Monday, June 21, 2010

Morning Update/ Market Thread 6/21

Good Morning,

It’s a Monday… so of course it was an obvious opportunity to gap the futures over resistance and thus keep the 90% trend for Monday ramp jobs in tact. It’s certainly is not a good thing, it’s a symptom of the disease.

Announcements out of China that they are going to allow more freedom for the Yuan to float caused our dollar initially dump on the news, but it has since recovered back to its previous level. The Euro is weaker and the correlation between the EUR/JPY and equities that was perfect over the past couple of weeks has subsided. Oil is up sharply, gold is down after reaching another new high at $1,266.

Bonds fell sharply, returning back inside of its triangle. Was the breakout higher just an overthrow? This is a bullish triangle, so a break downwards in the wrong direction could be violent. A break downwards would be bullish for equities and a break upwards would be bearish. Below is a chart of the dollar on the left and long bond futures on the right:

There is no economic data today, but later in the week we’ll get to look at Existing and New Home Sales, the FOMC monkeys meet this week and will attempt to manipulate our market psychology with their announcement on Wednesday, the final revision to Q1 GDP and Citizen Sentiment come this Friday.

China not only announced they were going to let the Yuan float more freely, but they also announced that they were going to buy up some of Greece’s debt – debt that no one else would. China is definitely playing a game… indeed, they do have a credit bubble going in China, but China also is printing money that is not backed by debt. Because their currency is perceived to be stronger than market, they are using the opportunity to buy debt, and why not? By printing and owning other nations debts, it gives them power, control, and influence.

Of course I’ll believe the currency moves when I see them. The knee jerk was a very large move downwards in the dollar this weekend that is already gone. There is obviously instability in the currency markets and we need to watch closely to see how those moves are impacting markets.

Russia also dropped a bomb this weekend when they announced that they are ending capital gains taxes. This is the type of move that will cause capital to be drawn into Russia, that’s the intent. And money will always flow to where it’s treated best, so this may set up some interesting dynamics as well. In any case, we can certainly see that the dynamics are changing and so we need to stay aware of the flow of capital.

Returning back to our markets, getting over the SPX 1120 overhead resistance level will cause much short covering and thus it appears that we are getting the run into the 1140 to 1150 overhead area. A break above 1150 will signal that a run to new highs is likely.

Earnings season starts soon, we’ve already seen some negative commentary, and so the odds are rising that we’ll start to see some earnings disappointments. The financial stocks are lagging the latest bounce in the market, a sign once again that all is not well under the surface – as we are all aware.

The 50 dma is at about 10,600 on the DOW, or about 1138 on the SPX. That will offer up our next overhead resistance area. This is an important area, a break above the 50 will likely cause more short covering. If it holds, however, the wave count still says wave 3 of 3 of looming. I think the markets are highly unstable still and obviously full of risk. The Monday long train is certainly running, but it’s also forming a very pretty right shoulder… I wouldn’t want to be near the tracks when this train derails. I sure hope those putting on end of month and quarter window dressing are nimble when it comes time to take it back down.

The Doobie Brothers – Long Train Running: