A Warning Signal From Dow Theory

By John Kosar

All major U.S. stock indices closed lower for the week of March 10, basically giving back all of the previous week's gains. The market was led lower last week by the blue-chip Dow industrials, which lost 2.4%, leaving the Nasdaq and Russell 2000 as the only two major indices that are still in positive territory for 2014, up 1.7% and 1.5%, respectively, year to date. 

U.S. stocks were particularly weak on Thursday, with the S&P 500 suffering its worst day since early February on rising tensions between Ukraine and Russia and concerns about a slowdown in China. Regarding the latter, I am expecting at least an additional 2.2% decline in China's Hang Seng Index to 21,000.

Dow Theory Non-Confirmation Persists

In last week's Market Outlook, I said, "The deeper that we go into 2014 without a confirming new high in the Dow, the more problematic it can eventually become from a Dow Theory standpoint."

As you can see in our first chart, the new 2014 closing high in the Dow transports set on March 7 of 7,592 versus the Jan. 23 high of 7,570 still has not been corroborated by a new high in the Dow industrials -- and last week both indices turned lower.

The longer this non-confirmation between these indices persists, the more likely that it will lead to a broad market correction.

Broader Market Testing Support

Also in last week's report, I pointed out that the S&P 500 was closing in on a quarterly overbought extreme that had previously coincided with or led most of the near-term broad market peaks in recent history. That overbought extreme helped to trigger a 2% decline last week, positioning it just above minor underlying support at 1,829 to 1,814, which is 3% to 4% off the 2014 highs.

The next chart shows that this support represents the S&P 500's 50-day moving average, a widely watched minor trend proxy, and Nov. 29 benchmark high.

If the S&P 500's 2013 advance is still healthy and intact, the 1,829 to 1,814 area should attract enough dip buyers to fuel a new advance to fresh 2014 highs. Conversely, a breakdown below this support would indicate that a correction is under way and would clear the way for a potential decline into major support 7% to 8% off the highs at 1,746 to 1,737, which represents the November and February lows and the 200-day moving average (major trend proxy).

One way to try to anticipate whether or not minor support at 1,829 to 1,814 will hold this week is by continuing to keep a close eye on investor fear via the CBOE Volatility Index (VIX). As I've been saying, a sustained rise above 14.6 could potentially trigger a market decline.

The "fear gauge" subsequently spent Thursday and Friday above 14.6, while the S&P 500 coincidentally collapsed by 27 points, or 1.5%. If VIX stays above 14.9 this week, look for the broader market to remain under near-term pressure.

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Corn settles into bearish trend, while liquidation looms in soybeans

By Allendale Inc.

Corn: Starting the new week, corn picked up right where last week left off. Once again, low volume trade was seen, which included no signs of fund buying. That makes three days in a row that funds have remained quiet, which now makes it a safer assumption this is going to be the new trend.

Before Monday, the sellers, especially overnight traders, who have wanted to come in and sell this market might have been worried about being run over by fund buying. Now it is likely that corn bears will not worry as much, becoming more active traders. There were overnight sales of 107,400 tonnes of corn to Mexico that offered light support to start the day.

Even with cool forecasts and small overnight sales, it is still likely that corn cannot support current prices without fund money being invested here. Those bullish fundamentals might prevent much of a slide but by themselves just aren’t enough to continue the corn rally seen to this point.

Concerns over Ukraine were somewhat eased, seeing the vote to join Russia occur with little other excitement over the weekend. It was mentioned that Ukraine is actually seeing its fastest exports of the year right now.

Bulls will continue to point out cool weather spring forecasts and regular exports as reasons to be buyers. Those bulls might want to wait for pullbacks now to get aggressive with buying as long as funds are not helping their case right now. Bears in turn should be more aggressive now, especially on bounces. March is known for seeing a corn setback during some part of the month and right now there is reason to expect one in the short term…Ryan Ettner

Soybeans: Soybeans traded higher Monday, although on very light volume as once again traders wait for any sign of Chinese cancellations. November beans settled at 1175 3/4, up 1 1/4 and May beans settled at 1391 3/4 up 3 1/4 cents. Rumors of China canceling cargos of beans from South America, which are then being diverted to the U.S., leave the market extremely vulnerable to liquidation as any talk of tight supplies would certainly take a back seat.

February Soybean crush numbers fell to 141.612 million bu.; however, still 4% over last year so demand is still sufficient enough to lend support to the market at this time. The tension in Ukraine seems to be having little effect on the markets for now. We’ll see if volume returns to normal tomorrow but any significant moves higher seem unlikely at this time…..Scott Donarski

Wheat: Wheat finished the day lower Monday as we saw a lack of new money enter the market after the recent run up in markets fed mainly by speculative liquidation of shorts and the idea of a lack of Ukrainian wheat on world markets over the next few months. The situation between the Ukraine and Russia appears to be easing slightly but concerns over a Russian invasion of Ukraine’s Eastern borders continues to underpin the market.

Much of the winter wheat is in the ground and the corn crop appears to have the potential to suffer more than wheat production. We failed to do much technical damage to the chart Monday as we failed to push new highs and also failed to take out Friday’s lows, which we would suspect would lead to some support near the 200-day moving average at the 660 area.

Dryness in the U.S. plains is still a major talking point, but we are still not at a time where a good few rains would help alleviate much of the crop stress for the hard red winter crop.

We are going to continue to remain friendly the market right now as the trend is still higher but we need to see a breakout into new highs and until we see this we would expect to see some consolidation and possibly a setback before a move to new highs.

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The Five-Year Fantasy Is Ending

by Charles Hugh Smith

Since these monetary/fiscal fixes (i.e. distortions) didn't address the real issues, all they can possibly do is increase the magnitude of the next collapse.


For five long years, we have pursued the fantasy that we could return to "growth" without having to fix or change anything. The core policy of the fantasy is the consensus of "serious economists," i.e. those accepted into the priesthood of PhD economists protected by academic tenure or state positions: what we suffered in 2009 was not the collapse of leveraged crony-state financialization but a temporary decline of "aggregate demand" and productive capacity.
The solution, the economic witch doctors asserted, was simple: replace temporarily slack private demand with government-funded demand (deficit spending) and flood the impaired financial system with liquidity (i.e. free money) and increase the incentives to borrow money.
In other words, the "serious economists" solution was to transfer all the interest earned by savers to the banks and push households to buy more low-quality junk from Asia on credit. This expansion of demand (for more of anything-- "serious economists" don't differentiate between a 13th pair of shoes and a single replacement pair of shoes--and they absolutely love building McMansions in the middle of nowhere) would push businesses to borrow money from banks (that's good because banks will profit, and "serious economists" want banks to skim enormous profits to keep the financial sector healthy) and expand their production and payroll.
None of this made any sense, of course, because the "serious economists" completely misread the problem. The key characteristic of science is predictable, repeatable results. Yet "serious economists" failed to predict both the 2008 global financial meltdown and the failure of their Keynesian Cargo Cult policies: zero interest rates, limitless liquidity and pushing households and enterprises to borrow more money.
There is simply no way this track record justifies economics as a science. It is at best a pseudo-science. The number of astrologers who predicted the 2008 crash far exceeds the number of "serious economists" who did so, yet the priesthood still claims the mantle of science.
Add the fallacies of "serious economists" to the resistance of the Status Quo to any reduction in their skimming operations and you get the fantasy that the only solution needed was to print trillions of dollars and give the dough to government and financiers. Five years on, "growth" has been extremely anemic, and no honest observer can deny the reality that the "recovery" is so fragile and dependent on free money that any normalization--raising interest rates, ceasing Federal Reserve quantitative easing and reducing the Federal deficit to $200 billion from $600 billion--would instantly toss the economy into a deep recession and trigger a collapse in stocks and bonds.
Absolutely nothing was done to address the structural causes of the meltdown and the erosion of the middle class and upward mobility. Was anything done to reverse the soaring costs of higher education? No--the crisis was papered over by the Federal government taking over much of the student loan debt-serf industry. You call this a solution?
How about financial reform? What exactly did the 2,319-page monstrosity of corrupted Federal power, the “Dodd-Frank Wall Street Reform and Consumer Protection Act" actually accomplish? Did it abolish the 'too big to fail banks" or did it simply enable them to prosper at the expense of the consumer?
What If We're Beyond Mere Policy Tweaks? (February 6, 2012)
How about the 2,074-page Affordable Care Act (ACA), a.k.a. ObamaCare? Did that fix the underlying problems with sickcare? No--it simply created more regulatory distortions and a subsidy for the uninsured to join the bloated monstrosity of sickcare, speeding the bankruptcy of the entire system.
America's Hidden 8% VAT: Sickcare (May 10, 2012)
The jewel in the Keynesian Cargo Cult's crown is the "wealth effect" created by the spectacular rise in the stock market. Nothing like a doubling of stocks to make everyone feel wealthier and more likely to spend, spend, spend--oops, except only the top 5% of households own enough financial assets to even notice.
This spectacular rise is supposedly based on corporate profits, which have soared to new heights. Roughly 11% of the nation's GDP (gross domestic product) is now corporate profits.

Financial sector profits have been equally wonderful:


Compare those spikes to GDP, which has registered a much more modest increase since 2008.



How could corporate profits have soared on such anemic growth? There are several rarely addressed causes.
1. The weak U.S. dollar greatly increased profits earned overseas when stated in dollars. In 2002, 1 euro of profit earned by a U.S. global corporation equaled $1 in profit when converted to U.S. dollars. That same 1 euro profit swelled to $1.60 a few years ago and still garners $1.37 in profit today. That's a 37% premium based not on profits being higher but on currency arbitrage.
Given that most U.S. global corporations earn 50% or more of their sales and profits overseas, this is an enormous factor in rising profits.
2. The Federal Reserve's flood of free money washed over the entire global economy, sparking an orgy of investment and consumption in emerging markets. Some percentage of this flowed to U.S. corporations, which have compensated for weak domestic sales with strong growth in emerging markets.
Both of these conditions are at risk of reversal. The Fed's modest "tapering" of its liquidity flood triggered a near-collapse in the emerging markets, and the U.S. dollar's weakness is based on a rising yen and euro. Given the systemic problems in Japan and Europe, this five-year trend could reverse.
Two other factors deserve mention. Some of these corporate profits result from dodgy accounting, not actual net profit. Much of the rise in stocks can be attributed to corporate buy-backs where the companies borrow billions of dollars for next to nothing and then buy back their own shares, driving share prices higher.
In summary, the five-year fantasy that free money would fix all the distortions and systemic problems is drawing to a close. Why can't the fantasy run forever? The two-word answer: diminishing returns. Handing out subprime auto loans works at first because it pulls demand forward: anyone who wants or needs a new car buys one now, rather than put the purchase off a year or two. Eventually the marginal buyers default and demand falls off, and the distortions cause an even greater collapse in demand and auto loan quality.
This pattern of diminishing return from all the fake fixes can be found in every nook and cranny of the global economy. Papering over structural problems with free money works for a while, but since these monetary/fiscal fixes (distortions) didn't address the real issues, all they can possibly do is increase the magnitude of the next collapse.

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Markets are watching Yellen not Putin

By Phil Flynn

Forget Crimea and bring on the Fed. While Vladimir Putin mocks President Obama it seems that the markets want to forget about those risks and focus on the Fed and whether or not Janet Yellen can be tougher than the President.  Janet’s first job is trying to rephrase the Fed's 6.5% jobs target and to send a signal that it is just not about a number but about a slew of data. We all know that the Fed had previously indicated  that the unemployment rate would need to go down to  6.5% before they would even think about raising interest rates, but that rate is far from sufficient in an economy where the jobs that are being created are a far cry from the jobs that were lost.

Stocks rallied hard after a big rebound in industrial production that perhaps indicated that the weakness we saw was energy related. Factories that had to interrupt their natural gas slowed production and now are playing catch up.  While the market hopes this is a trend but it will assure us that the Fed will not waver from the taper.

We know it will be tough to back off the $10 billion dollar taper but the real challenge may come when it is the right time to raise interest rates. Even more important may be when the Fed starts unwinding its ever growing balance sheet.

Of course the Fed should start to admit that there are consequences to their actions and yes tapering is a form of tightening. If you don't believe it, talk to the emerging markets who feel like the Federal Reserve left them hanging out to dry. As I have said before it seems the first steps in removing extraordinary stimulus may not be so painless after all. The global economies tried to keep a stiff upper lip but now is feeling pain as the Band-Aid starts to get ripped off.

The Federal Reserve's failure to acknowledge the emerging markets in its statement is hurting some feelings and some emerging market balance sheets. The Fed also failed to acknowledge that quantitative easing caused the emerging markets to blow bubbles and live beyond their means now have to deal with a world post hot money. Instead of dealing with the massive inflows as the United States started to deleverage, they now have to deal with the outflows unmasking the ramifications of being the Fed's economic dumping ground. Now the question is whether or not the Fed can continue to ignore the turmoil in the emerging markets and rely on our own rebounding economy or will it come back to haunt us.

China of course is a reason why oil is faltering.  Oil was getting weighed down led by RBOB and a rise in refining margins. OPEC is producing like crazy and wants to hang onto market share and maybe develop new customers that are being held hostage to a country that is using its energy advantage as a weapon to invade its neighbors.

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Jump in rig count should be a positive for jobs

by SoberLook.com

In another sign of improving momentum in the US economy, the active oil and gas rig count started rising in recent weeks. This is after a major decline in 2012 and a stagnant 2013.

Source: Baker Hughes

A big part of the drop in 2012 was due to the sharp decline in natural gas prices. Production in certain situations became unprofitable - particularly for some of the more leveraged projects.

Source: barchart

Now that gas prices have firmed up and likely to stay that way (see post), some of the extraction projects make sense again - especially as technology improves. Should conversion from gas to liquids become less expensive (see story), rig count will increase further.
Like it or not, oil and gas jobs tend to be high-paying - which should help with US wage stagnation. The industry also generates a decent job multiplier effect through the various peripheral sectors that support it (housing, manufacturing, transportation, etc.) If sustained, this jump in rig count could therefore provide a meaningful contribution to the US economic expansion.

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Deteriorating US wheat faces further cold, dryness

by Agrimoney.com

US winter wheat seedlings, whose condition deteriorated further last week, face yet further tests from poor weather, including "truly impressive" cold and "way below normal" precipitation prospects.

US Department of Agriculture scouts overnight revealed a further decline in the condition of winter wheat last week in the southern Plains, the main area for growing hard red winter wheat used mainly in making bread.

In Kansas, the country's top wheat-growing state, the proportion of seedlings in "good" or "excellent condition fell by 3 points to 34% in the week to Sunday, as crops again faced "windy conditions and limited precipitation".

"Available soil moisture continued to be a concern going into the spring," USDA scouts said.

While Kansas wheat is in better condition than a year ago, when the US was still recovering from the 2012 drought and the proportion of crop rated good or excellent was at 29%, the average for mid-March in the previous five years is 46%.

'Wildfires a major concern'

In Oklahoma, where the proportion of the state seen as suffering drought rose 18 points to 81% in the week to March 11, the amount of winter wheat rated as good or excellent by dropped four points to 18% in the week to Sunday.

"Due to warmer weather, dry air and high winds, wildfires were a major concern," USDA scouts said.

In Texas, the proportion of wheat placed in the top two bands slumped by 15 points to 13%. Even though the week-before figure was seen as anomalous, the rating is 2 points lower than on March 3.

And in Colorado, wheat was rated at 35% good or excellent, down 8 points over two weeks.

"There were reports of high winds last week with localised damage to winter wheat."

'Moisture shortages will build'

The ratings come at a critical time for seedlings, which are beginning to emerge from dormancy, increasing their needs for moisture to power crop development.

"As winter wheat emerges from dormancy, much of the hard red production area has seen less than 0.5 inches of rain in March," Mark Welch at Texas A&M University said.

However, the forecast for the next 5 to 7 days "calls for dry conditions to continue".

Weather service MDA said that "moisture shortages will continue to build across the central and southern Plains as rains remain very limited there through the next 10 days," adding that "dryness will also expand across the southern Midwest".

'Truly impressive'

At WxRisk.com, David Tolleris forecast a "truly impressive" cold temperature anomaly in the six-to-10 day outlook.

"There are no other ways to describe this outbreak of cold air coming," he said.

"Obviously it's not going to be as cold as what we would see in January or early February but relative to normal the blast of cold air coming in on all the models in the six-to-10 day looks pretty darn impressive."

And this cold weather bodes ill for rainfall hopes too.

"Not surprisingly with this sort of pattern, it's very hard to get any sort of moisture across any portion of the Plains and the Midwest, so the precipitation anomalies look way below normal as well."

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To Tell the Truth Tuesday for Gold & Silver?

by Chris Kimble

CLICK ON CHART TO ENLARGE

2014 has been kind to Gold, as its up over 13% in less than 90 days. What has this rally proven when it comes to the big picture for Gold?

The above chart reflects that in the past 9-months, gold looks to be chopping back and forth. In the bigger picture, Gold looks to be inside of a large falling channel, hitting support of this channel 9-months ago and now its hitting falling resistance.

Could we look to Silver for some answers? A month ago I shared with Premium and metals members that the Power of the Pattern reflected that Silver looks to have formed a bearish descending triangle and the downside looks incomplete. Should that pattern complete itself, Silver could fall as much as 30% from here (Silver decline)

Tell the Truth Tuesday....Gold and Silver are both facing key resistance lines, to change the big picture trend, they need to break these resistance lines!

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EU Country Exposures to Russia--The Rise of France

by Marc Chandler

This Great Graphic was posted on Bruegel in a post by Silvia Merler   Based on BIS data from September, it shows how the EU banks'  $156 bln of exposure to Russia is distributed among the various countries.   French banks alone account for nearly a third ($51 bln).  Italy is second with roughly $28.5 bln exposure and Germany with almost $24 bln.  UK banks have $19 bln of exposure to Russia and Dutch banks have about $17.5 bln.    Of note, and importantly, the Austrian bank exposures are not available for the last few quarters.  BIS data suggests US bank exposure to Russia is about $40 bln.
Merler notes that the BIS data may not be comprehensive and tries to complement with a review of work by EIU and other economists and journalists.  Austrian, French and Italian bank exposures may be greater than the BIS data suggests, in part due to local operations. 

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Should Investors Worry About Crimea?

By Dave Moenning

It is clear that the focus of the stock market remains squarely on the geopolitical situation in Ukraine/Crimea/Russia (NYSE: RSX). What is not quite so clear is why this actually matters to traders.

Before we go any further on this topic, let me first state that this missive is not a pontification on the expertise of the politics of Russia, Ukraine or Crimea. Heck, we struggle to keep up with the shenanigans that occur in Washington, D.C. However, when the stock market's focus turns to a specific topic, it is important for investors of all shapes and sizes to try and understand what is going on, and why.

The overall objective at times like these is to try and make sense of whatever is driving the action. To be honest, traders don't really care whether Crimea stays with Ukraine or becomes a Russian state. However, what traders do care about is whether or not the situation in Crimea will turn the current pullback into something more meaningful.

In looking at the recent action the first question is, why are traders selling? With all the talk of referendums, troop movements and economic sanctions going on last week, it wasn't exactly a surprise that traders decided to avoid the potential "weekend headline risk" by doing some selling into Thursday/Friday.

However, traders should also keep in mind that stocks came into last week at all-time highs, that the indices were overbought, and that sentiment was becoming overly optimistic. Therefore, a pullback of 1.96 percent - for any reason - isn't exactly a cause for alarm.

So, other than the fact that stock prices have been pushed down a bit, it's unsure that the situation in Crimea is worthy of the "crisis" label being applied currently. Sure, people could be concerned that the powers-that-be in Washington might do something stupid and wind up fighting another war. But seriously folks, isn't this an outlier possibility? After the political mess that was created by picking a fight in Iraq and Afghanistan, does anybody really think a war over a pipeline in Crimea is the likely outcome here?

Just The Facts Ma'am

Let's look at some of the facts of the situation. On Sunday, a referendum was held in Crimea asking citizens if they would like to come under Russia's flag. In essence, the Crimean's were taking a vote on whether or not to secede from Ukraine.

To be sure, the outcome of the vote was expected to go Russia's way. However, exit polls showed that 95.5 percent of voters favored joining Russia over staying part of Ukraine. And running contrary to the West's contention that people were being forced to vote this way, voter turnout was 79 percent. Which, by the way, was higher than ANY Presidential election in the United States since 1900.

As expected, the U.S., the U.K., and the Eurozone object to this whole thing, contending that the vote in Crimea would be rigged and that it violates international law. Cue the sternly worded statements of contempt, the threats of sanctions, and the resolutions in the U.N. Yep, we've all seen this movie before.

On that score, we received the following note on Wednesday last week from someone who actually is an expert on this stuff:

I know far less than any of you about the stock market per se. My background is in Russian history. Here is what I do know: the Crimea situation will continue to be serious for at least a few weeks, possibly escalating into the next few months... There's a 100% guarantee of that Crimea's lawmakers won't budge and that the referendum will go through on Sunday. Ukraine will probably declare the referendum null and void before Sunday and may formally dissolve the Crimean parliament from afar, but that will change nothing on the ground.

On Sunday, Crimea's residents will vote with a virtual guarantee that the referendum will pass. Ukraine will scream but do nothing. The West will issue a lot of stern warnings. The ball will now be in Russia's court. Odds are high that Russia will vote to formally annex Crimea or do something very close to that in essence. This may happen as early as next Monday. The West will make even more noise. In short: expect Crimea to dominate the news between Friday and Tuesday. I don't know if this is enough to trigger a correction, but I can assure you that my short positions in East Europe are doing well.

What Do The Charts Say?

As has been written a time or two already this year, one of the best ways to tell if you've got a real crisis on your hands is to listen to the message from the charts. So, let's briefly review the action on a few key indices and see what we see.

S&P 500 Daily

Although there is a lot of concern and teeth gnashing about the situation in Crimea, traders will have to admit that the chart of the S&P 500 (NYSE: SPY) still looks pretty darned good. One take is that unless the February low is taken out, the bulls can say they remain large and in charge. This doesn't mean that things won't get nasty here or there. But, again, from a big-picture, simplistic standpoint, there doesn't appear to be much to worry about at the moment.

VIX Weekly

Speaking of fear, the chart of the VIX (NYSE: VXX) really tells the story nicely. In this weekly chart, you can clearly see what real fear (i.e. a real crisis) looks like. Since 2011, the spikes in the VIX have declined as the various crises that cropped up weren't really a big deal and wound up fizzling fast. And since the middle of 2013, a weekly close above 19 appears to be the line in the sand determining what is or isn't a crisis. And while the VIX has spiked, the move does not yet appear to qualify as a reason to panic.

10-Year Note Yields Daily

The same can be said for the action in the government bond market. While the chart of the 10-year note yield (NYSE: IEF) does appear to present a double top, it is also clear that rates are not diving at the present time. And if we did indeed have a crisis on our hands, rates would be moving down - and fast. Therefore, traders should look for a break below 2.50 percent as a sign that something serious could be occurring.

The Bottom Line

As the expert on Russia wrote, the situation in Crimea could certainly remain a focus for a while. And threats to sell U.S. bonds or retaliate against sanctions could indeed cause the algos to lean to the sell side.

However, so far at least, investors who don't trade on a millisecond basis may be better off focusing on other things such as the bond default and/or growth issues in China, the upcoming Fed meeting, or the U.S. economic data. Because from where most sit, all might be better uses of time.

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