Friday, August 13, 2010

Morning Update/ Market Thread 8/13

Good Morning,

Welcome to Friday the 13th, the day that could potentially bring us our second Hindenburg Omen as we did meet all the conditions for one yesterday as I suspected we would. This morning the equity futures are lower after being first substantially higher overnight. The dollar is slightly higher, bonds are higher, and both oil and gold are about flat.

There were 92 new 52 week highs and 81 new lows on the NYSE yesterday, meeting the 2.2% of shares requirement for the Hindenburg. The NYSE 50dma was also rising, the McClelland Oscillator was negative on the same day, and new highs were not twice the amount of new lows.

This, by itself, gives us very high odds of experiencing a significantly lower market sometime within the next 4 months. Receiving a second confirming Hindenburg gives us very high odds of experiencing a decline that meets the definition of a market crash (-15% or more). That second observation could come today, or at anytime within the next 36 days. The last time we had a confirmed Hindenburg was in June of 2008, and I don’t think I need to show you a chart to know what the result was. No market crash in the past 25 years has occurred without a Hindenburg Omen in place. When they occurred in 2008, it was not long before serious declines began. So, it is time to buckle up, I believe we are likely to get confirmation and that it is telling us we are ready to make the trip down to the large H&S target of SPX 860 – that decline from this week’s high is approximately a 24% plunge. If you own stocks, you will definitely want to miss that.

A Hindenburg Omen is telling us that the market is hugely divergent internally - conflicted. This is the same thing that the many 90%+ up and down days has been telling us. Conflicted markets do not rise, they fall. A rising market requires uniformity and conformity. This market is as high as it is based upon manipulation - I know it, you know it, and now the market is telling us it's ready to correct that condition.

The Retail Sales Report for July came in below expectations showing .4% growth when .5% was the consensus. This is a rise from the prior -.5% in June. My caution on this report is that it suffers from survivor bias, only counting sales at stores that still exist, and not overall sales. That means that to get a true and accurate picture of sales, we need to look at sales tax receipts. Therefore, I do not put full credence into this report, especially in an environment where stores are closing. Here’s Econoday:
Retail sales made a comeback in July – but it mainly was due to a jump in auto sales. Overall retail sales in July rebounded 0.4 percent, following a 0.3 percent decrease in June. Analysts had called for a 0.5 percent boost. Excluding autos, sales gained 0.2 percent, following a 0.1 percent down tick in June. The July ex-auto number equaled the median forecast. But without the jump in gasoline sales, consumer spending was soft. Sales excluding autos and gasoline slipped 0.1 percent, following a 0.2 percent boost in June.

The rebound in July was led by a 1.6 percent boost in motor vehicle sales and a 2.3 percent jump in gasoline station sales. Also showing gains were miscellaneous stores, nonstore retailers, and food services & drinking places.

Declines were seen in furniture & home furnishings, electronics & appliances, building materials & garden equipment, food & beverage stores, health & personal care, clothing, sporting goods & hobby stores, and general merchandise.

Overall retail sales on a year-ago basis in July improved to 5.5 percent from 5.2 percent the prior month. Excluding motor vehicles, the year-on-year rate rose to 4.9 percent from 4.6 percent in June.

The underlying trend for consumer spending is soft, indicating that the recovery is slowing. Numbers, however, are not weak enough to confirm a double dip. On the news, markets were little changed.

Love that, “the recovery is slowing.” As if there was a recovery. There was not, there was only a government sponsored pump which made things worse, not better in the long run. Year over year numbers are still higher only based on still easy comparisons, but those comparisons are getting more difficult rapidly from here. Gasoline prices were rising up through July on the back of higher oil – that is now reversing again as deflationary forces overpower the sugar high.

You can see the effect of energy prices in the CPI released this morning as well. Want to create the illusion of inflation? Simply jack the oil futures with hot money. Higher energy costs, however, are not a good thing for the economy as they act as a tax draining wealth, not creating it. The overall CPI rose in July .3%, but the core rate rose .1%. Here’s Econoday’s excerpt:
A bump up in energy costs led to a rebound in CPI inflation, ending a three month string of declines. Meanwhile, the core rate remained soft. In June overall CPI inflation rebounded 0.3 percent, following a 0.1 percent decline in June. July's rise equaled analysts' forecast for a 0.3 percent increase. Excluding food and energy, the CPI eased to a 0.1 percent gain after a 0.2 percent boost in June. The consensus projection was for a 0.1 percent increase.

By components, energy increased 2.6 percent, following a 2.9 percent drop in June. Gasoline rebounded 4.6 percent after a 4.5 percent decrease the previous month. Food prices dipped 0.1 percent after being flat the prior two months.

Within the core, a lot was going on. Probably the biggest item of note was the continuation of soft shelter costs which rose only 0.1 percent for the fourth month in a row. This reflects the weak housing market which has resulted in more unsold homes going to the rental market. Medical care cost fell back 0.1 percent after jumping 0.3 percent in June.

But some components showed some strength. Apparel jumped 0.6 percent. Tobacco spiked 1.6 percent. And new & used motor vehicles gained 0.3 percent.

Year-on-year, overall CPI inflation firmed to 1.3 percent (seasonally adjusted) from 1.1 percent in June. The core rate in July was unchanged at 1.0 percent. On an unadjusted year-ago basis, the headline number was up 1.2 percent in July while the core was up 0.9 percent.

Overall, inflation at the consumer level continues to meet the Fed's expectation of "subdued." Markets were little changed on the news.

Again, as oil prices decline we should see this number turn negative once more.

The Dallas Fed published a report admitting that the “recovery” is far weaker than has been forecast. This chart of unemployment, shows that even the HIGHLY massaged 9.5% number is way behind their overly optimistic assumptions – as if anyone here had any doubt? And frankly the amount of bad and manipulated data is simply shocking – absolutely a confidence destroyer:

Counting the waves in the market, it appears to me that there are a couple of possibilities… Yesterday morning’s dip could have been wave 5 down to complete wave 1 of 3, in which case we completed subwave 2 overnight - or it was the end of wave 3 of 1 of 3 and we are completing wave 4 now, possibly entering wave 5. Typically I like to see all the waves appear on the day only charts, like the SPX, but sometimes waves when they are moving quickly do occur after traditional market hours. On the futures, it appears we made a wave 2, but on the SPX I would favor the wave 4 scenario – time will reveal which, the movement so far during trading hours is more of a flat, retracing only 23.6% of the move down which favors the wave 4 scenario. If that’s the case, we should experience a 5th wave down soon. If we rise higher, we could be in wave 2, and that may test up to the 38.2 or even 50% move. Below is a 5 minute chart of the SPX:

Remember that today is Friday, and that precedes Monday which is a 90% HFT ramp job day as the manipulation is still unchecked as there are no watchdogs in this casino (actually there are, but they are all on the take). That’s okay, let the market come to you, any bounce higher is an opportunity to get positioned on the short side. Also keep in mind that next week is options expiration. A day that moves both higher and lower today would be ideal, that would likely generate the necessary new highs and lows for a confirming Hindenburg. The NYSE 50dma is barely rising, so too large of a decline could turn that negative, while too large of a ramp job could turn the McClelland positive – should be interesting, get ready for some wild swings.

Dire Straits - Sultans Of Swing: