Monday, October 18, 2010

iPop?

Apple did their usual, “beating” of expected Quarterly earnings and then lowering expectations for next quarter, only this time the market smoked them. You can see here that Apple rallied right up into resistance today. In after-hours trading it has fallen $18 to $300, so basically it has given up all of Friday’s gains.

The last resistance level was $292 and Apple had a mini “flash crash” off of that level. The event was later blamed on a “rumor”… On a side not, the S&P 500 ETF (SPY) had its own “flash crash” upon Apple’s earnings release, falling 10% in a matter of seconds. Over $500 million in orders were reversed –

http://www.bloomberg.com/news/2010-10-18/nyse-euronext-cancels-trades-of-s-p-500-etf-at-9-6-below-opening-price.html?cmpid=yhoo



IBM also ran too far too fast and is down $5 in after-hours trading.
Microsoft (MSFT) is down too, with a key executive deciding to leave.

My big concern with Apple is that Apple is over 20% of the weighting of the NASDAQ 100 Index and it could have a nasty effect on QQQQ. One day it will fail and it will blow up the market, because it will simply be owned by too many people who all want to sell at exactly the same time – see Intel, Cisco, Microsoft circa 2000.

Markets give clues when things change. Sometimes it is a process, where prices drop, rally back up, drop, rally back up… Markets tend to do this. Stocks and Sectors can literally top in a day. These days are normally the biggest down day ever in price, on the biggest day ever of volume, where price is significantly overbought. October 6th may have been one of those days for a key group – Cloud Computing.

Take a look at some of the leaders from the group – VMWare (VMW), Salesforce.com (CRM), Red Hat (RHT) – the patterns are now tops.

Other former leadershad similar days – F5 Networks (FFIV), Citrix (CTXS), Rackspace Hosting (RAX), Mercadolibre (MELI)



Markets top as leaders break, stock by stock and sector by sector. It is critical to watch how leading names are doing and how they react to earnings this month. On the chart below, I have listed critical support levels for the S&P 500 (ES Z0-D). As long as price holds above these levels, the uptrend remains intact. If price fails to hold these levels, then the possibility opens up for a more substantial correction or top.



Also keep a close eye on the US Dollar, because believe it or not, when Apple tanked this afternoon, the US Dollar spiked higher. Gold, The Euro and The S&P 500 all tanked in unison. It was amazing to watch. The bottom line it this, if Apple has topped, then money had better quickly rotate into other areas.

Fed Keep Pumping Money into Risk

The markets are still rolling, much like the did the last time the Fed decided to print money and dump a bunch of it into the markets each week. This week they will buy Treasuries three times. They already bought $6.3 billion this morning and $4.7 billion last Friday. There will be two more purchases on Wednesday and Friday this week (POMO operations).

The goal of Bernanke is to inflate away the debt that is overhanging the markets. He gave a speech in 1999 where he discusses what monetary policies he would have used to get Japan out of its “lost decade”. There are now on their third “lost decade”. His goal is to give away money, print money and crash the Dollar to get Inflation.

In Bull Markets, whether induced my cheap money or by economic fundamentals, I like to buy leaders on pullbacks. It allows me to buy strength and manage risk.

The latest setup to trigger today was Baidu (BIDU) breaking out of a 17-day consolidation –



Last week there were breakouts in McDonalds (MCD), Oracle (ORCL), Consolidated Edison (ED), Linn Energy (LINE), Insurance (KIE), REITs (IYR) and the NASDAQ 100 (QQQQ). Analog Devices (ADI) and Barrick Gold (ABX) broke back below their breakout levels and stopped me out. I am still interested in them though.



Insurance (KIE) and REITS (IYR) sat around for three week before breaking out and are not both in narrow 4-day trading ranges as they consolidate the gains of last week.



Here is the daily chart of the S&P 500 (ES Z0-D). You can see that there is significant support right below here. If support is violated, then I will be on the lookout for a potentially larger correction. Otherwise, 127% of the April – July selloff is 1,264.



I think Financials are very important to the extension of the current move. If they can join in, then the rally continues to broaden out and get more bullish. But not everything is going to work. You can see that Financials (IYF) tried to break out last week and failed, falling almost 4% in two days. I am watching Financials closely. I will not buy anything extended, because there is simply too much risk here for a quick, sharp selloff.

Bernanke Told You What He Would Do in 1999

In December 1999, Ben Bernanke wrote an essay that discusses the mistakes made in Japanese monetary policy that led to an asset bubble, an asset price crash and then 20 years of deflation and anemic growth. The essay is important, because it goes deep into the thinkings of Bernanke and how he wants to solve the problems now faced by the US economy.

http://www.princeton.edu/~pkrugman/bernanke_paralysis.pdf

According to Bernanke, Japan made a series of “important monetary policy mistakes” –

1) The failure to tighten policy during 1987-89, despite evidence of growing inflationary pressures, a failure that contributed to the development of the “bubble economy”

2) The apparent attempt to “prick” the stock market bubble in 1989-91, which helped to induce an asset-price crash

3) The failure to ease adequately during the 1991-94 period, as asset prices, the banking system, and the economy declined precipitously.

“(I)f the Japanese monetary policy after 1985 had focused on stabilizing aggregate demand and inflation, rather than being distracted by the exchange rate or asset prices, the results would have been much better.”

That the key sentence to Bernanke. He is about “Aggregate Demand”. It is all about inflating away debt.

There are many scary parallels between what occurred in Japan 20 years ago and what has been going on in the US since 2008 –

There has been a crash in Asset Prices (namely Real Estate)
Banks are not lending, because their balance sheets are stuffed with defaulting debts
The Fed has dropped the Fed Funds Rate to basically zero
There is Deflation in a number of areas of the economy
Demand is flat and GDP is flat or down
Money Supply growth is weak, as Banks sit on massive piles of cash

Since the early 1980’s, the US has been able to drive growth by lowing Interest Rates and buying on Credit. Consumer Credit has been contracting since 2008 and Interest Rates have very little room left to fall. Rising Credit is essential to keeping the economy growing and falling Interest Rates are required to drive Asset Prices higher.

We now face a new economic reality and Bernanke has his proposals for how the Government can rescue the economy –

“Commitment to Zero Rate – with and inflation target”
First you announce “that the zero rate will be maintained for some time to come.” This has been done already by the Fed. Then you announce that you will print enough money to have achieve some target level of inflation –

“In particular, a target in the 3-4% range for inflation, to be maintained for a number of years, would confirm not only that the BOJ (Bank of Japan) is intent on moving safely away from a deflationary regime, but also that it intends to make up some of the “price-level gap” created by eight years of zero or negative inflation.

Further, setting a quantitative inflation target now would ease the ultimate transition of Japanese monetary policy into a formal inflation-targeting framework—-a framework that would have avoided many of the current troubles, I believe, if it had been in place earlier.”

The Fed is now talking about targeting a 1-2% inflation rate. The goal of this is to get the anticipated inflation built into prices and make up for the lack of growth in Real Estate prices over the past decade.

“Depreciation of the Yen”
“I believe that a policy of aggressive depreciation of the yen would by itself probably suffice to get the Japanese economy moving again.”

“(T)he BOJ should attempt to achieve substantial depreciation of the yen, ideally through large open-market sales of yen. Through its effects on import-price inflation (which has been sharply negative in recent years), on the demand for Japanese goods, and on expectations, a significant yen depreciation would go a long way toward jump-starting the reflationary process in Japan.”

“In short, there is a strong presumption that vigorous intervention by the BOJ, together with appropriate announcements to influence market expectations, could drive down the value of the yen significantly. Further, there seems little reason not to try this strategy. The “worst” that could happen would be that the BOJ would greatly increase its holdings of reserve assets.”

“Money-financed transfers”
This is how Bernanke got the name “Helicopter Ben” –

“Suppose that the yen depreciation strategy is tried but fails to raise aggregate demand and prices sufficiently, perhaps because at some point Japan’s trading partners do object to further falls in the yen.

An alternative strategy, which does not rely at all on trade diversion, is money-financed transfers to domestic households—-the real-life equivalent of that hoary thought experiment, the “helicopter drop” of newly printed money. I think most economists would agree that a large enough helicopter drop must raise the price level.”

“Surely at some point the public would attempt to convert its increased real wealth into goods and services, spending that would increase aggregate demand and prices. Conversion of the public’s money wealth into other assets would also be beneficial, if it raised the prices of other assets.”

“Money-financed transfers do have a resource cost, which is the inflation tax.” In Bernanke’s mind, Inflation is the goal and not a cost…

“Nonstandard open-market operations”
“A number of observers have suggested that the BOJ expand its open market operations to a wider range of assets, such as long-term government bonds or corporate bonds; and indeed, the BOJ has modest plans to purchase commercial paper, corporate bonds, and asset-backed securities under repurchase agreements, or to lend allowing these assets as collateral (Ueda, 1999, p. 3). I am not so sure that this alternative is even needed, given the other options that the BOJ has, but I would like to make a few brief analytical points about them.

In thinking about nonstandard open-market operations, it is useful to separate those that have some fiscal component from those that do not. By a fiscal component I mean some implicit subsidy, such as would arise if the BOJ purchased nonperforming bank loans at face value, for example (this is of course equivalent to a fiscal bailout of the banks, financed by the central bank). This sort of money-financed “gift” to the private sector would expand aggregate demand for the same reasons that any money-financed transfer does.”

Bernanke actually defines the purchase of “nonperforming bank loans” as a “’gift’ to the private sector”.

“A nonstandard open-market operation without a fiscal component, in contrast, is the purchase of some asset by the central bank (long-term government bonds, for example) at fair market value. The object of such purchases would be to raise asset prices, which in turn would stimulate spending”.

Where We Are Now
The US Government has already –

Dropped short-term Interest Rates to effectively zero
Bought worthless bonds at 100% of their original value
Substantially weakened the US Dollar
Handed out $800 billion in “stimulus”
Told us that low rates are here for a “extended period”
Told us that here is a “inflation target”

So they are following Bernanke’s playbook. The Fed has clearly bought into Bernanke’s game and will print as much money as they have to to create Inflation. They will also use Gold as a lever to force China to unpeg with the Dollar.

Wednesday, October 13, 2010

Rally Broadens Further

The rally continues to broaden out, with lagging groups now participating.

Financials and Insurance have been lagging on this move, but they are very important. A move above $54 on Financials (IYF) would be an important turn in the opinion of market. Insurance (KIE) has stalled after breaking out, which is bullish.

Berkshire Hathaway (BRK/B) has been stalled out at old highs for several weeks.

Crude Oil (OIL) has been stuck underneath its 200-day average for the past five months. A break above would tell you that the sentiment has changed from Bearish to Bullish.

Keep in mind that many breakouts fail and these failures often turn into vicious losses over a very short period, so committing money is a process, which requires constant monitoring. But this is the first time stuff has been working like this for many months.

Treasuries have broken bullish symmetry and look to have a deeper correction. That could be the start of money flowing from bonds into stocks, which would be even more bullish.



Monday, October 11, 2010

Some Gold Stocks Consolidating

Gold has been on a tear as the Fed is now printing the Dollar into oblivion. However, while Gold has gone parabolic, many Gold stocks have not followed.

Barrick Gold (ABX) has just broken out of an 11-month base. Harmony Gold (HMY) is trying to do the same.



The “Junior” Gold and Silver stocks have been performing much better than their larger counterparts. Some of this have been the result of M&A activity and some is the result of the larger companies using hedges for future deliveries. As you can see, a lot of the Juniors have stalled out over the past few weeks (similar to the NASDAQ 100).

These are the setups you want to see in leading areas – narrow trading ranges in an uptrend. If prices fail here (like they did in a lot of leading NASDAQ names last week), then I will look for support near the 50-day averages (Black Lines).





Stalled and Consolidating

The NASDAQ 100 (QQQQ) has been the leader. It has now been in a narrow trading range for about 15 trading days. While the index has stalled, many of its key components and leading names have also stalled and consolidated. They are now in a position where the big boys can break them out and run them again or hit them hard. This trading range gives me a chance to manage risk.









There are many other leaders that look very similar.

Thursday, October 7, 2010

Growth Leaders Got Hammered

This market has been feast or famine, where things move up quickly and then implode with equal speed. That has made it a very risky market.

Many leaders have stalled out over the past few days and they got hit yesterday on massive volume, causing them to break trendlines and moving averages. William O’Neil (IBD) teaches that massive selloffs on massive volume normally mark the end of a rally.

Cloud Computing
You know when Microsoft wants in that the move is probably over (at least temporarily). Take a look at some of the names related to the space –

F5 Networks (FFIV), Salesforce.com (CRM), VMware (VMW), Citrix (CTXS), NetApp (NTAP)



Apple was hit last week with some massive selling early one day. It was attributed to a “rumor”, but after seeing the pounding some leaders too yesterday, it was probably some real institutional distribution.

Other leaders that got hit hard –

Riverbed (RVBD), TIBCO Software (TIBX), Open Table (OPEN), Red Hat (RHT), Rackspace (RAX), Acme Packet (APKT), CTrip (CTRP) and a whole bunch of others were down 4% or more.

Now obviously, the way the market has been trading lately, these stocks can all recapture all of yesterday’s losses and move to new highs, but yesterday’s action was at least a warning shot and shows you the dangers of buying extended stocks.

All of this damage went on while the Dow and was up some yesterday. The key will be if money flows out of leaders into the less risky stuff. That may mark the second phase of the topping process for the recent rally.

Corn
Here is another example of how much you can get hit if you buy at the wrong time. Corn (ZC Z0) was down over 14% in a week!



Which brings me to Gold (GLD)
Gold has now broken above its uptrend and has now gone parabolic. It did the same thing last November and got crushed. It is either now in a parabolic Bull move like the NASDAQ did in late 1999/ early 2000 or it will soon regress violently back towards the 50-day (Black Line).



After looking at Corn and some of the hot stocks, you can see how potentially risky it is to buy Gold here. There are some Gold Stocks that offer at least a stop loss, like Barrick Gold (ABX) -



This move off the lows has all been about a crashing Dollar. The Dollar is now at some pretty significant support, so a bounce would not surprise me and it would not be good for risky assets. Remember, the S&P is still at significant daily resistance, with timing.