SPY looks like crap

SPY had a lot of damage done Monday and still looks bad today.  

The A/D line Monday and breadth were extremely bearish.  Today we have some recovery in non-financials but still not a very convincing snap back.

Costanza would buy the hell out of this lousy tape... heck with as much counter- intuitive sentiment, why the hell not?

Game Theory for end of month [Update 4-1]

My elaboration of  Eric's Quick Thouights [sic]

Friday: Market up in anticipation of Barron's saying the bear is dead.  

Weekend: Barron's announces "Bear is Dead"; talking heads mention the booming market up 20% in 3 weeks, yada, yada, yada.  

Monday: Retail traders call their brokers to get in and late day rally as managers (ie, "smart money" guys) buy.  

Tuesday: Market sells off or goes sideways all day, then tanks in the afternoon.  

Wednesday: Broad-based trend down day.

UPDATE 4-1

Well, I couldn't have gotten that more ass-backward! So much for me gaming the market on daily movement, I guess I'll go back to grunt work on the daily grind.

SPX: Bullish, but be patient

SPX  Two scenarios exist, one bullish and one bearish... and yes I will make a call.

Bearish case: Declining 50 d MA in an overall bear market, lots of structural damage in the economy, reversion toward the mean after the strongest month in 18 years.

Bullish case: SPX trading above 50 dMA, strong upward price movement on increasing volume, bullish MACD with healthy divergences.  Cash on the sidelines and high short-interest will act as a bid on the market.

I would add a couple more things to the bull case, namely the ability of markets to correct through intervention by government and central banks to counteract unemployment trends and tight credit.    These are huge factors in the global economy and the macroeconomic improvement will certainly be dependent on some co-ordiantion of these institutions which is no small feat.

The good news on that front is that the US is the 800 lb gorilla and even ass-backward policies in the rest of the world can be mitigated by thoughtful intervention here.  Our future is in our hands, and despite the broadsides the administration is recieving by the opposition party, prudent Keynesian stimulus and investment in education and infrastructure will win out in the end.  

Also, while the EU may not sign on to such massive spending and US conservative critics will decry that we are doing too much, we have to remember that Europe already has huge safety nets with more generous unemployment benefits and universal health care, so we need to spend more at this juncture.  Yes, our deficits will be higher, but that's because half our budget is going to unproductive military interventions.  To neglect the necessary spending now would cripple us further in developing our human resources for the next generation.

Conclusion: The US economy is at a nadir but the path we are on is healthy.  The market as a leading indicator will do what markets do as the sausage maker of government debates regulation, spending and taxes, but the longer term trend looks positive.  

Strong Performers Hitting Resistance

GLD is trading near the 50 dMA and the lower trendline.  I see no fundamental, technical or sentiment reason to sell at this point.  I continue ot hold the metal but have recently sold half my position in the mining index.

MS moves fast and has been a good trading vehicle, although not as volatile as WFC.  Today I added some near the day's low and expect this to make a run for 30

FCX continues its upward trajectory off a solid base with the next 

resistance level at 45.7.  Materials in general are working off the best developed basing pattern.

IYM has a beautiful base and may be developing an inverted head and shoulders now as it approaches some resistance.  This may take a couple weeks to break out, but with the violent moves, who knows?

SMH is likewise struggling with some overhead supply after a 20% run.  This is due for a pull-back.  I recently took some profits in CY, but will re-enter on any correction.  MRVL also could be a buy with any pull-back.

Bear Market Rally Continues

Despite a mid-day market swoon and a dizzyingly high VIX, the market managed an impressive gain, coming only 2 days after a monstrous rally on Monday.  Many analysts point to competing news items -- good housing sales, deficit spending by the feds, early re-payment of the TARP, poor Treasury auction, etc,-- as the cause of the wild swings in price levels.

The fact is that the market has been long overdue and now we are up about 20% from the low set March 9th, just about the average for a counter-trend rally.  Problems remain with bank solvency, asset deflation, rising unemployment and decreasing consumer spending which appear to have no end in sight.  Is there more rally left in the market given all these headwinds, or should prudent investors be heading for the safety of cash?

Factors in favor of a continued rally are the large stores of cash on the sidelines and  the end of the quarter when fund managers need to report their positions and few will want to say they spent the best month since 1991 in cash.  Also, sentinment remains bullish with "wall of worry" permeating the trading sites.  Perhaps most immediately significant is the statistic that short-interest is at a one year high, which should act as a continued bid on the market.

My surmise is that a small pull-back may be in the offing, but we should make one more push for the 840 mark on the S&P before consolidating.  But make no mistake, we are still in a bear market however timid he may appear at the moment, so set those stops and stay disciplined.

Unintended Consequences are Often Good

My Friday Night Rant (and some will argue as evidence for contrarian bullish sentiment):

One of the unintended consequences of the populist pitchfork wielding performed by Congress Thursday is that now the curtain is pulled back to show the Wall Street wizards in all their dirty disheveled inhumanity.

The executives are now officially vilified not only in the presumptuous hearts of taxpayers and investors, but in the Congressional Record that has votes tallied showing our official disdain for the omnipresent greed on Wall Street. What we all kinda knew has now been corroborated by our representatives. The AIG cretins were more concerned with negotiating their bonuses as the world was melting down due to their own negligence.

The unintended consequences of this legislation is that it will only further the mistrust we have for publicly traded companies by putting some stamp of officialdom, however tainted by populist angst... and I would argue that this mistrust is healthy and long overdue.

While the economy was in free fall last September, the perpetrators of the debacle were not interested in fixing the damage, no, they were instead only interested in protecting their zillion dollar bonuses.

And the CNBC talking heads were out in full force defending the bonuses, and other business media were outraged at the outrage, and still others scoffed at the unwashed masses' and their uncouth behavior and talk of piano wire. How dare the royal financial wizards put up with such bourgeois emotion!

I predict the outcome of this drama will be a stronger economy and a stronger nation. Instead of wiring hard-earned coin to New York, I envision a future where Joe Sixpack keeps his investment in his hometown, his own business, a local bank, real estate in his neighborhood. Why do the craven wizards of Wall Street deserve our investment anyway?

We will have to endure the talking heads like Kudlow and Cramer telling us how short-sighted we are for eschewing the sacred engine that drives the economy, ie, Wall Street, as the DOW plummets to 6000 then 5000 and the cries will become more plaintive at DOW 4000 and 3000.  

Ha! The sacred engine that drives the economy is the guy or gal who gets up at five o'clock, gets dressed and goes to work to do something useful, to make something pertinent, to perform an honest service. And, no, that does not include anybody on Wall Street, my friends.

Why anybody would put one red cent into any company's stock after all the lies, the boldface lies, the wanton negligence, the unmitigated greed, is beyond me... On what planet is a banker or insurance salesman worth more to society than a nurse? Or a teacher? Or a dry cleaner, for that matter?

Yes, the consequences may be unintended, but they will definitely be righteously beneficial. DOW Zero! Bring it on.

XLF and descending triangle

Unpredictable gold doesn't disappoint

Gold, gold, gold.  It never makes sense, has no fundamentals and cannot be analyzed technically, which are the reasons I choose not to trade it and hate looking at it.  I hold a fixed percentage of GLD and SLV in my long term portfolio as a dollar hedge and currency substitute.  

A couple days ago I presented some charts on GLD and the gold miners.  On Wednesday, I made a little coin shorting ABX in the morning and thankfully got out of the trade before Uncle Ben shot his ICBM down Wall Street and unleashed a gob of liquidity.  All the dollar hedges went crazy including gold and especially silver.  

Bill Seidman on CNBC said that we are no longer living in a market economy, we are in a fed economy.  Certianly monetary policy is dictating much of the market movement as traders and investors react to every buzz from a microphone.

This is deflation and Ben Bernanke is the only man with the tools to correct it.  Naysayers who fear inflation are daft: with the low employment, high inventories, consumer demand destruction, falling asset values (copper at 80 cents!) and home prices, failing banks and absent credit markets, we are in the grips of an unrelenting deflation.  With a D-E, folks.

So why is gold so hot?  I thought gold did well with inflation?  Well, actually, gold does well in both inflation and deflation, and any time of uncertainty.  Some traders bemoan goldbugs as irrational nutjobs who horde canned fish and stack firewood outside their bomb shelter, but I would argue that precious metals have a valid place on any portfolio, especially when stocks are questionable.  You can only put so much of yoru investment in bonds and US dollars; diversification would dictate a little gold, silver and foreign currency.

Sure, GLD produces no dividend and has no inherent value, but so do a lot of things we invest in. Bed Bath and Beyond (BBBY), for instance, is merely a huge repository for wax shit and cinnamon potpourri.  What inherent value is that?  Is there a dividend?  Why is it more valid to buy BBBY than GLD?  The same could be said for any number of publicly traded entities that make useless crap from toys (RGR) to sugar water (KO) to plastic food (KKD).  And don't even get me going on how useless banks are!

Any activity that reflates the economy will act to devalue the US dollar and other sovereign currencies to some degree and a hedge is needed.  If you don't like gold, that's okay, there are other hedges that work almost as well if not better.  Currencies related to export economies such as those involved in natural resources should do fine during the reflation: Australian dollar (FXA), Canadian dollar (FXC) and emerging market currencies.  Also, as the dollar decreases in relative value, oil services (RIG), copper miners (FCX) and other commodities (DBA) will be solid.

But remember, in case anyone asks, we are in the grips of a deflation that needs to be reflated, and that's what Bernanke is doing.

How far will XLF correct?

It's chart voo-doo time.  Let's look at the Fibonacci retracements that have occurred on the XLF since the March 9th low.  There have been 3 fairly classic 23.6% retracements and each time the sector index has recovered nicely to achieve a new high.  Now we are at the 4th successive 23.6% retracement, which of course is deeper than the others.  Will it hold, or are we due for a more precipitous drop?

First bounce off the March 9th low was solid although we heard all the calls of the "dead-cat" bounce.  Remember this was precipitated by Citigroup stating that they have been profitable for the first quarter.

Second retracement after a nice recovery from the first correction.

Third retracement is deeper, but not alarming and a classic bounce with a more sustained rally.

Now we are at the fourth retracement since March 9th and the XLF is at the 23.6% retracement.  We have done a lot of work to get this far with almost 50% appreciation of the sector.  Big news from Citi and a huge injection by the Fed this week helped the burst.  With Friday options expiry coming into the weekend, I would expect a pull back to 50% Fib, which would also coincide with the 50 dMA at 8.25.

Gold miners losing their glitter

I have been a long term holder of gold and view it as a currency surrogate.  The miners are a different animal altogether, and while I do own some mining companies in the form of Fidelity Gold (FSAGX) in my retirement accounts, GLD is my favored vehicle.  I also have SLV.

The charts, however, are showing some signs of technical weakness and this may get worse as macro factors weigh on the cost structure of gold mining companies.  If oil rises, gold miniers will experience margin pressure since they use an inordinate amount of fossil fuel in production.  As the stock market recovers, interest in owning gold will wane.

Gold sentiment has been bearish for a while with advertisements to buy gold becoming commonplace.  This usually occurs near the top of the market.

GLD has broken down below trend as the stock indices have improved.  This may be evidence of damage to the gold complex. I will continue to hold both GLD and SLV, but favor SLV currently.

ABX is a short candidate here, trading below its 20 dMA and now having retraced 23% on the Fibonacci.  Set the buy-stop near overhead resistance, but not too tight.

NEM is not as clearly a short candidate, but is showing signs of weakness.  If oil spikes and/or we have continued improvement in the stock indices, this could fall apart.  Short only below 34.50 and use the declining trend line as the buy-stop.  It can fall pretty far if it breaks down. 

Wrap up and Review

As discussed in previous post...

Sprint (S): Re-purchased Sprint (S) at close for $3.59 and MACD shows bullish divergence on 5 and 20 minute charts.

BMC opened long near end of day for $28.97 with strong MACD and near low of day.

AXP opened a short near the day's high and rode it for 40 cents and nice profit.  

IBM and RIG both sold near high of day for profit.  may re-enter at some point.

TJX still watching for an entry.

FCX and SLV and GLD are holds.

MS is now oversold, but I did not buy it yet.

FXA and FXC: Australian and Canadian dollar ETF's were opened long to diversify my fairly large cash holdings with US dollar in the overbought area.  Yes, cash is a holding.

Wall of Worry Charts

Now we climb that wall of worry.  The SPX is still below the declining 50 dMA and nobody expects it to make a move past 815 before pulling back.  Was this just short-covering, or will it develop into a real rally?  Shorts are nervous about getting squeezed, longs are nervous about that 815 resistance, cash holders are nervous about missing something.  Game on.

BMC long if it can break through the overhead resistance.  It may have to pull back a bit here, but this charts looks okay if it can break above 30.22

AXP short set up is developing with high volume doji Friday showing the short-covering may be finished.  Look for confirmation Monday with a red hotdog on decent volume, then short the bejesus out of this one.  High end credit cards?  Yeah, right.  These guys are paying customers to pay off their balances... what kind of a business model is that?

TJX is coming off a healthy basing pattern although the breakout is on lousy volume and RSI is now overbought.  Retail should have a little more life in it, but Iwill wait for a pull back to horizontal support before entering a long and keep the sell stop near the trend line.  If this gets above 26.36 it could run.

Sprint (S) long has been strong.  I took 22% gains on Friday with the lower volume, but this baby was strong into the close so it should be interesting to see how it opens Monday.  On any low volume pull back, I'll add to my position.  Above 4.5 the next resistance is 6.5.  Sell-stop is the trend line.

MS long may be one of few survivors in the sector along with GS.  I would be careful entering here, but long term this should do okay.  

Citigroup (C) is still standing despite doing just about everything wrong.  In fact, C had a 78% gain this weak on pretty decent volume.  Sure some was short-covering, but probably some new buyers, too.  Ben Bernanke on 60 minutes said they will not allow any big banks to fail and the leading indicator out of the crisi will be when the big boys start getting private equity.  I'm not buying this smoldering heap of burning tax bailout money, but the chart is interesting.  This could run if it breaks above 2.88, but I'm not holding my breath... I'll just put it on my radar.

In other items, Friday I added to FCX and opened a long position in IBM at 89.50 as discussed last Thursday.  I will add to MS and S on any pullback Monday.  

Bullish chart patterns

UN looks to have thrown out a morning star doji which is bullish.  I took a couple bucks off this bad boy going short last month and have been following it for another short entry.  Now, it looks like it may be reversing.

CY has had a pretty ascending triangle for several weeks and looks to have finally broken through the upside resistance.  This one could run.

FCX has been my baby.  Classic ascending triangle with a breakout above resistance with the third try... now it's off to the races.  There really is no more resistance until $40, and that's pretty weak.  This has seen triple digits just last year.  I took some profits, but will add it back on any pull-backs below the middle regression line.

"Six percent rallies don't happen in bull markets."

...and that is directly quoted from Macroman.  Well, we'll just have to see about that.

Or, for Rambo fans: "Nothing is over."

Needless to say, I took some profits.  First, let's go to the charts:

IBM looks good for a long here.  Very good price movement and has formed a classic double bottom.  Conservative traders should look for a breakout above 89.50 to get serious.

SLV long. You either love precious metals or hate 'em.  I just decided to keep 5-10% of my trading portfolio in this sector and split it equally between GLD and SLV.  No emotion, no fallout bunker, no ammo, no SPAM.  When they get above the regression line, I sell some; when they get below, I buy some.  It works for me.

Sprint (S) is a nice pattern for a long position.  This is snugging up to overhead resistance should break through one of these times.  Could double.  Use the lower trend line for a sell-stop.

MRVL has been reviewed before as a long candidate.  Like a wimp, I got stopped out in the past-- which is further evidence of Teresa lo's advice not to set stops too tight.  Any pullback in this could be a buying opportunity, but this could just run away from here.  CY also is a strong chart.

While I remain skeptical by nature and I have no trust in the bull thesis here, I could not find any classis short set-ups.  AXP, COF, FRX and CEG all look like decent shorts, but not outstanding.  I sold half my FCX in the pop, but will add it back with any pullbacks... I still think it's going to $40 or beyond.  MS, likewise, was sold for a gain. 

Killing the Generals

The worst performers today were those stocks that have been relatively spared within their sectors and the broader market:  GOOG, WMT, MS to name a few.  Even hot names like GERN and STEM who benefited from Obama lifting the previous administration's ban on stem cell research faded the open.   Both ended down double digits.

Good news like DOW buying ROH and MRK buying SGP for cold hard cash was shrugged off.  At any other time such news would have been greeted with glee at least within the respective sectors. Not today.

What does all this tell us? 

As Eric has pointed out in the past, they kill the generals last and WMT, GOOG and MS are four star generals.  My take is that we are nearing the end of the beginning of this bloodbath.  The next phase will be a capitulation on high volume (may or may not be classic) followed by a relief rally of 20%.  Only after this can we begin the long hard slog up the wall of worry.

Any rally will require a catalyst and if two significant mergers could not do it today, then we'll need something really big.  Finding Osama would be great.  Rescinding mark-to-market might do it, and those Congressional hearings start Thursday.  This market is oversold and ready to pop.

I really thought today's morning rally could have been it, but alas, it fizzled.  Who knows when this counter-trend rally will transpire, but in the mean time, keep your powder dry and be careful with those shorts.

Where's the bottom? More pain to come.

Justin Mamis has given us some insight in what to look for at the time of the bottom, and we have covered this before but let's look at it again.  While the current market has met some of the criteria for a Mamis bottom, we still have not had the utter surrender and then the kickback on worse news.  We tried to do some of that the first week of January when rotten economic reports were met with rallies... however, this rally failed miserably and we are now at new lows.

Mamis postulated a chart that looked at different phases of the bottoming process.  My thought is that we have not reached the "D" phase yet where the positive news is met with denial and retracement to "DD".  We really have not had positive news to disbelieve as yet.  So currently, I think we are either before or after "C", and I would favor before.  In other words, the worst is yet to come.

Three Scenarios for the coming weeks/months:

1) Death spiral whereby the bad news begets more stock price deterioraion and the cycle goes on in the fashion that we saw in the last deflationary recession from 1929 to the eventual bottom in 1933.  Slow, painful death of confidence with a vicious cycle of  job losses, equity decline, etc.  The factor that speaks in favor of this scenario is that in the one-dog study of the last century this is the only other deflationary cycle that we have seen, and maybe they all go with unrelenting agony for years.  Of course, the counter position is that Dr. Bernanke and Dr. Romer, Obama's Chairwoman of Council of Economic Advisers, are both students of the Great Depression and seem to  have learned the lesson that unleashing liquidity from central banks coupled with the immense stimulus from the US and Chinese governments can increase consumption and hasten the recovery, unlike what happened with the tight money policies and tariffs of the early 1930's.

2) Wall of Worry begins to take place from the recent lows as depicted in the Mamis chart from E to H.  In my view this is not likely happen since we have not met all the criteria of Mamis' thesis above.  We have had no good economic news that is met with disbelief which speaks against this scenario.  But, the MACD on the bottom of the chart does show some divergence which gives this scenario some possibility.

3) Capitulation to new lows followed by a quick bounce and then smaller retracement.  In other words, we have yet to see the "C" bottom as depicted by Mamis.  I favor this scenario.  The wash out must occur on decent volume with much gnashing of teeth and worldwide consternation with perhaps significant unemployment and labor unrest in less developed markets such as Eastern Europe.  Blood in the streets.  We have just not seen enough evidence of pain that should correlate with the amount of lost industrial production.

I favor this last scenario although the graph is not really drawn to proper scale. The lows could still be several weeks or even months away and we may have a choppy market with gradually lower trends with aggressive fits and starts for quite a while. 

 Marc Faber recently referenced some research that looked at the 1974 (at left), 1982 and 1991 bottoms and noted that from peak to trough in stock price took approximately 400 to 600 days and we have only been at this for 350 trading days since the peak.   So, although the descent in stock prices has been more dramatic with a steeper slope than other recessions, the time series analysis may indicate that we have longer to go, ie, it takes investors time to regain enough confidence to begin purchasing stocks. 

Furthermore, those were inflationary recessions have a different character and tend to finish quickly once the punch bowl of excess liquidity is removed.  Thus, the deflationary nature of the current crisis would speak to even longer prolongation from peak to trough if we use the 1929 to 1933 deflation as our only example, especially if the current populist cry against deficit spending is heeded by our political leaders.  There is no evidence that deflationary recessions resolve more quickly than inflationary recessions, althought the numbers to study are small.

The important factor to remember and get straight is the difference between inflation and deflation.  If we treat this like 1974 and tighten monetary and fiscal policy then we will re-live the early 1930's again and exacerbate the worldwide depression.  So while I may like Rick Santelli as an infotainer and provider of emotional angst (who doesn't like to get the adrenaline pumped), I respectfully disagree with him on this issue.