Thursday, August 12, 2010

Morning Update/ Market Thread 8/12

Good Morning,

Futures are down strongly again this morning, following through on yesterday’s 97.1% NYSE down volume move. That is the twelfth 90% down day since the April peak to go along with the ten up days. The dollar is higher, bonds are higher, oil is down hard (now $76 a barrel), and gold is up substantially.

It was earnings that disappointed investors from Cisco yesterday evening that started futures lower, but this morning the weekly Jobless Claims rekindled the selling with a headline increase to 484,000 new claims when 460,000 was expected. Here’s Econoday:
The outlook for the August employment report is off to a bad start in what can't be good for today's stock market. Initial jobless claims for the August 7 week came in at 484,000, far above expectations for 460,000 and the highest level since February. The four-week average, up a steep 14,250 to 473,500, is also the highest since February. There are no unusual factors affecting the results.

In a partial offset, continuing claims fell 118,000 in data for the July 31 week. The four-week average fell 64,000 to 4.519 million. The unemployment rate for insured workers came down one tenth to 3.5 percent. These numbers do look good but do reflect, to a degree, the expiration of benefits as the unemployed simply fall out of the insured labor pool.

This is a disastrous report, the trend is higher once again and people have been jobless for so long that they are falling off the rolls just like the hundreds of thousands before them.

Import and Export Prices were released for July, the month over month change showed a .2% increase in import prices and a .2% drop in export prices. This is against a backdrop of strongly rising oil costs, that trend is now reversed, so it will be very interesting to see what August looks like. My guess is that we will see deflation in prices begin to accelerate:
Today's import/export price report is likely to deepen emerging concern over deflation. Import prices did rise 0.2 percent in July but reflect a 2.1 percent rise in fuel. Excluding fuel, import prices fell 0.3 percent following June's 0.5 percent contraction.

Export prices, which fell 0.7 percent in June, fell another 0.2 percent in July with declines posted in most components. Price weakness for capital-goods exports extended to a third straight month in July. Prices for consumer-goods exports contracted steeply in June but bounced slightly back in July.

Import prices for capital goods slipped slightly for a second month as they did for consumer goods. This price weakness for capital and consumer goods, on both the export and import side, hints at price competition at the finished goods level. Today's report points to disinflation elements for tomorrow's consumer price report and Tuesday's producer price report.

Hey, “disinflation” is a good thing when prices and debt are not supported by income. It is the central bankers who are hurt by it, but it was them who directly profited from creating this massive and historic credit bubble in the first place.

Foreclosures also reportedly rose 3.6% in July, which follows a rise in June as well. Remember where we are in the Option-Arm Reset chart, I believe that the mid to upper-end homes will experience great pressure between now and 2012, so don’t be suckered by some local agent – yes, rates are low, but there may indeed be a better time to buy:

Consumer Metrics, who publishes the ECRI number (now -10.3%), published a report showing the slowing of growth in our economy yesterday: August 10, 2010 - The Ghosts of Lapsed Stimuli

They show growth now contracting at a rate of 4.5%:

And they show that growth compared to the collapse of late ’07 and ’08… we are now contracting at a faster rate for where we were then, and you can clearly see just how dangerous the current slope of the decline is:

While the Administration is now reticently acknowledging that growth is slowing, I think it is clear that the Emperor is wearing no clothes whatsoever and that it feels quite “breezy” as the wind is rushing out of the economy’s sails. Now we will get to see what happens as it is clear that prior stimulus created a simple sugar rush and did, in fact, dramatically worsen our overall position. Continuing to do the same under pressure, or worse, is exactly what will lead to very bad end results – they need to let the depression run if they wish to keep this system going. Of course ending this cloaked feudal system might not be such a bad thing, hmmm.

What’s there to say about the broken wedge and yesterday’s action? Talk about a decisive break, and it came on higher volume…

The VIX broke up and out of its flag and is already pushing the upper Bollinger Band. The Transports crashed 4.3%, and oil got burned on further indications of falling demand. The RUT has been leading the decline down and by the close yesterday had already retraced 61.8% of the rise since July. A break below the 61.8% today will confirm the likelihood of retracing the entire move up since July 1:

In fact, prices fell so much that it erased nearly two months of gains – in just one day. That is why this market is so dangerous, and why it is not a market for those to be “investing” in, when they are not professionals who posses inside information and manipulate the markets with their HFT bid front running. It is worse than a casino, at least a casino is still regulated and you know the rules and the approximate odds going in. Wall Street is currently making the Las Vegas strip look saintly.

Meanwhile money pours into the long end, the Ten Year continues to race towards its first target of 2.3%:

That’s still quite a move to go, I believe equities have a long way to fall as well.

Yesterday we received 67 new 52 week lows on the NYSE according to the Wall Street Journal. This was only 3 short of the number required (2.2% of the NYSE issues traded) to trigger a Hindenburg Omen – all the other conditions were met. While this was a near miss, it is still a warning sign that the market is VERY unhealthy. It is split with some segments making new highs while others are making new lows. This condition is a precursor to crashes, all modern history crashes have been preceded by at least one confirmed Omen (which requires two readings within 30 days). I think that it’s now highly likely that we go on to get an Omen, it’s even possible that we get one today. When we received the Omens in 2008, very powerful declines were not far behind.

I think the first destination for this decline is near the base of the rising wedge/ neckline of the large H&S pattern, somewhere just above SPX 1,000. No, we won’t get there in a perfectly straight line, and the gaps from yesterday and this morning make me a little nervous about a small degree subwave 2 bounce. In fact, I can count yesterday’s decline into this morning as 5 waves complete, so I will not be surprised if we begin to bounce a little today. We now have strong overhead resistance, however, and with all the data pointing to accelerating economic weakness, any bounce will likely be short lived. Remember, declines take prices down far more quickly than ascents move prices up.

The Dollar and Euro charts are interesting to me. They are very linear, creating a clear zig-zag pattern. The 61.8% correction in the dollar, and the corresponding weaker move in the Euro, both have 5 clear and distinct waves, which means this current move may be powerful and will likely produce new highs for the dollar/ lows for Euro. In order for that to happen, I think there needs to be renewed interest in Euro zone debt levels, we’ll see what happens:

Overall the markets appear to have begun wave 3 down. There will be a “fool you” wave 2 in there, then we should get into the meat of the decline, possibly as we get closer to the fall which is traditionally a time that’s recognized as difficult for the markets. The psychology shift is fascinating to me with the start of this decline – you can see the difference everywhere. Should deflation be allowed to run a ways here without severe intervention, then we need to be ready to shift gears back into an inflationary environment. That means having plenty of cash to take advantage, this is the down stroke that will bring about a true buying opportunity, one way or the other – just keep in mind that it takes longer than we think for events to unfold.

Don Henley – The End of the Innocence: