Thursday, August 5, 2010

Morning Update/ Market Thread 8/5

Good Morning,

Stocks dropped sharply on the weekly unemployment numbers which rose “unexpectedly” the last week of July. Bonds are sharply higher, the dollar is sharply lower (!), oil is lower, and gold is higher. The dollar correlation to the market has changed and should be watched carefully as it is telling us something that is very painful for those who must live by their productive efforts while being paid in dollars.

Take a look at the food futures to see exactly what I mean. Since the dollar’s latest top in June, the price of wheat has risen 92%! The price of corn has now risen 30%, oats are up 60%, and the price of soybeans, rice, and all food commodities are rising sharply. This is not just a drought in Russia, this is a combination of rampant speculation with money that is out of control combined with a rapidly weakening dollar. Expecting a disaster to occur at this time frame, here it is, below is a daily chart of wheat and corn – please go look at the other commodities, this is very dangerous for the world:

Remember, oil is also above $80, that seems to be a tipping point for equities. The longer it stays above $80, and the higher it goes, the worse the economic condition.

My advice? Make sure you have enough food to last you awhile should these conditions worsen and before these prices translate to the grocery store shelves (that sounds like a call for food inflation… will it actually translate? I don’t know, but the thing about food is that there can be very little demand destruction, and if there is you do not want to be a part of it). A rising dollar would help that situation, I don’t think any of us want to see a disaster be related to food.

The weekly unemployment numbers rose to 479,000 from 457,000. The consensus was looking for a fall to 455,000 – Oops. And last week’s figure was revised 3k higher. These numbers are simply horrific in that they have remained so high for so long. Here’s Econoday:
The labor market remains weak, at least based on initial jobless claims which rose 19,000 in the July 31 week to 479,000. The prior week was revised 3,000 higher to 460,000. The four-week average rose 5,250 to 458,500 but is still slightly lower than this time last month in what is one of the few positives of today's report. There are no special factors in the latest week.

Continuing claims fell 34,000 to 4.537 million in data for the July 24 week. Here the four-week average rose 26,000 to 4.576 million. The unemployment rate for insured workers is unchanged at 3.6 percent. Today's data won't boost confidence for much improvement in tomorrow's employment report.

The Monster Employment Index added to the bad employment mood by falling from 141 to 138. Most of the weakness here was in construction jobs. Are there any of those left?

Construction Employment:

Manufacturing Employment – same number of manufacturing employees as in 1942:

Once again the primary down channel since April (dashed green) contained stock prices which have failed to break through overhead resistance so far:

On the 30 minute chart, you can see that prices have also failed, so far, to reach the upper boundary of the rising wedge while 5 waves have transpired, it appears that the 5th wave could potentially have concluded this morning, but may have one more rise left in it – again, the demarcation point for me is the bottom of the rising wedge, now roughly 1104. Today's descent could be a middle movement of the final wave higher, so once again it's probably best to continue to be patient:

Note the divergent RSI on the chart above… I see divergences in a lot of charts at this time.

Yesterday the VIX produced a small inverted hammer just above the lower Bollinger band. This is often a reversal indicator but it needs confirmation by rising above the hammer today:

It appears that wave 2 which occurred within the confines of that rising wedge may be concluding, but the proof is in the pudding, we need to see that lower boundary break. If it does, I think that the large H&S pattern is complete time wise and we will then proceed to make lower lows to eventually fulfill its target of approximately SPX 860.

John Mellencamp - Rain On The Scarecrow: