Wednesday, August 4, 2010

Morning Update/ Market Thread 8/4

Good Morning,

Equity futures are higher this morning. Bonds are flat, the dollar is up slightly, oil is still rising, and gold appears to be making another run higher. The push higher in oil is against a weaker economic backdrop and rising oil inventories. Again, being back above the $80 mark is a strong negative for the economy and for equities in general.

The market moved higher on the release of the ADP Employment release which rose from their net 13,000 jobs in June to 42,000 in July. This report often sets the expectations for the official Employment report and it is notoriously inaccurate compared to the BLS report – we’ll see.

The Challenger Job Cut conversely rose for the month of July to 41,676 mass layoff notices versus June’s 39,358. I’m not sure if the Challenger report monitors government jobs or not, but that is the latest source of pressure for the job market as states and all municipalities are forced to cut back.

According to the MBA, Purchase Applications rose 1.5% in the prior week, with refinancings rising 1.3%. Their reporting methods are ridiculous, but we know that the index for purchases are near all time historic lows. Here’s Econoday’s take on this week’s report:
The purchase index rose for the third straight week, up 1.3 percent in the July 30 week. Government purchase applications were up 3.4 percent while conventional purchase applications were flat. The refinance index was up 1.3 percent as was the composite index. Refinancing made up 78 percent of all applications. Rates came down in the week with 30-year mortgages averaging 4.60 percent.

The housing market remains simply a disaster. Yesterday’s Pending Home Sales report for June hit yet another low, losing another 2.6% on top of record low numbers. Factory orders also unexpectedly fell yesterday.

In yet another economic lowlight, bankruptcies are soaring up 9% year over year:
Aug. 4 (Bloomberg) -- U.S. consumer bankruptcies, after rising 9 percent last month from June, might exceed 1.6 million this year, according to the American Bankruptcy Institute.
The 137,698 bankruptcy filings in July also represent a 9 percent increase from a year earlier, the institute said yesterday in a statement posted on its website, citing data from the National Bankruptcy Research Center.

“Debt burdens, unemployment and an uncertain economic climate continue to weigh on consumers,” Samuel J. Gerdano, the institute’s executive director, said in the statement. “The pace of consumer filings this year remains on track to top 1.6 million filings.”

Last year, there were 1.4 million consumer bankruptcy filings in the U.S., a 32 percent increase from 2008, the institute said in March. Total filings have been increasing since the implementation of the Bankruptcy Abuse Prevention Act of 2005, a change to the federal law that made it harder for individuals to seek protection from creditors, the institute said in March.

The trend in bankruptcies is clear, and there is no government inspired stick-save for that market! I don’t expect one either as the government does not work for the people anymore, they work for the corporations, who in turn work for a narrow group of money changers at the top.

Below is a memo to President Obama that VIPS, a group of high level ex-politicians and military strategists, sent in an effort to avoid another war. There is a lot of truth telling going on here, I think everyone should pay attention to what they wrote as well as their track record. My fear is that Obama isn’t really in control, his actions clearly show that he has been serving the interests of the money changers so far: VIPS memo to Obama regarding Israel and Iran

Stocks over the past two days have formed a small diamond formation. These can be either a reversal pattern, in which case they are referred to as a diamond top, or they can be a continuation pattern, breaking in the same direction in which they were entered. This one has yet to break, so the direction of exit will give an entry point higher or lower. Below is a 5 minute, 5 day chart of the DOW:

McHugh believes that we have one more wave higher as wave 1 and 3 were comprised of 3 waves each for an a,b,c. He sees that yesterday was wave b and thinks that wave c of 5 up should be next to finish this wave off. That could very well be, I see the waves as he does, they are pretty clear at this point and there is still room in the rising wedges for one more push that may take us into about Friday or Monday time wise. Below is a 30 minute chart of the SPX showing the rising wedge:

Regardless of wave count, a break below the lower rising trendline is the key. Again, watch the VIX as we are close to the lower Bollinger Band. A final wave higher may push the VIX beneath the lower band setting up a potential market sell indication.

The dollar is right on the 200dma which is just above the 61.8% retrace point. Will it find support here or continue down? Sentiment has turned negative, but that is not yet at an extreme so yet another eye needs to stay tuned to the action in the FX markets. Below is a daily chart of the dollar on the left and Euro on the right:

Bonds are very close to breaking out higher in price, lower in yield. Despite nearly an 11% move up in equities from the July low, bonds have not moved – that is a sign that money does not believe in the equity rally. The TNX (ten year Treasury fund) is very near breaking down. It has created a flag that when it breaks will target substantially lower rates, in the 2.2 to 2.3% range. Below is a daily chart of the TNX, you can see how close it is to breaking down:

The long bond futures, /ZB, is also on the verge of breaking out of a flag, in this case higher in price and also lower in yield:

We are now in the window, time wise, I believe to give us a good relationship with the prior waves in this move since the July 1 low. It’s beginning to look like everything is lining up neatly for a major turn:

The Eagles – Pretty Maids all in a Row: