Saturday, September 13, 2014

«The first thing I look for is the exit sign»

by Christoph Gisiger

  • «Things could theoretically turn into what I call a «Lehman moment».»

    «Things could theoretically turn into what I call a «Lehman moment».» (Bild: Richard Drew/AP/Keystone)

Wall Street veteran Art Cashin does not fully trust the record levels at the stock market and draws worrisome parallels between the geopolitical tensions over Ukraine and the Cuban missile crisis.

From the assassination of President Kennedy via the stock market crash of 1987 and the Fall of the Berlin Wall through to the burst of the dotcom bubble, the terror attacks of 9/11 and the collapse of Lehman Brothers: Art Cashin has experienced all the major world events of the last half century at the floor of the New York Stock Exchange. Currently, the highly respected Wall Street veteran keeps a close eye on the geopolitical tensions in the Middle East and on the situation in Ukraine which reminds him of the Cuban missiles crisis. «The markets are edgy and nervous», says the Director of Floor Operations for UBS (UBSN 16.46 0.43%) Financial Services while constantly checking the quotation board. Like many traders here, he is somewhat skeptical of the huge stock market rally that started in March 2009. «I think it is a question of the extraordinarily low interest rates», he explains.

Mr. Cashin, September is historically the most difficult month of the year for equities. What is your take on September 2014 so far?
It is strange that September still lingers as a particularly weak month. It goes back to when America was more of an agrarian society and we depended on what would happen with the crop cycles. If a cooking factory for example had to buy wheat from the farmers it would send a check out drawn on an account at a city bank and the country bank would then cash it and put the money in the farmer’s account. Before the Federal Reserve was created, there was a wide spread between the time that money was asked for and when it was replaced. For centuries, this caused bank panics around this time of the year, most notably the panic of 1907. You would think that now that we are no longer an agrarian society, those changes would ease up on the financial pressures. But the market has kind of an echo.

So what are traders talking about at the present time here at the New York Stock Exchange?
We are concerned about two questions. First, how will the Fed do in keeping money reasonably easy without causing inflation? Second, where do we stand with the current geopolitical challenges? For now, these challenges seem to be short term concerns. But should we begin to see a financial contagion and pressure building on banks in Europe, perhaps out of the Ukraine situation, things could theoretically turn into what I call a «Lehman moment». That is when markets come under pressure but seem to be under control, and then things change suddenly.

How do you handle these concerns in your daily business as stock market operator?
Having done this over half a century now, the market tends to have recurring cycles of some type or other. For example, at the beginning of the Cuban missile crisis no one thought that it would turn into a major event. Yet, as time went on and neither side relented, it began to look like we might be on the verge of a nuclear war. That had great reverberations in the financial markets. Then, finally the Russian convoy that was going to resupply the Cuban missiles turned and headed back. Immediately, the stock market began to rally on that sense of relief and that rally continued for months. So you can have these theoretical events – whether they are geopolitical or not – and you get two sweeping changes: First, you can get further and further pressure on prices. And then suddenly, when it releases, you can get almost a rocket shot to the upside.

What are the signals you are looking for to stay on top in such a market?
Over the years, we on the floor have taken to look at what we call the risk monitors. For instance, the yield on the 10-year Treasury note is usually an indicator for the flight to safety. People are looking to get over to the United States protected by the two large oceans. You also look at the gold market where people invest who are concerned that things are changing radically and who think they need some currency protection. And then, particularly in situations like this, you look at things like oil because that is inextricably involved with Russia and with the Middle East and what is going on with the Islamic terror organization ISIS.

And what are the risks monitors signaling?
Right now, it almost looks like peace is breaking out. The price of oil is sharply lower, both Texas West Intermediate and Brent. That indicates a lot less stress there. Although traders can be believers in conspiracies too. There is some wonder if perhaps Saudi Arabia and the United States are encouraging downward pressure on oil prices which would in turn put pressure on Russia and limit the availability to finance what they are doing. So there may be either market forces or government forces behind this.

And how stable is the situation on the stock market? Equities have stalled somewhat lately. Nevertheless, at the End of August the S&P 500 closed over 2000 for the first time and so far equities have performed quite well this year again.
I think it is a question of the extraordinarily low level of interest rates. There are very few places that investors can go to and get some return. So some people are using historic yard sticks and they are saying: «If rates are this low and the economy is this okay then the value of stocks should go higher.» But some of us question that since rates are artificially low.

So what is your take on those super low rates?
I think it means that there are still deflationary pressures out there and that the central banks all around the world are fighting off that deflation risk by keeping rates low. Rates are incredibly low in Europe, they are incredibly low in Japan, they are incredibly low in England and in the United States. That drives people to look at some other avenue to get a return and they have been driven into the stock market.

With the looming end of the QE3 program, the stock market soon will have to pass an important test. But surprisingly, in contrast to the end of QE1 and QE2 investors do not seem to be so nervous this time.
But we are seeing a rather similar reaction in the bond market. Perversely, when they ended the earlier QEs, treasury yields went down instead of going up. So we are seeing a little of that. I think the reaction of the stock market has to do with something that is referred to as the Greenspan put, and later as the Bernanke put. Investors believe that the Fed is concerned about its own independence and therefore it cannot let anything drastic happen. Our government has not been able to do anything on a fiscal basis. So the Fed has gone out and developed tons and tons of access free reserves. If that fails the central bankers know that it will be quite convenient for all the politicians to point the finger at the Fed. Hence, not only is the Fed interested in maintaining the economy but also in its own independence.

During your career on Wall Street, you have seen the coming and going of several Fed chiefs. How would you grade Janet Yellen so far?
I think it is a little too early to tell because she has not been fully able to implement her policies. We have not been done with the taper and she has not clearly defined what yardsticks or mileposts she is using. She is a scholarly woman and has done a great deal of studying, like Mr. Bernanke. Also, I have a new person to look at in the Fed and that would be Stanley Fischer. He brings a lot of experience in as vice chairman. As we begin to look at his speeches and comments, we will see that he is going to have an enormous influence and we may be begin to see him helping Ms. Yellen. He is not going to confront her but helping her to, perhaps, understand why things have to change a little.

With the end of QE3 and the return to a somewhat more traditional monetary policy, investors will likely put their focus more on the fundamentals like revenues, profit margins and earnings. In what shape is Corporate America?
That is one of the great debates here. It really breaks down to on what do you view the stock market is based on. On one side, there are the skeptics. They look at macroeconomics like the GDP numbers, the unemployment rate and a variety of other things. Those people tend to have been skeptical all the way through this rally. On the other side, there are the believers in the stock market and the recovery. They have seen the earnings go up and have been spot on so far. But there is a couple of asterisks that you have to put in. Thanks to the low interest rates, companies are finding that they can improve their balance sheets and they are buying back their own shares. So even when you are earning a little less money, if there are fewer shares around, than the price earnings ratio looks pretty good. That is why the critics of the stock market say that it is all part of financial engineering. Nevertheless, the supporters will respond: «Well, here is the earnings and we are at seventeen times earnings and that is very good for us.»

On what side of this debate are the traders here on the floor at?
The view of the traders is a slight degree of skepticism. As I say, having done this over fifty years, traders are always making sure they know the way out. When I go into a room, the first thing I look for is the exit sign. So when things turn bad I know which way to go.

Also, some skeptics argue that you cannot trust this really since it is based on unusually low trading volumes. Especially at the end of August we have seen some of the lowest volume days over the past seven years.
Over the years, I was always thought that volume equals validity. Just as you would not want to elect a president with only ten or twelve people voting. You want to see a broad consensus. Likewise, you would like to see a broad consensus on what is going on at the stock market. But these days, some of that lack of volume is structural. We have new products like Exchange Traded Funds. So you can with one purchase buy the five hundred stocks in the S&P 500 instead of the five hundred transactions that would have taken place in the past. That contributes to a lower volume, too.

How did the trading business change over the last few years in general?
We are going through a transition into automated electronic trading and we are still adapting to that. The new owners of the New York Stock Exchange, the Intercontinental Exchange, said that they would like to revamp what is going on, change some of the rules and perhaps produce a little more visible activity. I for one miss some of the old trading, especially the simple things. When there was a big crowd, noise would tell me things. When the noise level picked up I would know the activity is picking up. And if you are doing it as long as I am, you could almost tell by the pitch of the noise whether they were buyers or sellers: The buyers sound a little more like a Russian chorus. The sellers, on the other hand – I guess because they were nervous – would have a higher pitch when they shout «Sell! Sell! Sell!»

Today, the silent machines of high frequency traders do most of the trading. How do you cope with those superfast computers and highly sophisticated algorithms?
They may be faster but they are not necessarily smarter. Sometimes an old dog can still learn variations of new tricks and get things done. They might get the first step out of the building but you have to think on behalf of your clients what other impact will that have. If they are doing something in General Motors (GM 33.27 -1.01%), what does it mean to Ford (F 8.9 -4.81%) or someone else? So in this business, your clients expect you to be able to relate something that is happening in a particular stock with something in the rest of the market.

In May of 2010, the Flash Crash made the world suddenly aware of what can happen when robots are in charge in the trading arenas. How vulnerable is the US stock market today to a similar threat?
I am, of course, prejudiced. I prefer the trading system that we have had through the years. Here on the floor, not one stock traded at a penny during the Flash Crash. That was only in the electronic markets. And that was because here were humans who looked at each other and said: «That does not make any sense. There is no news out, there is no event. Let’s slow down and see where things are going.» As a consequence, the prices here on the floor tended not to be distorted in a manner that they were in other places. So as far as market structure is concerned, I think it is very helpful to have humans around. I prefer that somebody is watching the market as trades are being executed – just as I would not want to fly in an airplane with no pilot.

See the original article >>

Something white


FANny aperitif locandina

Bella iniziativa dell’ormai nota associazione dei giovani produttori franciacortini, i FAN FranciacortAppassioNati, in programma domenica 14 settembre in quella località che in molti dimenticano far parte della zona di produzione, oltre ad essere un bellissimo posto, Iseo.

Ritorna il format già collaudato Born to Be FAN con una bella novità per i giovani: sette locali, tre percorsi con colori diversi per le strade del centro di Iseo e ancora buffet e musica live, il tutto all’insegna del Franciacorta! Il programma inizia “in centro ad Iseo, in Piazza Garibaldi, dove dalle 17.30 sarà possibile acquistare le tessere da 15 euro che daranno diritto ad un calice per ciascuna delle quattro zone.

I percorsi della prima parte di degustazione sono tre (zona verde, gialla e blu) ed includono sei locali del centro di Iseo: zona Verde con Punto Zero e Bull Cafè, Zona Gialla con BarLume e Garibaldi e Zona Blu con Sucré e Opera. Dalle 21 invece si apre la Zona White presso Cascina Doss, a pochi passi dal centro del paese, dove si avrà diritto all’ultimo calice di degustazione insieme ad un buffet con piatto caldo e musica live”. Punto Zero, Bull, Lume, Garibaldi, Sucré, Opera e Cascina Doss sono locali serali con una clientela giovane e dinamica, dove la tendenza ricade in prevalenza sul consumo del cocktail.

Tuttavia ciò che accumuna i giovani titolari di questi bar è la volontà di spingere il consumo di un prodotto come il Franciacorta che tutti e sette ben conoscono ed apprezzano. La scelta di riservare il loro locale per una domenica sera alla promozione del Franciacorta nasce da questa loro passione che li lega quindi all’associazione dei giovani produttori franciacortini, i FAN FranciacortAppassioNati appunto. “Something white” è il tema della serata, quindi non dimenticare di indossare un accessorio bianco… perché il Franciacorta non macchia!”.

Il gruppo di FranciacortAppassioNati ringrazia in particolare Arber di Cascina Doss “che con una sana vena di pazzia (che del resto connota anche tutto il resto del gruppo dei FAN!) aiuta i ragazzi dell’associazione fin dall’inizio ed in questo evento ha messo idee, tempo e voglia di comunicare un prodotto che i giovani del territorio devono avere l’orgoglio e l’onore di capire e bere, viva il Franciacorta!”.

Per informazioni:
e-mail oppure Arber 347-8060219, Anita 335-5638610
O ancora sulla pagina Facebook dei FAN FranciacortAppassionati!/FanFranciacortAppassioNati

Goldman sees demand hitting commodity prices

by Houses and Holes

If you want a clue as to why the Australian dollar is suddenly weak, here’s one from Goldies:


Recent broad sell-off reflects increasing demand concerns
Commodities have sold off across the complex over the past week, following a number of macroeconomic and “micro” commodity-specific events. In the main, it appears that demand concerns were the primary driver, with weakerthan- expected Chinese import and inflation data, comments by the Chinese premier that structural reforms rather than credit expansion would be relied upon to underpin growth, together with European growth concerns, all contributing. While a stronger US dollar and higher US yields have contributed to the decline in precious metals prices, the extent to which this has affected the other commodities is more ambiguous given that, in part, it reflects an improving outlook for US growth.

Supply differentiation has driven significant dispersion ytd
In most cases, the recent move lower represented the continuation of trends that began earlier in the year – with oil (brent, -c.12% ytd), copper (- 8%), iron ore (-39%), thermal coal (-21%), corn (-21%) and soybeans (-20%) falling sharply, primarily owing to bearish supply dynamics. More specifically, in oil, Libyan and non-OPEC output has been improving (although risks around Libyan output remain high). By stark contrast, for aluminium (+21%), zinc (+11%), nickel (+33%) and palladium (+22%), the recent sell-off represented the largest price correction of the year to date, following a period of strong outperformance, in turn generally a result of more bullish supply dynamics.

See the original article >>

As Venezuela economy worsens, fears of default


CARACAS, Venezuela (AP) - President Nicolas Maduro is reassuring foreign creditors that Venezuela's government will make good on a $4.5 billion foreign debt payment due next month.

But economists are uttering the D-word for the first time, noting the inflation-ravaged economy is stumbling with basic goods in short supply and the currency eroding in value.

Maduro has repeatedly said default is not an option. On Wednesday, he reiterated his administration's commitment to pay "down to the last dollar."

The subject gained traction in recent days, and even got its own Twitter hashtag, after an article by former Venezuelan planning minister Ricardo Hausmann and Harvard economist Miguel Angel Santos argued that a managed default could help Maduro resuscitate the economy and help his people.

"The fact that his administration has chosen to default on 30 million Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude. It is a signal of its moral bankruptcy," they wrote.

The article was followed by a swing in the trading of Venezuela's debt. On Thursday, investors appeared to take comfort in Maduro's words and prices for its bonds rebounded. Venezuelan bonds pay out more to investors than the debt of any other developing country.

Government opponents have stopped short of endorsing the notion of a default.

Venezuela's 15-year-old socialist administration has always paid its bondholders, though it hasn't been as consistent about repatriating corporate profits. This year has seen an exodus of airlines that complain they haven't been allowed to turn their local earnings into dollars.

Alejandro Grisanti of Barclays this week dismissed the notion of a default, noting that Venezuela could easily find the money it needs to pay off foreign creditors by halting the oil subsidies it distributes to allies around the region. The county boasts the world's largest proven oil reserves, providing a constant flow of income for the government.

Last week, Maduro authorized the consolidation of off-budget funds into a single transparent reserve. Analysts were skeptical that the fund would actually reflect the government's finances, though, especially after it was revealed to have a balance of $750 million, a number dramatically lower than expected.

Analysts agree that more painful adjustments, including a currency devaluation, are needed to right the economy, default or no. But no one expects to see those changes soon.

See the original article >>

Chinese Growth Slows Most Since Lehman; Capex Worst Since 2001; Electric Output Tumbles To Negative

by Tyler Durden

While China may have mastered the art of goalseeking GDP, always coming within 0.1% of the consensus estimate, usually to the upside, even if the bogey has seen dramatic declines in the past few years, dropping from double digit annualized growth to just 7.5% currently and the projections hockey stick long gone...

... it may need to expand its goalseek template to include the other far more important measure of Chinese economic activity, such as Industrial production, retail sales, fixed investment, and even more importantly - such key output indicators as Cement, Steel and Electricity, because based on numbers released overnight, the Q2 Chinese recovery is now history (as the credit impulse of the most recent PBOC generosity has faded, something we have discussed in the past), and the economy has ground to the biggest crawl it has experienced since the Lehman crash.

What's worse, and what we predicted would happen when we observed the collapse in Chinese commodity prices ten days ago, capex, i.e. fixed investment, grew at the slowest pace  in the 21st century: the number of 16.5% was the lowest since 2001, and suggests that the commodity deflation problem is only going to get worse from here.

As JPM summarized earlier today, pretty much every economic data release was a disaster, missing consensus significantly, and suggesting GDP is now trending at an unprecedented sub-7%.

"Today China released major indicators of economic activity for August. Industrial production growth slowed to 6.9%oya (consensus: 8.8%), slowest pace since the global financial crisis period of late 2008/early 2009, suggesting that the economy has lost  momentum again following the 2Q recovery. On the domestic front, both fixed investment and retail sales came in weaker than expected. Fixed investment growth decelerated notably to 16.5%oya ytd in August (J.P. Morgan: 16.8%, consensus: 16.9%), the slowest pace of growth since 2001, while retail sales increased 11.9%oya (J.P. Morgan: 12.4%; consensus: 12.1%). Recall that August merchandise exports (released on Monday) still showed solid growth pace at 9.4%oya, while imports disappointed, falling 2.4% y/y".

It wasn't just the economic indicators: there was pronounced weakness in the biggest Chinese asset, far more important to the local economy than stocks: the housing market:  Home sale area fell 13.4% Y/Y in August, compared to the fall at 17.9% Y/Y in July. In value term, home sale fell 13.7% Y/Y in August, compared to the fall at 17.9% Y/Y in July. In other words, those predicting the bursting of the Chinese housing bubble better be paying attention as it is currently taking place.

Which also means that with organic cash flow plunging, real estate developers had to resort to the capital markets increasingly more, and raised 7.9 trillion yuan year-to-date by August (up 2.7% ytd), compared to 6.9 trillion yuan year-to-date by July (up 3.2% ytd). Basically, this means that in order to delay the hard landing, China is now pushing its banks into the all-in moment as everyone is mobilized to stop the one event that could result in a global depression: recall - Chinese banks have over $25 trillion in assets, the bulk of which is backed by housing.

Finally, and perhaps most disturbing, was that alongside a slowdown in cement and steel production, Chinese electrical output saw its first Y/Y decline since Lehman, dropping by a "shocking bad" 2.2% (in Bloomberg's words) by far the best economic indicator of what is going on in the middle kingdom.

Putting it all together, here is JPM: "Overall, the August activity points at some downside risks going ahead. Note that trade surplus is strong in recent months, but this is mainly because weaker-than-expected import growth, which is related to the story of weak domestic demand. The weakness in domestic demand is not only reflected in real estate activity, but also in manufacturing and other sectors. To some degree this is good news, as slowdown in manufacturing and real estate investment is a critical part of economic re-balancing. Nonetheless, it remains unclear what other sectors could arise and provide alternative source of growth in the near term."

Or, as Bloomberg's Tom Orlik shows, based on these real-time economic indicators, China's GDP has tumbled to a shocking 6.3% from 7.4%, and far below the 7.5% GDP target set by the premier.

And since it is unclear what can drive growth, JPM is happy to provide one solution: more easing of course. Then again, even JPM confirms that this will be an hard uphill climb: "Despite the weak data in August, there is no sign that the Chinese government will ease macro policies in the near term. In a speech earlier this week, Premier Li reiterated that China’s growth is within a reasonable range, and the government will rely more on structural reform, rather than stimulus, to support economic growth."

But recall that China has used big words before, such as last summer when it swore it would engage in a 1 trillion deleveraging, only to quickly forget all about it when its banking system nearly collapsed after overnight repo rates soared to 25%.

So what are the options? Here, again, is JPM:

What measures could be introduced to stabilize the growth momentum?

First, the central bank has adopted unconventional measures to ease the monetary policy since 2Q. These include a target for relatively low market interest rates (e.g. repo rates and SHIBOR); targeted credit easing, such as the PSL, re-lending, targeted RRR and target rate cut; tighter rules on shadow banking activity and improve the credit support to the real sector (via compositional shift from shadow banking to bank loans in total social financing). It is likely that the PBOC will expand the PSL operation in the coming months to support targeted sectors (e.g. environment, water conservation, small business).

Second, given the limitations in fiscal policy to support investment in 2H14, the government may introduce measures to encourage the participation of private investment. Such measures include removing government control, opening market access, or the public-private-partnership (PPP) model.

In addition, we expect housing policies will be further eased to slow down the adjustment process in the housing market. Many local governments have removed or eased the home restriction policies in recent months, and since July mortgage support for first-home buyers has improved (e.g. lower mortgage rates and improved mortgage availability). In recent weeks some real estate developers were allowed to raise funds from the bond and equity market. A next possible policy option could be the easing in loan-to-value restrictions for second-home buyers, which now is subject to a maximum LTV of 40%.

More importantly, this administration has announced some supply-side policy measures. It remains to be seen whether these measures will be implemented in practice. The areas that are worthy of special attention include: (1) administrative reform, i.e. removal of government control and private access to sectors used to be controlled by the state sector; (2) reduction of the tax and fee burden for the corporate sector; (3) reduction of funding cost for business borrowers especially for small business.

In other words, we are now in a world in which the biggest economy, Europe, is about to enter a triple-dip recession, and the third largest standalone economy, China, is undergoing an economic standstill, and all hopes and prayers are that China will join the ECB in activating monetary easing once again. But yes, the Fed will not only conclude QE but will supposedly begin rising rates in just over two quarters.

Good luck with that.

See the original article >>

Junk bond fund repeating 1999 & 2007′s pattern?

by Chris Kimble



The Pimco High Yield fund (PHDAX) for a period of time around from 1997 to 1999 & 2005 to 2007 found it difficult to move higher, creating a series of level highs. At the same time it created a series of higher lows. Once old support was tested as resistance and it failed to move higher, large declines in junk bonds and the stock market took place.

Over the past couple of years, the fund may have created a pattern that looks similar to 1999 & 2007, as it seem to have trouble getting above the highs hit in 2007.



The above chart of the B of A/Merrill Lynch high yield adjusted spread highlights that when sharp rallies took place in 2000 & 2007, stocks turned soft.

It might pay to keep a close eye on the Pimco high yield fund and the adjusted spread in the next few weeks, to see if any important messages come from the junk bond complex.

See the original article >>

SPY Trends and Influencers September 13, 2014

by Greg Harmon
Last week’s review of the macro market indicators suggested, as the kids were back to school and the adults filed back into work from vacations that the equity markets were looking strong but with short term consolidation likely. Elsewhere looked for Gold ($GLD) to continue lower but not stray much from 1300 while Crude Oil ($USO) consolidated in its downtrend. The US Dollar Index ($UUP) looked strong and higher while US Treasuries ($TLT) were biased lower in the uptrend. The Shanghai Composite ($SSEC) was also strong and biased higher along with Emerging Markets ($EEM). Volatility ($VIX) looked to remain subdued keeping the bias higher for the equity index ETF’s $SPY, $IWM and $QQQ. Their charts showed signs of consolidation in the short run with the SPY and QQQ a bit strong on the longer timescale.
The week played out with Gold running lower while Crude Oil tested support lower. The US Dollar consolidated its move higher while Treasuries made new 1 month lows. The Shanghai Composite consolidated its move before probing higher while Emerging Markets moved lower. Volatility ticked up but remained under control. The Equity Index ETF’s basically moved sideways all week, with the SPY pulling back Monday first, and the IWM and QQQ barely changed. What does this mean for the coming week? Lets look at some charts.
As always you can see details of individual charts and more on my StockTwits feed and on chartly.)
SPY Daily, $SPY
  spy d

SPY Weekly, $SPY
spy w
The SPY moved lower Tuesday and then consolidated in a tight range for the rest of the week around the 20 day SMA. There are indications on the daily chart that the move down may continue. The RSI is making a lower low as it heads down and the MACD is crossed down and falling, both supporting more downside. The Bollinger bands are starting to tighten and that bodes for a move soon. The weekly chart shows a strong trend higher interrupted by a small down week. It is near the rising trend support and has a RSI rolling lower with a MACD joining it, so a touch at that support may come soon. There is support lower at 199 and 198.30 followed by 196.50 and 195. Resistance higher comes at 200 and 201.40 with a Fibonacci extension at 202.78 and a Measured Move to 210. Consolidation with a Chance of Pullback in the Uptrend.
Heading into September Options Expiration Week the equity markets look tired and ready for a pullback. Elsewhere look for Gold to continue lower while Crude Oil does the same. The US Dollar Index is strong and looks to continue higher while US Treasuries are biased lower. The Shanghai Composite is also strong and biased higher with Emerging Markets looking to continue their pullback. Volatility looks to remain subdued keeping the bias higher for the equity index ETF’s SPY, IWM and QQQ. Their charts show more consolidation in the zone for the IWM and a possibility of consolidation or even a pullback for both the SPY and QQQ. Use this information as you prepare for the coming week and trad’em well.
See the original article >>

Weekend update

by tony caldaro


After closing within three points of the all time high last week, the market went into a choppy pullback mode this week. For the week the SPX/DOW were -1.0%, the NDX/NAZ were -0.4%, and the DJ World index was -1.4%. On the economic front, reports came in mostly to the positive. On the uptick: consumer credit, retail sales, wholesale/business inventories, import prices, consumer sentiment, and the budget deficit improved. On the downtick: export prices, the WLEI and weekly jobless claims increased. Next week is FOMC week, and we get reports on Industrial production and Housing.

LONG TERM: bull market

Here we are 66 months into this bull market and we are still trying to identify the top of Primary III, in a five primary wave bull market. The western central banks have been propping up liquidity since the bull market began. The FED with QE’s 1, 2, 3 and Operation Twist. The ECB with LTRO’s 1 and 2, and now ABS. During this period the SPX has tripled, and is more than 25% above its 2007 all time high. Germany’s DAX has nearly tripled as well, and is more than 23% above its all time high. With the ECB just starting ABS another liquidity injection is thrown into the count.

Thus far we have counted Primary waves I and II completing in 2011. Primary III could have topped in 2013, but extended into 2014. The current uptrend has the potential to end Primary III, as we can count five Intermediate waves up from the Major wave 4 low in February at SPX 1738. However, there are two problems with this count, one in the DOW and the other in the NDX/NAZ. We detailed these problems in the last weekend update, and the one two weeks before that. Currently we think the probabilities of Primary III ending with this uptrend, or extending into next year, are equal.


The key levels to watch are first SPX 1905. If the market revisits this level Primary III probably ended at SPX 2011. Second SPX 2011. If the market rises above this level the uptrend is probably extending. Third SPX 1991. Should the uptrend extend it has to rise high enough to avoid overlapping the high of the previous uptrend. Since we are in pullback mode now, SPX 1905 and 2011 are the current levels to watch.

MEDIUM TERM: uptrend

From the early August low of SPX 1905 we have counted five waves up into 2011 a week ago. Since this was a five wave pattern and the market made new all time highs it could have completed the uptrend, and with it Primary III. The expected pullback to medium term support at the 1973 or 1956 pivots just occurred on friday. As the SPX hit the upper range of the 1973 pivot. At friday’s low the market was sufficiently oversold if this uptrend is going to extend. But we think there maybe one more wave down.


If the uptrend does extend the five wave sequence up to SPX 2011 would be counted as Minor wave 1 of the Intermediate wave v uptrend. And SPX 1980, or lower, would be Minor wave 2. Minor wave 3 would then be getting underway. The rally to follow would take the market to the OEW 2070 pivot, or even higher, to complete Minor waves 3, 4 and 5. Currently the market remains in between the SPX 2011 uptrend high and the 1980 recent low. We can not confirm a Minor wave 3 rally until the market starts making new highs. Medium term support remains at the 1973 and 1956 pivots, with resistance at the 2019 and 2070 pivots.


The five waves up during this uptrend were as follows. Waves 1 and 2 SPX 1945 and 1928. Wave 3 subdivided into five waves: SPX 1964-1942-1995-1985-2005. Wave 4 declined to SPX 1991, and wave 5 completed in a diagonal triangle: 2006-1995-2009-1998-2011. After that high we had a choppy pullback to SPX 1980. We have counted a simple wave ‘a’ at SPX 1990, wave ‘b’ at 2008, then a wave ‘c’ 1991-2000-1983-1997-1986-1998-1980.


If we count 1991-2000-1983 as wave a of ‘c’, 1997-1986-1998 as wave b of ‘c’, and 1980 as the beginning of another three wave sequence for wave c of ‘c’. We should see a small rally early next week, then another decline to lower lows. Since wave ‘a’ was 21 points (2011-1990), a wave ‘c’ of 34 points should bottom at SPX 1974. Also since wave ‘a’ of c was 25 points, another decline of 25 points from SPX 1998 suggests 1973. So the OEW 1973 pivot appears to be the Fibonacci fit on both the larger and smaller waves of this pullback. Short term support is at the 1973 and 1956 pivots, with resistance at SPX 2011 and the 2019 pivot. Short term momentum ended the week just under neutral.

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The Week Ahead: Profiting From a Weak Euro

by Tom Aspray

It was a nervous week for the markets as September’s history of weak stock performance kept some on the sidelines. The other main concern for the market (as overseas tensions subsided) was whether the FOMC may change its policy this week.

In last week’s analysis Is the Junk Dump a Warning?, I noted the heavy selling in some of the high yield or junk bond ETFs ahead of the FOMC meeting.  If we do see a change in the wording of the FOMC announcement, as some are expecting, it could trigger a sharp-but I believe brief-market decline.

In a way, it would be a positive as it would remove one more concern from the investor’s wall of worry. A decline would also serve to reduce the high level of bullish sentiment as-amongst the Wall Street firms-the bearish strategist camp was reduced further last week.

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The volatility has returned to the currency markets with a vengeance as forex traders have been suffering with the low volatility. The Japanese yen fell to a six-year low last week as their bond yields dropped into negative territory. Overseas yields are now much more attractive, especially with the potential of higher US rates in the next year.

The chart shows that the yen broke major support, line b, on December 12, 2012.  Since then, it has lost 22% of its value. The breakout (line 1) came one week before the NK225 broke through its downtrend, line a. The NK225 is up over 71% since the bottom formation was completed. I continue to think that the yen will get even weaker, which will be good for Japanese stocks.

The comments from Mario Draghi last month that the Eurozone should drop its austerity-based recovery plan was followed-up by an asset repurchase plan. Some countries, like Germany and France, are not in favor of this change in policy. He also suggested that the governments should guarantee some of the riskier assets.

The pressure of the low inflation and low growth needs drastic action, in my opinion, to avert a deflationary spiral. As I pointed out in October of 2012, Austerity Didn’t Work in ’37…What About Now?, the brief switch in 1937 to austerity by FDR almost pushed the country back into a depression.

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The action by the ECB has had a big impact on the euro as it has dropped almost 14% from the March highs. The euro has been forming lower highs since the spring (line b) and then violated its uptrend, line c, in the middle of July.

As I noted last week, sentiment on the euro is overly bearish so a rebound is likely before it moves even lower. For those interested in the forex markets, I will be doing a Webinar on September 23 discussing FX trading techniques (If you are interested, sign up here).

European stocks have been lagging this year, including Vanguard FTSE Europe (VGK), which is one of my dollar cost averaging picks I discussed last week. In addition to the 66% in developed European stocks, it also has 33% in the United Kingdom. The Scottish vote on independence has hurt the pound recently.

The chart of VGK shows that it has come back to support from the 2011 highs, line a, which is holding so far. I think the weaker euro will have a positive impact on their exports and their economies. I expect more widespread growth in the Eurozone by next spring.

Some of their economies are already recovering nicely as the beaten down Irish economy has staged a dramatic turnaround as they will repay part of their IMF loan early. Their composite purchasing mangers index recently hit the highest level since 2000.

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Though the economic calendar was light last week, the falling gasoline prices should translate to stronger consumer spending in the next few months. The chart shows the sharp drop in the gasoline futures since early in the year. A drop much below $2.50 (line a) would signal that prices can move even lower.
Lower gas prices may have helped push the University of Michigan’s Consumer Sentiment higher as the mid-month reading came in at 84.6, up from the August reading of 82.5. The jump in expectations, a component of the index, says Econoday “does point to long-term confidence in the jobs and income outlooks.”

Retail Sales were also out on Friday and-at 0.6%-it was not disappointing. One of the highlights was the 0.6% increase in food service and entertainment, indicating a higher level of discretionary spending.

The economic schedule is much heavier this week with the Empire Sate Manufacturing Survey and Industrial Production on Monday. The FOMC meeting begins Tuesday and the latest reading on the Producer Price Index is also released. Consumer Prices are out on Wednesday followed by the FOMC announcement and press conference in the afternoon.

Some new numbers on the housing market are out on Thursday as the Housing Starts data is released along with the Philadelphia Fed Survey. On Friday, we have the Leading Indicators as well as the quadruple expiration of futures and options.

What to Watch

The stock market was hit with heavier selling on Friday as the declining stocks led the advancing by a 5-to-1 margin. The selling was the heaviest in the Dow Utilities, which were down 1.5%. All the major averages did close the week lower.

The A/D analysis, including the S&P 1500 I featured Friday (see chart), did confirm the early September highs. This is consistent with an orderly pullback not a test of the August lows.

The monthly OBV analysis for the Spyder Trust (SPY) and the PowerShares QQQ Trust (QQQ) did make new highs in August and the weekly has also confirmed the recent highs. This is in contrast to the daily OBV analysis which has been diverging from prices.

The number of bullish investors, according to AAII, did decline last week to 40.38% from 44.67% the previous week. The bearish percentage at 26.6% is still quite low.

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The number of stocks above their 50-day MAs has dropped sharply from the early September highs. In blue, there is the % of Nasdaq 100 stocks, which has dropped from 59% at the end of August to just above the 40% level.

In green, we have the same plot of all US stocks, which was 75.5% on September 5 and is now at 61.6%. This suggests that we can see a further correction this week as we head into the all-important FOMC meeting.

The NYSE Composite (NYA) hit a high of 11,108 on September 4 after breaking its short-term downtrend, line a. It looks ready to close Friday just above the monthly pivot at 10,886 with the 50% support level at 10,816.

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The monthly projected pivot support is at 10,717 with the longer-term uptrend, line b, at 10,650. This is approximately 2.3% below Friday’s close.

The daily NYSE Advance/Decline has made higher highs, line c, before it dropped below its WMA. It is already close to support from the late July high.
The McClellan Oscillator looks ready to close around -165, which is at moderately oversold levels. It dropped to -278 at the August lows.

The flattening 20-day EMA is now at 10,962 with further resistance in the 11,000 area.

S&P 500
The Spyder Trust (SPY) looks ready to close the week on its lows. The week of September 5, SPY formed a doji so a final print on the SPY below $199.42 will trigger a low close doji sell signal.

The monthly pivot and the daily starc- band are in the $197.56 area. There is further support in the $195.50-$196 area. The weekly starc- band is at $191.17 with longer-term uptrend, line b, just a bit lower. The support from the early 2014 high is at $188.

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The weekly on-balance volume (OBV) did make new highs two weeks ago but has not turned lower. It is still well above its rising WMA and support at line c. The daily OBV has been below its WMA for most of September.

The S&P 500 A/D (not shown) looks ready to close the week below its flattening WMA.

Dow Industrials
The SPDR Dow Industrials (DIA), after a new high in early September, has closed below its 20-day EMA at $169.37. The 20-week EMA is at $167.57, which is just above the 50% Fibonacci support level at $167.12. The quarterly pivot is at $164.98.

The Dow Industrials A/D line (not shown) did confirm the recent highs but may close just below its WMA on Friday.

The weekly relative performance has been below its WMA since it broke down in the summer of 2013 (see arrow). This was an indication that it was starting to lag the S&P 500.

The weekly OBV did make a new high this week with support at its WMA and then the recent lows, line h. The daily OBV did not make a new high with prices.

Nasdaq 100
The PowerShares QQQ Trust (QQQ) continues to hold up the best with the 20-day EMA now at $99. The daily starc- band is at $98.31.

The monthly pivot is at $97.86 with the monthly projected pivot support at the $95.81 area.

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The September high for QQQ is at $100.46 with the daily starc+ band at $101.24 and the weekly is just slightly higher.

The technical studies still look the best on the QQQ. The weekly relative performance closed at a new high last week as it broke through resistance, line c, in late July.
The Nasdaq 100 A/D line, after making a new high, has traded in a narrow range but looks likely to close above its WMA. A drop below the late August lows would be more negative.

Russell 2000
The iShares Russell 2000 Index (IWM) is trying to close barely above its 20-week EMA and the quarterly pivot at $114.61. A close below the $113 level would be more negative. There is still major support, line d, in the $107 area.

The weekly RS line is now testing its steep downtrend, line e, but is still below its WMA.

The weekly OBV has turned down and is very close to dropping below its WMA. The daily OBV is holding above its still rising WMA.

There is initial resistance now at $117-$118 with more important in the $119-$120 area.

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