Tuesday, July 6, 2010

Morning Update/ Market Thread 7/6

Good Morning,

Equity futures are up quite strongly after being down strongly over the weekend, yesterday evening they began to ramp and have climbed straight up, over 220 DOW points off the /YM bottom, or are up about 100 points above Friday’s close. It may not be Monday, but it is the first day of the week, definitely a counter to the Monday morning 90% ramp statistic! Below is a 60 minute chart of the DOW futures on the left, and a 5 minute chart showing this low volume trading activity on the S&P futures on the right (double horizontal line is approximately Friday’s close):

Bonds are actually up slightly which does not support this move higher in equities. They may be basing before moving higher and need to be watched closely to see how much fuel is there for the move in equities. Oil has managed to bounce, gold is slightly above Friday’s close.

The dollar is down strongly with the euro moving back up rapidly. Both charts created small flag patterns and have broken those flags continuing in the direction expected by that pattern, down for the dollar and up for the euro. The target on this move is outside of their respective channels, about 81.7 for the dollar and roughly 1.29 for the euro. Below is a daily chart with dollar on the left and euro on the right:

The non-manufacturing ISM is released at 10 Eastern this morning and then there is very light economic reporting the rest of the week, primarily just the recurring weekly reports.

There was another small movement in the McClelland Oscillator Friday, thus we should expect the first directional move today or tomorrow to be large, the 100 point higher open on the DOW seems to satisfy this.

Note that the down channel was broken on this move, the /ES reached a low point of 1,002 before bouncing. Overhead resistance is now 1040 on the SPX, the neckline of the H&S pattern. Should we rise above that level, bears do need to be cautious as there is a gap in the charts about 1074 that could be filled by a strong bounce. It is completely normal for prices to retest the neckline from below, and it appears that’s what we’re doing. It can fail on the retest to get above 1040, or it can rise above the neckline, either way the Head & Shoulder’s target of 860 is still valid and will remain valid unless we rise above the level of the head which is a very long way up there and is highly unlikely to happen at this point.

Of course Trichet was talking up austerity once again, and JPMorgan came out and said that they expect global economies to shrink their budget deficits by 1.6% in the next year, the largest budget tightening in the past 40 years according to them. I think the psychology of wave C will produce much larger movements than that, but the statistics will undoubtedly be massaged to make it appear better than it is.

Speaking of massaged numbers, how about a record 1.21 million people being counted as “discouraged workers.” Despite the population growing nearly 3 million people per year, the work force is shrinking at the fastest pace in history! LOL, this is nothing but game playing with who is counted and who is not in the unemployment figures. Get this, the labor force according to the BLS, has shrunk by 974,000 people in just the past two months. Again, nothing but fun and games – certainly not reality when it comes to tallying the unemployed.

I’ve been wanting to post the following chart of the Consumer Metric Institute’s Daily Growth Index. Their leading index was designed to account for changes in today’s economy versus yesteryear’s industrial production economy that is tracked by the more traditional LEI that the Fed and other economists use. The fidelity of their indicator have been far superior at forecasting the future and it is nearing a point that says the odds of an officially recognized recession is now very high:

Of course those who don’t pay attention are going to miss it entirely. They are looking at things like the yield spread which, according to them, is currently signaling only a very small 12% chance that we reenter recession. Of course they fail to realize that the bond market is highly, as in extremely, manipulated with FED money on the short end and international fear dynamics on the long end. Here’s an excerpt from a recent Bloomberg article:
July 6 (Bloomberg) -- U.S. government bond yields are signaling almost no chance of the economy slipping into another recession even as stocks and commodities tumble, according to research from the Federal Reserve Bank of Cleveland.

The 2.34 percentage point gap between yields on two-year and 10-year Treasuries is more than double the 20-year average and about the same as in 2003, just before gross domestic product rose 3.6 percent. The so-called yield curve suggests growth won’t slow to less than 1 percent and about a 12 percent chance of a recession in the next year, Joseph G. Haubrich, head of the banking and financial institutions group at the Cleveland Fed, and Kent Cherny, a researcher, wrote in a July 1 report.

Market rates conflict with growing concerns that the U.S. economy will contract for the second time in three years. Bond returns exceeded stocks by the widest margin in nine years during the first half as investors retreated from higher- yielding assets. The Labor Department reported the first drop in employment this year on July 2. At the same time, Wall Street expects bond yields to rise as the U.S. expansion continues.

“We could get a sharper move to higher yields once growth dynamics take hold,” James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, said in a July 2 interview on Bloomberg Television. “We still expect 3.5 percent growth this year.”

Looking at indicators like this will lead you into the fantasy land of false accounting, money printing, false statistics, and flat out market manipulations – all of which are very fragile and likely to snap with even the mildest of triggers. Confidence is still waning as the debt is still there, that is the key to our futures.

The non-manufacturing ISM was just released, it came in at 53.8, down from 55.4, and well below the consensus of 55.0. Yet another data point that the growth of the economy is slowing rapidly, I believe nearly all of the data over the past two weeks has missed on the down side, “professionals” failing to see the deceleration. Stocks rise further on the release, LOL. Hey, everything’s easy with blinders, misunderstanding all you see…

Beattles – Strawberry Fields: