Charles Gave Warns: "Should The Fed Lose Control, The Downside Move In Markets May Be Terrifying"

by Tyler Durden

Charles Gave of GaveKal has a fascinating summary of where the nearly five-year long experiment in central-planning has taken the US, and by implication, global economy. To wit:

What kind of failure?

By propping up asset markets, the Fed has created an illusion that wealth is being created. The next step, according to Bernanke’s plan,  should be for growth to follow. In fact, there is no reason why the rise in prices of financial assets should lead to actual investments or a rise in the median income. So far, it has not. There has been no real increase in the private sector propensity to borrow, and the danger may be that any further public sector borrowing will hasten the decline because of our “permanent asset hypothesis”.

This means that, should the Fed lose control of asset prices (is this what is now happening in Japan?), then the game will be up and the downside move in markets may well be terrifying. Most at risk would be low and medium quality credits, banks, commodity producers, and any companies with negative cash-flow.

It is obvious, then, that if Bernanke’s experiment fails, it will be a profoundly deflationary failure. The best hedges in a deflation and in financial panic are US long bonds and the US dollar. Renminbi bonds seem also to be developing safe-harbor status. In fact, we found it interesting how, in May, every bond market around the world sold-off, except for the RMB bond market.

We agree completely with Gave on his proposed "permanent asset hypothesis" (as explained further below) which is a simple derivation of what happens in a world in which the Keynesian multipler is now negative. It is what we have been saying for over a year, namely that in an environment of permanent low interest rates there is no impetus on behalf of the private sector to spend for growth, either in the form of capital spending or the hiring of incremental workers. The only net money exchange is the issuance of debt to fund dividends and stock buybacks: or simple EPS-boosting balance sheet arbitrage as shown most recently here. 

We also obviously agree that if and when Bernanke finally loses control, there are simply no words to describe what would ensue as a situation like that - one where not just the Fed, but every single central bank has gone all in on reflating the world's biggest asset bubble - has never been encountered before.

However, we disagree that the final outcome will be a "profoundly deflationary failure." This will be an interim step. Recall that the Fed and its private bank conspirators simply can not accept deflation as a resolution. Which means that faced with the specter of full on deflationary collapse, Ben Bernanke will simply resolve to doing what he has hinted, if jokingly, in the past: he will literally paradrop money out of helicopters. Maybe not in that fashion, but he will find a way to bypass the banking sector as a monetary transmission mechanism, and bring crisp, fresh, just off the press banknotes into the hands of consumers in order to finally get the much needed inflationary spark as too much cash chases after too few products and services.

And remember: hyperinflation is and always has been a phenomenon concurrent with the full loss of faith in a given currency, be it reserve or not. It may emerge for economic, monetary or purely political reasons. It is also why the most valuable commodity a central bank has is credibility, and faith in fiat, or fiath as we like to call it. Furthermore for those who say that the Fed has a reserve currency premium, we like to show one of our favorite charts: reserve currencies through time...

... as well as our two favorite axioms: Nothing is forever, and this time is never different.

* * *

But those are all thought experiments for the future: a future, in which if we may remind readers, not one nation in history has collapsed due to hyperdeflation...

As for the present, and going back to Gave's wonderful analysis of the can of worms Bernanke's tinkering has unleashed, here is the balance of Charles Gave's "More On the Deflationary Bust Risk" just released paper highlights:

More On the Deflationary Bust Risk

This is what I will, for the purposes of this paper, call my “Keynesian multiplier” - it is simply the arithmetical difference between growth in  wealth and growth in public debt—on which I compute the seven-year rate of change.

If the multiplier is expanding, this tells us that an increased level of debt should lead to a greater increase in the household net worth over seven years. And vice-versa. This allows us to roughly evaluate how many dollars of private wealth are created by one more dollar of public debt.

Let us look now at the relationships between our Keynesian multiplier and certain economic variables. The chart below shows that the marginal efficiency of public debt, at least in the US (public spending in emerging markets from a low base usually improves productivity) has been declining structurally since 1981. And it seems that this marginal efficiency has now reached a negative level.

One initial indication that the Keynesian multiplier was now shrinking was the US boom that followed the Clinton/Gingrich balanced budgets and era of government deleveraging between 1997 and 2000. A reality which brings us back to one of the greatest debates between Keynesians and Austrians as to whether Milton Friedman’s “permanent income hypothesis” makes sense, or not; i.e., are economic agents rational enough that when they see an increase in government debt, they will increase their savings, safe in the knowledge that they will have to pay for the debt increase down the road? Or whether economic agents are just too shortterm focused to project themselves that far?

Modifying the above idea somewhat, we have, in the past, come up with a “Permanent Asset Hypothesis” which probably best applies in asset-rich, ageing countries. Basically, as interest rates move ever lower, retirees, pension funds and insurance companies needing to a certain fixed amount of return are forced to buy ever more fixed income. So low rates and rising public debt issuance, instead of encouraging more risk and renewing animal spirits, instead pushes investors feeling ever poorer into increasingly defensive, and yield generating, assets.

In essence, the perception that assets will not generate enough income going forward encourages the average saver to increase his savings, which is the precise opposite of the stated goal. This law of unintended consequences may help explain why the private business sector’s demand for credit remains limp, even though money is being lent for free.

Of course, credit demand may also be weak because there is no immediate reason to expect the rise we have seen in US (and global) financial assets should help boost median incomes. So far it has not:

And in a world where it does not pay to borrow, one should expect a structural decline in the velocity of money to take place. Which is what the next chart is indicating:

A decline in the velocity of money is equivalent to less money circulating in the system, and should lead to a structural decline in the inflation rate:

With the Keynesian multiplier now negative, one would expect very low growth in volumes and nominal GDP. And this, of course, is what we are seeing. Despite the massive stimulus, and the improvement in the US trade balance (thanks to the energy revolution and the US manufacturing renaissance), the US economic expansion remains rather unimpressive. The recent moves in bond yields would seem to suggest that markets are expecting that the economic lift-off is finally about to arrive; either that or that Ben Bernanke will soon throw in the towel and start normalizing monetary policies. Given that the odds of the latter are lower than a snowball in hell (from afar, it usually feels as if the Fed chief has made his motto that of George Bidault’s: “I don’t know where we are going, but we will get there without detours”), it is more likely to be the former than the latter. The problem, for me, is that I struggle to believe that we are on the verge of a new global economic expansion.

Instead, if structural growth is to now be dragged lower by the fact that the Keynesian multiplier has gone negative, and with governments continuing to spend like sailors on shore leave in Hong Kong despite the drag on productivity and structural growth, then we cannot really expect long rates to move decisively higher.

* * *

Summarizing the above: if Bernanke is honestly curious why the economy remains broken, and none of his "central" tinkering has done much to boost the Keynesian multiplier and with it any prospects for real economic growth, he suggest he take a long, hard look in the mirror.

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Eyes on Income: Don't Be Baffled -- Watch the Charts

by Tom Aspray

Last week’s wide ranges in the stock market had many on edge but bond holders were even more concerned. Bond funds, managed by some of the world’s best-known experts, endured double-digit losses in May but from the charts, this was not surprising.

The monthly jobs report calmed the stock market as the Dow Industrials was up 1.4% on Friday and gained almost 1% for the week. The bond market was not convinced as the yield on the 10-year T-note rose from 2.075% to 2.161% or a 4% increase.

A weekend article in The New York Times A Bond Market Plunge That Baffles the Experts focused on the sharp rise in yields. As they reported “mutual funds that invest in long-term United States Treasury bonds lost an average 6.8% in May, according to Morningstar MORN +0.17%, with the loss in principal wiping out years of interest payments.”

The uptrend in yields was evident on May 9 with the 10-year T-note yields (TNX) closing at 1.813%. The weekly reverse H&S bottom formation in the yields of the 30-year T-bond yield (TYX) that I discussed in the premier edition of Eyes on Income was confirmed the following day (May 28) as yields closed at 3.290%.

Click to Enlarge

Key Yields to Watch: The reverse head-and-shoulders bottom formation was completed when the neckline (line a) was overcome.

• The rise in yields since early May has been sharp enough that I would expect some consolidation or a pause in the rally over the next week or so.
• Only panic selling by bond holders could cause an upward acceleration in yields.
• It may take the June monthly ending statements to really shock bond holders.
• The next resistance for the 30-year T-bond yield (TYX) is in the 3.426% to 3.489 area.
• There is further resistance now in the 3.629% area.
• The upside target from the reverse H&S formation is in the 4% area.
• A drop in yields back below 3.100% would weaken the uptrend.

The daily chart of T-note yields (TNX) shows the trend change on May 9 (see arrow) as yields moved above their 20-week EMA and resistance at line d.

• The downtrend, line c, was overcome on May 23 and the neckline from the reverse H&S formation is now in the 2.349% area.
• A confirmation of the bottom in 10-year T-note yields would make bond holders even more nervous.
• There is further resistance in the 2.682% area and then at 3.000%.
• The upside targets from the H&S formation are in the 3.340% area.
• There is initial support now at 2.066%.
• There is more important support now at 1.952% to 1.864%.

Click to Enlarge

Annaly Capital Management NLY +0.74% (NLY) is a yield play that I have been warning about for almost two years, and most recently, last November in Don’t Step into the High-Yield Swamp. It has dropped 24% since the highs last September and currently yields 13.30%

• They cut their dividend in December for the second time in the year.
• Recent data indicates that they have just over $9 billion in cash but over $100 billion in debt.
• Their current ratio is a dismal 0.21.
• The chart shows the break of support in the $16.80 area, line a, last October.
• The on-balance volume (OBV) confirmed the price action as it also broke support at line b.
• The OBV made new lows last week and continues to be weaker than prices.
• The next good support is in the $12-$12.50 area.

Though NLY is getting oversold and is ready for a bounce, I would expect further dividend cuts in the next six months. The risk of capital loss is not worth the yields even though it is still being recommended frequently. Before following such advice, I would suggest you check the performance since it was first recommended.

Featured Investment: The high-yielding utility stocks have dropped sharply since they peaked in early May as fears over a change in Fed policy caused some heavy selling in this sector.

The Select Sector SPDR Utilities (XLU) currently yields 3.72% with an expense ratio of 0.18%. The top two holdings are Duke Energy DUK +0.59% Corp. (DUK) and Southern Company (SO) and the top ten holdings make up 57% of the portfolio.

XLU hit a high of $41.44 in early May, and at last week’s low of $37.20, was down over 10% from its highs.

The 50% Fibonacci retracement support level from the late 2012 lows was broken last week. The 61.8% support is at $36.74 with additional chart support in the $35-$36 area.

The weekly OBV did confirm the highs in early May and has now turned up after getting near long-term support at line c. It is still below its WMA.

There is initial resistance now in the $38.85-$39.30 area.

Income Strategy: As I discussed in the last Eyes on Income report, the goal is to develop an income portfolio that will strive to provide a decent return, as well as some growth potential.

Portfolio Update: Based on a $100,000 portfolio.

On May 28, $1,000 was invested in Double Total Total Return Bond Fund (DLTNX) at $11.32 and an additional $3,000 on May 30 after it closed below $11.34. Another $4,000 was invested on Monday June 3 at $11.28 as it closed at $11.26 on May 31.

Another $1,000 should be invested today and the final $1,000 next Monday. This will then make up 10% of the portfolio.

New Recommendation: I would buy $2,500 of Select Sector SPDR Utilities (XLU) at $37.88 or better and $2,500 at $37.04 or better with a stop at $34.88.

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S&P Upgrades US Outlook From Negative To Stable On "Receding Fiscal Risks"

by Tyler Durden

In a confirmation that the S&P is starting to get worried about the drones surrounding the McGraw Hill building resulting from the ongoing litigation with Eric Holder's Department of Injustice, not to mention a reminder that US downgrades always happen after hours, while upgrades must hit before the market opens, Standard & Poors just upgraded the Standard & Poors 500 the US outlook from Negative to Stable. On what "receding fiscal risks" did the S&P raise its assessment of the US - the fact that the US is now at its debt limit, that there is no imminent resolution to the credit issue, or the 105% and rising debt/GDP - read on to find out. And of course, the countdown until the S&P wristslap settlement with the DOJ is announced begins now, as does the upgrade watch by Buffett's controlled Moody's of the US to AAAA++++.

The market's reaction is focused in the FX markets for now - but is fading...

From S&P:

United States of America 'AA+/A-1+' Ratings Affirmed; Outlook Revised To Stable On Receding Fiscal Risks

Overview

• Under our criteria, the credit strengths of the U.S. include its resilient economy, its monetary credibility, and the U.S. dollar's status as the world's key reserve currency.
• Similarly, in our view, the U.S.'s credit weaknesses, compared with higher rated sovereigns, include its fiscal performance, its debt burden, and the effectiveness of its fiscal policymaking.
• We are affirming our 'AA+/A-1+' sovereign credit ratings on the U.S.
• We are revising the rating outlook to stable to indicate our current view that the likelihood of a near-term downgrade of the rating is less than one in three.

Rating Action

On June 10, 2013, Standard & Poor's Ratings Services affirmed its 'AA+' long-term and 'A-1+' short-term unsolicited sovereign credit ratings on the  United States of America. The outlook on the long-term rating is revised to  stable from negative.

Rationale

Our sovereign credit ratings on the U.S. primarily reflect our view of the strengths of the U.S. economy and monetary system, as well as the U.S.  dollar's status as the world's key reserve currency. The ratings also take into account the high level of U.S. external indebtedness; our view of the effectiveness, stability, and predictability of U.S. policymaking and political institutions; and the U.S. fiscal performance.

The U.S. has a high-income economy, with GDP per capita of more than $49,000 in 2012. We expect the trend rate of real per capita GDP growth to run slightly above 1%. Furthermore, we see the U.S. economy as highly diversified and market-oriented, with an adaptable and resilient economic structure, all of which contribute to strong sovereign credit quality.

We believe that the U.S. monetary authorities have both the strong ability and willingness to support sustainable economic growth and to attenuate major economic or financial shocks. As a result, we expect the U.S. dollar to retain its long-established position as the world's leading reserve currency (which contributes to the country's high external indebtedness). We believe the Federal Reserve System has strong control over dollar liquidity conditions given the free-floating U.S. exchange rate regime and as demonstrated by the Fed's timely and effective actions to lessen the impact of major shocks since the Great Recession of 2008/2009. Since 1991, the Fed has kept inflation (measured by CPI) in the 0%-5% range. In addition, the U.S. monetary transmission mechanism benefits from the unparalleled depth of the country's capital markets and the diversification of its financial system, in our opinion.

We view U.S. governmental institutions (including the administration and congress) and policymaking as generally strong, although the ability of elected officials to address the country's medium-term fiscal challenges has decreased in the past decade due to what we consider to be increased partisanship and fundamentally opposing views by the two main political parties on the optimal size of government. Views also differ on the preferred mix between expenditure and revenue measures in the quest to return the federal budget toward a more balanced position. Recent examples of impasses reached on fiscal policy include the failure of the 2010 National Commission on Fiscal Responsibility and Reform to obtain a qualified majority of its members in favor of its fiscal consolidation plan and the inability of the Joint Select Committee on Deficit Reduction to reach an agreement to specify specific fiscal measures to avoid indiscriminate cuts set down by the Budget Control Act of 2011 (BCA11).

That said, we see tentative improvements on two fronts. On the political side, Republicans and Democrats did reach a deal to smooth the year-end-2012 "fiscal cliff", and this deal did result in some fiscal tightening beyond that envisaged in BCA11, by allowing previous tax cuts to expire on high-income earners. The BCA11 also has engendered a fiscal adjustment, albeit in a blunt manner. Although we expect some political posturing to coincide with raising the government's debt ceiling, which now appears likely to occur near the Sept. 30 fiscal year-end, we assume with our outlook revision that the debate will not result in a sudden unplanned contraction in current spending--which could be disruptive--let alone debt service.

Aside from tax hikes and expenditure cuts, stronger-than-expected private-sector contributions to economic growth, combined with increased remittances to the government by the government-sponsored enterprises Fannie Mae and Freddie Mac (reflecting some recovery in the housing market), have led the Congressional Budget Office (CBO), last month, to revise down its estimates for future government deficits. Combining CBO's projections with our own somewhat more cautious economic forecast and our expectations for the state-and-local sector, and adding non-deficit contributions to government borrowing requirements (such as student loans) leads us to expect the U.S. general government deficit plus non-deficit borrowing requirements to fall to about 6% of GDP this year (down from 7%, in 2012) and to just less than 4% in 2015. We now see net general government debt as a share of GDP staying broadly stable for the next few years at around 84%, which, if it occurs, would allow policymakers some additional time to take steps to address pent-up age-related spending pressures. 

Outlook

The stable outlook indicates our appraisal that some of the downside risks to our 'AA+' rating on the U.S. have receded to the point that the likelihood that we will lower the rating in the near term is less than one in three. We do not see material risks to our favorable view of the flexibility and efficacy of U.S. monetary policy. We believe the U.S. economic performance will match or exceed its peers' in the coming years. We forecast that the external position of the U.S. on a flow basis will not deteriorate.

We believe that our current 'AA+' rating already factors in a lesser ability of U.S. elected officials to react swiftly and effectively to public finance pressures over the longer term in comparison with officials of some more highly rated sovereigns and we expect repeated divisive debates over raising the debt ceiling. We expect these debates, however, to conclude without provoking a sharp discontinuous cut in current expenditure or in debt service. We see some risks that the recent improved fiscal performance, due in part to cyclical and to one-off factors, could lead to complacency. A deliberate relaxation of fiscal policy without countervailing measures to address the nation's longer-term fiscal challenges could place renewed downward pressure on the rating.

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“Somebody” Bought Stocks on Thursday Because “Somebody” is Terrified

by Graham Summers

“Somebody” moved in to support stocks last week on Thursday.

The 50-DMA has become the “line in the sand” on the S&P 500. Anytime the market has come close to breaching this level in the last few months, “someone” has stepped in and propped the market up.

It’s pretty clear who the “someone” is. Given that the Fed is openly citing the stock market as an indication that QE is working… and given that every other metric shows QE is a total failure…

With that in mind, last Thursday’s action and the follow through Friday should be seen as a clear intervention.

This will end very very badly.

• Margin debt levels (meaning debt that investors take on to buy stocks) are at record highs.

• Hedge fund stock ownership is at levels last seen before the 2008 Crash.

• We’ve had multiple Hindenberg Omens (signs of a potential Crash).

All of the signs are in place: the market has become a complete bubble. When you compare the market to its fundamentals, it’s arguably an even worse than the bubble that brought about the 2008 collapse.

Take a look at the divergence between stocks and Copper. Stocks could fall over 20% before they’d realign.

I’ve been warning subscribers of my Private Wealth Advisory newsletter that we were heading for a dark period in the stock market. We’ve since taken action to insure that when the market falls, we make money.

Indeed, in the last month alone we’ve seen gains of 8%, 12%, 21%, and 28%… all from basic stocks and bonds. And we’re now preparing with six carefully targeted investments that will pay out when the market falls.

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Bank of Japan June Policy Meeting Preview

By Aamar Hussain

WHEN

11 June 2013, usually released between 04:00 BST and 05:00 BST: Bank of Japan release results from its latest policy meeting

11 June 2013, 07:30 BST: BoJ governor Kuroda gives a press conference following the BoJ’s monetary policy announcement

FINE TUNING JAPANESE MONETARY POLICY

There have been doubts over the efficacy of Abenomics in recent weeks, as “a few” of the BoJ’s own policymakers expressed in its May policy meeting, and prime minister Shinzo Abe’s partial unveiling of his “third arrow” (structural reforms) underwhelmed traders last week, Abe is expected to expand on his brief outline on Friday.

Additionally, on-going questions over the Fed tapering its QE3 programme, and a potential economic slowdown in China, have also contributed to volatile trading conditions in Japan.

The yen has subsequently strengthened against the US dollar, trading below the psychology important Y100 level at pixel time; the Nikkei index has plunged by over 15% from its highs in May; and 10-year Japanese government bond (JGB) yields have more than doubled since April, currently trading around 0.85%.

However, there are tentative signs that Abenomics is starting to bear fruits. This week, Japanese economic growth for the first-quarter of 2013 was revised upwards from 3.5% year-on-year, to 4.1% year-on-year. Further, CPI inflation in Tokyo, a leading indicator of Japanese inflation, turned positive in May for the first time since 2009, suggesting that Abenomics may be on course to deliver 2% inflation in 2 years’ time.

But the volatility in the JGB market, as well as the strengthening of the yen over the last few days seems to be at odds with Abenomics. For Abenomics to work, JGB yields need to stay low on a nominal basis, and the yen needs be weak against the US dollar.

The move higher in JGB yields is “starting to obstruct portfolio allocation abroad,” according to Geoff Yu, an analyst at UBS. “Even lifers are joined the list of net sellers in May.” Consequently, the BoJ may take action to stem the volatility in JGBs and the yen.

Although the BoJ is likely to keep its rate on hold at 0.1% on Tuesday, there could be tweaks to its bond buying programme. Currently, it is committed to buying 70% of the gross issuance (and more than 100% of the net issuance), and this plan is likely to be maintained at Y60trn to Y70trn annually.

“We believe the BoJ is likely to extend the loan period for its fixed-rate fund-supplying operations against pooled collateral (Japanese-style LTRO),” say analysts at Nomura. The BoJ is likely to do this by extending the loan period in these operations from one year to (potentially) up to three years.

Some have also suggested that the BoJ may hike its self-imposed cap on REIT (real estate investment trusts) purchases. And some are speculating that the BoJ may begin buying equities as part of its easing efforts, which is likely to support Japanese equities.

“These measures would have a greater impact on market sentiment. But it remains unclear whether officials will choose to make such policy announcements in the week ahead,” says Mansoor Mohi-uddin of UBS. One thing is clear: the BoJ does not appear to be shy of taking further bold action to achieve its aims.

But there is a lot of uncertainty surrounding this meeting, and analysts at Barclays remind us that there is an outside chance that the BoJ will stay on hold until July, after it has conducted its interim assessment of its semi-annual report.

Going forward, however, it is likely that the yen will resume its slide against the dollar, according to UBS, which forecasts dollar-yen at Y110 by the end of 2013. “Last week’s massive position clear-out in yen shorts and Nikkei longs should allow dollar-yen to base now in a Y95-Y100 range, before climbing back into its earlier 100-105 range,” says Mohi-uddin, “but Japanese policymakers will need to take more actions in the week ahead to calm volatile market sentiment.”

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Stock Market Index Trend, Facts, Rules Equals Successful Results

By: Michael_Noonan

Markets provide an opportunity to grow one's capital, and create a return on capital, in addition to a return of capital, its preservation being the benchmark to ensure it remains fully intact. Is there a magical formula for success in the markets? No. However, there is a realistic approach to increase the odds of consistent returns while keeping exposure to risk at an acceptable level.

The S&P used to be our mainstay market concentration, but we stepped away from that market when central planners took over, starting with POMO, [Permanent Open Market Operations], conducted by the privately owned Federal Reserve. With fiat being pumped into the markets on an ongoing basis, it was a fatal blow to free market operations, where supply and demand were the true measures of value. Now, [then], there was only an artificial demand that took quarrel with any attempts by supply to alter the Fed's upward trajectory.

These circumstances were unacceptable, and so we withdrew from analyzing the equity markets, rightly or wrongly, but right for us. There may be change coming, and if/when it does, 2008 will likely be relived, again, possibly worse, given how the buy side market has become so distorted. It is now back to our game plan, and greater attention will be given to reading developing market activity, which is what we do.

Are successful results possible? Absolutely! There are never any guarantees in obtaining profitable results, but we know for certain that guidelines exist for gaining an edge in all markets: Trend, Facts, and Rules.

The trend is the most important first piece of knowledge one can have in order to become profitable. Trends persist in the market, and they often go much farther than many think likely. If you want to be successful, you must always trade in the direction of the trend, in whatever time frame chosen. Plus, one must also be mindful of the next higher time frame to not run into a larger, potentially opposing force. Just this one observation, alone, can enhance one's odds for success.

Facts. They are incontrovertible, conclusive, not subject to dispute. Facts are in direct opposition to opinions, themselves subject to beliefs or judgment, both of which fall short of certainty. We want as much certainty in decision-making as possible. Facts provide that.

There are ways of determining the trend based on facts. There are ways of determining which force, supply or demand, is in control, based on facts. When you take the trend and combine it with factual market observations, it results in creating an edge for every market decision that can lead to stock market success. There is one more element.

Rules, the missing ingredient for a majority of market participants. What undercuts successful trading/investing more than anything else? Having an opinion. We all have them, but they cannot be the compass upon which decision-making is based. Why not? Opinions are subjective, and almost always charged with emotion, ego, both of which are destabilizing factors.

Why do so many people lose so much money? They have an opinion about what a market will/should do. "This market can't go much higher." But it does. [Trend]. "The market is overdue for a correction." It may be, but it does not correct. [Trend]. Once positioned in a market, emotions take over. "I can't take a loss. The market will bounce back." [Going against the trend and ignoring the facts.] You get the idea.

Rule One: Trade with the trend. Rule two: Buy strength, not weakness. Rule three: Buy at support, once proven it will hold. Etc, etc, When you have a fixed set of rules that determine when to take a position within an established trend, the risk factors have been greatly reduced, and the odds for success have been enhanced. Neither is guaranteed, but the odds of probability are now tilted on your favor.

With this brief, but comprehensive groundwork, we apply it to better understanding the charts and moving forward.

The first fact to determine for the weekly S&P is the trend, and clearly, it is up. You can see how the lighter line connects the swing highs and lows. The highs are higher and the lows are higher, the essence of a trend. [It does not matter how one defines a trend, as long as the guidelines for its determination are used consistently.]

It is also apparent that price closed higher for the week, and it did so on increased volume, both facts, regardless of what opinion someone may have. What does not show is how the weekly bar looked so weak, going into Thursday, and it appeared that the market would continue to sell off. However, the time frame is weekly, and we have to wait for the end of the week close in order to make a valid assessment. That would be a basic rule for weekly.

If one made a determination to take action, based upon apparent weakness on lower prices starting Thursday morning, that action would have been based upon a judgment made at the time, [and proven wrong]. Taking any action at that point would have meant it was based on opinion and a breaking of rules, or alternatively, not even having a set of rules in place, which is just as bad.

This is not to belabor the point, rather to drive home the importance of knowing the trend and adhering to rules, based upon market facts. The time frame is weekly, so no decision can be made until the close of the week is known, another fact. Despite the apparent drop in price, almost 50 points, starting out Thursday morning, the Trend, reasserted itself, and by day's end, price rallied the most in a single day from low to high close in many months.

The weekly chart shows a strong, trending market. Higher time frames are stronger than lower time frames. The daily chart had been selling off, longer in time and greater in price since the November 2012 lows. The sell-off was approaching a swing high support from April, and the bottom of the down sloping demand line.

The fact that price reversed and rallied so strongly from a known [potential] support area, demonstrated how and why knowing the trend is so important in order to react to the developing market activity and not be swayed by emotions. This is how to trade in the markets: knowing the trend, using facts gathered from the market, and having a set of rules for engagement.

What to do now?

Was the May high the high for this move? The trend says no. More evidence of a change is needed to make an informed decision.There are two likely scenarios. 1: The high is in and this is a retest of the high that will fail, leaving price to go lower. 2. This was just a natural correction within a bull market, and price will make higher highs, keeping the trend intact.

With a set of rules, the decision is an easy one. For now, we have to go with the trend is up and should be heeded scenario, until proven otherwise. We can also add the fact that the last swing low, from Thursday, [should it hold], left bullish spacing. The last swing low is above the last swing high, as the two horizontal lines show.

A weak retest of the 1596 low will confirm that the daily trend remains up. [The weekly is not close to turning, at this point.] What is a weak retest? Smaller range bars and lower volume when price declines, indicating sellers are not in control, as one example. Should that happen, it can set up another buy opportunity, next week.

The NASDAQ shows greater spacing between last Thursday's low and the mid-April swing high. It is testing 50% of the previous range, a general guide, indicating overall strength. There is a slight conflict between the stronger volume on the sell-off from the May high, compared to the lesser volume from last week's rally. The possible offset to that negative is the fact that price rallied so easily from the low. Where were the sellers to stop the buyers?

Bottom line is, in both markets the trend remains up, and a solid set of rules to determine when to buy within an uptrend will best serve one's objective of consistently profitable trading success.

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EMI Weekly Price Performance

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Soy, wheat lead bullish turn in hedge fund ag bets

by Agrimoney.com

Hedge funds extended their return to a more positive stance on ags despite a more bearish take on corn and many soft commodities, raising bullish bets on soybeans to a seven-month high and cocoa to a five-year top.

Speculators - whose position in futures and options in the main US-traded agricultural commodities was at least most pessimistic on record in early April - continued to rebuild a net long position in the week to last Tuesday, raising it nearly to 310,000 contracts, regulatory data showed.

