ton of inventory out there and more coming on all the time. Keep that chart of Option-Arm resets in your mind, that wave is quickly approaching.

Also keep in mind that RealtyTrac reported yesterday that, “Foreclosure filings were reported on 367,056 properties in March, an increase of nearly 19 percent from the previous month, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005.”

Sure am glad the recession in housing is over. Option-Arm resets, end of buyer credits, government supposedly no longer buying Fannie and Freddie paper… okay, let’s see that rock swim.

Citizen Sentiment just came in with a reading of 69.5 when 75 was expected and 73.6 was the last reading. Seems that the unemployed aren't quite as joy filled as the media.

Google beat official earnings estimates yesterday, but didn’t blow out the supposed “whisper” numbers and promptly fell $30 a share, or nearly 5%. BAC, with the help of Merrill junk assets, managed to rape the people of $3.8 billion for the quarter. Nicely done for an insolvent zombie, bravo. Just imagine removing all those marked to fantasy and market manipulating earnings from the S&P, it would be very ugly – nothing but paper profits, nothing real. Their stock initially zoomed, but fell right back down. GE, another financial company bad boy who used to primarily be known for actually making things did the same thing; beat estimates, their stock zoomed but then fell right back down.

When you get “beats” that produce sell-offs, it’s telling you loud and clear that the market is overpriced and that the insiders are distributing to whomever they can.

We saw a record 611 new 52 week highs on the NYSE on Wednesday, then yesterday the market moved slightly higher yet the number of new highs contracted to 511. That’s exactly what you expect to see with topping action. The indices are all up against their upper Bollinger bands, the DOW and S&P are up against their upper uptrend lines, up against their 200 day moving averages and their 61.8% retrace levels.

Volumes have been higher the past two days, not super high, but higher. It would be nice to see a real high volume spike to show capitulation buying, but we may be seeing that in the options market with numbers yesterday that were nearly twice historic highs.

The move over the past two months has been a very steep one, nearly parabolic in nature. It is possible that a parabola is exactly what we’re building. If so, it could continue until it simply runs out of fuel. Parabolic moves are very dangerous, they are late stage bubble moves. Again, I’ll point out the psychology of Minsky’s 5th bubble stage, “The strong will not enter at stage five and reconcile themselves to the missed opportunity. The ‘fool’ may even realize that prices can’t keep rising forever… however, they just can’t act on their knowledge. Everything appears safe as long as they quit at least one day before the bubble bursts. The weak provide the final fuel for the fire and eventually get burned late in stage six or seven.”

Roll here or zoom to the moon, doesn’t matter to me, it’s a fool’s game. I’ll take a small poke at the extreme internal readings for fun, but only with money I’m willing to lose, and I know that the right way to play parabolic moves is to simply wait for a trendline break and then enter.

The ingredients for the move to be over are here - they are simply waiting for a triggering event. VIX sell signal, record number of 52 week highs, record low put/call readings, extreme bullish sentiment... the trigger event can happen at any time, a volcano or one piece of bad news can be it. The triggering event will take the blame, not the actions that created the bubble.

Markets that behave in that manner should be a warning sign to the general population, unfortunately the media and government trumpet parabolic moves and simply add fuel to the speculative fire. Look at China… what a mess. Twelve percent growth rates? Completely not wise and not sustainable. Today their planners are taking action to cool it down, seems they would be happier with only 10%! What a joke, 12% produces a time to double in only 6 years. Good luck with that.

"Another factor in maintaining balance involves the element of time. As we peer into society's future, we you and I, and our government must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow."
Dwight D. Eisenhour

Pink Floyd – Time: