Wednesday, June 2, 2010

Morning Update/ Market Thread 6/2

Good Morning,

Equity futures are up this morning, seesawing in a rising symmetrical pattern. The dollar is up fairly sharply with the Euro still descending with the lower channel trendline. Oil is up slightly after a large decline yesterday; gold is down, correcting yesterday’s up move.

The worthless MBA Purchase Applications fell deeper into record territory by losing another 4.1% in the past week. Refinancing activity, however, supposedly rose 2.4%. This fall in activity over the past month bodes ill for the home sales reports coming this June and July.

The number of layoff notices tracked by Challenger for the month of May grew over the month of April, here’s Econoday:
Challenger's job-cut count held at a pre-recessionary 38,810 in May, little changed from April and compared against 111,182 in May last year. The report said state and local government, hit even harder now by budget gaps, is a key weakness. Otherwise it notes that summer is the slowest time for downsizing. This report supports expectations for sizable payroll gains in Friday's employment report.

Motor vehicle sales will be released throughout the day, and the Pending Home Sales Index is released at 10 Eastern this morning.

I know that it’s hard to follow waves unless you’re up on the Elliott Wave rules, but let’s take a look at a daily chart of the SPX and RUT and discuss what we see and what McHugh sees:

To me this is an obvious leg one down into the flash crash pin lows, a wave 2 bounce, a wave 3 down that is followed by a wave 4 bounce, and what appears to be the beginning of wave 5 down. But that’s not what McHugh sees and he’s the expert, so I spent a little time trying to figure out why he sees it differently.

What he sees is the flash crash low as wave 1, then a wave 2 bounce, and then the decent into the most recent low as wave 1 of 3 (of 1), the bounce over the past few days as wave 2 of 3. He believes wave 2 is most likely comprised of an a,b,c and that we probably made most of b yesterday and are getting ready for wave c to take us up into the SPX 1,140 area. His alternative is that wave 2 truncated and that we just began wave 3 of 3 (of 1).

Why does he think that? Because on all the indices except the RUT, what I was counting as wave 3 is not as long as wave 1 if you count the flash crash pin as a part of wave 1. Therefore wave 3 must be longer, and that means that we were only looking at wave 1 of 3, follow? On the RUT, however, wave 3 exactly equals wave 1 and so it is possible that we made a wave 4 movement and are just starting wave 5 down.

The bottom line is that I think we do need to count the pin lows and that McHugh’s count is most likely correct but we need to watch the action to see what the market is saying.

Yesterday’s action was relatively benign until later in the day and then volume was quite heavy on the decline. Believe it or not, yesterday was another 90%+ down day (92%), the seventh since the April 26 high. Again, the ability for so much volume to be traded in the down direction on a day that was up for a good portion of the day shows how fast the HFT machines are at chasing the direction. This is not healthy for the market, it is a very bad omen in my opinion. Just imagine and let’s say that the vast majority of the market liquidity comes from only 4 players… What happens when just one of the players decides, for whatever reason, to stop playing? Uh, huh – and we already know what happens when they all stop playing, that equals no bids – in other words no real market participants.

Yesterday at the close we did have some extreme readings, so I think we need to be on our toes today. Normally you would expect a fairly strong bounce following readings like that, but then again we are in the danger zone.

If McHugh is right about his count, it’s quite bearish as wave 1 still has quite a way to go. Again, his possibilities are that we are either going to bounce here to finish wave 2 of 1, or that we have already begun wave 3 of 1. Subwave 3 of 3 will likely feel like a crash. Right now support is at 1,070, once we get below 1,040 we’ll break the large H&S neckline and that will produce a target down around 860.

Are the fundamentals really that bearish? Yes, they are. Spain, whose top rated debt recently lost its AAA rating, has 5 times the amount of debt as Greece. Most of Greece’s debt is held by banks in Europe. A large percentage of Spain’s debt, however, is held by banks in the United States. When defaults or write downs happen, our banking system is going to be left standing naked and dramatically over leveraged – as in insolvent. This is inevitable. Why? Because incomes cannot possibly support the debt that’s been created. Creating more debt will not work. The only reason our major financial institutions still stand today is because of accounting fraud – period.

Jim Morrison - When the Music’s Over: