Monday, June 20, 2011

Stock Market Investor Sentiment Growing Overly Negative

Right now just about everything that has to do with the financial markets except for bonds has been in a corrective mode since the end of April. That means gold, oil, and most commodity related stocks are down too. It is true that the price of gold itself has held up well during this drop in the broad market, but the HUI gold stock index is down over 19% from its April high.

Since almost everything is moving together it makes a lot of sense to keep a close eye on the broad US market averages and investor sentiment in order to get an idea of when this correction is going to end. From a contrarian standpoint sentiment surveys were flashing a warning sign. According to the Investors Intelligence survey the ratio of bullish investment advisors and newsletter writers to bearish ones stood at 78% on April 5, which is higher than the average level of 76.2% that has marked the peak of the past several major tops in the stock market.

The herd tends to be right often in the stock market, but at critical junctures is almost always wrong. So when there is a manic level of bullishness in the market that was a reason to be concerned. I know from feedback I've gotten myself from individual investors most people were starving for stock picks and trading ideas to play the market. When I expressed caution on the market in my May monthly newsletter I even got some hate mail from people and a few new people demanded refunds for my WSW Power Investor trading service who were angry at the lack of stock picks. I simply won't put out picks unless I think the time is right.

The truth is almost everyone has a bullish bias for the stock market. If you are a broker or investment advisor your clients are almost always true believers in the market so you have an interest even if you don't realize it in being bullish all of the time for them. Newsletter writers have subscribers who are always hungry for stock picks and trading ideas so when the advisors start to get negative on the market if often becomes a time to buy - because they are really going against the grain then.

The reason why sentiment date is important, is because most people do not get bearish on the stock market until they sell their holdings. Since corrections are driven by selling once everyone is sold out and becomes bearish bottoms are often at hand.

According to last week's Investors Intelligence survey the number of writers bearish on the stock market rose to 26% from 23% while the number of people bullish on the market fell to 37% from a higher of over 56% in April. This brings the ratio of bullish-to-bearish writers at 1.42, which is the lowest ratio since last September.

So in other words while people were getting wildly bullish in April and May they are now getting negative on the stock market. Bad news is everywhere. Turn on the TV and all you hear now on the financial networks is talk of Greece (wasn't that a story a year ago), how real estate is going to fall more, and poor economic data. All of these things may be problems, but the stock market tends to move in waves and overdoes things on both the downside and the upside.

Chart action and sentiment are key to reading the weekly trend of the market and sentiment suggests that we are nearing the end of this current correction.

Now sentiment doesn't always call exact tops and bottoms. Although the top in gold stocks coincided closely to the peak in bullish sentiment, the broad market averages didn't top out themselves for a few more weeks. To me sentiment is saying a lot of people are getting too worried now about the stock market so you shouldn't worry so much.

More useful in calling exact bottoms in the market is the VIX, the Chicago Board options volatility index, which measures the premium options traders are paying for volatility in real time. At key moments of panic traders and investors pile into puts to protect their long positions or bet against the market and this causes the VIX to rise in value. 

During most of this current stock market correction the VIX has stayed below 20. In May while the market dropped the VIX barely went up, which was a sign that the correction was not going to be a mere couple days pullback, but a correction that could last for several weeks and lead to big losses. Last week the VIX finally broke above 20.

During most extended market corrections the VIX has a final surge right on the bottom. We have not yet seen that happen so I expect we'll see the market pullback one more time to cause the VIX to spike up. If such a move coincides with a heavy ratio of sell to buy orders on the NYSE and Nasdaq than it will likely market a complete end to this current correction.

The S&P 500 has been trying to hold up on its 200-day moving average and put in a bottom. Whether it is successful or not I still expect we'll see at least one more day of panic selling in the market with the VIX spiking up before this current correction is completely over. I think it most likely it will break its 200-day moving average before it finally bottoms, but I doubt there will be much more downside from there because of the growing bearish sentiment.

Gold stocks peaked out before the broad market averages did and led the market lower. I expect once this current correction that they will take back at least half of their losses and in a fast snap back rally.

The HUI is actually just hovering on major support at its lower 200-day Bollinger band.

High yield funds break below their 200-Ema lines ...

by Kimble Charting Solutions

Market faces key technical turning point


Do you remember when the Clinton Administration kicked off? For the first 6 months it seemed that every issue that came down the pike was the potential turning point for the new President, even as he was in the honeymoon period. All of that Playhouse 90 really wasn’t necessary as we know now, simply because he ended up in the White House for 8 years. 

So I really don’t like to come here and add any hype or Playhouse 90 when it comes to financial markets but we really are at one of those turning points that could affect the outcome for the rest of the year. Yes, I’m indulging the Playhouse 90 because I think we are at a critical inflection point where most of the technicals are literally on the ledge. 

First of all, we come to yet another important time window at the June 21st Summer Solstice which is one of the key seasonal cycle change points in the year. As we come to this key turning point the major indices are all in various stages of retesting the March low. You know what I think of this test. Sentiment couldn’t have been worse in March. Well, I suppose it could but I don’t think anyone would like to see what it would be. It took an earth shattering event, literally to bottom out the market. Recently, the selling was met with a good deal of apathy and I was wondering what could possibly happen to get us close to those kinds of fear levels. All I can tell you is sentiment improved last week in a very perverse way. On the top of the list is the Greek debacle which once again took center stage. The Greenback seems to climb a wall of worry, yeah, European worry. Now the report coming out of Europe is no help is forthcoming on a bailout until at least July. 

The next major headline was a report last week on CNBC that stated the housing crisis that started last decade is now WORSE statistically than the Great Depression. I know you can manipulate statistics to fit just about any situation but I find it really hard to believe things could be worse than the GD. But that’s not the point. Throughout this crisis, our baby boomer generation has had an incredibly hard time admitting what kind of hot water our financial system was really in. We haven’t many, if any references to a depression in any shape or form since all of this began in 2007. This period is non-lovingly referred to as the Great Recession. So I think any reference to the Great Depression is a step in the right direction. On Friday a report out of Investors Business Daily suggested the patch we are currently in isn’t so soft after all. 

What does that mean? Simply put, it means we are likely reached the point of recognition. I’ll borrow from the Elliott community and take their word for it that the point of recognition is usually the middle of the correction. The problem is we don’t know if this is the middle in terms of time or price. Of all the charts sitting on the ledge the closest to serious trouble is the SSE which has an important Gann square out line at the 2640 level. This is not an exact science to it can violate slightly but as I’m writing this the SSE opened the week to the downside and if that’s a hint, the major averages will also violate their March low. From this chart you can see that not only is the SSE testing the long term Gann line, it’s also at the bottom of an uptrend line from a year ago and right near the bottom of the channel to the trend that started in April. 

So the question I pose to you is if an end of the world type event like a nuclear meltdown didn’t create a major bottom, what exactly is a major bottom going to look like? Our view is also as long as the SSE keeps dipping there is no good commodity/risk trade. I think the oil market gets it as it’s now in a C wave down which broke the May low which was also an important Gann square of 9 reading. How low can oil go? If it elects the more bearish course, we could only be getting warmed up. What’s important about the oil trade is the break on Friday was obviously an advance warning that China might not hold my important square out line, and it didn’t. More importantly is the economic indicator that by breaking the recent support level, oil was giving us a no confidence vote, similar to what European leaders just did with Greece.

I don’t mean to come here to ruin your Monday morning Starbucks, so is there any bullish news to speak of? The BKX did not confirm the new lows of the second part of last week. However, the BKX violated the March low a long time ago. But as long as the banks aren’t leading to the downside there is the chance of mitigation to the technical damage that could materialize this week. 

The next issue is the Fed meeting on Tuesday and Wednesday and this one should be more important because the language comes out right on the time window. Not that I really care what the statement reads, the market is going to use it as an excuse to do its thing simply because conditions are ripe for an important reaction. As traders what we need to do is go with the flow because whatever comes out of a seasonal time window can set the table for the entire summer. 

The other thing to be encouraged about is the recent apathy from the prior week is gone. It’s our belief that corrections or bear markets terminate when fear spills to the point where fear runs rampant and everyone believes the only way the price action can go is down. We are obviously not there yet since there is belief that the bottom could conceivably hold at the March low. There is a chance of that, isn’t there? So when you add up all of these factors we can see an important reversal this week but chances are it will be from a level LOWER than the March low. 

Whatever happens this week I don’t think it’s the end of the corrective period from May or February as the case may be. The point of recognition is rarely the bottom although it could spawn an important trading leg. In summary, this is the point where we should get a turn for a trading leg or a gap down. We don’t predict what will happen; just recognize certain times of the year where we can get the most important reaction. This is one of those times. With apologies to the politics of the early 90’s, I don’t think you can give this sequence enough hype. 

Click chart to enlarge

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by Cullen Roche

Tomorrow brings us the beginning of another FOMC meeting with a Wednesday decision. The Fed will announce their decision on rates, release their quarterly forecasts for the economy, provide some details on a potential QE3 and will finish off the big event with the new Q&A by the Chairman.

If you’ll recall last quarter, the Fed hinted at remaining accommodative for what feels like a permanently extended period. Markets loved the news and a speculative frenzy ensued as commodity prices went ballistic. Unfortunately, nothing of any significance was announced with regards to actually impacting the economy and the markets have since responded with their recent swoon. And that’s the conundrum the Fed now finds itself in. Their policy choices are depleted.

Tomorrow’s meeting is likely to result in no change in the Fed Funds Rate, no hint at QE3, remaining accommodative for an extended period, a marginal downgrade in the economic outlook and a very boring press conference with the Chairman. In other words, the whole thing should be a big snooze fest. Given the Fed Funds futures curve I think it’s safe to say that the markets largely expect this meeting to be no different than the last few. The nearest rate hike is currently projected all the way out to November of 2012! Now that’s accommodation.

Morning markets: grains sell-off feeds on Greek debt worries


It was hard for risk assets to make much headway in early deals, given the disappointment over efforts to sort out Greece's sovereign debt problems – increasingly viewed as a matter of global importance.
Eurozone finance ministers said they expected Greece to get E12bn in emergency loans by mid-July, but made no firm commitment – until the country makes more progress on austerity measures aimed at sorting out its problems.
The move put the euro back into reverse, and helped up the dollar, which jumped 0.6% against a basket of currencies as of 07:20 GMT (08:20 UK time), signalling lower prices for dollar-denominated assets, which become less competitive as the greenback appreciates.
Saudi purchase
Oil took the bait, falling 1.6% to less than $92 a barrel in New York, and copper lost 1% in London.
But agricultural commodities were at least managing to limit their losses, with fundamental news providing some crumbs of comfort.
Wheat, for instance, had a 360,000-tonne order from Saudi Arabia over the weekend, spread between Europe and the US, and so providing yet another signal that buyers remain cautious over Black Sea wheat, however cheap it is.
Russia is still toying with export levies, and there are some, though waning, fears over this year's Black Sea harvests, following a dry period last month.
'More heat'
There are some weather fears too, with US wheat showing heavy rains for the Upper Plains over next 60 hours", said, hardly ideal for any farmer still thinking of sowing winter wheat.
There is also "more heat all this week over the Lower Plains and Deep South", which bodes badly for cotton crops already tested by drought.
Indeed, New York cotton for December managed to go against the run of play, adding 1.0% to 124.95 cents a pound.
It could be less than ideal for corn too, as an 11-to-15 day outlook showing a "much hotter and dry pattern developing for all of the Plains and Midwest for the long July 4 weekend".
'Has value'
Brian Henry at Benson Quinn Commodities held out some hope for corn, saying that the last session made it appear that some bottom may be near.
While "bulls in the corn market remain nervous of additional fund liquidation, the market traded like it had value near these prices", adding that he "would not be surprised" if margin requirements which fuelled the sell-off last time had been resolved.
Still, wheat prices felt the weight of a US harvest which Lynette Tan at Phillip Futures noted has been "topping the low expectations of market watchers who had predicted a severely reduced crop due to dry weather in the southern US Plains".
Mike Mawdsley at Market 1 said that "July 1 is normally the time of year to find a harvest low in wheat", referring to the hard red winter variety as traded in Kansas, and which lost a further 0.3% to $8.02 a bushel for July delivery.
Chicago wheat for July lost 0.6% to $6.68 a bushel.
Better hopes for Europe's harvest following rain has also been keeping a limit on sentiment, with Agritel noting that "there is now a consensus that production could be slightly better than expected".
Chart signals overcome?
And, with wheat lower, corn was undermined too. Corn's unusual premium over wheat is seen as fostering increasing pressure for a switch of grains by feed buyers.
Corn for July eased 0.3% to $6.98 ½ a bushel, with the new crop December lot down 0.5% at $6.56 ¾ a bushel.
It was left to soybeans, again, to show resilience, standing unchanged at $13.33 ¼ a bushel in Chicago, and with new crop lots doing a better job of holding on to weather premium than in grains.
The November contract stood 0.25 cents higher at $13.33 ½ a bushel, even after in the last session falling down through its 100-day moving average, which might be considered likely to trigger further selling.
The same went for soymeal too, which added $30 to $349.30 per short tonne, despite dropping through its 200-day moving average in the last session.

What to Watch as the Fed Abandons U.S. Stocks

Jon D. Markman writes: Without any more help from the U.S. Federal Reserve, U.S. stocks are on their own - and they're in for a rocky ride. 

Markets have slumped as the Fed has not indicated it will initiate another round of quantitative easing, and last week was a sign that there's more volatility ahead. 

Stocks were as jittery as June bugs, jumping higher in the first couple of days and the last couple of days on signs of improvement in the economy, but sinking hard in the middle on renewed fears about European debt woes.

In the end the major U.S. indexes were up by a whisker for the week. The Dow Jones Industrial Average rose 0.4%, the Standard & Poor's 500 Index rose 0.01%, the Nasdaq fell 1% and the Russell 2000 small caps rose 0.3%. On Friday, 67 stocks on the three U.S. exchanges hit new highs, while 170 hit new lows.

Contributing to the jumpiness was a key data point released on Friday: the University of Michigan survey on U.S. consumer sentiment. The index took a larger-than-expected face-plant in June, sinking to the lowest level of the past few months and logging the first decline since February. Consumers are definitely becoming more pessimistic, or at least less optimistic, than they had been earlier in the year.

The numbers show that confidence has not run off the road, but preliminary data shows that the first half of this month has been scary for people -- and scared people don't go out and buy cars, make lavish vacation plans or buy big pieces of jewelry as birthday gifts. They pull in their buying appetites a bit, and that can impact retailers' and manufacturers' earnings.

Who can blame consumers, though, right? There are threats of downgrades to the U.S. debt rating, the Fed chairman in a speech called the recovery -- which he helped engineer --"frustratingly slow," and there has been an endless string of natural disasters. 

On the positive side of the ledger, gasoline prices have fallen hard, which takes away the evil "pump tax" that cuts into households' budgets.

Now looking a little more broadly, one more report came across the wire late last week that you need to know about.

The U.S. leading index of economic indicators rose 0.8% in May, which was above expectations and the largest advance since February. The main reason was an increase in building permits, capital goods orders and a slight decline in jobless claims.

Now when you put these data points into a cocktail shaker and pour it out, it seems that the overriding sentiment is worry. That's probably why the number of Google searches for "double dip recession" has surged and the old "Misery Index" -- inflation plus the unemployment rate -- has hit a 28-year high.

My sense in talking with customers, friends, cab drivers, grocery store clerks, random parents at my son's high school graduation and watching trending Twitter topics is that people are not as gloomy as all these indicators seem to suggest. It really takes a lot to knock down the spirit of Americans in the summer, when school is out and the sky is blue, MLB pennant races are heating up, and thoughts turn to Fourth of July barbecues and vacations.

Yet we need to respect the fact that due to the thinning number of jobs, the lack of wage increases, the squabbling in Congress, the mess in Europe and paralysis at big companies ranging from Research in Motion Ltd. (Nasdaq: RIMM) to Bank of America Corp. (NYSE: BAC), no matter how good people feel at their core they may simply be unwilling or unable to spend as much as they have in years past. And there is no getting around the fact that this is going to condemn the United States to a couple of years of sub-par gross domestic product (GDP) growth.

From a stock market perspective, investors have felt as if they had one ace in the hole at times like this. They have always figured that if things get really bad the U.S. Federal Reserve Bank will play its quantitative easing card again, print more money and all will be well in the realm of finance.

But Fed Chairman Ben Bernanke has spent the past few weeks trying to dampen that expectation, and my guess is that signs of a renewed economic slowdown will not prompt a knee-jerk reaction from the central bank when its two-day policy meeting finishes up on Wednesday.

Moreover, the statement issued by the Fed's rate-setting committee is likely to acknowledge a deceleration in momentum, and the chairman will restate the same in his news conference. Yet because the Fed thinks that the slowdown is due to temporary factors like the bad weather and the supply disruption stemming from the Japanese earthquake, it is not going to offer any hint of a new round of quantitative easing -- especially since there is growing evidence that the last round did not help much.

Traders love this market volatility, while investors should be looking actively for bargains. Wall Street is a zero-sum game; for one party to win, another must lose. The markets may be in a bit of a no-man's land at the moment, but this sort of jumpiness creates the sort of fog that experienced investors leverage to their advantage. People with conviction about value and opportunity make their greatest strides at times like this when the herd lacks direction.

While bargain hunting, the one thing investors should watch with an eagle eye is the 1,250 area of the S&P 500. That is the line in the sand for the intermediate-term trend. If bulls do not buy the market by the 1,247 level -- a couple of points below the 1,250 level -- then they will be making a clear statement that the entire QE2 rally in U.S. stocks from September of last year may need to come undone.

Bottom Line:U.S. stocks are going to be on their own during the next few weeks, with no pats on the head or backstopping by the Fed. That should provide more volatility than ever, and thus opportunities for traders and long-term investors. Look for utilities, consumer staples and healthcare to outperform, and tech to suffer.

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Why Soybean Price Could Double From Here

By: Submissions

Risk Hacker writes: While for the past 12 months, corn and wheat prices have nearly doubled with corn price rising 88% by percent and wheat price by 95%, soybean price has been lagging the performance. However several key factors suggest that risk of soybean price is still dramatically skewed upwards.

Societe General’s Dylan Grice made a neat comparison in the 1970s and what will happen to grain in the future. In 1972, Soviets secretly bought grain on the global markets to make up for a shortfall. That led to the“Great Grain Robbery” of 1972. In 1972, Russia’s wheat crop failed. Russia had to dip into the global grain markets to meet demand. Russia’s purchases sent grain prices soaring around the world. 

China now faces similar scenarios. With government artificially suppressing edible oil prices by pouring reserves, farmers are expected to plant 20% fewer soybean acres this year. China's overall soybean area, on a harvested basis, was pegged at 8.5m hectares, 200,000 hectares lower than the current USDA estimate and the lowest since 1999. With soybean/corn ratio as unprecedented low level, more farmers tend to switch soybean to higher value crops.

Not only the tight supply balance resembles 1972, technical parallel is equally compelling as well. I overlaid the current 2011 soybean contracts on 1972 and get these.

I remember how Paul Tudor Jones predicted the 1987 crash by looking at a 1920s chart (the famous document ‘trader’). If one believes markets self-resemble, these two charts may give us a clue what’s going to happen. And from a supply and demand side perspective, this makes sense as well. Both the government of China and 1972 Soviet Union interfere with the market, trying to temporarily suppress the grain prices. For a while, they succeeded, led to near-term market prices trending downwards, but later backfire is also expected. Grain prices tend to suffer seasonal weakness in summer, however, with the decades low stock-to-use ratio, any type of supply disruption could trigger the dramatically upward.

Stock Market Flashing A Buy Signal?

Since the first trading session in May we have seen the stock market sell off. The old saying “sell in May and go away” was dead on again this year. Here we are 7 weeks later with the stock market continuing to lose ground. This extended sell off has everyone all worked up that this is the beginning of another market collapse.

Let’s take a quick look at the SP500 hourly chart covering the month of June.

As you can see, price is still falling but every couple of trading sessions we get some big money players nibbling on stocks accumulating shares and running the market higher. This type of price action is typically an early signal that the market is trying to bottom.
Chart12 stocks
There are two key ingredients for a higher stock market and both have been missing from the mix for a couple months. The two key sectors which have a significant weighting in terms of the broader market are the financial and technology stocks.

Let’s take a look at the financial sector:
As you can see on the bottom of this chart, financials started to lag the market in late January. Ever since then this sector has been in a strong downtrend pulling the broad market averages lower with it. The good news is that this sector has just reached a major support zone and is looking ripe for a bounce and possible rally.
Chart22 stocks
The other main ingredient to a higher stock market is the technology sector.

Looking at the technology sector:
Here we can see technology stocks have been pulling back for several weeks. Tech stocks are now trading down at a major support zone and they look oversold. A bounce from this level is very likely in the coming week.
Chart32 stocks
Weekend Trading Conclusion:
In short, I continue to feel the market is trying to bottom here and we are at the tipping point when things get volatile and choppy just before we get a trend reversal in the S&P 500. Keep an eye on the short term charts of financials and technology sectors. Once they start making higher highs and higher lows on the 60 minute charts I believe it will be the start of a nice bounce and possible rally.

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