Wednesday, August 25, 2010

Two-Step Symmetry

Here is how technical the markets have become.

The S&P 500 hit a high of approximately 1,130 and has so far had what is called a “two-step” pullback, where the first leg down equals the second leg down.

Leg 1 from 1130 to 1070 = 60 points
Leg 2 from 1100 to 1040 = 60 points

The first leg down retraced 50% of the rally
The second leg so far has terminated at the 76.4% retracement level

These are all key levels and patterns used by computers to make buy and sell decisions. The computers have clearly taken over the markets. I am also assuming that many of the 20-something hedge fund managers are using these same models. There are a bunch of key decisions here for stocks, Treasuries and the Euro here, so I am looking for a potential reversal.

Investors Business Daily went to “Market in Correction” last night. The old ways of making money are having a rough go lately. I think the computers algos have been set up to cause overshoots in signals like IBD to get people making buy and sell decisions and then the markets are reversed – causing a massive squeeze as the newly entered orders are covered and reversed.

This is why I continue to get incredibly technical in my communications and decision making.

Blessed Gridlock?

Cutting spending of any kind during a depression is a bad idea. It simply slows an already slow economy down further.

European Austerity

Moody’s is telling us that fiscal tightening actually harms the long term economic outlook for European economies.


Ireland had its credit rating cut by S&P because it had to put another $20-something billion of new capital into propping up its insolvent banks. Now 10% of Ireland’s GDP is going to picking up the cost of its banking system.

US Tax Increases
There is no way that increasing taxes here will help the economy. By definition, it will slow down growth.

Post-Election Gridlock
If the Republicans do as expected and gain control of the House and more than 40 seats in the Senate, then they will slow down government spending. This too will hurt the economy and push us closer to Hoover 2.0

Borrow from Tomorrow
The old system is broken. When you are forced to argue that you need to worsen your current finances in order to not worsen your economic outlook, you start to realize that the system fueled by debt needs debt to keep from collapsing.

There is no good outcome. The goal is simply to protect purchasing power from a falling Dollar and future Inflation.

Tuesday, August 24, 2010

Real Estate Made Simple

These three charts from Econompicdata tell the story of housing –

Falling yields over the past 30 years…

Have lowered monthly mortgage payments…

This has inflated housing prices…

If you think about what Quantitative Easing is, it is simply the Government buying Bonds to keep Interest Rates low. This props up housing prices. I thought the goal of the Government was to make housing “affordable” to all Americans. But it is clear that artificially forcing Interest Rates lower makes housing prices more expensive.

I almost forgot this great testimony from Kansas City Fed President Thomas Hoenig from the other day -

"If the American people are looking for the housing market to be their investment opportunity, I think they're making a mistake."

"The facts are, we have an excess supply. And we created that by providing financing and leverage that was almost nonsense. So, now we have to adjust from that. Housing may eventually start to rise again as other assets across the country begin to rise again. But it is not something that I think that the American Consumer should be speculating on, in terms of their investments."

Holy ****! Did he really say that "(HOUSING) IS NOT SOMETHING THAT I THINK THE AMERICAN CONSUMER SHOULD BE SPECULATING ON"!?!? The President of a US Federal Reserve Bank?!?!

Does anybody still want to buy a house for investing purposes?

Gap Down Open With Reversal?

There is a lot going on in the daily chart for the SPX Futures (ES U0-D) (I started to use the Futures charts because so much significant price activity is taking place while the US markets are closed and that is having an adverse effect on the accuracy of the cash charts).

All you need to look at on the chart is the cluster of key dates on 8/5 and the key price zone at about 1,130, which gave you time and price for the 1,130 high. There is now a cluster of dates in the 8/24 – 8/26 zone, so I am looking for a potential reversal this week in stocks. You can also see that there is support in the 1,055 – 1,040 range. A trade below 1,050 would trigger the potential reversal pattern (low so far this morning is 1,051.50).

I would expect any rally to only be a bounce into Labor Day, but anything can happen, so I am on alert.

The flip side to when you see a bunch of dates all clustered together is that sometimes they lead to big, fast moves in the direction of the current trend, which would mean a big selloff in stocks, so you can’t just blindly buy and expect prices to go higher out of this zone. You have to also manage your risk.

US Treasuries (ZB U0-D) have taken out three resistance levels and are now at a point where a pullback would not be a surprise. Here are the support levels I will be looking at. A pullback in Treasuries would by definition fuel a reallocation into stocks.

Gold (GC Z0-D) has had a nice rally over the past few weeks. There were key dates last week and the key resistance was 1,239.18. Critical support was 1,218.70, with today’s low so far at 1,211.7
I will update this chart today with new support levels.

Again, potential support and resistance levels get breeched all the time. That is why there is more to this than picking a level and hoping that it holds. My goal it to show you how I think and what I see and not tell you what to do.

The uptrend in the Euro (6E U0-D) is broken. This is not good for Commodities and Commodity stocks. I will be looking for a potential low later this week. This morning’s low for the Euro is 125.88

Crude Oil (CL Y0-D) has broken key support at about $73.5 and now has me looking for a total breakdown. I have been saying for weeks that a break of $70 would signal a new recession. That now seems like the most probable scenario after a potential bounce. I am interested in Oil and Energy Stocks if Crude gets into the $66 range (or worse?).

I am looking for the opening weakness to take prices to emotional extremes and then will be looking for potential reversal patterns at key levels.