Wednesday, August 11, 2010

Morning Update/ Market Thread 8/11

Good Morning,

Finally, we get a break… literally! Futures are down hard this morning, decisively breaking the wave 2 rising wedge that has transpired since the beginning of July. You would expect rising wedges to break quickly and this one has. The only problem with the break overnight is that it will leave a fairly large gap, and that opens up the possibility of a return to fill the gap at some point.

Bonds are making new highs, the dollar is higher after touching the 61.8% retrace mark, oil is breaking down hard and is back below the important $80 mark again, while gold is roughly flat.

The FOMC announcement yesterday included the Fed’s latest scheme/ scam/ game to fool the public. Uh, let’s see, we’ll take the principal payments from Freddie and Fannie mortgages (robbing Peter) held by the government (and not on our books), to purchase long term government bonds (pay Paul) in an effort to continue to suppress interest rates which will help the banks and once again do nothing to help consumers who are saturated with debt while living in homes that are sinking in a sea of falling liquidity...

…In other words, they are printing money but conning the globe in hopes that they don’t destroy confidence. That’s what con men do in order to keep their game alive longer. And this con is going to cost about another $340 billion over the next year – effectively to buy down interest rates again. And once again this is a hidden INTEREST EXPENSE. The real interest on the national debt is much higher than admitted and takes up a huge chunk of (if not all of) our tax collections. This is a circle from which there is no escape and no end – it will have to continue until the game collapses, that’s the way all Ponzi schemes and exponential growth works.

For now, the game continues, but they are walking a tight rope and they know it. On one side of the rope a plunge awaits due to a deflationary spiral. On the other side of the rope lies disaster as confidence, if lost, will definitely land the country on the rocks below.

The market, knowing that deflationary forces far exceed $340 billion of stimulus put in a high the day prior to the Bradley Model turn date, obeying the cycles of the universe.

Overseas economic reports are showing signs of economic cooling, this is pressuring overseas markets and that will provide a feedback loop into our markets, further pressuring our already weak and fragile economy.

The MBA Purchase Applications Index fell from a week prior rise of 1.5% to a .3% rise – gee, what happened to their wild 30% weekly swings? LOL, have they realized that not everyone is that gullible? The Composite Index fell from a rise of 1.3% to a rise of .6% in the past week – this index is still sitting near all time record lows.

The International Trade report for June shows that Americans are still willing to spend money they don’t have, but that other countries are not buying our exports. This is causing our trade deficit to widen again, here’s Econoday:
The U.S. appetite for imported goods rose in June – but not overseas as U.S. exports fell. The overall U.S. trade deficit spiked to $49.9 billion from $42.0 billion in May. The June shortfall was much larger than the market forecast for a $42.5 billion gap. Exports fell 1.3 percent, following a 2.5 percent gain in May. Overall imports advanced 3.0 percent in June after rising 2.8 percent the month before. Nonoil imports gained a sharp 4.7 percent, following a 6.1 percent spike in May.

The widening of the trade gap was primarily in non-oil. The nonpetroleum deficit widened to $40.0 billion in June from $32.2 billion the prior month. The petroleum goods gap, however, narrowed to $21.2 billion from $21.5 billion in May.

By end-use categories, the drop in goods exports was led by a $1.4 billion decline in capital goods excluding autos. Also slipping were industrial supplies, down $1.0 billion and foods, feeds & beverages, down $0.3 billion. Exports of consumer goods, and autos posted modest gains.

The advance in imports was widespread outside of oil. Consumer goods surged $3.1 billion; autos were up $1.3 billion; capital goods ex autos increased $0.5 billion; and foods, feeds & beverages rose marginally. Industrial supplies-which include oil-fell $0.2 billion.

Equities dipped further on the news. Already futures were down sharply after news of slower growth in China and a downgraded outlook from the Bank of England sent equities down overseas.

And once again, only those playing in the futures market overnight had a shot at a clean entry for the break of that rising wedge. The rest of us non-HFT owning peons are left with no clean entry as, unlike a Cray supercomputer, we require sleep.

Be wary of the SPX 1100 area, it is the bottom of the range (depicted in red below) that has provided support for most of the past year. A break beneath 1100 is very bearish, as if the break of that rising wedge isn’t bearish enough! That, by the way, portends a return to the base of the wedge, about SPX 1010, and that should happen in a much shorter time frame than the rise occurred – in other words, we have most likely begun wave 3 down and it should be powerful. On the one year chart below, you can see the textbook perfect Head & Shoulders pattern that now looks complete both in price and time wise. Wave 3 should take us to its target of approximately 860ish over the next few months:

The VIX has now broken up and out of its pennant, the bullish target on this break is approximately 58:

My belief is that the coming waves are the ones that will usher in real change. They are very dangerous waves, as that change will profoundly impact real lives. But in every environment of change there is opportunity, and that is coming for those who have managed their affairs well. Those with cash and real assets are going to have once in a lifetime buying opportunities – they are coming, but not yet.

I'm up on the tightwire
one side's ice and one is fire
its a CIRCUS game with you and me...