Looking at the Candidates: Barack Obama

This year's presidential election is an important one for the nation. The country is suffering from erratic growth patterns (growth in some areas and contraction in others) and generally holds the white house to blame for it. Further, there is a war, or two, going on overseas and it appears the current conflict in George is steaming towards another. There is a global housing crisis in play though domestically it feels like the worst housing bust ever. There is a problem with rising prices and falling real wages (though rising nominally). Overall, at first glance, things suck to put it bluntly. At least this is the message that the democrats and Barak Obama are arguing.

(Before I continue, just for disclosure purposes, I am a registered democrat).

Over the next few months, I will attempt to break down the policies of the candidates for the oval office. I figure now is a good time to start with the democrats as they just finished their convention and the policies, or the proposals, are now "out there" for everyone to analyze. Next week the republicans will have their chance to spread their ideas and following that period, the proposals will be out more formerly which will allow for a more thorough analysis.

Initial Thoughts on Obama's Plan
Obama starts his economic plan with an expert from a speech he made in 2007. He endorses the free market as building block to our nation. He argues that everyone is involved in the process and should benefit from it. However, if you continue on with this plan, reading down the rest of the page, every policy discussed goes after the free market. It argues for the government to bend over backwards for everyone. It depends on a good deal of money. Overall, it is essentially a plan to socialize the free market. Is this necessarily a bad thing?

Well, everyone should care for each other some vicinity - to have compassion for those who are having problems. I myself are healthy. However, many people are not. Does that mean I go out and donate my life to medicine? No but it does argue that if I have a few extra dollars or some extra time, I should volunteer it to an organization or to an individual. One thing that the free market does not create is compassion as the free market is pure capitalism. Pure capitalism is survival of the fittest. Unfortunately, not everyone can survive and that is the environment that we currently reside in. Obama's plan is to move the pure capitalist environment towards the social side. Is he saying to cross it? It does not appear that way.

In his opening missive, he argues that the problem is two fold: First the rich are not paying enough. Second, wages are stagnant. In regards to the former, that is an debate that has been going on forever. One could argue that the system allowed for the rich to get rich and some of those "riches" so to speak should be plowed back into system for the benefit of others. On the other hand, if one works hard and achieves riches, why should he be penalized? In regards to the latter problem, on wages, this is not something the government should be involved in. Sure, the minimum wage should exist but beyond that, stay away. The government, through the Fed, should push price pressure lower so real wages are positive. Rising wages are a good thing. however, given the current environment, rising wages are not helpful. Knocking down inflation should be the goal.

Over the next few days and weeks, I will break down Obama's plan. It involves several topics including

• Middle Class Tax Relief
• International Trade
• Job Creation
• Small Business
• Labor
• Home Ownership issues
• Credit and bankruptcy issues
• Work Family balance

Each of the issues will probably be discussed by the candidates so when I present John McCain's plan, I will probably run the same list. Just a different perspective on the issue. So with that said, I shall start with Taxes and the issues behind it in my first post later today (or tomorrow depending on my time).

Vacation

Well folks. My 2 week vacation has started. I shall be on and off the blog for the next few weeks (though I will still be trading). I will come back in September refreshed and ready to go. Talk, or should I say, write, to you then..... - TC.

Is Housing Affordable?

The NAR Affordability Index has been knocked in the past for not representing the housing market correctly. It tends to overstate the health of the consumer and understate the weakness. It takes into account Median single family homes values, median income and current mortgage rates manipulating the data so it gives a the payment percent of income and a qualifying income (which is explained here). The data does not appear to take into account rising local tax rates. Further, I am not sure if it takes an average interest rate for a weighted average interest rate. The difference, in today's world particularly, is somewhat major given the state of the credit markets.

In looking at the data over the past year, the price of existing homes and the mortgage rate have been decently correlated with both rising and falling together in most cases. For the June data, the price of an existing home moved up about 6k to 213k. The mortgage rate jumped more aggressively to the upside to 6.28. From what I can gather of the rate markets over the past month, this 6.28 has been about the level for conforming rates, via FNMA generics. However, prices of sales in July and August for that matter, have declined somewhat aggressively. Essentially, prices have fallen but the credit markets have not followed. This is somewhat of a worrisome trend and could derail my housing thoughts from this morning.

In terms of the bigger picture, the housing affordability index, when combining the idea that only people with income can buy a home, has actually been strengthening at a greater pace over the past year. Payments as a percent of the median price fell under 20% earlier this year. If you take into account those who can make the payments, this argues that the market may actually be stronger than these numbers indicate. This means that the general stress that housing payments became, are now unwinding. If this stress unwinds, when combined with lower gasoline prices (and perhaps heating bills as Natural gas gets clubbed), could create some growth in consumer spending come the fall. Further, if there is less stress in the payments, then that raises the probability that many of these written down CDO's or other mortgages debts, starts to find a pulse. This could lead to write ups in the coming future.

Now, I need to do some more search on this idea but I figured I would share it as it seems like perhaps things are improving as stresses unwind in the economy - this contrary to the popular belief on the economic bears side of the ledger.

Weekly Equity Market Outlook

An interesting week came to an end on Friday with a low volume rally into the close. As I mentioned yesterday in my notes, the persistent bid that showed up at the 1265 level earlier in the week was sitting at the 1285 level on Friday. Some may call this the plunge petrol. Others may call it a lack of selling strength. With the volumes very low and tapering off as the week went on, one could argue that the shorts, who probably had a decent past three months, decided to pack it in and go on vacation. August after all is the month that most in the financial world goes on vacation. It is also one of those types of months where what happened at the beginning tends to unwind at the end. Last year we dived into the midmonth only to finish down marginally by the end - interestingly, we are seeing the same thing this year as well.

Short Term
Over the short term, I am on the offensive side of the ball. I was tripped into long positions in both the S&P and the NDX. The forward trends look like this rally could continue into the end of the week though overall it is very slow moving. At this rate of speed, by my calculations, the high of the run would be somewhere in the 1308 level going into month end. That would coincide with a high of sorts as well. In addition, that would be about 6 to 7 weeks from the low in July which some have argued would be the length of the bounce. What hurts the rally case is again the low volume of the mini contracts which has tapered off to the point that the 9 day average of volume is the lowest since the beginning off May.

Intermediate Term
The Intermediate term models are still pointing to the upside though it is tapering off. There is also a divergence as well which indicate that the rally is long in the tooth. This sort of goes hand and hand with my idea of moderating trends in the marketplace. If you combine this with my believe that the rally had potential to go towards the 1325 level, then perhaps the outlook now is towards the 1325 level through September before we head lower. In terms of the leaders from last week, the NDX and the Russell, weakness has arrived it appears. The NDX got over the resistance levels mentioned but has stalled around 1965. This is not necessarily a negative to the rally but a failure here and a move back toward 1900 could become a problem for the bulls. In terms of the Russell, it too has stalled but the upward trend remains intact. So overall, the intermediate term looks like these indexes could march towards the resistance levels before a return lower and a resumption of the bear.

Long Term
The 1350 level, combined with my bull/bear model still argues for a bear market focus. On the long term chart, the S&P is forming a nice reversal pattern but in order to confirm it, we would need a rally in September. Do I see that coming at this point? Not quite sure. A few things would have to kick in. First, the Russell would have to climb further and not stall out. The Crude market would have to collapse further and earnings would have to pick up. Do you see any of that occurring? Perhaps the idea of crude falling further is possible and the Rally in the Russell continues but earnings are just awful at this point and if crude falls lower, the one positive earnings contribution from the energy sector will be less. But, one thing working on the long term chart is the continued strength in the NDX. A rally from here over the 2000 level, could create an interesting impulsive move higher towards 2500 level. A 25% rally in the NDX would translate into sizable moves in the other indexes and it would be safe to say that the bear might be removed by then.

So in summary, I remain bullish over the short term, intermediate term and partially hopeful over the long term. The bear market remains but it is clearly showing cracks. Continued improvements in the credit markets and a stabilization in the housing market could make things very interesting for the fall.

What are the Homebuilders Telling Us?

It's no secret that the housing market is weak. Sales are coming but at greatly reduced prices. Builders continue to put up the "million dollar castles" in cities nearby which has confused me. Financing is tough these days though available at much higher rates. Crude prices are lower but the price of unleaded has not completely unraveled....at least not yet. The unemployment rate has been moving higher and job creation is basically nil with my own models showing that job creation at its weakest since June of 2003. Lastly, the realtor's of today look like the stock brokers of the bubble era - they went along for the ride and now don't know what to do when the "ride" blows out a tire. So with all of these negatives in play, why are we seeing the homebuilders rally?

Now this is no ordinary rally. There have been squeezes in the past but those squeezes were isolated and not accompanied by other securities - in this current case, the greenback. The bears have been out on the dollar but more so of late on the housing market. The reasoning behind such has merit but the homebuilders have continued to climb. One of my trader friends, who has been doing this for 30 years, often says that at market lows, the next leaders are born. We saw that in 2002 when the basic materials were the first off the lows. We saw that in the late 90's with the tech's accelerating to the upside. Could 2008's low candidates, the financials and the homebuilders in this case, be the next leadership? Could they be telling us that perhaps credit conditions are now in place for housing to stop falling?

That is a strong leap in some cases. One could say that the homebuilders and the financials were so beaten up that a bounce was inevitable. For the financials, I don't necessarily doubt that and in using the BKX, they really have not reclaimed levels of last year. The homebuilders on the other hand, using the HGX, have reclaimed a trading range and have bottomed in a similar location to the lows of 2003. If they are truly moving up, and have seen the lows, this could market stability. The last true time that housing had stability was in 2005. The market probably was much more than stable at that point but in this case, I argue steady to rising prices. 2006/07 were periods of flat to down though the statistics won't bear that out. 2008 has been "tough" for the lack of a better word. Thus, stability has not existed for 3 years now going into year four, which is only four months away.

A while back, in trying to understand the real estate market, I did analysis of the new home sales data to the existing home sales data for the period during the late 80's into the 90's. Now I cannot find it anywhere but I do remember a few things from the research. First, the new home sales data bounced first followed by existing home sales data about 2 years later. This makes sense in many ways in that the new homes went into the existing pile and took a few years to work off in terms of inventory. Meanwhile, homebuilding just was not strong during this period and overall inventory levels came down. Comparing that to the current period, homebuilders have been steadily cutting back on building and playing defense if you will. If the homebuilders index is correct, perhaps we are now at that point where the new homes sales data stabilizes while the existing takes a few years to work off the slack? So what we have here is one index telling us perhpas what is going to happen down the road.

Now there are a few things that actually support a rally. First, the Fed is maintaining an easy monetary policy stance - I estimate about 195bps at this point which is well off the lows of the Greenspan times during 2003 but still pretty easy when inflation and commodities are rising. In addition, long rates are not terribly high and only those with good credit are getting loans. Now one may look at this as a problem - I see it as a way to stabilize the market. If those who have good credit and 20% down to buy a home are the owners, the probabilities of foreclosing on these folk is much lower. If the foreclosures slow to a crawl, then the focus remains on the existing inventory which means that the price that it sells for, will be not at firesale prices but rather something comparable to the given area.

Another factor to consider is the dollar. Now I am not advocating that the dollar low is in. One can never call a low in a currency in my opinion for the long term. However, I am bullish on the dollar now and could see it trading another 3-5% high from here. That means that dollar assets might be in vogue which could attract international flows into US domestic assets. If those assets include credit instruments, then the credit markets will stabilize which also creates better loan conditions for the banks and more buyers for the real estate market.

So what am I saying? I argue that the homebuidlers have bottomed. But, I don't know if the actual housing market is going to rise anytime soon. The CME Housing futures have stabilized over the past few months but they are not particularly liquid so using them perhaps is not a strong support for the real estate market. My own models show that we are in the third wave down for housing right now (we had three rising ones in the earlier part of the decade). We have bounced each time for this level but the previous two times were not accompanied by the homebuilders. Thus, we have the CME futures, the homebuilders and my own indicator all at extremes or turning. The market is making a bet and that bet is that real estate is stabilizing. Question is....is it a good bet?

Bits and Pieces

What an interesting market today. The buyers who were hanging around the 1265 level yesterday were doing the same today around 1285. It was a persistent bid though if you look at the volume numbers, the sellers really were not that aggressive today. Market conditions, as I will talk about later this weekend, were not exactly bullish - new highs jumped a bit but new lows did not sink enough. There were other stories in the marketplace that I found of interest which could explain the lack of interest in the equity markets as these stories were all ex-stocks if you will.

• The Lehman takeover news was an interesting tid bit. S&P futures immediately jumped on the news but that exuberance was unwound as the day went on. I am not sure if this company is taken out or not but there is some big betting going on in the marketplace if they will actually still exist by the end of September.
• GSE's sinking was not the story today - at least not on the preferred side. Essentially the market is pricing back in the fact that these subordinate securities will be worth something. Interestingly, generally speaking, when subordinate debt does not get paid, the company is most like bankrupt. So does that mean that the Preferred will not bet paid if FNMA and FRE go into bankruptcy? Oh, didn't the government say that could not happen?
  
• Speaking of bankruptcy, it appears that anyone who is in financial trouble is putting out there hand to the US Treasury - today's client is the US automakers who could be asking for as much as $40billion. I don't think that is going to be supportive for the dollar. AT the same time, do you really think the treasury will give out a handout to an industry that is riddled with high costs and low margins?
• As for the dollar, nice reversal today followed by the nasty reversal yesterday. I think too many people jumped on the dollar express and yesterday they all reversed. Today they all covered. The COT data showed the highest net long position since 2005. The fact that the greenback recovered today supports the continued rise higher. The homies are also holding gains and climbing.
• On the trading front, I have been cutting back positions in my portfolio. I just don't find the current environment exciting. Perhaps a big move by the S&P over the 1300 level could stir the pot a bit. That is what I am playing for as I am holding some S&P and NDX exposure to the upside.

Well, that is about it. Have a good night.

Perspective

Perspective is everything in the "business." In my six years working in financial services, I came across many who really did not have an idea of what was coming - a perspective if you will. One thing that I always had was a perspective of the environment. When I worked as an consultant on the sports management side, I always needed to be properly prepared and offer an outlook for the industry and what types of advertising and promotion would work. So today as I write this, after reviewing and updating some trading models, I am left with a different perspective so to speak. In short, I see tops and bottoms on the charts but within my trading models, thanks to a new function that I did not have before, I perhaps was too "quick" to jump the gun on various markets.

Now one could say I am being pushed around by the environment. That is possible but unlikely. I mentioned over the weekend that the dollar recovery hinged on the housing stocks. They have stalled and the dollar has weakened somewhat. I mentioned last night that crude was probably going to continue to bounce higher and the 111.50 level would provide adequate support for the bulls. Today, it finished up over the resistance point of 120. What I am offering here is an analysis of two different perspectives - one via my trading models from the computer and the other via the charts.

Now both share some commonality. I use the ADX formula on the chart and within my trading model. The trading model though changes the ADX formula a bit creating a different twist on things. Both have aspects of contrarian and momentum trading. The charts are about momentum and waiting for a turn or a double bottom whereas the trading models via the computer look for extreme points within an upward rising trend. Now if this all sounds like gibberish, then I apologize. So I will move on and explain my issues.

First, I have been openly bullish on the dollar since the beginning of time - time being the begging or launch of this website a month ago. My reasoning was simple: The DXY had found good support at 71.70 and was oversold while doing so. It bounced higher breaking through several resistance levels in the process. Other indicators on the chart started to turn. Meanwhile, the Euro has a double top sitting around 1.60 and it was extremely overbought. Add to this some policy issues with the ECB and I thought it was ripe for a beating (also the GBP though I did not envision the decline being this much). I also had bearish readings for crude and gold as well.

So with that in mind, after putting together some stronger trading models tonight, via my computer (and programming magic), I discovered some interesting things. First, the "trend" if you will for the Euro, GBP and Yen still argues for strength (ie dollar weakness). While there were numbers that indicated trading against that trend was a good idea, they have disappeared...ever since the Euro hit its lows last week. Now, this is not to say that the Euro is very strong - it is actually at its weakest point since 2006 in terms of trend strength. This is to say that I may have been a bit premature in terms of being overly bullish on the dollar. As for crude and the gold market, the call last night on crude was partially based on this model, combined with the charts. Gold, it was so beat up that it had to bounce - it too though is exhibiting and extremely strong upward trend.

In the end, I now have two perspectives. Which one does one ride? Well, I believe they can both be used. So lets give a quick rundown of each going into the weekend.

Dollar
The Dollar Index has found resistance the last few days as the credit issues rise to the surface again and the homebuilders back off. Meanwhile the Euro has found some support and is moving higher. I still argue that the chart holds some more significance here and the rally peters out around 1.50 at best or sometime early next week. The weakness in the pound, on both the chart and within my trading models, also argues for strength in the dollar. Thus while the trends of both the GBP and the Euro point up, I argue that the trends are weak and long in the tooth. I remain bullish on the dollar

Gold
Gold is somewhat interesting. I argued a few weeks ago that a break of 850 would lead to a nasty decline lower. Sure enough, the yellow metal collapsed as everyone was looking at the same level (and the stops rained down). Now it has climbed back and is attempting to get something going. I am inclined again to believe that the primary trend is due to correct further and gold is as well. Now, here comes a divergence in opinion. Gold's uptrend is very powerful and I would be very surprised now if we saw the 600 level, like I mentioned a few weeks ago. Short term the sellers could reemerge as the yellow metal, with further strength tomorrow, will be overbought.

Crude
I argued Crude's case yesterday so there is very little reason to rehash. I will say though that after the sizable bounce, I am less bullish now. $122 is a major resistance point now and it looks like that a turn lower could come sometime next week. AT the same time, the crude barrel is oversold - very much so as a matter of fact. I would guess that the market bides time heading into the hurricane month but a move back to the highs now, cannot be ruled out. I myself will be playing the long side heading into the next month but again there might be some short term top in place next week where I then would start looking short again.

Well, that's it for now. I will have some new models coming in a few days covering the soybean market as well as the silver market. Have a good night.

Support for Crude?

Wednesday was an interesting day in the crude pits. First, the market opened substantially higher and crude moved straight up till the 9mm build of crude was announced by the DOE at 10:35am. Then it proceeded to have a $4 reversal over the course of the morning - then it rallied into the close. In between, there were many stories being thrown out there but one that I should have noticed had to do with the idea of support. Support, as most know, is a point where the buyers are stronger than the sellers and prevent sellers from taking the price lower. On the weekly chart of the crude contract, 111.50 is that level. As you can see from the chart, there is a double bottom there. Furthermore, this is occurring while crude is deeply oversold. Result: Perhaps a solid bounce higher...and not the plunge I was looking for.

At the same time, there are a few things working against crude. First, the aforementioned dollar versus gold model has turned into the favor of the dollar. Over the past 20 years, when this has occurred, crude has underperformed and in most cases, backed off toward the lows. Now that is not to say that crude moves down to the $30 barrel level. It does indicate though that the road higher will be difficult and paved with bearish stories. One of those bearish stories, could be the energy report from the morning.

I say "Could be" because this report had a little of everything in it. First, the headline build in crude was largely driven by imports though as one energy analyst I read indicated that the four week average of imports was somewhat inline with the figure today, making the "imports" excuse somewhat mum. On the bullish side, the gasoline and heating oil inventory levels were reported stronger than expected for the bulls. Distillates is getting quite a demand push as overseas demand for it is driving down the levels of inventory we have on hand. Gasoline demand was actually lower again this week but in terms of year over year figures, sort of inline.

My rule of thumb with these inventory reports is to focus on the product that is the primary at the time of the report. In this case, it is gasoline though in a week or two, the focus on heating oil will be the story. Till then, the gasoline story is the one to run with on inventory day. AT the moment, the bulls might say that inventory levels have sunk over the past four weeks. That is true but if you delve into the details and review a few other anecdotal news stories, you would find that refiners are not building inventory - they are just not refining as much. I guess that happens when you practically lose money on each barrel of crude you refine! So essentially the crack spread is effecting the inventory levels. A more advantageous spread and the supply will start cranking!

Another interesting support for crude sits with the oil stocks. Now, I am not saying go out and buy yourself an XOM or CVX. I am saying that they are starting to show some relative strength and in the past this has served as an leading indicator for higher crude prices. These indexes I speak of though are not quite strong enough yet to buy. This could be just one oversold bounce being set up for another drubbing to the downside.

So here is the story going forward. Short term indicators are rolling over. My gold vs dollar model favors the dollar at the moment which is again bearish for crude. At the same time, my short term model is oversold and thus selling down here might not be the best bet still the market unwinds some of the pressure. The weekly model shows some support at 111.50 so as long as that level is held, this market should find some level of buying. The weekly bounce, if holds, would push for the $120 level. Longer term models still argue for lower prices. Add to this the breakdown in the USO through the 95 level and my previous forecast of lower levels is still in play. Thus, longer term I remain bearish on crude. Short term, I am looking for a bounce towards the $120 level. From there, we could resume the decline.

A Little Sports Talk

When I launched this site, I had every intention of talking about the business side of sports as well as the financial markets. They don't really intertwine too much but since the business end of things is being evaluated, I figured that both could coexist on the site. Also, a disclaimer: I am a big Boston sports fan and have been since the day I was born. So if my Red Sox talk or my Patriots Banter gets to become too much, then feel free to comment saying such. Will I listen? Probably not but feel free anyhow.

So today as I am listening to WEEI.com through my computer, the buzz and banter, to steal that from Minyanville, was about the sox and the wildcard. First of all, when did we write off the sox and the division? I know the devil dogs have a 4.5 game lead but lets face it...most in Boston have seen that lead before evaporate! The Devil Dogs are indeed a formidable force - they sport the best home record in Baseball and their team pitching stats are near the best in the AL. However, there hitting is mediocre at best and with the losses of Longoria and Crawford occurring this week, that mediocre offense just fell down further. The pitching can only take them so far!

So outside of this conversation, there was a mention that attendance in Tampa for the D-dogs was finally rising. When I heard this, I said, Finally? Maybe it is Tropicana field or maybe it is the Florida market but they just do not want to support a baseball team down there. The attendance figures for the Marlins (they have won 2 titles by the way in the past 11 years) are pitiful. The Rays attendance figures are somewhere in the 18k per game - for a first place team! Now maybe nobody believes in the story. Maybe the pundits are correct and the Rays will fold. That is to assume though that the Sox move up - and based on their ball playing of the past few weeks, that is no guarantee!

A site that may be proving the pundits wrong is CoolStandings.com. They run millions of simulations on each team for the remainder of the season and determine the probability of a given team winning the division, the wild card or the pct chance that each team in the division will make the playoffs. At the moment, they give a 69.5% chance that the Rays will win the division and a 23% chance they will win the wild card. The former is the second best in the AL (Angels are an almost certain lock at 99%) and the latter is the second best (to the sox at 44%). Now with such stats, the obvious does not always happen. At the same time, one could argue that the Rays would have to really screw up to lose the division down the stretch.

At the same time, their schedule in September looks deadly. They have a ton of games on the road against the American League East. The week of Sept 5th through 14th provides them with road games against Toronto, Boston and New York. Since this team is a major home team type of player, this little stretch of games could destroy the fortunes of the Rays. Conversely, a move through this level and they could sell out the remaining amount of their games in 2008.

So will the Rays hold on? Well I am going with Coolstandings and the high probability of success to win the division. I just don't think the Sox will turn it on in time (somewhat listless).

Random Thoughts

What an interesting day in the markets. The S&P rallies near the open and then does an about face for about 30 points before turning higher into the end of the day. The twins of the US Government, Fannie and Freddie, took another beating today. The homebuilders, which I indicated were a very key variable for the dollar, also saw some intense selling. I was looking for a correction coming into today though I did not realize we would see an full fledged whoppin. As those FRE's and FNM's collapsed, I started to feel panic again. Perhaps this is a good sign. Of course, when I felt that panic, I just got up....took a deep breath and waited for things to calm....all better!

Anyhow, this market had a bunch of interesting things going on today.

• The dollar and homies correlation held strong today. The Euro found some support as the selling looks like it might slow for the rest of this normal vacation time of the year. I used to call August an mean reversion type month: Essentially nothing happened so the given index return to the mean or if something happened, by the end of the month, the index returned to where it started.
  
• Some people are getting a bit perplexed by the movement in rates. Today did not really support my risk coming off the table idea but it continues to catch the eyes of stock traders.
• Gold bounced but I continue to remain bearish...grain markets were very strong today in the face of buyers right off the bat. This reminds me of the commodity trade when the bulls came in on Monday, purchased the markets and let them run for the rest of the week. Old habits die fast.
• Since when does Barrons' become the mouthpiece of the government - via the FRE and FNM news today. If true, does this mean Paulson does not support these two companies in their current form, as he indicated a month ago?
• Anybody know if Barrons track record is any good?
• Hearing that the window is closed again to preferreds. Tell that to the major banks that did them last week.
• 1275 is kind if important on the S&P. Keep an eye out for it.
• 117.50 remains a roadblock for crude. I still like my call for lower prices.

Have a good night.

Weekly Equity Market Outlook

Well, the dog days of summer are officially here. Historically, the last few weeks of August have been dreadful periods to trade. In fact, for the whole month of August I typically take a step back unless I have high probability signals in play. This month, August of 2008, only sports one signal I am using and as of today, it has not occurred (though something like it has been popping up over the last few weeks). So from there, I am basically on alert for the unpredictable. I will way that this market move resembles the one in 2000 when the market went to the highs and then got piledrived lower into the fall. Essentially it appeared then that the shorts had given in and markets moved higher. Then the economy soured and the election problems began. Repeat?

Short Term
Over the short term, I am playing defense. My trends still argue for a long side trade in the NDX 100 though on Friday, an extreme signal came out and I covered. As for the S&P, nothing is going on here. A mild reveral signal came up on Friday but the probability of success for it is slightly more than flipping a coin - thus does not hold a significant enough value to actually short the market. If I were to hazard a guess, I would imagine that we correct a bit in the early part of the week. The 1280/1285 level looks like good support and based off the strength in the NDX and the RUT, I would imagine any correction will find support. Thus, I maintain a marginally bullish stance with pallet dry at the moment.

Intermediate Term
This is like a tale of two cities. On the strong side, we have the NDX 100 and the Russell 2000 - both good leading indicators for future growth. On the opposite side sits the very slow moving Russell 1000 and the dragging Dow. The S&P sits in the middle and is slowly improving (Slowly being the operative word). In regards to the leadership, we are seeing expanding participation which is supportive for the dips. Further money flows have reversed and argue for a bullish stance on the NDX (The RUT is getting there). The concern I have is with the Dow which has stalled. Like the Russell 1000, the index formed a doji this past week while the leaders formed stronger looking candle formation. Essentially the market is saying that we'll pay up for growth but not value at this point. I guess we'll find out who is correct as this rick aversion spread trade plays out. Overall, I maintain a positive stance on the equity markets.

Long Term
Long term models still argue for a bear market in place. At what point does the bear reassess itself? Well it could be this month. Generally speaking the best sales I have ever had have occurred when the market is a bit exuberant. At the moment, that is not the case. In fact, pessimism is pretty strong. But as well all know, this market can shift its emotions quickly and exuberance, with continued gains by the NDX 100, could show up in now time. As for the formations on the charts, they all look solid except again for the Russell 1000. It is dragging and threatening to fall backward towards the breakout point. AT the same time, the NDX and RUT both argue for much larger moves so in this case it is 2-1. Thus I maintain a bullish stance within the bear market.

Questioning My Dollar Premise

Each weekend, I will take a look at the various indicators I follow from the many different financial markets and ask, "what is the market telling me?" Over the past month, with this massive dollar bounce, biggest in several year, I have been under the assumption that the selling had dried up and a low had been put in. In fact, there was a double bottom of sorts on the charts, which in my world, is bullish. However, as I was reviewing some things this weekend, I left with a quandary of sorts. That quandary involves three variables: The Dollar, Gold and the 2 year note.

Now each of these has been on the move for one reason or another during 2008. If you look at the charts, the dollar and the 2 year seemed to have bottomed around the same time. Gold simultaneously topped within the same time frame. The moves of these three securities held in place till last month when the 2 year note reversed course from the 2.75% level. Meanwhile, gold and the dollar have continued their negative correlative moves. From a macro point of view, I believed the move in the dollar was based on overnight policy - essentially that the ECB and BOE were way too tight with policy and their next move was down, while the Fed was too easy with policy and would have to tighten next. This is a sound argument generally for any currency pair. However, the move in the 2 year has me rethinking this premise.

Why? Well, if the market is indicating that lower overnight policy is coming, then the dollar trade, based on overnight rates, is no better than the UK or the EU's. In fact, their overnight rates are higher on a fair value basis. Generally, when all three are moving in the same direction, the one with the highest fair value combined with rising growth, has the most strength. Currently, the one with the strongest growth is the US but the highest fair value belongs to the ECB. If the US is now expected to possibly keep policy steady for sometime, the Euro might actually draw support. That assumes though that the premise, of overnight policy, is the guiding light for the dollar. I am starting to believe that it might not be. Here is a list of other things also occurring in this environment.

• The spread in the 2 year note price and libor 1 month futures is tightening. This generally argues for a fall in risk within the financial system. As the chart shows, libor has stabilzed.
  
• The NDX 100 is leading the S&P 500 from a momentum standpoint. When such is occurring, in a rising time frame, generally speaking the growth in the local economy is picking up.
• The Bank Index (BKX) has been the crux of the financial market problems over the past year and still remains substantially below its August levels. If all were great in the world and risk was leaving the system, these banks would be rallying back more aggressively.
• The Philly Homebuilder Index (HGX) has staged its most impressive reversal in several years to the upside.
• The CRB downtrend looks like it has legs on the long term chart down towards the 350 level or another 8%.
• Falling copper prices has in the past been a good leading indicator for growth. The price has been pretty much range bound since the beginning of 2006 so growth globally probably leveled out at that point. Right now it looks like it is heading lower towards the 300 level or another 8%.

So there are the variables. What stocks out the most to me? Well, the British Pound had a very high correlation with its housing market throughout this decade. When its market began to have troubles, right after the latest hiking campaign by the BOE, the pound began to crumble from 210. As the problems have worsened, so has the pound.

Interestingly, the US's major problem has been the credit markets and what housing has done to those credit markets. Many analysts have said, once the housing market stabilizes, the credit markets will stabilize. Using the libor vs 2 year note read, the two are coming together and the standard deviation of libor seems to have fallen arguing for abating risks. The homebuilders are in major rally mode and it looks like it has legs for another 20%. Rising trends in the homebuilders do not occur generally against weak real estate markets.

So there perhaps sits the support point for the moves. Risk is abating in the housing market and the homebuilders are moving up. What appears to have driven the dollar down over the past year has been risk to the system. The move in gold shows that the capital flight from the US is over. The move in the 2year and treasury curve along with the collapse in the cRB appears to signal that inflation is abating. Lower inflation and stabilizing credit...at this point has translated into a higher dollar. Sustainable? No. But for the short term, should continue to move the dollar higher.

The Wheat Debate

I have always found the grain markets as a "great futures market." When I say that, I am talking about the people who operate within it, the price discovery that goes on and the knowledge that many of these traders have. Now, price discovery might be too nice but the other two factors put these guys/gals near the top of their profession. Each time I have traded these markets, the broker on the floor has been more than willing to give me a little insight on the insanity that has been occurring. That insanity has included a wheat price spike in March and a corn/soybean price spike in July. These limit up and limit down moves have created enough heartburn that has caused a limit up move in zantac to cure it. Thankfully, I have not been on the wrong side of a limit up move (or limit down move for that matter). Call it luck or whatever it might be).

Anyhow, I was discussing the grain market futures with a trader at the board and something struck me funny in the conversation. Iran has been a big buyer of our wheat this year (vs little or no buying last year). Yet, we sit there and argue with them about the nuclear ambitions. This tells me that perhaps we are not that serious about Iran and nuclear weapons - either that or the farmer in this country controls the decision making. Anyhow, aside from this, in our conversation, two things outside of this Iran news, had me go back to my drawing board. First is the effect of a strong dollar and second is the Baltic dry index.

Let's start with the dollar. Historically, when the dollar has been overly strong, the grain markets here have been somewhat weaker than other commodities as globally our markets are just not as cheap as others who have weaker currencies. Over the past few weeks, there has been some very large buying of the wheat market. As I mentioned, Iran has purchased a sizable amount this year and Egypt was rumored to be in the market last week (There was also talk that the Ukraine was buying but the US was left out). So it appears at this point that US wheat seems to be competitive at the moment, regardless of the strong dollar. Across the pit though, this is not the case. The soybean market collapsed today (products included) as demand is actually falling in their market. Rumors were floating around overnight that China had defaulted on a shipment out in the far east (that is from my friend). This cause some oil futures overseas (palm oil) to sink aggressively and this spilled into our market. The strong dollar is not effecting things here but global demand is.

Global demand in this case can be best represented by the Baltic dry index which is having issues at the moment (its cascading). The index is now approaching a trend line drawn from the lows in 2006 and has moved below a major moving average I use. The last time this occurred in January, the index reversed course and had a strong half year till its most recent decline. First, if the rumors of China's demise are starting to become more than rumors and the house of cards is about to fall, then what does that do for global commodities. Back to the original argument - what does that do for wheat?

Well, if we have a rising dollar and global demand is falling, our grains become much more expensive relative to other nations. This is deflationary in many ways and given the massive amount of money that has poured into the grain markets here in the US over the past few years (via futures, actual purchases of land, farms, etc), the effect could be tremendous to the downside. You saw limit down moves today in the beans - this could become more widespread if the Baltic dry starts to fall more aggressively. Rising dollar, falling demand - not helpful for US grains.

From the technical side, two things are working against the grain markets. First, there has been two major rallies this year with the corn/bean market and the wheat market. Both have been sold into heavily and as a result of the limit down moves today on the beans side, the charts are almost in line with each other (as you can see). Wheat has had a bounce of late on the back of the foreign purchases but given the weakness in the bean and corn side, I have to believe wheat starts to feel the pinch as well. Further supporting this case is the downward trend in the DBA (Grains ETF). It has rallied back to the 65 week MA but did not close above it today which makes it ripe for a reversal next week with another sell off to follow.

So my outlook on the grains is this: I remain bearish on commodities in general. As for the grains, the DJ AIG grains index failed a few months back at the 1995 lows. If it has taken the 91 level convincingly, we could have been on the verge of a major rally push up another 20%. This would have been bullish for the whole grains complex - conversely, I think this would have really hurt the dollar. Now with this failure, one could make a case that the short side of the trade is in and downward prices are what to look for going forward. Thus, I am bearish on the wheat and grains as a whole.

Policy Update: Going Down

What a horrible week if you were long the Euro or the Pound versus the good ole greenback? I argued every time on this site since launch that the dollar rally was here and everything that was trading against it would lose. Well, the markets spoke this week and in the process ran over anything that had a negative correlation to the dollar. The Euro and Pound have been smacked very hard to the downside. Gold is trembling and the crude market is coming off as perhaps the rest of the world now will face higher real energy prices, like we have in the US. Just in case your are wondering, that is deflationary to growth globally as people globally demand less as prices rise. Aside from this, we also had some economic news this week that effects my policy models so without waiting much longer, here is my policy update for this week.

Summary
Globally overnight policy fair values, as shown on the chart, have been coming down all year. The Federal Reserve has jumped out in front of this trend by dropping rates aggressively. The Bank of England on the other hand cut a small 25bps earlier this year but still lags overall policy tremendously (leaving UK conditions tight by almost 100 bps). The ECB actually tightened rates to 4.25% earlier and as of today, they are now sitting in a very tight policy stance. Based on latest estimates, the Fed is easy by 200 bps, the EU is tight by 5bps and the BOE is tight by 98bps.

United States (Bias: Neutral, Policy: Dovish by 200 bps)
The Federal Reserve has been barking of late about higher policy but that really has not done much to the forward futures contacts. One hike is priced in at the moment to 2.25% within the next 6 months. Beyond that, given the now downward momentum in the overnight fair value calculation, I would imagine that till this reverses course, the Fed may hang out and wait for things to stabilize in the commodity markets. The CPI this week pushed up my calculations but the overall growth picture, at a mere 1.48% year over year (my estimate, not using quarterly numbers but the numbers of dismal.com), the momentum is to the downside. Also, Bernanke was scared about the Shadow Banking system and its effects on prices to the upside last year. I would imagine he is wondering how much downward pressure it puts on the economy in the coming months.

Eurozone (Bias: Neutral, Policy: Hawkish by 5 bps)
The European Central Bank is sitting on its hands at the moment watching as its economy slows down and its inflation rate sinks. Ok, the headline was much higher than expected this week but the core rate is coming down and not rising. Based on current variables, if the growth figure for the Eurozone comes in at 1% and inflation sinks further, the ECB may have to get aggressive with policy to the downside just to stem the fall off in output. However, the ECB will probably not do that because they are so focused on headline inflation. And with a falling Euro, import prices are about to rise for crude goods (crude in dollars all of a sudden more expensive). So they watch for these variables to scare them and meanwhile the real numbers that they should be watching (core inflation and growth) march towards zero. This remind me much of the Fed during the early part of this decade under Greenspan. He held the line on rates with headline inflation higher and guess what? Assets compressed everywhere. Does that sound familiar?

United Kingdom (Bias: Neutral, Policy: Hawkish by 100 bps)
BOE Governor King is in a bind. If he cuts rates with retail price inflation at 4.4%, then he not only irritates the queen and the prime minister but he also perhaps stokes inflation higher in the eyes of many economists (not mine). I read somewhere that it is very possible that the UK could have 0% growth and 5% inflation - no wonder they are sending the pound down the crapper! Overall, I would argue, even with the 4.4% price inflation, they can cut rates by almost 1%. Given the global deflation in the shadow banking system globally not to mention the international stock markets getting slammed, inflation in the UK would not become a problem to the upside as long as they get back to neutral. Now in order to jump start growth, they may need to get easy with policy but that won't happen till the RPI drops under 3%. Till then, I am afraid that Gov King and his merry men may also sit on their hands and send the UK economy into its worst state in decades. Only then will the react and then they'll have a new problem - deflation.

Natural Gas Needs Octane

I have been watching the Natural gas market a bit more of late as it as fallen five straight weeks now (the little bounce in between I guess counts as an up week which makes it four out of five). The selling to the downside has been more aggressive than the Crude market as Natural gas has moved from roughly 14.50 to near the $8 level (interestingly crude has moved from 146 to the 110 level....more to fall?). This has all occurred with a mild summer for the most part and very little storm activity (again) off the gulf. At the same time, inventories are 356 bcf lower than a year ago and basically in line with the 5 year average. Generally speaking, when these two statistics are lower from their respective benchmark and a heat wave sweeps through (or in the winter, a cold snap), Natural gas rally's strong. Since there are neither on the horizon, Natural gas might be destined to continue lower?

However, if you examine weather patterns from year to year, sometimes one can determine what the following season will be like. One could have hypothesized that the great amount of snow that hit the northeast this winter was a leading indicator of how much rain we were going to get this summer. In the past, I have used super hot summers, combined with some other data, to argue we are going to have a mild winter. This time around, I am wondering if the rain (and eventually snow) is going to actually be greater than a year ago. Why do I say this? Because when combined with some heating and cooling degree data, it shows me that there is a chance we will get hit hard this winter with cold weather or just lots of snow which based on the current inventory picture should be supportive for nat gas. Now this is really nothing scientific. I put together a few numbers and came up with a correlation. This correlation argued that natural gas should do well this winter.

What's most interesting about the current move is the timing. Generally speaking over the past 15 years, when Natural gas is rallying, we do not sell off so violently from the highs established at this time of the year (middle of the summer). The big sell offs of this time frame have come later in the year or early in the year post winter. This sell off though occurred in the middle of the summer which could lead to the following: First, if we do get hit by some storm, the low inventory picture could be a spark to send things higher. If we get hit by some volatile weather, with extreme heat, that too could send the price of Nat gas higher through the end of September.

From the price action, the $8 level looks mighty important on the support side. It is a point where if support is not held, the momentum of the action will turn bearish. When combined with some other metrics, this could lead to a full scale breakdown, looking at $6 for a target. Shorter term, the charts are a bit stronger but the major support does not kick in till the $7 level. Overall, the action is oversold. In addition, at the moment, the crude ratio to natural gas resides at 14x which is absurd in my opinion. Generally speaking in the past this has provided support for the natural gas market as it moves back towards the 12 level.

So with that said, we get inventories coming Thursday. I don't have the preliminary numbers at this point but I am sure that if the 5 year and 1 year averages remain higher than the current figure, natural gas should be able to build on that support. When would the reversal come? Probably when we get that "catalyst." That catalyst could be a storm, the weather or just an change of opinion in the pits. I myself...well I remain cautious. It does look kind of interesting at the current levels for a long trade but I think I will keep my powder dry and see what transpires in the days ahead.

Happy trading.

Getting Pounded

My bullish call behind the dollar has been based on many factors. One factor though that I did not take into account is the action in the British Pound. Sure, I track the overnight rates of the UK economy and where fair value of that target should reside but generally speaking, I have kept my comments to the Euro. But as I reviewed my notes this morning and the charts of the currencies, I noticed something that was quite interesting. First, things technically are breaking down for the Pound. Second, the UK economy is suffering much more than the US economy at this juncture. In between, the Monetary policy committee (MPC) of the Bank of England is stuck as rising inflation and falling growth are accelerating from a spread perspective - the proverbial rock and a hard place.

First, trading in the Pound has been mediocre, relative to the Euro, over the past year. The Sterling peaked in the fall of 2007 around 2.10 and has not looked back falling into the 1.90 range today, thanks in large part to a RPI rating that was much higher than most expected (more on that later). As the pound has been falling, the Euro has been moving up, hitting recent highs at or near the 1.60 level before the most recent tumble lower. This relative strength by the Euro vs the pound was for obvious reasons - stagflation and growth prospects. Plus, the market has believed that the BOE cannot raise rates while the ECB can or could at one point. So all of this contributed to the EURGBP cross rate moving from .70 to the .80 area. Now that trade has reversed.

Generally speaking, historically, the Pound has led the Euro in indicating dollar strength was coming. If you look at the cross rate of the Euro/GBP, it is somewhat decently correlated to the dollar index. When the dollar is weak, this cross rate favors the Euro. When the dollar is strong, such as now, it favors the GBP. In terms of the long term chart, the spread between the GBP and the Euro, relative strength wise, is at its widest since the Pound was pushing towards 2.10. As the Euro moved towards 1.60, that spread boomeranged in favor of the Euro. Now it is unwinding again. The last time we witnessed such a move (ie the boomerang), was in 2005, when the Euro tumbled from 1.36 to a low of 1.18 and the Pound fell from 1.95 to 1.70. If we pushed that forward today, in terms of percentages, that would mean that the Euro corrects from 1.60 to 1.36 and the Pound moves from a 2.10 high to 1.79. Moreover, this would imply that the dollar index moves from the current 76 level to 80.

Both of these points argue that the Pound is headed lower. From the quantitative side, the support levels do not look so supportive from here. Momentum models, long term, now argue the sellers have control. This is the first time since the first half of 2005. Additionally, a very long term trend line, drawn from the lows in 2002, was taken out on this drop down over the past week. 1.90 is a good support point but with the failure of the weekly chart, things look like they will continue to get worse. From a trading perspective, very short term, the currency is oversold. This argues for a bearish perspective still but some moderation in the declines.

Economically, two data points this morning reasserted their might on the currency. First, the RPI came in at 4.4% this morning. This is much higher than the market expectation (near 4.2%) and .5% higher than last month! This is occurring even as the MPC is holding an hawkish outlook and tight overnight policy (I estimate that fair value between prices and growth is near 4.40%). On the other side, this tight overnight policy has pummeled the local housing market. the latest RICS survey showed that 84% of surveyors reported lower prices. While this is a four month high, it is also the fourth WORST reading since the survey was founded over 30 years ago. So like the US, this survey is bouncing along the bottom so to speak. If you add in growth expectations of a mere 1% through the end of the year and possibly lower in 2009, things could get worse from here - this would lead to additional pressure on the sterling (since I am looking for better inflation and higher growth for the US in 2009).

So the story here is rather simple. The sterling is being "pounded" lower and the trends all point to it continuing. Shorter term we are oversold and the ability of the Euro to hold the 1.49 area, might support the pound coming back to the long term trend line which resides around the 1.94 level. From there I would imagine that the selling resumes. Overall, a defensive posture in the GBP is warranted.

Random Thoughts

So over the weekend, I submitted two more articles to SeekingAlpha and both were posted. The response on the crude piece was for the most part in agreement which had me wondering if I was actually wrong in my assessment. One person said that technical analysis was stupid or something like that and had no usage - all I can say to that is, go put yourself in a trading pit and then come back to me and talk about the fundamentals of crude. As for the gold article, it was as if I had blasphemed god! There were so many negative things thrown my way that I do not have enough space in this blog to comment (though I will later this week).

However, here are a quick few snippets that I think many in the gold community are missing

• Gold is not a replacement for currency. If we go back to a barter system, we move back to the dark ages. With currency comes many problems but it also creates many opportunities and encourages capital creation. I suppose I could go on and on but I won't. Bottom line, we are not moving back to the gold standard so get over it!
• One person questioned my thoughts on the index funds dumping gold - I should have said hedge funds and those CTA's who are pegged to an index. The redemption's have been coming fast and furious over the past 6 months and this is putting downward pressure on the yellow metal.
• Oh, I mentioned that $850 had to hold. Guess what, it didn't....

As for the rest of the market, there were a few interesting things going on.

• Short squeezes are occurring all over the marketplace. My stock rating model is showing superior gains now for those stocks who had waterfall lows (waterfalls to me are like parabolic tops). Interestingly, in those stocks that are not heavily shorted, the gains are not coming that quickly. That argues that the sustainability of this rally may be waning.
• At the same time, today was not enough for me to go short.
• This mess between Russia and Georgia might get much more interesting if the Ukrainians have something to say about it.
  
• Did I mentioned gold collapsed today?
• How about Crude's reversal off the lows? There was a late day bounce on the back of Russia virtually taking half of Georgia in today's fighting.
• The late fade in stocks took things below a major 1300 level in the S&P but the bulls got together and rode it higher into the close. Should be interesting to see if it holds tomorrow.
• I cut my last long position and now waiting for a correction. Not sure when or where it will come from.

Good night.

Weekly Equity Market Outlook

After this week, I have to say, "What an unpredictable market!" I thought last week that if the market could get going early, things continue to improve to the upside. If it did not get going, the bears would come out swinging and knock this market for a whirl. So we started the week moving down decently though nothing aggressive. Then the bulls roared sending the market up on Tuesday. So I guess there was hesitation but it was not enough for the bears to take control. Then just when things are great, the market gets hammered on rumors Fannie Mae was going to report some dreadful things. Sure enough they did and the market rallied back to the highs! I am a contrarian trader and even this, is to confusing for me.

Short Term
So what is the outlook now? Well, I still remain on the sidelines with S&P. I took a long run at the NDX futures last week when my trend indicator turned to the upside. On Friday's close, I covered the position as the overbought button started flashing. Does that mean we can't go higher? No but the probabilities tell me that continued ownership of the NDX could result in me giving back some profits in the coming days. Given the current position of the NDX, I will probably sit out Monday's action as well and let things play out. Interestingly, the S&P is somewhat overbought but has room to move higher.

That is a good thing because come tonight when the globex session opens, the bears may be out in the market swinging looking to take the market again below the 1290 level. This has held the bounces in check over the past month and has proven to be a decent play to short the market. Now, things do not remain this obvious for long so I would imagine some sort of resolution comes quickly on Monday - either we take off away from the level or fall well below it. I think that we continue to move up and set up my short for Tuesday. Now with that said, lets review the models for the equity markets.

Intermediate Term
First, this week I had upgrades across the spectrum among the US market indexes (international is a completely different story). The move by the NDX 100 past its 65 week has set up an interesting point on the charts. It sits right below major resistance. At the same time, my power model is turning up which generally argues for a much longer rally (than a few days). Thus, it is safe to say that the NDX is at critical resistance and is overbought. If I were a short, I would probably take a chance here on the short side and have my stop on the breakout side. Thus, my outlook for the NDX (which will then guide the marketplace) is this: If the power model turns up, this market is going to accelerate as the shorts cover. 2050 would be my target. Heavy resistance though is right in front.

As for the followers of this move, the Russell 2000 has been tearing higher. I suppose you could make a case for the Russell being the leader of this move as growth breaks away from value. In this case, a breakout by the Russel would occur with a downward trending Mocu line. Essentially, those who short term trade this market will cover. Those who have longer term views will also cover. Thus, a full fledged breakout to the upside which would probably be accompanying the NDX 100 breakout. As another added support for the Russell 2000: There is a triple bottom on the weekly chart. Generally speaking those are very powerful supports.

In looking at the Dow and the S&P, I found two markets that look tired. This is where the growth (NDX and RUT) vs Value (S&P and DOW) story is showing up. The S&P climbed over the vaunted 1290 level this week but did so limping to the finish line on Friday. The Dow was a bit more convincing with its break of 11,500 but it was really nothing to write home about. The financials continue to truck higher helping things with these two names but the commodity and energy names are providing a drag. This is not to say that a rally cannot follow. However, it will lag behind the moves by the NDX and the RUT.

Long Term
Sometimes it is interesting how the long term and the short term can conflict. In this case, the long term charts of the Dow and S&P have formed what I call doji reversals over the past few months. Sure, August is a mere 10 days old so there is mcu to do in this month. However, if these formations hold, then it could imply that a sizable market rally is coming. Sizable means to me at this point like 1400 in the S&P and about 13000 in the Dow. Generally speaking, when this has occurred from the monthly chart over the past 20 years, a big move across the equity market has followed. Can an equity market rally given the current environment? Well the charts tell us that stocks had big runs when things looked bleak so I would say, given the current confused nature of the market, anything is possible.

Summary
So how does this market look at the moment. Longer term I am getting more positive. While the bear market still contains action in the world (sustainable moves reverse the signal, not short squeezes), this market is acting like it wants to continue higher. However, I am waiting and seeing so to speak. If the NDX and Russell break out, the whole equity market should follow. Given I took profits Friday in the NDX trade, I think we'll see some backing and filling before the next move up. Till then, I will keep my powder dry.

Happy Trading

Random Thoughts

I am an avid reader of many things on the web. I take in some things from Hays Advisory (very good material). I read the folks at realmoney.com and minyanville.com. I sort of like the dismal scientist though I think it is too pricey overall. Seekingalpha, who publishes some of my articles, is a fantastic site for information from those on the ground, so to speak. In between, I talk to my friends who are on the street and some other traders who are in their home offices, like myself. Everyone once in a while, I hear a few things that I just don't agree with.

• First, I am hearing that the latest dollar rally is being called deflationary. This is kind of interesting because the dollar is lower year over year which implies inflation. If the dollar rallied another 5 points, that would put it up 3% on the year. What has it fallen over the past five years? Deflationary comes in when the dollar has appreciated 10 or 20%. Not 5%!
• The folks over at minyanville may be leaning toward the bullish side - Harrison said they might be a bit early (like they were withe bearish call a few years ago). Todd Harrison is a great trader and they have a great site over at the minyan but sometime the bear calls are just too much. Perhaps this is a sea change? Too early to say I guess. Buzz and Banter by the way is fantastic!
• A friend of mine, who reads buzz and banter, said that one of the contributors said the "Window is now closed" for financing these financials. Of course, this has been the common refrain before and after this huge rally in the BKX. If Merrill can get stock done at $22 and still be higher today, this tells me the window is very open. Add in a rising dollar and all of a sudden, US assets look like a double whammy - higher nominal values and higher relative values in other countries.
• All the talk lately has been about commodities. Not much mention about stocks. Interesting.
• From a trading standpoint, I am down to one position in the portfolio. I will probably be out of it come Tuesday as I think that might be the high for the short term of this stock market run (correction only though).
  
• I have to say, with their currencies falling, inflation rising and growth sinking, the ECB and BOE are screwed! People say that our US Fed is in trouble. These two are now sporting tight policy with rising inflation! The rising dollar at least offsets rising commodity prices - now the EU and UK are not benefiting from the falling crude price as much because their currencies are sinking!
• Being a sox fan, I have to wonder if Manny was really dogging it the last few weeks with the bat. We always saw that he was doing such in the field or on the base paths but never with his bat. Now he is crushing the NL - give the doldrums of the sox offense over the past month, we could have used such!
  

The Gold Trend

Ok, I figure this article upsets the apple cart in the gold bug community but figured that gold was worth looking at. After all, if it rallies or falls, someone is talking about it, various stocks and sectors respond to it and enough chatter follows. On Friday, it came very close to breaking a major, major, major support but bounced. So the question is: where does it go from here? Well, lets analyze this technically, like I did with crude the other day. Before we begin though, the process that I use to determine golds trend is three fold. First, from a day to day trading perspective. Second, from a long term chart perspective and third, from and inflation perspective.

First, from a day to day standpoint, gold is very oversold. One of my indicators shows the yellow metal is the most oversold since the collapse from 1000 in March. One could look at this one 2 lights. First, gold never recovered from these highs or conversely, maybe the second time is a charm and the metal rallies? Personally, I think it is a change in sentiment. Before the major fall off in March, we had not seen a sell down as aggressive as that plunge from 1000 since June of 2006 which is basically almost 2 years prior. Now we have two of them within 6 months? I know that index funds have been unloading these positions which explains why we have not bounced. the problem for gold though is that it took a long time for the funds to get into the commodity market. If they are dumping today, when will they come back? It won't be tomorrow!

From the chart side of this equation, we bounced right in front of both my intermediate and long term support position which resides at 850 (low as 857, finished at 864). I would argue that since we are here, a test of 850 will probably occur and if it breaks, the next level of support resides around 770. For those of you keeping track at home, that would be a 25% decline from March. In between that though resides the mighty 65 week at 825 and the mocu cloud below at the 770 level. So on the positive side, I think the waterfall might be coming to and end. Does it mean we rally? Not quite. Interestingly enough, gold leads the CRB so if gold falls 25%, raw material prices will be falling probably just as aggressively.

Finally, from the economics side, the prices model is moderating now from its ultra high levels of a few months ago. Continued moderation is not supportive for gold to shoot higher. Easy monetary policy, which we currently have is supportive. Generally easy money with rising prices argues for higher commodities. I am not saying that gold can't move up. I am saying though that the pricing pressures of yesterday are now unwinding and it appears that overnight policy, looking forward now, is tightening. This is not supportive for assets - or gold. Oh, did I mention that the dollar is in breakout mode? All of a sudden the prices of our assets becomes a bit more expensive for the global consumer to buy = less demand for commodities and thus more deflationary pressure.

So the bottom line is simple. There are bullish factors supporting at least stabilization in the gold price. The yellow metal is oversold and as long as 850 holds, I could see the bulls mounting a stand of some sort. Longer term though, things do not look so promising and if today's trends continue into tomorrow, gold could be on its way back towards the 600 level or even lower, depending on how far this dollar rally exerts itself (my projection of 82.50 should put gold around 600 if historical trends hold).