Friday, July 30, 2010

Morning Update/ Market Thread 7/30

Good Morning,

Equity futures are down this morning following the release of second quarter GDP. The dollar is up slightly, bonds are higher, oil is down, and gold is higher.

The GDP number came in at 2.4% while the consensus called for 2.5%. Q1 was revised upward a full percentage point, however, to 3.7%! Not only that, but the past 3 years growth numbers were revised! Hey, if you can’t stand the truth, just make something up – it is now a time honored tradition in money, politics, and economic statistics.

As if the GDP numbers weren’t already grossly overstated enough via manipulations with inflation and the “deflator,” and by including financial engineering as productivity. The bottom line is that even with their manipulations, the trend is down and I think by the 3rd quarter it is likely to turn negative again – the ECRI has not been wrong yet with readings such as are occurring now. Here’s Econoday attempting to convince you otherwise:
Despite all of the doomsayers, the recovery continued in the second quarter but at a moderate pace. Yes, the recovery is still below par but it's not a double dip so far. Second quarter GDP came in at an annualized 2.4 percent growth, following a revised first quarter gain of 3.7 percent. Today's release includes annual revisions going back three years. The second quarter advance estimate is just barely below analysts' projections for a 2.5 percent increase. But the first quarter upward revision of a full percentage point from the prior estimate of 2.7 percent is a positive surprise.

The latest quarter was led by a rebound in residential investment, a jump in investment in equipment & software, and by inventories. PCEs also posted a moderate gain along with government purchases. The big negative is a worsening in net exports.

Real final sales to domestic purchasers rose 1.3 percent, compared to up 1.1 percent in the first quarter.

Final sales of domestic product gained an annualized 4.1 percent in the second quarter, following a 1.3 percent rise the prior quarter. Final sales to domestic purchasers exclude inventory investment but include sales to consumers in the U.S., business fixed investment, residential investment, and government purchases. Final sales of domestic product include final sales to domestic purchasers and add in net exports (GDP less inventory investment).

Economy-wide inflation accelerated in the second quarter as the GDP price index rose an annualized 1.8 percent, following a 1.0 percent in the first quarter. The market forecast called for a 1.0 percent gain.

Overall, the recovery is stronger than believed but markets reacted adversely to the headline number for the latest quarter being soft.
A part of the revised data shows that the “recession” of 2007 to 2009 was worse than previously reported, with growth revised downward for that period – part of the trend is to under report weakness, then revise it lower later.

The price index rising much stronger than expected I think reflects the recent bounce higher in oil prices. Still, that reading needs to be watched as it can pressure interest rates. Overall this report is about what I expected, a manipulated and heavily massaged attempt to placate the public.

Chicago PMI and Consumer Sentiment come out just prior to 10 Eastern.

And the world just gets even more bizarre by the day. Yesterday an idea surfaced from a MS analyst that the GSEs should simply reset every prime mortgage held to the lowest possible market rate! This would lower monthly payments and stimulate the economy according to his theory. And actually it would put more money into the hands of a few consumers, it would help the banks on one hand, but it may hurt the holders of bond and derivative holders. It would be yet another moral hazard that ultimately keeps real estate overpriced for longer, and thus it’s an idea that I certainly hope does not come to pass.

Moody’s says that Spain will likely lose their triple-A rating and that it’s time for the U.S. to develop a clear plan regarding our deficits. This warning is pressuring equities.

Additionally, the IMF says that it completed its mini stress test on U.S. banks and that our banks will likely need to raise additional capital. Here’s a snippet from Bloomberg:
July 30 (Bloomberg) -- The U.S. financial system remains fragile and banks subjected to additional economic stress might need as much as $76 billion in capital, according to the results of International Monetary Fund stress tests.

The findings, released today as part of a broader IMF report on the U.S. financial system, suggested that while the nation’s banking system is stable, it remains vulnerable. Home prices, commercial real estate loans and economic growth have the potential to cause shocks that could expose banks to more losses.

Under one scenario, small and regional banks as well as subsidiaries of foreign banks would need $40.5 billion in additional capital to meet a benchmark capital ratio of 6 percent Tier 1 common equity from 2010 to 2014. Under the adverse scenario, those needs rise to $76.3 billion, according to the report.

“Pockets of vulnerabilities linger,” the fund said in the report. The U.S. is recovering from what the IMF called “one of the most devastating financial crises in a century.”

Because the economic recovery is proceeding slowly, regulators must be especially vigilant in guarding against risks and weak spots, the report said.

The IMF also renewed its call for the Obama administration to push ahead with changes to Fannie Mae and Freddie Mac, the government-sponsored enterprise housing companies. The report suggested a partial privatization strategy, in which the government would take over the GSEs’ public housing mission while privatizing investment operations.
Since the IMF is comprised of the same central banks that they are “stress testing,” isn’t this the kettle calling itself black? So what’s their game this time? Let’s revisit that last paragraph… they want the government to “take over the GSEs’ public housing mission while privatizing investment operations.” Uh, huh. In other words, they want the taxpayer to pick up the tab while they run their high leverage games all backstopped by you and me… that’s their game, and they absolutely need to be stopped. Again, with no adult supervision to be found, the criminals continue to run their Ponzi schemes.

The up, down, up action yesterday broke what I was tracking as the wave c channel, but did not break beneath the larger wave 2 channel. The 30 minute chart below shows these, note that the opening print fell exactly on the bottom of the larger channel, so be careful:

McHugh still believes yesterday was a part of a wave 4 movement, and that should prices fall beneath 10,300 on the DOW that it’s his clue that wave 3 has begun. I personally don’t see how we could still be in wave 4 as the smaller channel break means that we have likely turned into the next wave. For me, a break below the larger channel means that wave 2 is likely done and that we have entered wave 3. Regardless, it appears that the 1115 area and the 50% retrace stopped the advance without making new intraday highs and now we are likely turning.

The VIX is attempting to break above its descending upper trendline, a clean break above that line is very bearish for the market:

Bonds are substantially higher showing that money is once again flowing to “safety.” Keep in mind that today is Friday and that the HFT machines are programmed to Pavlov the market prior to the close in anticipation of the coming Monday ramp job. At some point the dog is going to run out of treats, I hope that comes sooner than later as that trend is definitely tiresome.

Thursday, July 29, 2010

Morning Update/ Market Thread 7/29

Good Morning,

Equity futures began rising after the close yesterday and have not looked back. The dollar is down, and bonds are down as well which is supportive of higher equities this morning. Both oil and gold are down slightly, with oil in the $76 range, having failed to break above $80 resistance.

Slipping below most people’s radar, wheat has been one commodity that has been on a wild ride. Below is a chart showing the daily price movement, and on the right is the weekly. On the daily, you can see that price of wheat has risen from $425 to $659 in about a month and a half. That’s a 55% rise! And that move is absolutely straight up, the type of parabolic move that you know is going to reverse hard at some point, and that point may be approaching. If you look at the weekly chart you will see that price collapsed and then began a volatile trading range, wheat is now at the upper end of that range. I would not attempt to play it here, but a breakout may be talking to us, as would a reversal, so it’s worth watching. Corn has also been moving up, but not as dramatically:

This morning the jobless claims came in at 457,000, slightly lower than the prior week’s 464k (revised to 468k), and slightly less than consensus of 460k. Yet another very elevated report, it is troubling that this number is not coming down. It’s my thesis that debt saturation is the underlying cause, and that employment will not return to health until that condition is truly cured. Here’s Econoday:
Initial jobless claims for the July 24 week were down by 11,000 to 457,000, slightly lower than expected by analysts. However, the number of initial claims was revised up to 468,000 from 464,000 in the prior week. The four week average dropped by 4,500 to 452,500 in the July 24 week and the lowest since the May 8 week when the average was 450,500.

Continuing claims in the July 17 week were up by 81,000 to 4.565 million. The four week moving average here was down by 18,000 to 4,548,250, the lowest level since the December 27, 2008 week. The seasonally adjusted insured unemployment rate rebounded to 3.6 percent in the July 17 week after edging down to 3.5 percent in the previous week.

Tomorrow will be data intensive with the first crack at Q2 GDP. The consensus is looking for 2.5% growth. The Chicago PMI and Consumer Sentiment are also released tomorrow.

The rising wedge that everyone thought was occurring is now pretty much excluded as being in play. Our first clue is that prices normally drop hard out of a rising wedge, and instead we got sideways with a little bit of down. That movement created the lower boundary of what now looks like an up channel. Inside of that channel you can clearly see that it looks like we have made 4 waves and thus it looks probable that we will see a final wave higher. Just remember that 5th waves are wild cards, they can truncate or extend, so picking a target is difficult and requires paying attention to fib levels and prior resistance. Below is a 30 minute chart showing those waves within the brown up channel, that channel comprises wave c of an a,b,c that is inside of a larger up channel:

The good thing about having a well defined channel is that it gives us a clear indication of the next trend change and that boundary line will make a good entry/ stop point.

I find the move lower in the dollar interesting, it has come quite a long way. The Euro, however, is coming up on resistance soon and bonds are still close to their recent highs. The VIX is another item to watch, yesterday it produced a hammer just over the 200dma. Should it fall and stay beneath the 200, it would be bullish, but it is stubbornly remaining above it for now. Support is at 1090 and 1100. Resistance will be found at the 1107 pivot, the 50% fib at 1115, the June high of 1131, as well as a pivot at 1136. The 61.8% of the entire move since the April peak is at 1140, so there is quite a bit of resistance to chew on.

The market moves in waves, as manipulated as it is, it is still a part of nature and contains a rhythm. It’s our job to get in synch with that rhythm…

Carlos Santana - Oye Como Va

*The first sentence is actually “Oye como va mi ritmo,” meaning “Listen to how my rhythm goes.”

Wednesday, July 28, 2010

Morning Update/ Market Thread 7/28

Good Morning,

Thank you again to those who participated in an enlightening manner on the market threads while I was away! While I’m back for today, I am only partially up to speed and will be gone again off and on the rest of this week. Next week the markets should get my full attention.

Equity futures are lower this morning and they have broken my rising wedges on the futures – but not yet on the day only charts. It is possible that they simply broaden and morph into an up channel, we will have to watch the action to see. A rising wedge should break down fairly hard if it’s truly in play, if we move sideways then there may be another wave higher coming. Below is a snapshot of the rising wedges as depicted on a 15 minute chart, DOW on the left, S&P on the right:

The dollar is flat, bonds are down slightly, oil and gold are both flat after very large down moves yesterday.

The economic data continues to deteriorate – I can’t recall a truly positive piece of news over the past month or so and that certainly did not change while I was away. The ECRI has now fallen more than 10% and is a good indication that another recession will be recognized.

This morning the (worthless) MBA Purchase Index rose 2% over the prior week. The Refinancing index fell 5.9%, pushing the composite index down 4.4%. Housing remains in the gutter and will remain so for quite some time. I think it’s interesting to note that the media is reporting home ownership has fallen to 11 year lows (duh), and in unrelated pieces that renting is a growing trend (duh). This trend will reverse, but we are not close to that point yet as renting is still financially favorable to owning in most areas and circumstances.

Durable Goods Orders fell another 1.0% for the month of June, this follows a 1.1% drop in May. The Consensus was expecting a rise to a positive 1%, so they missed completely in the wrong direction. The year over year numbers are higher, but keep in mind that comparisons to that time frame are very easy and that there was much stimulus between then and now – much of which is no longer with us. Here’s Econoday:
The manufacturing sector sputtered in June, according to new durables orders. New factory orders for durable goods in June fell 1.0 percent, following a 0.8 percent drop the month before. The June numbers fell well short of market expectations for a 1.0 percent boost.

The June decline was led by the transportation component. Excluding transportation, new durables orders slipped 0.6 percent, following a 1.2 percent gain in June. Outside of transportation, major components were mixed, albeit net negative. Other than the fact that markets were disappointed that Boeing orders did not turn overall durables positive, the monthly trend is still upward, although volatile.

For the second month in a row, the big negative was the transportation component which fell 2.4 percent in June, following a 6.6 percent drop in May. Nondefense aircraft decreased 25.6 percent after falling 30.2 percent in May. Defense aircraft rebounded 6.5 percent. Motor vehicles continued a recent string of gains, rising 2.5 percent in June.

Other components were mixed. Declines were seen in primary metals, machinery, computers & electronics, and in "all other." Components gaining were fabricated metals and electrical equipment.

Nondefense capital goods orders excluding aircraft in June rose 0.6 percent, following a 4.6 percent spike the month before. Shipments for this category edged up 0.2 percent in June, following a 1.5 percent rise in May.

Year-on-year, overall new orders for durable goods in June were up 15.9 percent, compared to 15.2 percent in May. Excluding transportation, new durables orders came in at up 15.0 percent, compared to 17.8 percent the prior month.

On the news, equity futures slipped and Treasury yields edged down.

Turning to the charts, on the 3 month SPX chart below you can clearly see the a,b,c nature of the rally off the July 1 low. Wave c is now proportional to wave a time wise, but it is weaker distance wise. This tells me that the ultra bullish count some EW people are looking at is incorrect. If they were correct, then this would be a wave 3 higher which should be getting stronger on the next level of 3 – it’s not, it’s getting weaker with price and it’s on lower volume. As I predicted, the SPX 1115 area has acted as resistance for now – it is a 50% retrace level of the decline since April and has significant resistance in this area. Again, it could be that we are simply basing for another push higher:

The daily RSI bullish divergence that was in place is almost washed out at this point and there is now a fairly significant short term bearish divergence in place on the shorter timeframes.

What is bullish is that both the Transports and Industrials made new closing highs above their June highs. This is a secondary DOW Theory buy signal. A primary signal would only come by exceeding a primary high, that would be exceeding the April mark. Still, this should not be ignored as it gives the bulls fuel and fodder to believe that the trend has changed. That’s what wave 2s do, they are meant to fool.

Long term bonds have clearly broken their uptrend, but both TLT and the TNX look like they are running into support/ resistance.

The VIX broke support beneath the 200dma, but I note is back above it this morning:

Both the Transports and the RUT produced closes above the upper Bollinger Band and then yesterday closed beneath them. Those are sell indications, but prices need to be watched to ensure that they don’t close back above them – in other words, follow-through is required. Below is a daily of chart of the Transports showing this:

Overall I’m still not believing the bullish case and I’m certainly not buying the supposed massively higher earnings either. What I see are financial companies marking their garbage to model and that is producing fluff across the spectrum. Start marking assets to market and then we’ll see what is truly real in the market – until then it’s all simply games and illusion.

Tuesday, July 27, 2010

Market Thread 7/27

I'm out of town through Today... please use the comments to update and inform one another on the current market action, thank you!

Monday, July 26, 2010

Market Thread 7/26

I'm out of town through Tuesday... please use the comments to update and inform one another on the current market action, thank you!