Thursday, June 17, 2010

Morning Update/ Market Thread 6/17

Good Morning,

Equities fell to the lower rising trendline last night, bounced to a new high that is right in the 1120ish resistance area I’ve been looking at, and then collapsed back to about even on the weekly jobless numbers.

Oil is down this morning, gold is up and closing in on new highs, the dollar is down and testing the 86 area, while the Euro is up. Bonds are roughly flat, but they are getting close to an inflection point, so let’s take a look at the charts. Below is a daily chart of the long bond futures, /ZB… there is a clear triangle forming that appears to be consolidation prior to what should be a move higher:

Since that triangle was entered from the bottom, it should move upwards, and because the move into it was so significant, the move outbound should also be significant. The next chart is a daily of TLT, the 20 year bond fund. Yesterday’s action produced a black hammer right on the uptrend line. In the past, this type of candle on the uptrend led to strong moves upwards in the following few days. In other words, this trendline is powerful and needs to be watched. If TLT bounces higher that would be bad for equities, but if that trendline breaks or we break downwards on the /ZB triangle, then equities probably have more legs:

Weekly jobless claims rose from 456,000 to 472,000 in the past week. Once again the prior week’s number was revised higher. Consensus was looking for a drop to 450k, and again they are disappointed with jobs:
Layoffs continue at a rate not consistent with a recovering jobs market. Initial claims rose 12,000 in the June 12 week to 472,000 with the prior week revised 4,000 higher to 460,000. The four-week average slipped slightly to 463,500 but is still about 10,000 higher than this time last month which points to another disappointing monthly employment report.

Continuing claims rose 88,000 in the June 5 week to 4.571 million, retracing about a third of the prior week's big dip. Here the four-week average is slightly below this time last month though the unemployment rate for insured workers ticked higher to 3.6 percent.

The outlook for the U.S. economy has been improving despite troubles in Europe and despite still high jobless claims. But employment growth is a necessity for a healthy domestic economy. Stocks are falling and demand for Treasuries is rising following the report.

Next month’s Employment Report is going to be ugly as the Census is in the process of laying people off instead of hiring, and the ridiculous birth/death model peaked seasonally last month.

Don’t forget the 4.8 million people drawing Emergency Unemployment, this is still 2.5 million higher than last year. And here’s some wave ‘C’ psychology for you:
NEW YORK ( -- Seeking to appease deficit hawks, Senate Democrats scaled back unemployment benefits and Medicare physician reimbursement measures on Wednesday.

The revised jobs bill eliminates a $25 weekly supplement for the jobless that had been part of the last year's stimulus act. Those currently receiving the supplement in their unemployment benefits check will continue to do so until they exhaust their extended benefits, or until the week of Dec. 7, whichever comes first. That cut will reduce the bill's cost by $5.8 billion over the next decade.

Every move to reel in spending is another step towards another wave of deflation. In wave ‘A,’ it was easy to toss out some bucks to placate the masses – note how it gets progressively harder.

And now the CPI has turned negative again, falling .2% month to month, but still positive 2% year over year. Here’s Econoday:
Over the last two months, consumer spending power has increased and not just because of income gains. A buck actually goes farther as prices have dropped on average, tugged down largely by lower gasoline prices. In May, overall CPI inflation declined 0.2 percent, following a 0.1 percent dip in April. The latest number matched the market forecast. Excluding food and energy, CPI inflation rose 0.1 percent, following no change in both March and April. Analysts had projected a 0.2 percent boost in the core rate.

Checking out the components, energy component fell 2.9 percent, following a 1.4 percent dip in April. Gasoline decreased 5.2 percent after a 2.4 percent fall the prior month. Food price inflation came in at flat after posting a 0.2 percent rise in April.

Helping to keep the core rate soft was no change in the owners' equivalent rent subcomponent. This series has either been flat or negative for several months. Also, recreation was flat and medical care edged up only 0.1 percent for the latest month.

Year-on-year, overall CPI inflation slowed to 2.0 percent (seasonally adjusted) from 2.2 percent in April. The core rate in May was steady at 1.0 percent. On an unadjusted year-ago basis, the headline number was up 2.0 percent in May while the core was up 0.9 percent.

Bond yields edged down marginally on the news with an unexpected but small rise in initial jobless claims also contributing. Equity futures eased but were still positive. Today's report validates the Fed's recently ongoing decision to keep short-term interest rates low for an extended period of time. This outcome from the CPI report should partially offset disappointment over the modest rise in initial jobless claims.

Leading Indicators and the Philly Fed are released at 10 Eastern. The leading indicators may not be as strong as some hope with the money supply figures trending downwards.

As we close in on options expiration tomorrow, most watchers are seeing a ton of activity in the SPX 1100 area. That would be an interesting place to go out if we descend as it would place prices below the 200dma. The fact we’re still above it has many bullish and they saw the breakout above 1,100 as very bullish. I don’t think that level is as significant as others do as the wave count I’m following (c of 2 of 3) would place wave c’s top higher than wave ‘a.’ If you look at the 3 month SPX chart below, you will see a confluence of overhead just above 1120 – the upper Bollinger band, the uppermost downtrend line from the top (dashed green), and it’s a perfect 61.8% retrace of the prior wave, what I am counting as wave 1 of 3 until proven otherwise. A rise above 1125ish would throw this count into question, but it would not be invalidated until exceeding the top of wave 1.

I will note that wave 2’s job is to fool as many people as possible. This current wave is not rising in a channel as most people have it drawn, it is a rising wedge in both the futures and on the SPX, but it is subtle. The movements are getting narrower towards the top, that’s a rising wedge – all rising wedges eventually break, when they do prices usually return to the base, and this base is all the way back down at 1040.

And everyone seems to forget that the bigger picture is that we broke a rising wedge off the March ’09 bottom and that target is still in play – a very large wedge takes longer to play out. Another bit of information to consider is that summer doesn’t have to be a relatively strong time in the market. Wave C of the decline in 1930 picked up steam in June. That decline was a series of disappointing drops followed by bounces that convinced people it was over – disappointment after disappointment went on for two years, while the bad economic data went on for many more.

I think people are underestimating the BP spill’s effect on the economy. I think its impact will ultimately be MUCH LARGER than 911. In fact, a year from now it may be the event that winds up taking the blame for kicking off wave C. The “little people” will be mad as hell at the oil industry, a very nice distraction from the central bank.

The Doobie Brothers – Black Water: