Tuesday, May 4, 2010

Morning Update/ Market Thread 5/4

Good Morning,

Equity prices are significantly lower this morning. Below is a 5 minute chart of the DOW and a 15 minute chart of the S&P futures. Note on the right side a series of lower highs and higher lows, that is a perfect symmetrical triangle. Also note that yesterday’s advance stopped exactly by the 61.8% retrace line of the prior down move.

It appears that the bottom boundary of the triangle is broken, but I would want to see a new low that’s beneath the prior lows to become more bearish.

The dollar is much stronger and the Euro is basically in free fall. Below is a chart of the dollar on the left and Euro on the right. The dollar has broken out above the 83 level, that is very bullish, while the Euro has broken down to new lows and appears to be headed to the bottom of its channel. If so, it’s still quite a ways down before it finds support, most likely in the 1.26 region.

What’s going on, you thought Greece had been “saved,” right? Forcing both austerity and more debt onto a country is not a positive! But the largest negative of all is that the EU is having to break their own rules and make new ones. That’s an assault on the rule of law, capital does not like to stay where the rule of law is breaking down.

ECB Comes to Greece’s Aid by Waiving Collateral Rules

May 3 (Bloomberg) -- The European Central Bank joined the international rescue of Greece, saying it would indefinitely accept the country’s debt as collateral regardless of its country’s credit rating, underpinning gains in the bond market.

The decision came less than a day after Greece agreed to a 110 billion-euro ($145 billion) package of emergency loans from the International Monetary Fund and its euro-region allies. Under the plan backed by the ECB, Greece pledged 30 billion euros in budget cuts to bring a deficit of 13.6 percent of gross domestic product within the EU limit of 3 percent in 2014.

“The ECB is a key player in the rescue package designed to help Greece and it is clearly buying insurance against the likelihood of further multiple downgrades of the Greek debt, something that might lead to a halt of ECB financing to the Greek banks,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London.

Further downgrades from credit-rating companies had threatened to render Greek bonds ineligible for collateral for ECB loans after Standard & Poor’s last week cut the nation to junk status. Had Moody’s Investors Service and Fitch Ratings followed suit, Greece’s debt would have no longer been accepted under the previous rules, threatening to inflict further pain on the economy and its banks.

Bonds Gain
The yield on Greece’s benchmark 2 year bond fell 183 basis points today to 11.74 percent, after reaching almost 23 percent on April 28 on rising concern about a possible Greek default. The premium investors demand to hold Greek 10-year bonds over comparable German debt fell 50 basis points today to 5.44 percent.

The ECB’s Governing Council said Greece’s commitment to the terms of the bailout was “appropriate,” the Frankfurt-based bank said in an e-mailed statement. “This positive assessment and the strong commitment of the Greek government to fully implement the program are the basis, also from a risk management perspective, for this suspension.”

Today’s decision was a reversal for ECB President Jean- Claude Trichet, who began the year saying the ECB would not change its “collateral policy for the sake of any particular country.”

That prompted Christoph Rieger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt, to say today’s announcement “leaves a sour taste with regards to the ECB’s long-term credibility.”

I just don’t know how you could destroy your own credibility any more than Trichet has. Saying, “indefinitely accept the country’s debt as collateral regardless of its country’s credit rating,” is tantamount to simply stating that you are willing to print come hell or high water and that you simply do not care about the rule of law, nor about the rules of nature.

Capital is run by people who must have confidence that their money is still going to be worth something in the future and they must be confident that the rules will not just change at the drop of some politician’s pin. What next? You have all the other PIGS to go. How long will Germany keep supporting it? This is placing great stress on their union, change is coming, and that change is driven by DEBT which is controlled by the central banks who are talking up “international governance,” the very thing and the very people who brought the world their debt to begin with.

Bonds are up sharply this morning as money stampedes back into something at least slightly recognizable. Below is a chart of the long bond futures, /ZB, where you can see that it is now breaking above its prior range:

Below is a 10 day, 10 minute chart of the SPX. Again you can clearly see the triangle that has formed. Yesterday’s volume on the Monday ramp job was absolutely pathetic. On this chart it is clear that lower than 1,188 is bearish:

The VIX, however, once again generated a market buy signal yesterday by closing back inside of the upper Bollinger. However, there is a clear uptrend going and until that uptrend is broken, it is higher volatility:

There has been a lot of concern expressed lately for the Chinese markets, deservedly so. They are now beginning to tighten their central planned economy and their markets are reflecting that. Below is a 3 year chart of the Shanghai Exchange, note the divergence from the SPX. Divergences between these two have been resolved with the SPX correcting:

On the one year daily Shanghai chart, a large triangle formed and is now broken to the downside, that is simply bearish:

Goldman Sachs bounced back to the $150 level yesterday but failed to get through the now strong overhead and is sitting at $148 per share. Again, above $150 is bullish, but it doesn’t look likely at this point and a break beneath $140 is bearish.

Factory Orders and Pending Home Sales are released at 10 Eastern this morning.

Yesterday the number of new highs on the NYSE decreased significantly, that is a bearish divergence against price. The market is now open and is already setting a new low and breaking that triangle to the downside. The VIX opened back above the upper Bollinger and is making new highs. That is all bearish for the market...

Eagles – Already Gone: