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:

Thursday, August 12, 2010

Bill Black on Max Keiser

What follows is a terrific interview with Bill Black where he touches upon many important topics and helps delineate the scope of this crisis. Interview begins about 13 minutes in (ht Jeff):

Damon Vrabel – Monopoly Money and the International Banking Cartel

The sooner people understand what it is Damon is saying here - WHO is in control of our money - the sooner we can find real and meaningful progress!
Monopoly Money and the International Banking Cartel

By Damon Vrabel

The Federal Reserve has been at the top of the news for a long time and it’s getting a lot of attention now as it appears the next down cycle in the depression may be upon us. So what’s the real reason the world listens so intently to an Ivy League bureaucrat like Bernanke? Of course, it has nothing to do with him. It’s who he is accountable to–the international banking cartel:

Bank of America Securities LLC
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Goldman, Sachs & Co.
Jefferies & Company, Inc.
J. P. Morgan Securities Inc.
Morgan Stanley & Co. Inc.

Barclays Capital Inc.
HSBC Securities (USA) Inc.

Credit Suisse Securities (USA) LLC
UBS Securities LLC.

Daiwa Capital Markets America Inc.
Mizuho Securities USA Inc.
Nomura Securities International, Inc.

Deutsche Bank Securities Inc.

BNP Paribas Securities Corp.

RBC Capital Markets Corp.

RBS Securities Inc.

These institutions are the current primary dealers of the Federal Reserve System. They have power over the entire economy, everything in “the market,” very much a non-free market. They sit at the top of the world’s monetary system, currently the Fed’s debt-dollar pyramid, with a governmental license to what has been the most secure capital in the world–US Treasury debt–for a monopoly price that nobody else can get. And when it comes to global finance, the difference between the strongest banks vs. dying banks is just a few basis points in price (cost of capital).

These banks get first dibs on buying the servitude of the US population through the Fed/Treasury auction process. They distribute some of it to subordinate capital for a guaranteed premium, and they park a large amount of it on their own balance sheets as assets upon which they can speculate, trade, and fractionalize to create the rest of the money in the economy and put other countries, companies, and people in even more debt. So these institutions hold a monopoly position that even leviathan Standard Oil never dreamed of: a government-enforced usury license that generates trillions for their premium capital holders and senior employees and allows them to act as imperial armies sucking in more territory around the world as neoliberalism breaks down sovereignty.

This is why the country list above doesn’t mean what some may think. The institutions aren’t national. The list only indicates that the banking establishment has a permanent parasitic stake in those countries to churn their populations under the Fed’s debt system. All of the listed institutions are global in nature. Together with hedge funds and their other buy-side buddies, they have power over nations. Like any corporate institution, banks drive earnings per share (EPS) by expanding and leveraging their balance sheets, which for banks means putting everything else in more debt. So these cartel banks work to expand their territorial control beyond their national borders to put other populations in debt. This is a mathematical requirement of exponential growth enforced by the private capital system. The eventual end state of this dynamic is one integrated, global banking empire. It’s only a matter of time before their collective balance sheets (plus the large Chinese banks now that the cartel is colluding with them) control the rest of the world if people don’t awaken and choose to put a stop to it.

Will they succeed? The Fed system is in transition. The crash of 2008 was the first phase of global capital holders shifting their private capital out of the system so the Fed was forced to add public capital, i.e. your debt, into the system. More of this is likely coming. But does this mean the international banks behind the Fed are dying? No. They’ve simply transferred their bad assets to the public through the Fed and prepared to ramp up operations in Asia, which will be a primary churn center for the 21st century global banking system. Capital assets have been transferred, production assets have been transferred, and the capital holders can transfer much more capital in a short period of time if they so choose.

All the specifics of this coming transition may not be clear, but it is coming unless the global population says no. The banks have set up the ultimate voluntary test. If we continue to say yes by playing along with the banks and the multinational corporations they control, then they will have proven that a global empire ruled by an integrated banking system is preferred and possibly superior to independent countries. But they appear to be failing their own test. Ivy League neoliberalism has been exposed for what it is. The people are now indeed saying no.

Graham Summers – Is Gold Crash Proof This Time Around?

Here’s a good article on gold from Graham Summers. The bottom line for me is that until the excessive debt is cleared, gold is going to outperform in the long run…

Is Gold Crash Proof This Time Around?

I’ve been receiving quite a few emails regarding the topic of Gold and how it will perform if another Crash hits. The following are my thoughts on this matter.

The first thing that needs to be said is that IF we have another systemic meltdown like that of Autumn 2008, Gold will likely go down along with everything else. There are simply too many big players (hedge funds, investment banks, etc) with heavy exposure to Gold who would be forced to liquidate their positions during a systemic collapse.

I know this is not what the Gold bugs want to hear, but during systemic Crises, just about every investment on the planet plunges while the US Dollar and Treasuries rally. Of course, this time around if another 2008-type event hits, it will undoubtedly involve or be focused on sovereign debt. So this raises the potential that Treasuries, particularly those on the long-end of the yield curve, could be hammered as well as all other assets outside the Dollar. This is worth keeping in mind for those who view Treasuries as a safe haven.

So if we go into a 2008-type event, Gold will fall. It will likely fall much less than other assets (stocks and industrial commodities), but it will still go down at least at first. This forecast is confirmed by the market action in 2008 as well as the market collapse from April 2010-July 2010. Both times Gold took a hit, but both times it came back quickly.

So if you’re heavily exposed to Gold, you’re going to need to think “big picture” or have a very strong stomach when the market Crashes.

Now, let’s take a look at the charts.

For starters, the number one metric you need to focus on in terms of determining Gold’s market action is the 34-week exponential moving average. Since the Gold bull market began in 2001, this has been THE support line for Gold.

As you can see, Gold has only broken below this line ONCE in the last ten years and that was during the 2008 systemic collapse. So take a note of this line and always watch where Gold trades relative to it.

Indeed, a significant break below this line that DOESN’T occur during a system Crash would be a MAJOR warning that the Gold bull market is in trouble. Remember, the ONLY time we took this line out before was during the systemic collapse in 2008. So a break below it WITHOUT a Crisis would be VERY bearish.

And if Gold breaks below this line on its own (without a Crisis) and then fails to reclaim it… well, then it would be SERIOUS time to reevaluate the Gold bull market story.

Because of its significance as THE support line for the Gold bull market, the 34-week exponential moving average also serves as an excellent gauge for determining when Gold needs to take a breather or correct.

Indeed, anytime Gold has stretched too far away from this line to the upside, it has usually staged a pretty sharp reversal to re-test this line. I’ve circled the most significant episodes of this from the last seven years in red on the chart below.

These are the BIG picture gauges and items to take note of: the points to remember in terms of determining where Gold is in its bull market and whether it’s an asset class you want to “buy and hold."

Now let’s move into the more intermediate gauges and items relevant to determining Gold’s action from a trading perspective in the past and today.

Gold’s bull market of the last ten years has largely taken place within the confines of several very clear upward trading channels. Indeed, each “leg up” has featured Gold breaking above the upper trend-line of a given channel at which point said upper trend-line became the lower trend-line for the next trading channel (see below).

As you can see, the first “leg up” in Gold’s bull market took place from 2001 to late 2005. At that point Gold broke out of its old trading channel and entered its “next leg up” which took place from 2006-until early 2008 when the Bear Stearns crisis blasted Gold into yet another trading range.

The systemic Crash in Autumn 2008 brought Gold back down into a former range (the only time this happened in the last 10 years), but the precious metal bounced back quickly. It DID have some difficulty breaking into its final “leg up” and staying there this time around, but by mid-2009, Gold was again on a tear entering its highest trading range yet where it remains today.

You’ll note that the clear significance of these various trend lines have made for some great trading: virtually every test of a trend line to the upside or downside made for a good exit or entry point for a short-term trade.

As I write this, Gold is trading in a well-defined range between $1,150 and $1,300. Going by Gold’s action of the last 10 years, we could see the precious metal continue to trade in this range for a while without breaking out either way. This, of course, assumes we don’t have another systemic meltdown AND that the Gold bull market has plenty of more room to run.

The major indicators that could nullify this forecast are:

A break below the lower trend line WITHOUT a Crash

A break above the upper trend line that held

Regarding #1, if Gold broke below its lower trend line without a systemic “episode,” it would represent the first time Gold broke to a lower trading range without systemic risk. That would be a MAJOR red flag to watch out for if you’re a Gold bull.

Conversely, a significant break above $1,300 would signal yet another “leg up” has begun and would a MAJOR sign that the Gold bull market has plenty of more room to run.

A final significant move to watch for would be if Gold were to collapse into a lower trading range as a result of a Crash and NOT break out again. Even during the 2008 disaster, Gold was back to re-testing its upper trend line within a few months. So if another systemic Crash hits and Gold doesn’t bounce back quickly that’s ALSO a major warning sign that the Gold bull market is in trouble.

We’ve covered a lot of ground here, so I’ll close this article by listing the main points of this article:
“buy and hold” Gold investors MUST focus on the 34-week exponential moving average (currently $1,158). A break below this level WITHOUT a Crash is BAD NEWS.

Traders should focus on Gold’s trend lines for determining entry and exit points. Currently the trend lines are $1,300 on the upside and $1,150 on the downside.

A break below $1,150 WITHOUT a Crash would be a MAJOR warning to the bulls. So would a break below $1,150 WITH a Crash that wasn’t quickly followed by a strong bounce back and re-test of the upper trend line.

Good Investing!

Graham Summers

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:

Wednesday, August 11, 2010

Morning Update/ Market Thread 8/11

Good Morning,

Finally, we get a break… literally! Futures are down hard this morning, decisively breaking the wave 2 rising wedge that has transpired since the beginning of July. You would expect rising wedges to break quickly and this one has. The only problem with the break overnight is that it will leave a fairly large gap, and that opens up the possibility of a return to fill the gap at some point.

Bonds are making new highs, the dollar is higher after touching the 61.8% retrace mark, oil is breaking down hard and is back below the important $80 mark again, while gold is roughly flat.

The FOMC announcement yesterday included the Fed’s latest scheme/ scam/ game to fool the public. Uh, let’s see, we’ll take the principal payments from Freddie and Fannie mortgages (robbing Peter) held by the government (and not on our books), to purchase long term government bonds (pay Paul) in an effort to continue to suppress interest rates which will help the banks and once again do nothing to help consumers who are saturated with debt while living in homes that are sinking in a sea of falling liquidity...

…In other words, they are printing money but conning the globe in hopes that they don’t destroy confidence. That’s what con men do in order to keep their game alive longer. And this con is going to cost about another $340 billion over the next year – effectively to buy down interest rates again. And once again this is a hidden INTEREST EXPENSE. The real interest on the national debt is much higher than admitted and takes up a huge chunk of (if not all of) our tax collections. This is a circle from which there is no escape and no end – it will have to continue until the game collapses, that’s the way all Ponzi schemes and exponential growth works.

For now, the game continues, but they are walking a tight rope and they know it. On one side of the rope a plunge awaits due to a deflationary spiral. On the other side of the rope lies disaster as confidence, if lost, will definitely land the country on the rocks below.

The market, knowing that deflationary forces far exceed $340 billion of stimulus put in a high the day prior to the Bradley Model turn date, obeying the cycles of the universe.

Overseas economic reports are showing signs of economic cooling, this is pressuring overseas markets and that will provide a feedback loop into our markets, further pressuring our already weak and fragile economy.

The MBA Purchase Applications Index fell from a week prior rise of 1.5% to a .3% rise – gee, what happened to their wild 30% weekly swings? LOL, have they realized that not everyone is that gullible? The Composite Index fell from a rise of 1.3% to a rise of .6% in the past week – this index is still sitting near all time record lows.

The International Trade report for June shows that Americans are still willing to spend money they don’t have, but that other countries are not buying our exports. This is causing our trade deficit to widen again, here’s Econoday:
The U.S. appetite for imported goods rose in June – but not overseas as U.S. exports fell. The overall U.S. trade deficit spiked to $49.9 billion from $42.0 billion in May. The June shortfall was much larger than the market forecast for a $42.5 billion gap. Exports fell 1.3 percent, following a 2.5 percent gain in May. Overall imports advanced 3.0 percent in June after rising 2.8 percent the month before. Nonoil imports gained a sharp 4.7 percent, following a 6.1 percent spike in May.

The widening of the trade gap was primarily in non-oil. The nonpetroleum deficit widened to $40.0 billion in June from $32.2 billion the prior month. The petroleum goods gap, however, narrowed to $21.2 billion from $21.5 billion in May.

By end-use categories, the drop in goods exports was led by a $1.4 billion decline in capital goods excluding autos. Also slipping were industrial supplies, down $1.0 billion and foods, feeds & beverages, down $0.3 billion. Exports of consumer goods, and autos posted modest gains.

The advance in imports was widespread outside of oil. Consumer goods surged $3.1 billion; autos were up $1.3 billion; capital goods ex autos increased $0.5 billion; and foods, feeds & beverages rose marginally. Industrial supplies-which include oil-fell $0.2 billion.

Equities dipped further on the news. Already futures were down sharply after news of slower growth in China and a downgraded outlook from the Bank of England sent equities down overseas.

And once again, only those playing in the futures market overnight had a shot at a clean entry for the break of that rising wedge. The rest of us non-HFT owning peons are left with no clean entry as, unlike a Cray supercomputer, we require sleep.

Be wary of the SPX 1100 area, it is the bottom of the range (depicted in red below) that has provided support for most of the past year. A break beneath 1100 is very bearish, as if the break of that rising wedge isn’t bearish enough! That, by the way, portends a return to the base of the wedge, about SPX 1010, and that should happen in a much shorter time frame than the rise occurred – in other words, we have most likely begun wave 3 down and it should be powerful. On the one year chart below, you can see the textbook perfect Head & Shoulders pattern that now looks complete both in price and time wise. Wave 3 should take us to its target of approximately 860ish over the next few months:

The VIX has now broken up and out of its pennant, the bullish target on this break is approximately 58:

My belief is that the coming waves are the ones that will usher in real change. They are very dangerous waves, as that change will profoundly impact real lives. But in every environment of change there is opportunity, and that is coming for those who have managed their affairs well. Those with cash and real assets are going to have once in a lifetime buying opportunities – they are coming, but not yet.

I'm up on the tightwire
one side's ice and one is fire
its a CIRCUS game with you and me...

Tuesday, August 10, 2010

Morning Update/ Market thread 8/10

Good Morning,

Equity prices are slipping quickly this morning ahead of the FOMC announcement (2:15 Eastern). The dollar is up sharply, bonds are higher, and both oil and gold are lower. Unfortunately, this action will produce opening gaps on the charts, so be very careful if you are trading in front of the FOMC, and expect that the first reaction is very likely the wrong reaction.

Yesterday’s gains were very trepid, coming on falling and pathetically low volume. Below is a daily chart of the SPY showing how the volume has been falling ever since the Flash Crash low, and with each bounce volume falls further, while on each decline it rises. Volume confirms price, and the direction since the beginning of July is up, volume is saying that this rising wedge rally is getting very, very tired:

China’s Shanghai Index fell 2.9% overnight and that did help to get our futures rolling downhill. Note in the 3 year daily chart below (last night’s decline not depicted) that the gap between the SPX and Shanghai market has actually been growing. That condition typically will resolve with our markets playing catch-up as you can see that occurred during the ’08 timeframe with the Chinese markets leading:

There were some Chinese economic reports indicating potential slowing, but also China took action to have their banks pull some off-balance sheet paper back onto their books – holding debts off balance sheet can give the appearance of lower leverage than actually exists, thus this would be a step towards less leverage in their banking system:
Aug. 10 (Bloomberg) -- China’s banking regulator ordered banks to transfer off-balance sheet loans onto their books and make provisions for those that may default, three people with knowledge of the situation said.

The move may increase pressure for capital-raising at Chinese banks, which Fitch Ratings last month said had more than 2.3 trillion yuan ($339 billion) of off-balance sheet assets. It also underscores concerns about the health of the banking industry after a person with knowledge of the matter said regulators last month ordered lenders to conduct stress tests to gauge the impact of home prices falling as much as 60 percent.

Back in the U.S., Non-farm Productivity fell .9% in Quarter 2. Expectations were for a flat report, so this is worse than expected, however, quarter 1 was revised higher from the initially reported +2.8%. This is a rapid deceleration of productivity, one of the measurements that I believe has been vastly overstated. Unit Labor Costs rose .2% which is much less than the expected 1.5% rise that was forecast, showing once again that creating inflation is much more difficult in this environment than most economists believe - this is because they live and were trained in a linear world that does not exist, nor do they understand debt saturation. Here’s Econoday:
A 3.6 percent increase in hours worked outpaced a 2.6 percent increase in output, making for a 0.9 percent quarter-to-quarter decline in second quarter productivity and ending five straight quarters of strong growth. In a partial offset, first-quarter productivity was revised 1.1 percentage points higher to plus 3.9 percent.

The reversal in second-quarter productivity made for a 0.2 percent rise in labor costs to end three straight quarters of sequential decline. The rise in labor costs doesn't mean that workers are making more. Hourly compensation fell 0.7 percent following a flat reading in the first quarter. Weakening productivity is not surprise given the slowdown in growth, but today's results are further evidence that the recovery may be in jeopardy.

An admission that the “recovery” might be in jeopardy? Oh my, it’s only been what, three straight months of horrific economic data? Congratulations, I think they might be coming around… naw, their pay is tied to selling never ending growth, just like the rest.

Of course the bond market has been recognizing reality for quite some time, and has not backed down from that pronouncement. You can see that clearly in the chart below that shows the U.S. Bond Fund (long duration bonds) versus the SPX (thin black line). Note that typically a rise in bond price portends lower prices in stocks as was the case up until July. Then in mid-July bond prices continued to rise while stocks rose with them. One of these is wrong, and it is almost a 100% guarantee that the bond market is right:

This is one of many divergences now in place, all indicating that equities are pushing the envelope. And speaking of envelope, here’s a close up of the VIX daily showing how yesterday’s action pinned both the upper and lower boundaries of the flag it has formed. I think a break is highly likely today, but expect wild swings on the FOMC announcement:

Below is a 60 minute chart of the SPX showing the rising wedge. Note the top of the wedge is now 1140, while the bottom is roughly 1115:

There were 5 distinct waves into yesterday’s high, which means that a pullback should be expected. McHugh seems to favor overthrowing the top of that wedge after a small decline first, but that definitely does not need to happen, nor is it important from my perspective. What’s more important is the bottom trendline and breaking decisively below 1115 – that would indicate to me that wave 2 is over, and it provides a demarcation line for entry/ stop positions.

Today is the Bradley Model turn date… the direction into the turn is obviously up, and all indications are that the rise is very tired. We are also heading into the unfavorable time of year for equities, it may finally be time…

Monday, August 9, 2010

Morning Update/ Market Thread 8/9

Good Morning,

Welcome to your oh so difficult to predict, absolutely ridiculous, Monday morning HFT driven ramp. Like Bill Murray in Groundhog Day, I think all of us non-HFT using, non-dark pool “investors,” have already smashed our alarm clocks and are ready to find a way out of this most frustrating computer loop. It was ridiculous when it first became noticeable, then it became an outright slap in the face to any semblance of a market and freedom, but now it’s just plain old BORING.

With no economic data today in front of tomorrow’s rumor wild FOMC meeting announcement, there is little opportunity to throw any more reality onto the “markets.” In the mean time, the bond market remains in record yield territory, refusing to confirm the up action in equities. Oil remains above the dangerous $80 mark, while gold is basically flat.

There is, I think, a concerted effort to put a positive psychological spin on the markets via the politicians through the media (duh) that is getting to the point of being so blatant that these people are losing credibility. In just the past few days, we have had Obama, Geithner, Robert Rubin, and Paul O’Neill, all central banking lackeys who say they see continued [never ending and mathematically impossible] growth in our futures. Right… because saying so over and over will make me want to go out and buy a home that’s still 40% over priced, or an automobile that is 50% overpriced.

But attempting to talk people into believing that black is white reduces their ability to sell more stimulus. And that is why I think the rumors of FOMC action regarding “QE 2” are nothing but an attempt to prop the markets just a little longer as the big players continue to distribute to anyone who will buy their BS. In the old days we called such rumors “manipulation” and while there are laws about that, they only are applicable if such rumors cause the price of anything to go down. Any action to manipulate the price higher makes you a good hearted, red blooded, all-American. Do that well enough and you might even stand a shot at entering the inner circle. Do it well enough to make prices go down, you will wind up in prison – unless you are already in the inner circle, in which case you make money every single day in the first quarter, and only lose money on 10 trading days in the second quarter (how in the heck do you lose money on any day when you are the market and the government is complicit using trillions to build you in a permanent interest rate arbitrage scam)?

So we simply await the last sucker to buy into their bullshit, for there is always some idiot who is so asleep that they actually believe the spin... Evidently they must only watch CNBS and have therefore not seen the rising wedge that every single market caller in the world has now published at least a dozen times…

Yesterday’s plunge to the lower trendline and bounce made this pattern look complete to me with 5 waves inside of the wedge. The fact that it bounced and ran higher on Friday afternoon does not look natural, although McHugh labels Friday’s downmove as wave ‘b’ and believes that the ramp we are currently experiencing is the final wave higher of the formation with the potential to reach, or even overthrow, the top of the rising wedge. I personally think that this move higher produces too many waves and touches on that rising wedge, it does not look natural at this point. Regardless, I think that once we get beyond the latest market rumors and the FOMC announcement that we will run out of suckers for distribution.

Below is a 60 minute chart showing the rising wedge:

Tomorrow is a Bradley model turn date and we are squarely in the turn window for those who study cycles, like Martin Armstrong and Arch Crawford.

The VIX has formed a large pennant that is just about out of time. This formation is expected to break upwards. Note we are sitting right on the lower Bollinger – any significant push higher today may send the VIX to a close below that Bollinger, and that would set up a potential market sell signal when it returns back inside of the bands:

With the dollar finding support and with money continuing to race into bonds, I think the pressure is mounting on equities and I think the façade begins to melt soon…

Dang, 10 trading days that didn’t pan out in the second quarter… if only every day was an HFT Monday!