Wednesday, June 27, 2012

Get ready for the Fireworks!

After a brief bounce, investors pounce on any hint of positive news as a great chance to buy.  While the European leaders are starting to fight about how to solve the latest regional problem in Spain, the U.S. market has been focused on some weakening manufacturing numbers.  Unemployment and job growth remains sluggish, and some earnings disappointments may be in store for multinational firms in the second quarter earnings releases starting soon.

My outlook is for the S&P 500 to decline to below 1,100 at a minimum by the end of September.  I remain in the UUP position and you may want to purchase some VIX funds to protect your portfolio.

Tuesday, June 19, 2012

1364 on the S and P 500 and then what happened?

The S&P 500 hit 1364 on the money and stated to sell off.  The market surged on the hope of central banks around the world coming to bailout countries with looser monetary policies.  The question to ask yourself, have you been the last fool who holds stocks while the Central banks have been buying assets the last two years along with you? Who will by the buyer when the central banks need to liquidate?

Think about it tomorrow when the Federal Reserve makes the grand announcement tomorrow that every investor in the world wants to hear. Operation Twist or QE3. Who cares!

Monday, June 18, 2012

Important inflection point in financial markets

I have been doing extensive research on a number of models lately.  The technical outlook has not changed.  The key question is the "world depression" over or will we just have a normal major correction in the United States of at least 19%?  Let me ponder the question for a moment while I type.  Now I have the the answer.  While investors were focusing on "old news" regarding the Greek election, France's elections were ignored.  Let's have some fun and just think for a moment if Germany decides to leave the Euro.  Why not? They are the strongest country in the EU and why bailout a number of weaker countries?  In addition, the economic indicators in Europe are falling rapidly even if the banks are bailed out.  Think the U.S. is exempt from Europe?  Do you know where your money market funds have been investing lately for yield? Probably in Europe.  Watch Spain and Italy closely.  Spain's yields shot up over 7% today and Italy is too big to bailout with funds from the ESM. With the U.S. politicians in gridlock until election day, do not look for any action on the tax cuts expiring this year. Since the stock market looks ahead, the world economies are looking pretty weak and all correlated now. Look out below!  

Wednesday, June 13, 2012

Another one bites the dust

Wow, it is nice to get into the full blown technical analysis again.  The market had an initial spike up and is correcting now.  While I look for the market to short-term go lower, I think one more rally is in store before investors should bailout completely.  S&P 1364 is the final best target for a wave 2 bounce unfolding in a three wave pattern.  The market is in a B wave down with a C wave equal to the first move up in store.  A big crash down is likely after that. Interesting timing as the market may rally on the Greek election news next week. As far as the next target for the S&P 500, my initial calculations project it will be a minimum of 19% to the downside.  So, if you are conservative, you may not want to wait around for a few points to the upside!

The domino's continue to fall with Cyprus asking for a $5 billion Euro loan from Russia.  Why wait to have the IMF approve a loan, when you can go straight to one of the nations with a surplus.  I think the request is really interesting.  Cyprus also has a better debt to GDP ratio due to a social security surplus of $ 7 billion. The country has a total debt of $17 billion and subtracting the social security surplus drops the total to $10 billion.  Who does that sound like?  You guessed it, The United States.

Monday, June 11, 2012

Very interesting day today as the stock market in Spain rallied and then sold off hard.  The U.S. market did the same thing today.  I was looking at the double top eached today and wondering if the market is going to rally further to 1360 or go to the 1213 area first.  While the weight of the short-term technical indicators where oversold before the explosive rally last Thursday, the market has now retraced .382 of the entire recent move down. Now to determine if .50 or a .618 retracement is still possible.  We need to wait on further market action this week and watch carefully.  A wave 2 usually retraces more than .382.  If this is it, the market is signaling further weakness. 

Saturday, June 9, 2012

One fact of life in this market is you need to stay "on your toes".  While I was traveling for a consulting project, the bounce in the market occurred.  As I am writing this piece, European leaders decided to spend another $100 billion dollars or more to "bail out" Spanish banks.  The issue with the ESM is that only government's can borrow from the facility. Another interesting lesson learned for the future.  So, the major question is who will put up the $100 billion this time?

The market looks poised to rally further at this point.  However, the 1360 area will start the next dramatic leg down in the market. The CRB index, along with markets around the world seem poised for a major fall.  The major question is when all the bailouts are completed of the banks, the risk will be on government's to pay.  If the government's cannot pay, interest rates are poised to rise.  While we shuffle around deck chairs on the Titanic, the real underlying economies are weaker despite government leaders suggesting "everything is fine".

Thursday, June 7, 2012

No changes. Bounce over last couple of days has occurred. Market above the 200 day.  A break back below the 200 day will be very negative and confirm the downtrend to 1213 area is in place. Tomorrow will be key as to direction of the market short-term. 

Monday, June 4, 2012

Floating Trial Balloons

The markets around the world seem to be waiting on further steps by European officials to stop the banking crisis gripping the area.  Many” trial balloons “ have been floated by the media over the last week ranging from a E.U. banking unification, IMF bailout of Spanish banks, use of the ESM, another LTRO round by the European Central Bank, direct Spanish aid to their banks by issuing bonds, and the potential of Euro bonds being issued.  Pick your favorite story and investors will jump back on the potential solution(s) as a reason for a short-term rally.  I look for the market to continue to decline as the S&P 500 has broken below the 200 day moving average late Friday.  While a bounce back above the 200 day is possible, the relief rally should be used to sell as I still expect the S&P 500 to continue to decline to around the 1213 level. I made a rough calculation using an equal point total decline to the last wave down.  I look for a bounce after the level is reached.     

Friday, June 1, 2012

Deflation is the fear not inflation.

Investors seem to be catching the onto the falling domino theory as the Euro Zone is sinking under the weight of higher interest rates and proposed fiscal austerity.  Today, the major headlines of U.S. job growth and Spain have dwarfed  another example of European citizens refusing cuts in their standard of living.  Ireland’s citizens have voted against harsh austerity and more backlashes from the population from other European citizens in the region are expected.  The United States, China, or India does not appear to be immune to the spreading virus of deflation.  My future fear with holding government bonds is that while investors are rushing to the safety as they provide some yield as short-term interest rates are near zero, the ability of governments around the world to continue to fund stimulus by borrowing to offset the lack of private economic growth cannot end in a positive way.  As a few European countries have found out, you cannot spend your way to prosperity.  Bond investors in Portugal, Ireland, Spain and Italy have watched bond prices sink under the weight of government budget deficits to bailout banks and the economies in the region.  Most citizens now are as addicted to fiscal spending as an addict is to heroin.  While you may get short-term relief, you will face the long-term effects of the decision to avoid feeling the short-term pain. The last comment may offend readers, but government bonds will not end up being the place to be as they are in a “bubble” now. 
Historically, interest rates in the United States need to offer 3% just to offset inflation. So while you have "enjoyed the ride" while investors have been focused on lowering inflation, deflation will in the end hurt bond prices more as governments will end up not being able to pay.  What is the end game here?  As citizens, we should be tired of talking about government and central banking stimulus.  The result has not been an improvement in unemployment.  The only answer is the tough medicine of liquidation of debts by a combination of defaults, bankruptcies, and austerity with spending cuts in both the public and private sectors. The only other way  to solve this crisis is a fresh start with employment growth in the private sector.  If businesses hire, then the public can regain a balance sheet that can be able to rebound from the ashes of past policies.  My fear is a lot of economic pain and a change in leadership is needed at the governement and corporate level before a turn is in sight.