Thursday, May 27, 2010

Morning Update/ Market Thread 5/27

Good Morning,

Equity futures rallied hard off uptrending support last night, reaching all the way back to the SPX 1,090 resistance area. This produced a pretty clear inverted Head & Shoulders pattern with the drop yesterday and rise this morning being the right shoulder - here's a 15 minute chart showing this pattern clearly:

Should prices rise above the 1,090 level, that pattern will be confirmed and the target would become 1,140, although there are several resistance areas prior to that target. SPX 1,140, by the way, would produce a lower high that is proportional to the last lower high. Should it fail to break 1,090, then we are likely producing a sideways movement prior to the next leg lower.

The down move yesterday was difficult to read, however, it stopped right on the uptrend line from Tuesday’s lows as you can see in this 10 minute chart of the SPX:

Although I keep hearing talk of how oversold the market is, the truth is that’s only on the very short time frames, even the daily is not deeply oversold. There are some small positive divergences in place, the RSI, for example, is showing positive divergence in the 60 minute time frame, the number of new lows dropped dramatically on yesterday’s down move and over the prior couple of days the VIX had been moving lower despite lower prices. Yesterday the Transports rose in a bullish divergence against the drop in the Industrials. These are all indications that downside momentum is slowing – for now.

The most concerning item yesterday is the continued deterioration of the Euro. Yesterday it was lower again, and overnight it bounced back up to its channel downtrend line and turned around there again. The dollar may have put in a double top yesterday, if it makes one more run upwards though, it will probably break through.

Bonds are substantially lower this morning, that is supportive of a short term rally. Oil is higher today despite another large build in crude inventories. Inventories are nearly back to the record levels obtained when the markets were tumbling in late 2008. Obama, by the way, just signed a six month moratorium on new off-shore oil drilling while the top-kill procedure is still in progress – fingers are crossed on that working, evidently it is looking good so far!

On this messy nine month chart of the SPX below, you can see that we did produce an intraday low that is lower than the February low. We have not yet, however, made a closing low below the February closing lows. Also important is the fact that we have yet to close beneath the 1,040 level which is still a potential neckline of a large Head & Shoulders pattern:

The first revision to Quarter 1 GDP came in at an annualized rate of 3.0%. This is below the initial report of 3.2% and is in the opposite direction of the consensus that was looking for and upward revision to 3.4%. Here’s Econoday:
Today's revision to first quarter GDP disappointed as the new estimate was bumped down instead of up. The good news is that there really was little change overall. First quarter GDP was revised down to an annualized 3.0 pace from the initial estimate of 3.2 percent and falling short of analysts' forecast for 3.5 percent. The overall revision was net many small changes and was not a result of a large change to any one component. However, a notable disappointment was that real final sales to domestic purchasers was revised down to 2.0 percent from 2.2 percent.

Economy-wide inflation remains anemic as the GDP price index was revised up incrementally to 1.0 percent annualized from the initial estimate of 0.9 annualized. The market consensus called for no net revision to the prior estimate of 0.9 percent.

Although the latest GDP number was disappointing in terms of expectations, it still reflects a continuation of the recovery. And the mix is improved from the fourth quarter. On the news, equity futures softened but remained up sharply.

My perspective is that our GDP numbers are completely false and vastly overstated for a number of reasons, the most important of which is that it’s built upon engineered financing which is build upon fraudulent accounting. Cash flow is always the killer to false accounting, oh, and look at M3 plummet! Down 5% now on a year over year basis? That’ll eventually get real interesting:

Chart of U.S. Money Supply Growth

Here’s a longer term perspective going back to 1960 - nothing like it in modern history, that's for certain:

Weekly jobless claims came in at 460,000. This is still extremely elevated, it is lower than last week’s 471k (revised to 474k), but it is higher than the consensus that was looking for 450k. Here’s Econoday:
Initial jobless claims fell in the May 22 week but not by much. Claims were down 14,000 to a higher-than-expected level of 460,000. In a partial offset, the prior week was revised 3,000 higher to 474,000. Improvement in the latest week fails to offset prior increases, reflected in the four-week average which rose for a second week, up 2,250 to 456,500. The month-to-month look is mixed with the four-week average showing marginal improvement while the latest week shows a marginal increase.

Continuing claims are going in the right direction, at least for the latest two weeks of data. Continuing claims fell 49,000 to 4.607 million in the May 15 week to bring down the four-week average by 12,000 to 4.637 million. The unemployment rate of insured workers is unchanged at 3.6 percent.

Today's report will support expectations for moderate improvement in the monthly employment report, specifically private payrolls which exclude census workers. But the results don't point to the kind of significant improvement that would end talk of a Europe-led double dip.

LOL, “…end talk of a Europe-led double dip.” Stop it, you’re killing me.

According to the DOL, Emergency Unemployment Claims fell 41,403 during the week, but the 5 million plus people drawing EUC is up still nearly 3 million over year prior figures.

As I type the dollar is strengthening while the Euro sinks once again. Further breakdown in the Euro will drive equities - like always, keep your eyes on the money/DEBT!

The Kinks - The Money Go Round: