The DOW came out the gate in positive fashion after a dovish Yellen at the FOMC meet where her note was ‘markets should not be fixed on the first rate rise but the pace of them after’ – combined with this was a tame CPI report and a mkt beating jobless claims number. The bulls wee in bouyant mood, even Greek uncertainty was put to one side, then the Philly Fed number broke – another good number, the mkt was even in shock at all this good data or the bears were back in the cave. The Dow took another leg higher, Europe had rebounded to close higher, the champagne was on ice, then news came of an aid package agreement for Greece at the EG meet, the Dax futs surged the Dow took yet another leg higher to its days highs +250, the NAS was at a new record, could it get any better ? NO was the answer, Mrs Merkel played down any deal – all gains were retraced on the spike however the bulls wouldn’t be denied and as the dust settled all 30 Dow stock closed higher led by 3M. Overnight in ASIA China is down by 3.5% and in correction territory (10% off highs) as the IPO mkt is taking all new money away from existing listings. The rest of the region is in positive led by the ASX down under with the miners helped by the iron ore price and commods in general. Elsewhere in the region the BOJ stuck to its guns at its rates meet which disappointed some but with the FOMC aiding and the Yen off its highs the market closed with healthy gains as has the Kospi and Hang Sang. The commodity sector had a robust day y’day and trades flat overnight as the weaker $ saw Gold take out $1200 which is where it trades in quiet and narrow trade in Asia as does Copper and Silver. WTI/Brent trade with very modest losses however WTI is above $60 despite the outlook of weaker demand and the world swimming in black gold. In the FX space the DIXY trades just above the flat line after being hit by the FED y’day, EUR and £ retreating from recent highs whilst the Yen is above 123 – Aussie/Kiwi on the back foot. A quiet day on the data front, CAD data later but its all about Greece, an emergency meeting has been called for 6pm Monday, the Greeks are bullish (bull$hit more like) whilst futs are called flat. We have futs/opt expiry which will add to the vol. Good luck and enjoy the weekend.
The bulls were back in command y’day on Wall St as positive Greek news ( for now) gave already bullish mkts a further shot in the arm with all 10 SP sectors gaining. The mkt opened with around 100 pt gains thanks to a stronger Europe and the gains were quickly added to as the frustration of recent sessions was let go by the bulls – then with around 30mins left of the European session news filtered through the Germans were willing to aid Greece in return for them playing to the rules – straight away stocks bounced and bounced again straight upto their highs of the day ( DOW + 260) and this is where the mkt held until the final 2 hours where we saw a minor pull back but none the less a great day for the bulls ( all be it on low vol – whats new ? ). The final whistle : +230 pts, Visa leading the gainers, the financial sector as a whole benefiting with MS/GS/JPM/WELLS all at new highs. Now the bulls look ahead to todays data for confirmation of this newly found optimism.
Overnight in Asia a positive session so far with guess what China – NOT in positive – the only laggard for now with IP/retail sales matching ests, over in HK a decent rally of around 1% whilst the 2 stand outs were Tokyo +1.4% despite the Yen’s strong day y’day – Sony leading the advancers whilst down under in Sydney a positive jobs report helped the market to close at 1 week highs – the miners beaten up of late leading the gains.
Gold trades flat overnight in a very tight range after a decent day y’day, copper has losses of around 0.6%. The Oil market is also at the flat line in again a very narrow overnight range, yesterdays weekly inventory report showing larger draws in stock piles than est , the price not really moving on the number as the production data jumped to negate. In the FX markets the RBNZ cut rates last night, the kiwi dumped 170 pts in a heartbeat and trades just off 70, the Aussie has recovered from losses to trade near flat after a decent jobs report whilst the BOE gov Carney’s Mansion House speech pulled up no trees with cable sub 1.55. Today a quiet morning on the data front with a raft of data across the pond later inc Retail sales and jobless claims. Futs are called on the weak side after y’days blow out, Greece remains in focus firmly ( downgraded by S+P). Good luck.
Further Foibles In The Payroll Numbers – In his weekend note, my friend and fellow market veteran over at Option Investor cited some other disturbing anomalies that lay beneath the surface of Friday’s payroll report. Here’s a bit of what he wrote:
The best comment I heard on Friday came from Larry McDonald, managing director at Societe Generale. He wanted a number well over 300,000 jobs. He said we should not be excited by an economy that is averaging +191,000 jobs after zero interest rates for six years, $4 trillion in QE and $20 trillion and rising in global stimulus. He said when the financial crisis began in 2008 we had 23 million full time jobs in America. Today there are only 21 million. Over that same period the population has grown more than 20 million. In April full time jobs declined by -252,000, the most in nearly a year, while part time jobs rose by +437,000, the most since last June. There is something seriously wrong with that scenario and we should not be celebrating a Goldilocks number.
To me the most sobering of those numbers is the 23 million full time jobs in 2008 versus 21 million today, despite a population growth of 20 million. Not much progress in those numbers
As we come into one of the most important stock market cycles in the past 60 years we have reached some very important levels both psychologically and technically. My original idea for this letter was to write a lengthy paragraph about the overall state of the market. After some thoughts it is probably better just to list the things that I see happening at this time and let you decide your course of action. The one thing that I feels very strongly about and that is the low of the week of March 11. Should we take this out we are going down in stocks and it will not be just for a few weeks or months. So here goes!
First- there are many cycles and patterns completing the go all the way back to 1974, 1982, 1987, 2000, 2007, and 2009. They are all related to the golden mean and also to Pi 3.14!
Second- we have a divergence and the Dow Jones industrial average for me 1-3-5 lower top pattern
Third- there is a Dow theory sell signal in the transportation’s and utilities as they have not made new highs. The Dow Jones utilities made a sell signal Gartley on Friday!
Fourth – the Vix index volatility is completing a bearish butterfly pattern very similar to the last two times that we’ve had major corrections in markets over the past year and a half.
Fifth- the NASDAQ is completing a major butterfly pattern as it is the only index that is substantially above its old highs.
Sixth- the biotech index IBB is lagging badly which is important because it had been the leader.
Seventh- stock markets in the United Kingdom, emerging markets, Germany, and China are all completing major patterns at perfect Fibonacci levels at .618 or .786!
Eighth-there is a head and shoulders pattern and the Dow Jones E-mini futures which includes overnight trading which the Dow Jones industrials does not do.
Ninth- the banking index BK X is also lagging badly and is only been able to make a 786 retracement in this last rally.
10th- the stock of Apple which is probably the most widely followed stock in the world is making a bearish Gartley pattern as of the close on Friday. Earnings come out on Monday after the close in the stock has a history of being higher 75% of the time after the release of earnings. This has been over the last six years!
These are some of the things that I’ve been watching but they are technical indicators which are far from perfect. But we live in an imperfect world when trading stocks or anything else for that matter. The three things that really bother me the most that no one seems to pay attention to anymore because it’s different this time. And it is truly different this time as it is far worse!
First- we have bullish consensus is highs it’s ever been including the 1929!
Second- margin debt continues at record levels
Third- volatility index is near all-time lows showing that there is complacency for any correction coming in the market. This will be far more than a correction in my opinion
Fourth- in the past 14 months companies have bought back $1 trillion of their stock. This is in addition to the $4 trillion of quantitative easing in the US. Not counting foreign quantitative easing.
Fifth- corporations are borrowing at a faster pace than any time in history. Simple to understand as rates are very low and they can buy back their stock increasing their value which gives the executives of the company and added bonus as their remuneration is usually based on stock performance.
Sixth- in the past six years our money supply is increase 400% due to quantitative easing. The big experiment called quantitative easing will end in a disaster in my opinion. It just does not make common sense to do something like this. We cannot do this on our own lives nor can the government do it and get away with it indefinitely. How it’s going to unwind I’m not sure but no one else is either.
The one thing that I am absolutely 100% sure of is that if we go below those lows of March 11 we are in big trouble. This was a huge cycle equivalent to the low of last February and almost as important as the lows 2009. We have been waiting for this cycle hard to come in for quite some time especially since we made the low on March 11 at an exact 61.8% retracement. All of this is based on technical analysis and none on fundamental analysis. I’ve always believed you should trade what you see not what you hear or believe. Keep in mind that the Federal Reserve had no idea that there was a crisis coming in October 2007. If you don’t believe this fact just going to Google and ask a few questions. It’s on the Internet so it must be true?
My prayer is that none of this will really happen and we will go on the road towards Camelot once again. However, if you start to see bumps in the road make a U-turn and get out of the way!
Expect increased volatility in US stock market!
The volatility index on Friday, April 17 showed very little movement as the Dow Jones suffered a 360 point decline before rallying 100 points in the last hour trading. This index of volatility had virtually no movement is shown on the enclosed chart. The suggest total complacency by stock market investors. And why not, because stocks of been going up since 2009 with only one major correction in 2011. Something bad is going to happen folks. History is not wrong very often and markets to repeat. All the factors are there. As we see the market this week the New York Stock Exchange index made new highs on Wednesday and Thursday only to have a Island reversal pattern occur on Friday is a big gap began Fridays trading. Whether this is going to be the final top in this bull market will not be known until we take out the lows of the week of March 11. This is the key to the current market much like the low of March 9, 2009 was the low of the bear market of 2007 2009. We are seeing divergence now in the NASDAQ in the S&P 500 unable to make new highs. This is also true of the Dow Jones industrial average. Dow Jones utilities and Dow Jones transportation’s are already in bear markets because they have taken out the March 11 lows and of stayed below these lows for several weeks. The next few trading days i.e. 5 to 8 days should determine the final high. It was impossible to be bearish after the March 11 lows were put in at such a strong cycle date and a perfect Fibonacci 61.8% retracement’s on all the major indices with the exception of the NASDAQ that was much stronger. This is not the case any longer as the NASDAQ is acting weaker.
Treasury bonds at a wild day on Friday by moving lower by $1500 and then rallying $2000 for $3500 swing in one day. This is extreme volatility for this market that usually moves a point or less in one day. Treasury notes were somewhat subdued but are still acting rather strongly as they are touching the 786 retracement once again. Should there be a selloff in stocks the bond and treasury note markets could rally in a flight to quality agenda. Longer-term interest rates will be going higher. I’ve always believed that the Federal Reserve’s quantitative easing experiment is going to end badly and I still feel that way. This was such a good idea why haven’t they used it since 1913 when the Fed started its current reign .
Gold and silver are little disappointing from the bullish side. As you can see from the gold chart that we have completed a symmetrical triangle pattern in gold. These patterns are usually resolved in the direction of the longer trend which in this case is down in gold. The same is true and silver but silver is actually much weaker than gold. On this last rally attempt silver could barely make a 38.2% retracement when gold was making a 50% retracement. Longer-term these markets still have great potential in my opinion. The should be strong supporting gold at $1170 per per ounce and silver should have strong support at $15.80 per ounce.
Crude oil and heating oil as well as gasoline futures have reached major resistance in my opinion as can be seen on the enclosed chart for crude oil. We’ve rally 25% off of the bottom and have completed several AB=CD patterns as can be seen on the oil chart. Whether it is the last time for new lows is still too early to tell as there should be strong support at the $49 per barrel level which is the 61% retracement of this last move.
Foreign currency is still dominated by the US dollar which is experiencing some resistance at the 100 level. This is 25% off the bottom that we made two years ago when the dollar index was trading at 75. The euro versus US dollar which represents 53% of the US dollar index is still trying to rally. As you can see from the enclosed chart there is strong resistance at the 109 level and also at the 114 level. The 114 level would be a perfect ABCD pattern and the first major pattern of this type since the market broke down so badly last fall.
Keep your eye on the prize– watch the low of the week of March 11 in stocks!
Over the past several weeks we’ve talked about the importance of this low of March 11, 2014. From a cycle standpoint it is one of the most important cycle lows that we’ve had in the last several decades. Actually it is as important as the low from 2009 in my opinion. As you can see from the chart of the New York Stock Exchange index we’ve had higher bottoms since that time and it is formed a natural trend line from those lows. We are rapidly approaching the strong seasonal pattern of sell in May and go away which is one of the better seasonals in the stock market. The New York Stock Exchange index is actually doing much better than the Dow Jones industrial average, the S&P 500, and the NASDAQ. These 531 stocks have led the market higher for six years and now there is rotation into the other stocks. The Dow Jones transportation’s and Dow Jones utilities are exhibiting much weaker markets which is part of the Dow theory which also falls into place. The theory states that if there is no confirmation in these two indices versus the Dow Jones industrials than a major correction is at hand. This will not be a correction! This will be start of a major bear market that will last several years at least, probably 3 to 5 years. However, we must go below the lows March 11 to get the ball rolling in the right direction.
The new services are reporting that Hillary Clinton will be the next president of the United States. They cite her warchest of $2 billion and the fact that there is no one running against her of any significance as the factors leading to her presidency. If you recall our current president Barack Obama was basically unknown as a junior senator from Illinois and upset Hillary Clinton to take the presidency. Is about 18 months until the next election so anything can happen but election years have a positive bias on stocks and we are already three years up into that bias.
Gold and silver continue to hold key levels but have not broken to the upside as yet. They still have a chance to be bullish but is important that they stay above the lows of the last several weeks that we mentioned several times and are noted on the charts in this letter.
Crude oil is in the same situation as gold and silver however it is far less bullish. It will be difficult for crude oil to get above $60 a barrel in my opinion from a technical standpoint. Gasoline futures and heating oil futures is held up much better than the crude oil.
Treasury bonds and treasury notes have made some type of a correction high this past week as interest rates of start to rise again. The Federal Reserve is continuing its quantitative easing program and every time the market sells off rumors come out that it’s going to continue for some time. More on this at the end of this letter.
Foreign currency markets are still watching the US dollar is a continues to rise at 100. The euro appears to be heading towards 99 but it is extremely oversold could still rally to the 114 level however after last week’s action this seems highly unlikely.
Folks something big is ready to happen in the stock market. A been watching these markets for 55 years and you get a sense that something is foreboding much like what happened in 2000, and 2007! This time it’s different! The reason it’s different is because there are two factors that are present that are very troubling. The first is counterparty risk. This means that people on one side of the trade have a much greater risk than people on the other side of the trade because they’re not able to perform their part of the contract. I believe this is extremely important when you’re trading ETF’s. These vehicles were brought out and it becomes extremely popular but they came out of thin air. I must admit that I’ve not studied them very carefully but just watching them trade tells me something is not right. Many of these instruments do not follow the underlying idea of the trade. The second thing that is troubling is the overall complacency in the market for stocks and bonds when so many warning signs are there. These warning signs we’ve gone over many times but will do it one more time just to remind ourselves. Never in history have we had such a bullish consensus that stocks are going higher. Never in history have we had such margin debt. Never in history have we seen so many negative expanding triangle patterns that are indicative of a major top in US stocks.
In this letter you’ll see a global picture of the stock markets of the major economies in the world with the exception of Russia. These markets have been in bear markets for quite some time and have had rallies recently due to the quantitative easing.
The Fed And The Dollar – Here’s a bit from a fascinating piece that appeared recently in “The Hill” (hat tip, Rich Yamarone):
A key question for the Federal Reserve in the months ahead will be the U.S. dollar’s future direction. That question will have a crucial bearing on the appropriate timing of the start of the Fed’s interest rate hiking cycle. If it is thought that the dollar’s recent strengthening is likely to be reversed, the Fed would be advised to start raising interest rates soon for fear of allowing domestic inflationary pressures to build up. By contrast, if it is thought that the dollar might very well add to its recent gains, the Fed would be advised to exercise patience before hiking rates for fear of setting back the economic recovery.
The relevance of this issue is underlined by the dollar’s recent strength. Over the past six months, the dollar has appreciated by around 15 percent against a basket of currencies, making this the second steepest rise in so short a period since the dollar’s floating began some 40 years ago. If sustained, such a rise could materially alter the U.S. economic outlook. Indeed, according to International Monetary Fund (IMF) estimates, if the past year’s gain in the U.S. dollar is sustained, one could expect U.S. gross domestic product (GDP) growth to be around 1 percent lower than it would otherwise have been. Similarly, one could expect U.S. inflation to be around 1 percent less than otherwise would have been the case. Together with lower international oil prices, a strong dollar could very well contribute to a negative U.S. headline inflation rate before year-end.
Try to read the whole thing. We certainly hope the Fed does.
Our friend and fellow market veteran, Jim Brown over at Option Investor took a look at some seasonal factors in his market note over the weekend. Here’s a bit:
April has been the best performing month for the Dow since 1950. Over the last 20 years the Dow has posted gains 16 times with an average of +0.56%. Granted that is not much and only equates to about 90 points. The first trading day of April is the worst “post holiday” session of the year. However, the first two weeks of April are normally bullish with an average gain of +1.22%. The average gain for the first two weeks of the other 11 months is only 0.3%.
April is the end of the “best six months of the year” for the markets and May begins the “worst six months.” I just call it the summer doldrums but numerous analysts have built very successful trading strategies around the best/worst six month periods. The “sell in May” strategy has a pretty good record but it is not infallible. With earnings plunging I would say we could have a head start on that worst six month period.
Jim also noted:
The S&P 500 has not had back-to-back gains since Feb 13-17. That’s 28 straight days and the longest such streak in over 20 years. This has only happened twice since World War II. Hat tip to Eddy Elfenbein.
The back to back phenomenon could suggest the market is at an inflection point but corroborating evidence is needed.
The Dow opened out the blocks lower as energy weighed as did the lackluster economic data ( weaker jobless claims / stronger inflation / mixed durable goods) then managed to get into the positive. Around the close of European trade the bears awoke and took control taking the mkt down close to 100 pts – shock horror. Then came the final hour, some bids appeared and the bulls managed to circle those wagons taking the mkt back to the flat line helped by the banking names and McD’s. As the dust settled mkts closed down – just – a draw maybe with Cat/Chev/Exx/IBM lagging. The Nas however regained its positive momentum after Wed’s brief blip to close higher helped by Google.
Overnight in Asia a mixed picture in choppy trade taking its cue from Wall St. The Nikkei closed flat giving up early gains on the mixed data and stable YEN, whilst in China markets trade marginally higher – HK is flat. Oil suffered a rout y’day (-5%) on ample stocks but has rallied to trade higher overnight ( $49) Brent trades around $61 with the spread between the two now $12 – sharply higher from parity seen some weeks back. Gold trades flat in quiet trade. The FX mkts see the $ slightly lower after its strong up day y’day, The Euro trades marginally above 1.12 whilst more hawkish comment has seen cable pull away from 1.54. The Yen and Cad suffered but are stable in subdued trade and await their fate. German inflation dominates this morning and the Euro direction whilst across the pond we get the GDP print amongst others. Lloyds Bank have reported this morning and are requesting a return to dividend paying. Futs are called mixed and directionless. Have a great wkend. Good luck.
European mkts closed lower on a tight range bound day as the US was closed for the Presidents Day holiday AND they awaited news from Brussels on the Euro group meeting re Greece bail out programme . Shortly after the mkts closed news filtered out that NO agreement could be reached and the meeting was to finish early – futs took a tumble lower as did the Euro. Greece has now until Friday to decide on an extension to the bailout programme in order for the Euro group to reconvene whilst the Greek FM says undoubtedly there will be an agreement : something clearly has to change or someone will have to ‘bail’ down. The Ukr ceasefire as discussed in y’days morning note is already showing signs of cracks with fighting and shelling already heard – did they expect anything else ?
Overnight in Asia in quiet trade : sees China lead the gainers looking for its 7th consecutive winning day ahead of the lunar holidays. Japan closed a tad lower ahead of the BOJ meet and a strengthening Yen whilst HK trades unch. In the commodity sector Oil has gained around 1% whilst Gold trades on its overnight lows around $1225. The Aussie and Kiwi trade higher after the RBA mins showed they are ‘less dovish’ than anticipated and the likely hood of a rate cut at the next meet has dropped from 75- 55%. The Euro has fallen on the Greek bailout news whilst the £ looks ahead to inflation data out today which along with the German ZEW dominate this mornings play. Futs are called sharply lower on the Greek news as mkts await further developments – will they wont they – and the fall out in Ukr. Good luck.