TC's Market Views

We have Moved

2008-11-20T21:33:00.002-05:00

Our new address is twistedmarkets.blogspot.com.

Random Banter

2008-09-16T20:42:00.003-04:00

it is amazing really what has occurred since I took a break a week ago. We have lost two brokerage houses in LEH and MER and AIG is basically gone - since the government now owns about 80% of the company, I basically feel it is gone (more on that in a later). We have seen crude oil get toppled with it trading down towards the $90 level today. Gold has found a home below the $800 level and the US dollar has had mighty problems with the $80 level. The Euro has collapsed through a 6 year trendline and the Japanese Yen is now one of the strongest, if not the strongest, currency in the world.

What does all of this mean? It means that things are in massive flux. Markets everywhere are locking up and liquidity is drying up faster than one can take a breath. I guess when you essentially eliminate three brokerage houses from the marketplace in the past 18 months, this kind of thing will happen (MER is in flux and with any bank/brokerage marriages, transitions will disrupt things). this continued illiquidity essentially makes many companies insolvent. The amazing thing is that AIG has tons of assets but since they have CDS exposure, they are being taken down hard. GE is being hit hard to the downside because people are speculating about their well being given GE capital's large contribution to revenues.

this is one big story about "what if." Pure speculation and survival of the fittest. the problem is this: what happens if there is nothing left in the end? Here are a few other thoughts on the markets.

This AIG thing is disturbing to me. I heard someone on CNBC say that this move by the Fed, to essentially take a 80% ownership in a world wide insurer, was in the name of market stability. Essentially if AIG failed, then many things would have toppled over as a result. But to take ownership in the company? Lets just add another trillion to the balance sheet of the Fed. They have a leverage ration of 20:1 now.
Amazing how the dollar is taking this. Between the conservatorship of Fannie/Freddie and this, the government is becoming one very big hedge fund with tons of liabilities and very little equity. If there is a run on the dollar, it could be the end game for our economy. This is an enormous game of risk being played by the folks in treasury.
Speaking of treasuries and interest rates, Fed Funds futures were forecasting a cut going into the meeting today. What happened? the Fed thankfully did not cut rates as a cut was not needed. that supported the dollar. the problem with this little AIG thing is that rates here are about to shoot higher and people will start selling our assets as a result of tehse purchases. I would love to be optimistic but I don't trust anything the White House is doing these days.
Crude's fall from grace has been quite quiet. nobody is talking about it. Amazing how the black gold has fallen from $148 to $90 earlier today and the top headline is AIG. Perhaps the fact that gasoline and heating oil have not fallen aggressively could be the reason.
Interesting technical bounce today off the bottom end of a trading range I am using for the S&P. If this holds into the end of the week, we could now see a bounce back towards the top of this range which sits near the 1300 level. In addition, there was a double top of the range last year. If this is not like the 2001/2002 period, then this could be perhaps the lows of this bear market. I am not using that assumption but it is worth thinking about.

I am a bit busy with things but will be back to normal over the next week.

Weekly Equity Market Outlook

2008-09-07T12:39:00.005-04:00

Event risk is something that drives me crazy. There is very little one can do to plan for the unforeseeable. There is very little one can do if it goes against them. For example, years ago I was trading and got caught on the wrong side of a Fed rate cut, done during the day and not know. Conversely, when September 11th occurred, I was fortunate enough not to get hurt. When we went to war with Iraq and the bombs rained down, the following three months were difficult as the marketplace tried to gauge whether or not the war was helpful. Lastly, this credit mess, with another chapter today from the US Treasury, Fannie and Freddie, has distorted patterns and created trading conditions are erratic at best and treacherous to say the least.

So essentially here we go again. I was contemplating my possible positioning for this week on Friday as I hard the rumors about this takeover (though to be honest, I had heard a new rumor each Friday over the past month). I dismissed them and dealt with the facts at hand. First, my trend model had turned down as a result of the bloody trade. Second, my long term model supports were taken out at 1250 leaving me wondering how quickly it would take to get to 1070 on the charts. Lastly, I was debating on whether the low for the market would be midweek or at the end of the week. Now that this news comes out about Fannie and Freddie, I am left to wonder - what is going to happen?

Short Term
I am unsure of the short term. The market could look at this Treasury move in both a positive and negative light. Ultimately, I think the best place to look to see if the market likes this plan is the homebuilders (via the HGX) and the banks (BKX). At the moment, both are in upward trends over the intermediate term. An opening higher could be an indication by the market that things were done correctly at the treasury and the conditions will continue to improve in the credit space (and buy extension, real estate). If both of these indexes take a hit, this will continue the selling in stocks. It will also hit the dollar as well (another discussion). if the dollar, housing and financials are coming down, the trend will continue lower. That might make buying later this week risky. At the same time, if it is around 1200, it sets up the bulls for their retest of the lows of this bear market. Thus, short term I will watch what the S&P's do on the open tonight and what the banks and homebuilders do tomorrow.

Intermediate Term
The trend at the moment on the intermediate term chart says this: Things are weak. the trend models are both pointing lower and overall power models argue that the bears control. On the surface, this bailout by treasury removes some uncertainty but now the focus has shifted to the economy anyhow. Housing prices are still falling and unemployment is rising. Sentiment stinks and we have an election coming. This seems like too many variables that make it difficult to change things in favor of the bulls. In terms of the key levels, with 1275 gone, I argue that we are looking for a move down towards the 1175 area before the market bounces again.

In terms of the leaders following the bounce, the Russell and NDX 100, things do not look so promising there either. It appears that 690 will be once in place for the Russell 2000 as the market reversed hard below its major trend indicator. As for the NDX, it is right at support around 1750. A break there argues for a move down another 100 points. This would imply a break of the previous lows. Thus if the bulls have hope for a general market bounce, the NDX has to hold the 1750 level.

Long Term
The Bull/Bear model still points to a bear market. Things have been improving a bit over the past month but nothing major. Credit conditions may improve on the back of the treasury's move but the other variables are not exactly screaming Buy! The break of 1250 on the long term chart in the S&P now argues for the 1150 level next. Of course this is a monthly model which means that there is still time to climb back into the somewhat bullish area of town. The failure by the NDX over the past month argues for a much larger smoking down towards the 1550 level which is past the intermediate term possibilities. Overall, conditions look weak.

So in summary, this week will be interesting. If the banks and the builders bounce higher, we could be looking at much better conditions going forward. The NDX needs to joint his market though and given the selling in that sector, it might be difficult. I maintain my bearish bias on things going forward.

Looking at the Candidates: Barak Obama Part II

2008-09-05T10:26:00.002-04:00

This is part II of a series of posts regarding Barak Obama's economic plan. The introduction can be found here and Part I can be found here. In this note, I will focus on trade and manufacturing plans.

In reviewing the plans of for Trade and manufacturing, I found some interesting and not so interesting ideas. The most interesting to me is the idea focused around creating an alternative energy leadership position in the world. I think it was GE Energy's CEO who said that we the ability to create the most wind power in the world here in the United States. Personally, living in the northeast end of this country, I might agree given the weather this summer. The plan is to provide incentives to the industry (a fund in this case) that forces innovation in the alternative's universe. While forcing anything in a free market economy is normally useless, I think this might actually have some potential (as the government forced ethanol and that industry has grown).

On the other side of this trade and manufacturing ledger that I cannot agree with is renegotiating NAFTA. I think it is very important to have low to no trade barriers with our closest economic friends. Canada and Mexico are not the US but they provide means for the US to become more efficient. Overtime that will change and jobs will flow from one country to the other. In the meantime, the US takes the brunt of the job loss. Longer term, I think it makes the US stronger and creates better conditions of living as a result for its citizens. Also, going back on an agreement is not something we should be in the habit of doing. Lastly, Canada has enormous amounts of oil and energy products - by having an economic agreement with them, those flows will not be disrupted. they are an ally (along with Mexico). We should treat them both like such.

Before looking at the rest of the plan, lets look at the key points that Obama argues on the trade side (already mentioned NAFTA).

Fight for Fair Trade into Foreign Markets
Improve Transition assistance
Penalize companies that send jobs overseas and reward those that keep them in the US

On the first point, Fair Trade into foreign markets, I cannot agree more on it. however, this is a global issue and our government has been fighting this issue for over 20 years. Maybe he can open up some countries with his diplomatic sway but I don't hold out much hope for this. As long as we are at war in Iraq, our global diplomacy power is less or weakened and that will slow down everything else.

Improving transition assistance is important. John McCain said last night that transition assistance in this country is based on the 1950's model of an economy. Perhaps. In any event, I think some sort of government/non government joint effort should be put forth here. While I am not too up to speed on this issue, the free market has a remarkable record of creating jobs. As a result, some sort of joint operation in this regard should be employed on the job and education side to get people back into the workforce as quickly as possible.

I touched on the last topic in Part I in regards to the tax side. As I said then, it is a ridiculous measure to employ. We live in an global economy. Our companies must take advantage of that. if they don't, they disappear and innovation is crushed. Giving gifts to those companies who are not globally sales oriented to start with (the second part of the note above) is just a waste of money. Why give Joe and Mary's Supermart a tax break for hiring local people?

In terms of the manufacturing side of the ledger here, Obama indicates the following

Invest in next generation manufacturing and job creators
Double funding for the manufacturing extension partnership
Invest in a clean energy economy creating 5 million green jobs
Create new job training for clean technologies
Boost the renewable industry and create new jobs.

This is all about clean energy buildup (away from big oil) and new jobs. It appears he believes that funding on this side of the ledger will be the best way to lead the US into the rest of this century. While I agree this industry is growing, does it really need government interference? On one hand, more money into the industry may encourage much more innovation as the costs to alternative fuels are still higher than that of the established ones in crude and natural gas. On the other hand, if the industry is expecting government handouts, innovation will be slowed. I guess it is a catch 22. The idea is a good one. How to implement it on the other hand is a difficult one.

As for the manufacturing ideas, protecting an industry that really ebbs and flows with the US dollar, is something that is not wise. My guess is that they Dem's will call for a stronger dollar - this in turn will make our manufacturing industries less competitive. Giving incentives to this industry to keep jobs and invest in new technologies is admirable. however, if everyone can make the same widget, ultimately cost becomes an issue. Furthermore, you can bet that if the US companies are employing a very low cost manufacturing process, the international markets will find it too. thus, marginally, this plan is like swimming up a raging river - you get nowhere.

All told, Obama's plans are ambitious to some degree. It argues for moving tax incentives from one industry to another which is ok. creating new one and not eliminating old incentives is not ok because it implies more government involvement in the free market. this historically is a negative and I believe it will continue to be an negative. Let the private sector benefit where the inventive is needed and take it away from the sector that does not need it anymore. As for the other measures mentioned, NAFTA should be enhanced and improved - not renegotiated. Job training is very important and I would make this a top 3 issue. if everyone can be trained quicker for a new job, then the loss of one or two key sectors is not that big of a deal as we can just retrain those who suffered and get them back on their quicker.

Looking at the Candidates: Barak Obama Part I

2008-09-03T01:00:00.001-04:00

Earlier in the week, I introduced my miniseries on the candidates of this years election and their primary economic plan to help the economy going forward. I figured i would start with Barak Obama only because this plan is now out there thanks to the Democratic Convention. the republicans are speaking this week as well but since the dems went first, I shall post some comments on Obama's plan first...then McCains.

So on Sunday I started by writing about this two main problems with America: The Rich are not paying enough in taxes and wages are stagnantt. Today I will attempt to give a view on the subsets of these "problems" if you will. The first is the middle class tax situation. Now, I don't claim to be in the middle class though I live very much like one (as I feel like I could lose all my money at any time in this market and thus I don't spend it). Anyhow, Obama indicated in his plan the following issues around the middle class tax situation.

He will provide a $1000 tax credit for families that will "restore fairness to the tax code." The "making work pay" program will in turn eliminate taxes for 10 million people or about 2.5% of the population (assuming 250 million people).
He will eliminate taxes on seniors who make less than $50,000 per year. this will immediately knock 7 million people off the tax rolls saving them on average $1400. Furthermore, 27million seniors will not even has to files taxes.
He will simplify the tax filing process for most Americans so it takes less than 5 minutes to do your taxes. This supposedly will save $2 billion in filing fees.

Ok. so now the analysis. First, in looking at this plan, he pulls essentially 17 million people out of the tax paying pool or roughly 3% give or take. Interestingly, this small percentage accounts for a much even smaller amount of total taxes paid. Furthermore, they are statistically insignificant as it comes to paying down the finances of the US Government. In turn, he will attempt to raise the capital gains tax from the current 15% to the 20% level (not mentioned by the way) and basically tax the richer individuals in this country for taking risk.

Now, as I mentioned in my opening missive, I wonder about the usefulness of going after your biggest tax payers and making them contribute more. this plan mentioned above essentially is all fluff and no substance. If your goal is to penalize risk takers, just come out and say it! of course, this is politics so that will not happen.

In addition to these tax polices, there are also a few other tax situations mentioned in his plan.

End Tax breaks for companies that send employees overseas.
Reward those companies that hire more Americans with tax breaks.
Provide a tax break for small business and start ups.
Enact a windfall profit tax on energy companies that creates $1000 per year for middle class families.

These are all admirable positions to take. Personally I like them but I also do not like the practicality of them. By telling companies that they cannot send individuals overseas or you will get penalized for it, you are also indicating then that globalization will cost you - that is a very big negative in my opinion. Globalization is here. Embrace it. do not fight it or we will become like every protectionist state that fell over the past 300 years.

As for the second two, I don't think tax breaks should be given to companies that hire Americans. That is absurd. Companies are going to naturally hire an American. Why given them money to do so! As for the tax break on small business, I think that is admirable and a good policy. However, the taxes that small business faces is the problem - reforming that end of the code, and the double counting of taxes on employees (company pays taxes, the employee pays taxes of the same amount) needs to be fixed. Otherwise, this tax break, while short term useful, long term inadequate.

Finally, I ask, if the energy companies start losing money, will the government create an windfall profit taxes on say the consumer who is benefiting from the falling energy prices? This is a stupid policy that should be tossed out with the trash. it is dangerous to capital formation and will push companies overseas and create less jobs domestically. I just don't see the benefit. yet again, if I were a hard core liberal who does not understand a darn thing about the economy, this would make perfect sense. I am not though.

Roll Over

2008-09-02T23:16:00.001-04:00

As I reviewed my charts tonight, something struck me, leaving me with a big black eye. It was the stock market which plunged today from the near 1300 level to the 1277 level on the close. From a chart perspective, many of the supports that have been mentioned in the past have held. However, my trend model, which measure the best time to go long and short stocks, is turning over. This "roll over" and not in AT&T terms, is not good. Essentially it argues that the rally is over and the bear is about to reassert itself. While there are still three days to go in this week, which means that the chart could reverse back up if the markets find some footing to the upside, I am not on alert and holding off on any further purchases to my portfolio.

I will be back this week with my weekly piece on the equity markets. I figured I would share this potential "roll over" with you before then.

HO Could dictate Direction this Fall

2008-09-02T22:09:00.003-04:00

As we proceed into the winter season, as far as refiners are concerned, the focus will shift from the unleaded gasoline inventories to the residual fuel or heating oil inventories. When the winter is expected to be a warm one, sort of like what we saw the last few years, HO demand is less than the norm and prices for this product generally lag the price of the crude barrel (crack spread favors crude). When the winter is expected to be a cold one, refiners prepare for the rise in demand of this product. So when things are expected to be warm, lower demand is expected....cold, higher demand is expected. Simple, right?

Well, what happens when the expected does not occur? Two things. First, when the cold sweeps through and is unexpected, more heating oil is used driving inventories lower till the refiners bring the level back into line where supply and demand meet. This drives the price higher, rather quickly. Over the past few years with the warmer than expected winter, the price of heat has been leveling off before the winter really picks up. Basically, the months of October and November have determined the action for the rest of the winter for the price in heating oil.

So here is where the real fun begins. I use two weather models in my forecasts for the winter. I don't actually trade off them directly but I use them to better understand why people are buying and selling on the weather during different times of the year. For example, my reports had Gustav coming into the US at about a cat 1 or 2 whereas the market was looking for much larger and greater damage. That did not occur - crude and natural gas dived! Now, if I had only sold short every crude and natural gas contract on the exchange!!! Anyhow I did partake on the dive (as I mentioned in my crude call a few weeks ago making a quick $4).

Ok, moving on to the winter. Basically, my two models are indicating a colder than normal winter. There does not seem to be a consensus on the weather this winter online though most services require some sort of payment so getting the whole story is somewhat difficult. Anyway, one of my sources indicates temps around 3 to 5 degrees higher than normal for October/November. Interestingly, my trading models have heating oil perhaps finding support around that time period. Furthermore, in terms of residual fuel inventory levels for this time of the year, the level currently resides at its lowest level since 2005. Essentially refiners are not moving into this market aggressively basically with the mindset perhaps that we are not seeing a cold winter coming (on top of cascading prices right now not helping things either).

This all comes together and sets the market up for a surprise. Essentially if we get colder than expected weather temps, demand will be higher for heat. This will put stress on the already low inventory levels and push upward prices perhaps putting a floor on crude prices through the winter. Interestingly, year over year inventory levels for natural gas are also the lowest since 2005 at this time of the year - another market perhaps not looking for a colder winter (though electricity demand is playing a roll here....8% lower y/y from what I have read last). A cold weather demand push would give both of these products higher demand and thus higher prices.

Easy vs Tight Policy

2008-09-02T21:17:00.008-04:00

What has been interesting about this dollar rally has been what the waves have done in destroying the rallies in the other majors. For example, from the double top in the Euro around 1.60 and the double bottom in the USD around 71.70, several currencies have been pummelled lower. The Aussie dollar, suffering from overtight policy, has been crippled by almost 20% from the highs. This is a currency we are talking about by the way and not a tech stock. The British Pound, another currency suffering from overtight policy, also has taken a beating lower, falling almost 14% lower. Lastly, the Euro has backed off by about 10% - it too also suffering from overtight policy.

On the other side of the ledger, the Canadian Dollar, which has been tracking crude somewhat closely, is trading decently for the most part as the Bank of Canada (BOC) has been maintaining policy somewhat easy relative to its fundamentals. The Bank of Japan, the current proud member of a government in disarray but also featuring an easy policy mandate, has seen the Yen hold up well globally. Lastly, the good old greenback, the one that every bear has come to hate and blame for the current blow ups globally, also features ultraeasy policy.

So essentially what the currency market is doing is giving those currencies with easy policy mandates the benefit of the doubt going forward that essentially these currencies will be hiking rates in the coming future thanks to stable inflation pictures and rising growth. Those currencies that have tight policies will only feature rising growth if the policy is loosened. Till that point, the selling will follow which makes the Euro extremely interesting over the next six months.

The European Central Banks' current overnight rate, 4.25%, is restrictive in my opinion using a combination of models that have the core rate of inflation, growth, market inflation and market growth. I could explain these in more depth but that might take many pages so lets just summarize. Generally speaking, when growth is rising and policy is easy, the understanding in the marketplace is that the local central bank will have to hike rates. This will drive up overnight interest rates and support the given currency - sort of what we saw with the euro for the pats few years or even the Aussie the past few years.

At the moment, the Eurozone features shrinking growth, moderating core inflation, moderating market inflation (just watch the CRB for a good correlation there) and moderating growth (bull or bear model I often site is involved here). Going forward from here, the forecasts for European economy are for lower growth, moderating core inflation (last flash estimate dropped) and I believe that the market inflation picture will continue to moderate and on the growth side, I maintain we remain in a bear market so I don't expect that to rise anytime soon. All of this while the ECB is about 50bps too tight at the moment - meaning rates should be 3.75% vs the 4.25% used. The longer this persists, the more likely that the Eurozone variables, growth and inflation, will continue to fall and this will make conditions even tighter.

As we saw with the US economy following the breakdown in the dollar earlier in the decade, it took ultraeasy policy just to reverse the downward pressure that the strong dollar and tight policy, combined with a bursting equity bubble, to change the trend (and even that did not work as well). Back in 2000, the Federal Reserve was tight by almost 100bps when the stock market began its decent following the rallies in August 2000. The day the ECB hiked a few months ago began or increased the volatility throughout the marketplace. It also punched the EU economy in the gut and here we are today.

So what does this have to do with the Euro? Well, as it probably has been well chronicled, the Euro has fallen hard over the past month. Like my crude has support at 111.50 level call a few weeks ago (once that level broke today, crude collapsed), the Euro now has a similar setup showing on the chart. As the long term chart here shows, is sitting on a trendline that has held support since 2002. A break of this trendline very well confirms the breakout in the dollar to the upside. The dollar index has already climbed past its long term downward drawn trendline - now if the Euro breaks through, currency trading over the next 4-6 years might be much different. This could also create interesting changes to the US economy (that will be covered in another piece sometime).

Bottom line is simple here. If the month of September continues to be a month where the dollar is supported, the Euro could be on its way towards the 1.35 level and then the 1.20 level. If the ECB responds by cutting rates in the next few months or at least signals that such might occur, I think the 1.35 level will hold. Otherwise, I would argue that the 1.20 level is coming over the next few years. the longer the ECB holds out, the longer it will take to fix the damage.

Looking at the Candidates: Barack Obama

2008-08-29T22:56:00.009-04:00

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

2008-08-24T22:11:00.002-04:00

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?

2008-08-23T15:02:00.002-04:00

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

2008-08-23T10:36:00.005-04:00

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?

2008-08-23T08:16:00.005-04:00

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

2008-08-22T21:11:00.002-04:00

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

2008-08-21T21:49:00.004-04:00

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?

2008-08-20T21:48:00.004-04:00

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

2008-08-19T21:16:00.003-04:00

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

2008-08-18T21:56:00.002-04:00

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

2008-08-17T22:22:00.003-04:00

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

2008-08-17T07:24:00.005-04:00

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

2008-08-15T16:29:00.003-04:00

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

2008-08-15T15:25:00.006-04:00

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

2008-08-13T01:00:00.001-04:00

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

2008-08-12T11:23:00.000-04:00

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

2008-08-11T21:28:00.002-04:00

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

2008-08-10T07:01:00.001-04:00

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

2008-08-10T01:21:00.000-04:00

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

2008-08-09T21:42:00.002-04:00

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).

Talking to the People

2008-08-09T21:01:00.003-04:00

A few days ago, I was fortunate enough to have my article, Due or Die for the Dollar, published to the SeekingAlpha.com site. As you can see, if you click through on the link, it was a dollar bullish story which these days is hard to fine. Anyhow, going forward, anytime I have an article published at Seeking Alpha and there are people commenting on the article, I shall answer the critics here. So in my first installment of, "Talking to the People," I will paraphrase and then respond.

First comment comes from Mr. G. Essentially he says that the gold's fall off is not going to result in a bear market for the yellow metal and anyone who is without 30-50% of their portfolio in gold, is playing with fire.

My response to this is two fold: First, a bear market to me in gold is a falling trend. Some commodity bulls maintain that a commodity bull market can last 20 years and have 80% declines within it - personally, I think that is stupid. Many gold bulls hold onto the same logic. To that, I say, all the power to you. If you want to ride gold down back to the 350/400 level, good luck. Mr. G is not saying that but he is indicating that gold is a great safe haven position - he is correct. However, I am arguing that the safe haven trade is long in the tooth.

The second comment came from Captain Bob. He essential says that he could not disagree with me more (that's fair). He said there will be a point where gas prices do not fall anymore and the dollar benefited directly from this. Further, the CB's (central banks) have been buying dollars and this is not dollar bullish. The fundamentals of the dollar still stink. Lastly he says that the next move up in gold will be a doozy and it won't take 2 years to launch it.

My response to this is simple. People hold onto fundamentals in dictating the dollar direction all the time. They pull out the trade deficit or the rising debt levels here in the US but fail to point out that both of these factors were in play when the dollar last rose in 1994 to 2002. That to me is the story of the gold bug - pick the best story to push the gold agenda. Anyhow, the second part about the CB's buying dollars is not something I can really answer because it is published by the world bank with a 2 month lag. I know that the those who are pegged to the dollar have to buy dollars but I don't believe that is any factor driving this move. Finally, gold will rally sometime in the future since we live in an inflationary world. I argue though that inflation is now turning, regardless of the CPI figures and the next move for hard assets is down.

The last comment is from Paultaut. He says that the invasion by Russia into Georgia was the reason for the move (any time there is war near the EU, the Euro suffers). He says major resistance is at 80 (not 82 like I said) and he is using Fibonacci. He says that the eye popping inflation in the EU is what supports the Euro. Mentions that financial troubles will continue in the US and the dollar will resume its slide sometime.

My response, is several fold. First off, the dollar has been moving up for about a month now. The invasion occurred on Thursday or Friday. Further, there have been tensions forever between Mother Russia and is former kids. As for the technicals, I can see 80 though I don't think it will be that big of a deal. I am also not great with Fibonacci levels so if he sees 80, great. Just to let you know, inflation on the headline level is higher in the US than it is in the EU. Further, the core rate of inflation is higher here than it is in the EU. Additionally, rising inflation and sinking growth are not supports - especially when the future growth forecasts for next 2 quarters are for around 1% (where in the US I see about 2%). Finally, give me a break on the financial story. And in response that it will resume it slide someday, it will also probably rain or snow in the next year as well.

Well everyone, thank you for commenting on my article. Keep reading.

Crude Realities

2008-08-08T01:29:00.000-04:00

So here we are, crude oil sitting under the major $120 level. I had a discussion the other day with a person who has been bearish on crude all the way up from $70. The argument was just about the fundamentals of the market and the falling level of demand. I argued that such sometimes comes into play but for the most part, these numbers tend to lose you money trading these market - not make you money. Anyhow, the person went away all angry that I did not agree with him. My reasoning was somewhat simple: The crude market has not convincingly crushed the $120 level. If it did, then I would be calling a top but since the buyers have showed up, and the technicals overall somewhat support a move higher, I just don't think the cascade is there yet.

However, it could come to the party soon. To measure crude oil, I look at the commodities and the USO (US Oil Fund). I am not a big fan of the USO as the constant rolling of crude can distort the price action of the fund (lagging or leading it depending on the shape of the crude future curve). However the USO is useful because it provides me with a view of the retail investor's thoughts via the volume figures. Combining this together with my futures chart and economic outlook, I can reasonably come to a view on crude. So where do I think things are going from here?

Well, lets break down the parts and summarize at the end. First, the USO is telling me a few things. Money flow levels were at extreme levels around $140 a few weeks back. Generally speaking when this occurs, crude either accelerates and then levels off or it declines, like it did in late 2007. Since the extreme level, we have correct through one support area and now trying to hold a second around 95 (USO price). A break here could really open up the flood gates and set up a test much lower around $80. A break to this point though would probably flip over the power model to bearish and then my targets would be in the $50's range. So from the ETF side, crude is at support but a bounce soon will lead to another fall towards $80.

As for the futures charts, the long term monthly argues we are heading back to $110 which is somewhat opposite of the weekly which is kind of showing support at $120. Key word here is kind of though which means that if the speculation is correct in the marketplace and index funds are unloading on the market, much like they did with stocks a few months ago, there will be no bounce at $120 and $110 will become more of a certainty. A break of $110 and things get very interesting with $100 and then $80 next.

The last variable is the economy. During the previous cycles of my growth model, which measure whether we are in a bear or bull market, the crude market has leveled off during the bear side of the trade. If that is the case, then my friend, who has been wrong since $70, might actually be correct. My model turned over in November of last year. Crude was around $85/90 per barrel at that time. If the past is a guide here, crude should trade to this level and then bounce probably another 10 lower before returning to the mean, if you will.

So in summary, the USO is bearish, the futures are bearish and the bull/bear model is bearish. The average target looks to be $110 but longer term, it appears we are headed for a test with the $80 level. Further economic weakness could be a real problem though I think the dollar would weaken in such a scenario (unless the Euro falls apart) and crude will find some artificial support.

Stock Talk

2008-08-07T22:55:00.003-04:00

Since launching this blog a week ago, I have not really spoke much about my trading of individual names in my portfolio. Just for your information, I tend to carry 7 to 10 stocks at a time and trade differently given a bull or bear market. For example, in a bull market, I am willing to let a long trade run longer because there stands to be a better chance of it lasting. Conversely, I am looking for targets when shorting into a bull market. And for a bear market, it is the opposite: hold shorts longer, cover longs faster. So with that said, lets move on.

This past few weeks have seen furious moves up and down. As I have maintained, we remain in a bear market so my long positions, as a result, are mainly rentals (as Doug Kass would say over at realmoney.com) and I tend to cover when the target is hit. The short term trend, IMHO, turned up around the 24th of July and thus I am trading from the long side at the moment only. I purchased my portfolio worth of stocks around that date and have been unloading ever since with only once name left: Level 3 Communications (LLL). I unloaded the other names which included ESS, VNO and SYMC last week with a decent return overall.

So where are things going from here? Well, for my trading models, the most bought stocks (those with the highest ratings) are now dropping like flies. ISRG, one that I liked before the big bounce higher, was upgraded to a most bought and has promptly corrected about 25 points. SOHU, another name which I sort of liked, another "most bought" stock, has been dropped kicked 13 straight points lower. I currently have four agriculture stocks rates most bought and they each fell 4 to 14% in one week. Conversely, on the most sold list, the returns have been flat to down 1%. This tells me two things. First, this market is very willing to take profits which takes me to my second point: This is inherently a problem given the continued supply though some contrarians would take this as a buy signal or capitulative.

To that I just point to the stats. First, there are 40% of the stocks currently rated in my system as a buy. On the sell side, that number is more towards the 50% level. Now, at market bottoms, we are all tough that everyone is shot and capitulation and panic run rampant. If 40% of the stocks I follow are still in uptrends, what does that say about the overall market going forward? It could mean that we are in for a world of hurt coming soon or this underlying strength is a good omen for things to come as it shows buyers are in the markets. Well, from my technicals, I would argue that things are short term strong. Longer term is where the problem comes in and that is where I think that the 40% of long positions drops down to 30 or 20% before we find real bottom.

Bear careful out there. It is indeed treacherous.

Do or Die for the Dollar

2008-08-06T01:00:00.000-04:00

Over the past few days, we have seen an massive unwind of long energy, short financials, long commodities, short stocks, short dollar, long....well every currency versus the dollar. The selling has been brisk and aggressive and traders, much like the days where the Yen was the carry of choice, are fretting an environment where the dollar is strong and everything else is weak. Are traders jumping the gun early on this? Well, 3 things of my models are on the cusp of moving higher for the dollar.

First, technically, things are looking like something is about to happen. The dollar index is very close to breaking back above the 73.95 range level on the long term chart. A successful close above this level at month end would be the first since the spring. It would also confirm to me a double bottom of sorts around the 71.70 level. Using straight projection analysis, this implies a move towards the 77 level, which in turn argues for the Euro to end up somewhere in the 1.45 area. Shifting to the weekly, the same setup is seen in terms of the projection but the next major range level I show is near 82 or roughly 1.20 in the Euro.

The second and third major factors are somewhat related. First, my gold versus dollar model, which has favored the yellow metal since the beginning of 2002, is moving in the direction of a reversal though more aggressively on the gold side than on the dollar side. A break in this ratio implies a bear market for gold over the next few years. A bear market in gold implies a bear market in commodities. A bear market in commodities, argues for a bear market in commodity currencies.

And you probably just guessed what the third factor is: Commodity currencies (and the swiss franc). The Canadian Dollar (ie the Loonie) and the Australian Dollar (ie the Aussie) are both on the verge of horrific collapses lower, if you happen to be long. In my weekly note I post to friends (I don't post it on the web for a variety of reasons), the one constant I see with these commodity currencies is large gaps to .8750 in both the Loonie and Aussie from current levels. I mentioned in the market views piece that a break of $120 in crude oil, argues for a swift fall to the $110 level and lower. This could very well tilt these two currencies over and push the dollar index higher as a result.

Combining these factors together and you get an explosive move in the dollar to the upside. My guess is that the currencies will move after the ECB meets on Thursday. To be honest, with growth expected to be lower than last quarter in the 1.5% range and 1% in the following quarter, the fair value of the ECB target is coming down dramatically, regardless of where inflation falls when officially reported in a week. This means that the next path for rates is lower and not higher. Lower rates while the Fed is stable implies a lower Euro as a result. Thus, Trichet in a way holds the key - dollar rally now or dollar rally later. I guess we'll know more Thursday.

Reversal for India?

2008-08-05T22:00:00.003-04:00

Over the weekend, as I was reviewing the international stock indexes, I generally found that most are due for some major selling in the next few weeks and overall, things looked pretty weak. That was the case till I came across the Bombay Sensex Index - that of India. It has had a rough time over the past year falling from the all times highs near 21000 to the current level around 14961. Over the past month, a reversal of sorts has been taking place as the Sensex found support and is bouncing. Is this a move that is sustainable?

Not sure. My overall rating on the Indian market is still negative but this current move, occurring while the rest of the world feels the pain, has me wondering if there is now going to be a shift into the Asian markets, away from the Latin American markets. Will money start to pour into these once loved markets? Well, from a technical perspective, I am getting optimistic...on India that is. If this index moves past the 15,500 level convincingly, we could be looking at a re challenge of the highs. A move up in such a fashion could get the emerging market flows going once again and a global stock rally would not be far behind.

Conversely, as I mentioned earlier this week, the global markets are in a bear market. The weekly of this index is still pretty weak and argues for higher levels but not the previous highs. More aggressive traders might take profits around the 15,700 level which just happens to be the breakout point of the monthly chart. Thus, lets just say that his area is important. I will follow up on this as we get closer. Mark me down for moderately bullish but if the current month moves into the black, I shall dawn the bear suit again.

Fed Moderation

2008-08-05T20:47:00.002-04:00

So today was Fed day and the market listened to the old geezers and said in so many words, "you are wrong!" Essentially the market was indicating that the Fed's worry about inflation is yesterday's news. Why? Well, perhaps a $27 fall in the price of crude or a $.25 cent fall in gas prices over the last few weeks was a supporting point for the equity bulls. Or how about gold not making any headway higher during this move in crude in 2008. Lastly, have you seen the collapse in grain prices? Add this together with a moderating PCE and just perhaps the Fed has got it right to some extent.

Of course, lets get real. The Fed had to lower rates to 2% because they ignored what was going on in the credit markets. The White house claimed everyone should own a home and wall street obliged - meanwhile Greenie printed money and the housing and credit boom began. Today we are dealing with that and while we may all be happy about a Fed that may be finally getting something correct, at the same time, it is this Fed that helped with the predicament. That aside, lets take a quick look at the statement.

First, inflation is being spouted as an concern. Dallas Fed Gov Fisher, he of the 8th inning talk a few years ago, dissented today in the 10-1 decision to keep rates steady - he wanted higher rates to 2.25%. Perhaps a case could be made for that now given the fact that fair value of the overnight target still resides around the 3.75% level or about 1.75% higher than we are today. Conversely, my 2nd round effects indicator, which is a measure of pass through inflation to wages, is negatively correlated. What does that mean? Inflation is not passing through to prices and margins are being squeezed. So on one hand, there are no 2nd round effects. On the other hand, profit margins are being squeezed.

Another point to emphasize from today's notation to the marketplace is the Fed's belief that there is still considerable amount of stress in the marketplace. While that is true on the banking side as many regional banks are having issues, the broker dealers are not borrowing from the window anymore as shown by recent data. They were having the issues before and now are offloading those problems for .22 on the dollar (thank you for the bottom Merrill Lynch). By the way, if my mortgage is selling for .22 on the dollar, can I go buy it? Just food for thought.

Lastly, something to consider here is the dollar. As I have been arguing consistently, the dollar is perhaps on the verge of an explosive move higher. When Euro 1.50 is taken out or the Aussie, Loonie and Swissie start to weaken quickly, we could see a quick down 50 points for gold and another $25 for crude. Further, if the dollar index breaks past 75, I am looking for 80, which implies about $1.35 for the Euro. Aside from this, a stronger dollar does a few things for the Fed. First, it should lower import price inflation. Second, it should drop commodities on their face, which implies lower inflation. Finally, it could lead to a stabilizing housing market as people buy assets in the US expecting appreciation - that is something you probably have not heard in 6 years! This should loosen up the financial system and have the Fed raising rates with rising growth levels - generally a good environment for the dollar.

So the bottom line is simple. With inflation pressures coming down, my second round inflation indicator now negative and overall price levels in the marketplace backing off, combined withe beginning of what could be a big dollar rally, I think the Fed could be on hold for a while. Oh, did I mention that easy policy generally with rising growth is good for stocks? When stocks finally find some footing (tech is somewhat showing that), then the Fed will get into gear. Till then, Bernanke and company are probably on hold through the rest of the year.

Rate Dispersion

2008-08-04T14:10:00.000-04:00

Overnight rates drive much of the action in currency markets. It is not the actual rates but what the expectation of those actual rates will be in the future. So if the Fed is expected to hike rates sooner than later and the ECB is expected to be on hold with a bias to cut sometime in the future, then there will be an pressure on the Euro to weaken vs the greenback. Of course there are other variables which I attempted to capture in this measure you see on the chart. The current levels represent where I believe overnight rates should be NOW for a given economy.

For example, I believe the Fed is too easy but it appears that the fair value is now making a more convincing move lower. Current policy in the UK is too tight by over 125bps. In the EU, their policy is too easy by 50bps. Bottom line, unless something dramatic happens here in the US on the economic front along with Fed tightening, the dollar will not be getting any support on this end...yet.

Bear Market Remains

2008-08-04T06:00:00.000-04:00

Starting today, I will begin posting an updated "Bull vs Bear Market" Chart at the bottom of the blog. This chart measures the amount of pressure that is being exerted by the bulls or bears. Generally speaking when the model is less than 0 and falling, we are in a bear market and bearish pressure is rising (ie the bear market is getting stronger and more intense). Over 0 and rising trend argues for the exact opposite. As you can see, we reside in a bear market (surprise surprise) but the pressure has waned over the past few weeks as the markets have rallied and various other indicators have begun more bullish or less bearish (pick your poison).

For informational purposes, the model is comprised of mostly market based indicators as I rarely believe the government stats that are posted (except for a few which I will talk about from time to time). This model gives me a guide in terms of asset allocation and how I should trade a given market. It is but one though of my overall indicators I use to measure the marketplace. This however is an extremly important piece and when it says bull or bear, I listen.

Weekly Market Outlook

2008-08-03T14:40:00.004-04:00

So here we are. The wonderful and quiet month of August. Over the past few years, this month has brought volatility. During bear markets it seems to be the time of the year for the bears to take it to the bulls - perhaps the bulls go on vacation and there figures to be little resistance as a result. Anyhow, personally I am not a fan of this month. The market this time of the year has a memory of less than 24 hours so if news flow is all over the place, so is the market. Trends do not exist unless one theme is so overwhelming that it cannot be ignored (frozen credit markets last fall would be one) making August completely unpredictable and thus, a month I normally like to avoid. Now with that said, it does not mean I should duck and cover so here is a quick analysis for the upcoming week.

Last week I indicated that while the bear controlled things, there was some glimmer of hope in the NDX. As you recall, I mentioned that if the NDX 100 could retake the 1890 level, things would improve dramatically across the landscape. In addition, I said that if the SPX could reclaim 1275, then the 1300-1320 area was next. I was pretty confident about that. What happened? The bears took my calls and essentially drove them down my throat. So what's next?

Well for the leader, the NDX, the failure to close the 1850 level has opened up the more realistic possibility that we challenge 1750 next. The only caveat emptor to so speak to this sits in two metrics I use. First the level of stocks over my power MA still sits in an upward trend. Also the money flow numbers are still supportive. Conversely, my power model is bearish at the moment and the 65 week confirmed that trend this past week. Given this information, I think if this market can hold itself up through midweek, then a challenge of the 1850 level and then the 65 week is possible. If the sellers come out aggressive, 1750 here we come.

As for the other big index, the S&P 500 1275 remains a formidable challenge. Essentially it as support and now has become major resistance. Sure we traded above it each of the past few weeks but we have not been able to CLOSE above it by the end of the week. This continued failure raises the distinct possibility that a challenge of 1200 is possible. The doji candles of the past few weeks are not helping things either. The power model is down here as well and the power MA is bearish. On a positive note, money flow looks oversold or near it. Also, my stochastics model that I use to go long stocks or short in a given time period argues for upside - barely.

So bottom line here I think is simple. If this market can get started on the right foot early in the week, then the upside resistance levels could be taken out as the shorts will run for the exits. Conversely, any hesitation for the bulls will be taken as a weakness and the shorts will come out swinging.

Good luck trading

PS I do not have a position at the moment on the futures side. The signals for August are generally erratic though I will be employing one of my signals (of the many). At this point though, I am not getting an indication which way that trade will occur from.

A Few Quick Thoughts

2008-08-01T00:06:00.001-04:00

I don't really have time to post much but this is what I am thinking about heading into the "all important" jobs report - as those talking heads on CNBC would say.

The reaction to the jobs report later today will be important. If the number is exceptionally weak, which the claims numbers may be telling us, we could see a dozy of a number and a big fall in stocks. It is the response that is key. If we rally on the bad news, look out shorts!
Last week in my policy review note, I said that the ECB was now tight with policy. That was before I went back and changed my inflation variable and plugged in the flash estimate from this morning: 4.1%! This now implies that the ECB needs to hike 2 more times to just even out policy - probably more than 1% to slow inflation which at this juncture could plunge the EU into recession (I am looking for 1.8% growth).
Speaking of recessions, the UK appears to be headed for a really bad one. Sure the US is weak but the UK market is falling harder and is something to watch as this may torpedo the Pound.
The 1275 level in the S&P is important to me. We need to close above it on the weekly chart to keep hope alive for a rally towards 1300.
My overall view on rates has become more neutral of late. The 2 year is getting a bit spunky which tells me a) traders are now worried about hikes or b) traders see growth. We'll know more after the report tomorrow.
What am I doing up this late?

Good night (or early morning).

Hope is Bearable?

2008-07-30T21:30:00.001-04:00

Lets just get this part out of the way: The Bear market is still hear. It is strong and it is (or was) roaring loudly over the past few months. Some might say that an important low as put in over the past few weeks by the financials but at "important" market lows, EVERYONE participates on the downside. Example: Where is Apple today compared to say Merrill Lynch over the past few months? If Apple were cascading or RIMM were tumbling hard along with mother Merrill, along with all those oil stocks to the downside, perhaps a different perspective would be gleaned today. However, the facts are the facts and problems remain.

First, anecdotally, the credit issues remain for the markets. We are in the think of earnings season and I heard somewhere today that some analysts believe that financial earnings will be down over 20% from 2006 levels next year. Lower earnings combined with terrible debt to equtiy situations normally leads one to gets a bit worried about the given situation. One needs income afterall to pay of the intererst payments due from the debt. Thus, while BAC, JPM and WFC were able to show that they can make some money in this environment, the brokers and eveyrone else are having issues (regional banks going under again this weekend). Thus, while over the longer term this is something to watch that could change the tide against the finanicals, shorter term, there is no lift - just more selling.

The second fact to consider is seasonality. Generally speaking, August is the biggest vacation month of the year. Thus, many pro's will be on the sideline, probably working buy stops if they were long or sell stops if they are short. Thus, the moves that come between now and labor day may be range bound. Sure, 2001, which many are citing as a comparable period to the current action, had a major decline in August. Last year we had major issues in August. Thus, putting these instances together (both considered bursting stock market bubble periods), you get the expecation that the selling is right around the corner and things the next leg down to 1100 is in the cards. Taking this fact, and combining it with the credit picture, an ugly red is expected on everyone's trading screens.

However, I see some glimmers of hope for a continuation of the rally. The first support sits with the charts of the markets as a whole and the Nasdaq 100. In the NDX 100, you get the largest 100 companies of the Nasdaq. It is a closely watched index and the futures are liquid enough for me. This index has been outperforming relative to its brothers in arms (the Dow and S&P). Interestingly, over the past week, there has been no mention of this and only mention that markets are going to sink. The NDX 100 though showed me a few things that are worth talking about.

First, it bounced off the 1750 level which triggered an upgrade for me moving it from a minus 3 to a minus 1 (minus three from the beginning of June). If this move up from 1750 continues, the next big target to watch is 1890. A move above that level, when combined with the better power model figures (power model measures postive volume for me) and you have a positive 1 rating. Supporting this is hte increasing amount of stocks, on an MA basis that have jumped over their 150 MA moving average. This made a higher low, breaking a downdward trendline from the begining of 2007. What would support my case would be a good move over 1850 and close this week. If such happens, I would be much more optimistic on things going forward.

The other factor to consider is the bonce factor off a trendline. Generally speaking over the pats 6 years, when the S&P hits the top trendline of my chart model, it bounces to the bottom one - sort of like a ball bouncing off two walls. Since the Bear arrived last fall, the S&P hit a high in November before falling back to a low this spring. Then another bounce took us to 1400 beore the rcent fall back to 1200. The next logical level on this is somwehre between 1300-1325. If the bear still controls things that that point, then the move from that looks like 1150 sometime next year. So with that said, I am looking for a bounce towards the 1300 level in the next few months. We hit 1291 but that does not count in my book. 1300/1325 counts and that is what I am looking for.

The next few days should be interesting. With the jobs report on Friday, I wonder how we set up going into the number. It appears the bulls want a strong number as shown by the response to the ADP data this morning. If the BLS complies, we could NDX 1850 and a major push toward the 1300/1325 range.

Addition and Subtraction

2008-07-30T19:36:00.000-04:00

As many in the currency already know, a strong currency and a weak currency benefit the local economy in different ways. A strong currency can combat inflation while a weak currency can spur exports. Since 2002, the world has mainly benefited as the US Dollar has declined by almost 45%, using the Dollar Index (DXY), taking their currency gains and plowing them back into their own markets or other markets globally. This benefit mainly applies to those countries that "peg" their own currency to that of the dollar - mainly the middle east, China, Singapore and others. In addition, many countries have openly intervened to keep their currency from being too strong - essentially selling their currency high and buying the dollar low. This has created imbalances globally and what I call a "dollar bubble."

Essentially what is the dollar bubble? It is a bubble of investment that has benefited from the one way trade in the US dollar over the past 6 years. The likes of Brazil have seen major inflows into their economy as the Real has appreciated dramatically vs the good old greenback. Sure, there was some very interesting and supportive reasons to buy Brazil: high overnight investment rates, rising stock and local financial markets and stability politically. This has taken the Bovespa from the 18000 level a few years ago towards 70000 recently. Interestingly, when the USD was on fire to the upside through the late 90's into this decade, investment flows took the Nasdaq to 5000 (along with many other factors but the dollar was involved). A few months after hitting that 70000 level, the Bovespa is now cracking and guess what is occurring right at the same time - the dollar is stabilizing.

Another economy that has benefited from this one way trade has been China. In my opinion, if you take away the dollar peg, China is not growing at 9%, it is growing at 5% at most. The Yuan has fallen with the dollar over the last few years making their goods the cheapest on the planet by far sending major amounts of dollars and currency into the Chinese economy, leading to massive amounts of demand for infrastructure and commodities, sending crude prices sky high and global grain prices to the moon. The Shanghai comp rallied tremendously and then started to decline as the Yuan appreciated versus the dollar - albeit to a limited extent. Now the economy is slowing as well.

My point here is simple. These two economies, along with likes of Dubai and other mid eastern nations pegged to the USD, have benefited artificially from a weak dollar. What happens then if the dollar rallies like I think we are on the verge of? What happens if the Euro collapses through 1.50 and crude breaks 120? The great unwind occurs. What is the great unwind? the selling that is everything commodity or inverse to the dollar. I think the potential for a dollar rally is growing by the day and once the ECB flinches, and admits that they probably should have not hiked rates a few months ago (they are now tight by my calculations by 40bps), the Euro will be toast. And the one way trade....will be over.

Where is the Money Coming from?

2008-07-26T22:52:00.000-04:00

So I am reading through the WSJ.com online today and upon hearing that congress passed the housing bill, I am left wondering is this really a good thing? Wasn't the problems of the past two years from the fact that money was made easy which was a consequence of the bursting stock bubble. Couldn't one say that if money were not so easy over the past five years, housing would have corrected like normal in the early part of this decade, many homes foreclosed today may not even exist (as the builders would not build based on lower demand) and the average American would be in much better shape financially as they were saving instead of using their home as an ATM card?

In the end, this just argues for more garbage out of the US Economy over the foreseeable future. It is once again another policy mistake - one that will probably inflate credit again, create speculation again in housing (why has that occurred to start with?) and push today's problems down the road. So I guess the story is this. Short term, not a bad deal for housing. Long terms, very bad for the US economy and the US Greenback.

Over the short term, the foreclosure rate should slow. With the economy weak, and hung over as the president said of Wall Street the other day, it is inevitable that people will not be able to meet bills in certain circumstances. At the same time, taking some foreclosures out of key areas (read condo's) could help a local market stabilize. While this is not formal intervention, the US Government just became real estate owners in a more formal sense - $300 billion worth actually. Interestingly, my own housing models were actually stabilizing somewhat so if you push this much money into a stable market, does that mean housing actually accelerates and reinflates? Now that would be interseting if possible.

Long term, this once again shows that if people make a mistake, the US government will come out of the treasury with 2 hands full of money for the person who is in trouble. This encourages risk taking and perhaps this country needs some of that now, it does not need it in the long run. It needs measured risk taking - putting $300b into an asset will raise its value, regardless of the current state of an economy. Add to this the fact that this package will be probably paid for by running the printing press at the treasury and you have....wait for it....wait for it...JAPAN, 1992.

The bottom line is simple here. Let people fail. When they fail, they learn and do not repeat the mistake. If you don't let people fail, you create the last five years and the last 2 which have been particularly painful from a trading perspective. Overall, call me a short term bull on the US but longer term...I think there might be other opportunities out there.

All About Dispersion

2008-07-26T00:57:00.000-04:00

I follow about 500 stocks actively and rank them to see how many buys I have, how many sells I have and essentially everything in between. In addition, I look at various ETF's and see where the general strength tends to sit.

As of the close today, the findings show that I have 19 Strong Buys and 26 Strong sells on the stock side. Widening it out to Buys and sells, 62 Buys and 63 sells. This is an improvement from last week where there was about 3x the sells as there buys. Since last week, we have seen a surge in most names that were shorted and the covering, as you probably know, has been dramatic.

On the ETF side, of the 50+ that I follow, only 7 are listed as a buy. On the sell side, 27 stocks are now listed as shorts. Among those sectors that are now short, from my models, they include a large amount of International ETF's along with some energy sectors and broad based indexes. On the buy side, the Mexican Peso and Consumer Staples are leading the way for me.

From this data, I would list it all as essentially neutral for the US and bearish for the global marketplace. With so many international ETF's breaking down and the essential neutral status of the US markets, I wonder if foreign and domestic investors are looking back at the US for opportunities, thinking perhaps the worst is over? In any event, the next few weeks should show a break of the neutral status on the stock side and weakness in the international sphere.

Policy Update: Looking at the Gaps

2008-07-25T23:37:00.001-04:00

As you will probably read, I have been an ardent bull if the Euro vs the USD for few years (though bullish overall since 2002). It was purely a technical call and had nothing to do with the "pending collapse" of the US economy, as many bears will have you believe or the housing bubble. Just quantitative metrics and a few charts to boot. Anyhow, one of the metrics that favored the Euro over the dollar was the policy gap. The policy gap, as I term it, is essentially a measure of how easy or tight overnight policy is for a given central bank. At this point, I only follow three central banks for this metric: The European Central Bank, the Bank of England and the US Federal Reserve.

I find the policy gap to be very helpful in many ways from a trading perspective. Of course if I gave you all of those "ways" I might be giving away state secrets so I will just give an update of these gaps each week or from time to time along with the implications for such policy. Here is the first installment of "Policy Update: Looking at the Gaps."

ECB Now Tight (Fair Value of Repo Target: 4.08%)
With its latest rate hike of 25 bps a few weeks back, taking the overnight repo target to 4.25%, the ECB adopted an overly tight stance on policy. Many in the marketplace questioned this move and honestly, so did I. This move reminded me of our Federal Reserve in 2000 when it raised rates essentially giving the markets a punch in the gut and creating or hastening the greatest equity market plunge ever in the Nasdaq. Since this move by the ECB, financial markets have been in flux and stocks have been mostly falling. Did they make the right move? Well, if gold is any indication lately, these merry men may have jumped the gun as I think inflation is about to roll lower and not higher in the Eurozone. This means that rate policy will have to come down in the future - this implies that the Euro may be in trouble as a result.

Fed and Easy Money (Fair Value of Repo Target: 4.67%)
So lets me guess. You took a double take when you saw where I think the overnight Funds target should currently reside? I bet you did. From what I can see in my forecast, the funds target needs to come up to this level and hikes should start soon. Interestingly though in the 2000 to 2002 period, the gap was just as wide and the Fed dropped rates even further taking the overnight target down to 1%. Now with 2.67% of funds hikes needed, does the Fed hike at this juncture? Well Plosser was pretty adamant about raising rates but I think the Fed may have something working for it: the correlation between the PCE and CPI. Essentially, they are moving in opposite directions with the CPI higher and the PCE lower. This reveals shrinking margins in the corporate world. Weaker earnings in the corporate world will lead to lower demand as people are layed off. Historically the Fed does not make a habit of raising rates in such an environment.

So what are the implications? Well, I think once the market realizes that the ECB needs to cut, the Euro could be in for some major correction. When and where is the question. I will be out with a currency update in the days ahead.

Welcome to TC's World

2008-07-25T22:52:00.000-04:00

Well, after some very tough months in the markets, I am finally sitting at my desk, ready and willing to talk to you the reader about what is going on in the financial markets. Sure, I could say that the stock market stinks, the dollar is weak, interest rates are moving higher and the government is way to involved but is that original? Thoughtful? I don't believe so. What I will try to do on this site is post from time to time some interesting thoughts on the world. They will be unique (one hopes) and perhaps these notes will make you pause and think. Anyhow, I will begin posting in the days ahead. The focus mainly here is from a macro perspective. There may be some other micro stories but all intent and purposes, you will be reading about the globe and not Microsoft.