Friday, September 24, 2010

Resistance Again

We head into the weekend at resistance, with timing for The S&P 500 (ES Z0-D), The Dow ($INDU-D), The NASDAQ 100 ($NDX-D), Apple (now over 20% of The NASDAQ) and Gold (YG Z0-D). Prices don’t have to reverse, but the set up is forming.

I’m looking for a pause or a top early next week or early the following week. You can’t predict what is going to happen, but you can anticipate setups and then be ready if prices react.

I am seeing a number of serious divergences in the markets. Several key sectors are not going along for the ride and Small/Mid Caps are significantly underperforming the leaders. That said, there are a number of areas on the verge of major breakouts, so if these areas can get going, then this rally could go on for a while. QE 2.0 may be in full swing behind the scenes…

FYI, the purple lines below the charts are time cycles. The bigger the bar, the more important the date.

Wednesday, September 22, 2010

Indian Summer Update

Last year I called this market the “ 2.0” market, because it so closely mirrored the 1996 -2000 parabolic ascent in technology stocks, where the market was driven by cheap money from the Fed being leveraged into stocks with horrible fundamentals and impossible-to-sustain valuations.

A couple weeks ago, Bernanke said that The Fed would do whatever it takes to make sure that economic weakness does not turn into full-blown deflation. He then told how things were simply slow in the economy and that there was no chance of a “Double Dip”. Yesterday The Fed said that they are now prepared to pull the trigger when needed on Quantitative Easing 2.0 (isn’t this the third time they have now said this?).

The Fed is already monetizing about $30 billion a month (printing money) to prop up the price of US Treasuries and hold Interest Rates down. So doesn’t that by definition mean that there is material weakness right now? Otherwise, why would the Fed be printing so much money? Did you see that they printed $5 billion an hour before Obama’s ridiculous “town hall meeting” on CNBC? Stocks ramped over 1% in about 8 minutes that morning.

$5 billion leveraged at 30 to 1 buys a hell of a lot of Apple stock. Which brings me to my next point –

80% of the volume in the US Stock markets is in 122 securities
60-70% of all trading volume is computerized

So the Stock Market is now basically a bunch of computers front running each other with Flash Trades and Quote Stuffing in 122 holdings…

For the last 20 consecutive weeks, money has flowed out of US Stock mutual funds –

YTD outflows from US Stock funds is -$68 billion
YTD outflows from US Stock ETFs is -$16.8 billion

Yet the markets are hanging in there. Do you wonder why 86% of investors think the markets are rigged? Stocks are dead. However, Gold will have a Bull Market this decade that will rival any stock market rally you have seen in your lifetime – mark my word.

Jefferies saw Principal trading volume fall by 80% from Q2 to Q3. The CEO called the trading “painfully slow”. Take a look at the charts of Morgan Stanley (MS) and Goldman Sachs (GS) and you can see that the market is not pricing in a rosy quarter.

Bank of America fired 5% of its Capital Markets group because people just aren’t investing like they used to.

The Fed is not alone in printing money and having it flow through its primary dealers into the stock market. Microsoft is selling bonds and using the proceeds to buy back stock. The 3-year bonds are supposed to issue yielding 0.875%! Borrow for free, buy company stock with the money, inflating your share price and use the inflated shares as currency to buy other companies and give your shareholders the appearance of “growth”.

This will be the game into 2011. Expect there then to be another massive round of layoffs as companies consolidate and move what is left our middle class to Asia…

The Fed is also not alone in printing money to hold down Interest Rates. The ECB and the IMF are regularly buying bonds of Ireland, Portugal and Greece to keep these countries from running out of cash. Microsoft is paying 0.875% to borrow and Ireland, Portugal and Greece are paying over 6% to borrow for ten years.

Brazil is now selling bonds and using the proceeds to weaken its currency versus the US Dollar. Japan intervened to weaken the Yen. Earlier in the year, Switzerland lost something like $20 billion trying to hold down the value of the Swiss Franc. We are now at the stage of overt currency manipulation to prop up exports.

BRETON WOODS IS DEAD! The political party that figures this out and tells the citizens that it will rebuild the middle class and stop those nasty foreigners from cheating us at every turn, will lead the country for a generation. The Democrats had it (and promised it) under Obama, but Barack proved to be just another greedy politician.

BREATON WOODS IS DEAD! All of this leads back to the one currency that can’t be created in a printing press – Gold. Gold stocks are on the verge of breaking out of a multi-year base. At some point, the markets will lose faith in paper money and Gold and Gold Stocks will go parabolic (like Tech from 1998 – 2000 and Gold in the last 1970’s). When it happens, the charts will look just like they do now and prices will break out on massive volume.

Is this the time? Maybe, maybe not. But it is coming and I am monitoring it closely.

Tuesday, September 21, 2010

Potential Price and Time Resistance

The markets are nearing another technical decision. You know how technically the markets have been trading, so this bears watching. There is timing today for a potential reversal. The first level of meaningful resistance for the S&P 500 (ES Z0-D) was 1,140. It was barely taken out yesterday, but is now resistance again. 1,146 and 1,162 are the next areas that really stand out.

Remember how the market bottomed for the near term the day IBD went to “Market in Correction” in their Big Picture section? The setup is now there to get everybody all excited about a “breakout” above 1,131. Just in time to reverse things down hard and trap a lot of new Bulls… I see the conical reversal pattern showing up yet again.

Meaningful resistance on the Dow ($INDU) is in the 10,860 – 11,000 range. Like SPX, there are lots of key dates next week and in early October to be aware of.

The same goes for the NASDAQ 100 ($NDX). You can see the potential reversal pattern and that price is getting into resistance at key dates.

Because Apple ($AAPL) is now over 20% of the weighting of the NASDAQ, you need to watch it to see what the market is doing. Another way of saying it is if Obama wants to game the markets higher into the election, all he needs to do is buy the crap out of Apple. Key resistance on Apple is $292, with the key dates coming in over the next few days.

Here is the chart of the Banking Index ($BKX). You can see that all it has done is bounced within a downtrend. It is now at meaningful resistance. If it rolls over from here, then the 127.2% extension of the move is always the technical target at about 41. I'm not saying short $BKX and cover at 41. I'm just saying that I am wary of this rally and if you buy wrong, then the downside is potentially pretty nasty.

Crude Oil (CL V0-D) is still in a downtrend, with potential out of this pattern in the 66.80 range. I have been watching this pattern for the last few months and it can’t be good for the economy if Crude puts in lower lows. $70 has been heavily defended.

The Russell 2000 (TF Z0-D) Small Cap index is also at resistance with key dates being 9/27 – 9/28.

While stocks have been ramping higher the last few weeks, US Treasuries have been in a pretty orderly pullback. All maturities I watch (5-year, 7-year, 10-year and 30-year)have held above their 50-day averages. You can see how the 30-year (ZB Z0-D) is going to make a key decision soon as it is stuck between support and resistance.

Gold (YG Z0-D) has been moving nicely and is now approaching a significant decision. The target all along has been $1,300 – remember how Goldman came out with a $1,300 target a few days after I produced this chart... They didn’t see my chart. They simply are running the same calculations for technical support and resistance levels.

You can see where support comes in here for Gold in the $1,262 -1,258 range. Key dates are today and early next week. The 120-minute chart shows you more detailed levels of support for Gold. A move below $1,272 probably opens Gold up for a more meaningful correction.

Silver (SI Z0-D) hit its first few targets in the $20.20 – 20.80 range. You can see the next levels of resistance. I assume that Silver will move in unison with Gold, so if Gold breaks $1,272, then I will be looking for weakness out of Silver. I expect that weakness into September 27 will be buyable or strength into the 27th will be sellable.

To sum things up, the markets are within a week or so of making a critical decision as they rally into strong resistance. Each of the rallies in the recent trading range have failed in set ups like this. If this one is different, then I will know it is meaningful and be ready. This goes for Stocks and Metals. Bonds have a significant support decision to make as well. The October 4-6 range comes up a lot in the indexes.

There is massive Quantitative Easing going on, with the Fed buying about $30 billion a month of Treasuries and the ECB buying at least a Billion a week in Irish and Greek debt. This money flows right into risk. The move yesterday morning coincided with the Fed buy $5 billion in Treasuries. There will also be purchases of about $3 billion tomorrow and Friday.

During the vertical moonshot from March 2009 – March 2010, the Fed was buying about $130 billion a month in US Agency debt. They are now buying about $30 billion a month. So figure that the markets will have a vertical grind higher with about 1/4 the magnitude of last year’s rally, until the $280 billion is exhausted.

The Fed meets today and will either add to or hold steady on QE 2.0

ECB Buying Irish Bonds

Ireland is so bad, that investors are not buying their bonds. On Friday, the ECB (European Central Bank) had to buy Irish bonds to prevent yet another financial meltdown. One day it’s Ireland, the next day it’s Greece, then Portugal, then Spain, then back to Ireland… Ireland is back on the docket this week as it issues another $2 billion in bonds. I’m guessing that the ECB made a few phone calls and that this week’s auction will go smoothly.

You can see how the yields on Irish Bonds have gone through the roof recently. On a related note, things are so bad in Greece, that the ECB will not run a “Stress Test” on Greek banks ahead of their next round of bond sales. Again, no sane investor would buy something when they thought that important facts were being withheld, so the Government will step in with taxpayer money to buy whatever is left over.

From Mohamed El-Erian, chief executive and co-chief investment officer at PIMCO-

“Market measures of risk for peripheral European countries (Greece, Ireland, Portugal and Spain) are at or near danger levels… despite exceptional support from the ECB, EU and IMF, and despite the implementation of adjustment measures on the part of some.

The failure to reduce risk spreads means that the public sector bailout is not working. Rather than provide assurances of better times ahead and, thus, encourage new investments, ECB/EU/IMF support funding is being used by existing investors to exit their exposures to the most vulnerable peripheral European countries.

This situation cannot be sustained forever. It undermines any chance that the most vulnerable countries (e.g., Greece) have of limiting the collapse in their GDP and maintaining social cohesion; it contaminates the balance sheet of the ECB; it exposes the revolving nature of IMF resources to considerable risk; and it raises the risk of renewed contagion.”

To summarize what I have been saying all along, the Government is using our money to buy the crappy assets from the banks at artificially high prices. The bankers are collecting their bonuses on the sales of these bonds at inflated prices. They then make huge campaign contributions to the politicians and hire the regulators who are supposed to be protecting the citizens, to be million-dollar lobbyists. And EVERYBODY KNOWS IT IS HAPPENING.

Good stuff…