Sentiment in many soft commodities weakened, with managed money - a proxy for speculators - cutting its net long position in New York cotton futures to the lowest since January, as official data showed US farmers catching up on corn plantings, and the International Cotton Advisory Committee cut its price forecast.

In New York raw sugar, speculators raised their net short position nearer to a record high, as prices continued to suffer from expectations of a bumper harvest and from a weakening real – a factor for arabica coffee too, given that Brazil is also the top producer and exporter of the bean.

Meanwhile, in corn, hedge funds trimmed their net short position, as an easing off in rains boosted hopes for farmers finishing off plantings of the grain.

Positive on soybeans

However, such bearish positioning was more than offset by bullish turns on sentiment in crops such as soybeans, in which speculators raised their net long position above 140,000 contracts for the first time since November.

While sowings of soybeans also picked up, the better planting conditions overall lower the risk of farmers switching to the oilseed from corn, for which the ideal sowing window closes earlier.

Demand news on the soy complex overall has also been firm, with shipments and export orders of soymeal, high protein feed ingredient derived from soybeans, already exceeding the official forecast for 2012-13 with more than three months of the season to go.

Although exports from Brazil, a major US rival in crop exports, hit a record 7.95m tonnes in May, up 800,000 tonnes year on year, its soymeal shipments fell 230,000 tonnes to 1.38m tonnes, reflecting logistical hiccups.

Quality fears

In New York-traded cocoa, hedged funds raised their net long position in futures and options to 46,488 contracts, the highest since March 2008, helped by a lift by the International Cocoa Organization to its forecast for the world surplus in 2012-13, but also concerns over West African bean quality.

Macquarie analyst Kona Haque said: "Supplies from the mid crop have started to arrive, although bean sizes and quality are said to be deterring buying" by end-users, so boosting the appeal supplies meeting New York exchange criteria.

Prices have also been lifted "on the back of technical moves and spread trading activity, and concerns over potential supplies due to damaged cocoa at Antwerp warehouses".

Surprise shift in wheat

However, the biggest turn bullish – or at least less bearish – in hedge fund sentiment came in Chicago wheat, in which speculators slashed their net short position by more than 18,000 contracts.

That represented the most significant bout of short-covering since June last year, as dryness concerns in the former Soviet Union and the US sent grain prices soaring.

The positioning puzzled many investors, coming against a backdrop of concerns about US wheat exports, following the discovery of genetically modified plants in an Oregon field.

Furthermore, prospects for former Soviet Union crops improved, as rains provided refreshment for dry areas of Russia and Ukraine, major wheat exporters.

Chicago vs Minneapolis

The change in positioning was seen in part down to technical factors, with the grain benefiting as investors closed spreads with other crops.

"Wheat has been a prime candidate for spreading with the likes of corn. So if funds are closing corn longs, wheat could benefit as an after- thought," a UK grains trader told Agrimoney.com.

The troubles besetting northern US spring wheat farmers, for whom rains have continued to slow plantings, also appears to be being reflected in Chicago prices, even though spring wheat is traded in Minneapolis.

"Minneapolis is not a preferred market for hedge funds. It is not liquid enough," the trader said.

"If speculators want exposure to the slow spring wheat sowings story, they are going to get it in Chicago."

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US weather, weak real, weigh on crop prices

by Agrimoney.com

Will data later on really show decent progress in wrapping up corn sowings, and catching up on soybean plantings too?

If ag bears were unnerved about the prospect of the US Department of Agriculture crop progress report, released after the market close, they were not showing it in early deals.

The short-covering which marked the last session, amid concerns of further rain delays to fieldwork, dried up, allowing crops to make a soft start to the week.

'Rainfall below expectations'

In fact, "weekend rainfall was slightly below expectations" in the US Midwest, the corn and soybean production heartland where rain delays really count, according to weather service MDA, if acknowledging that they are nonetheless "leading to soybean planting delays and increasing wetness concerns".

And looking ahead, "the western Corn Belt and central Plains look pretty dry for the next three days before the rains begin to move back into the western Corn Belt days four and five," WxRisk.com said.

The western Corn Belt includes Iowa, the top corn and soybean producing state, where planting delays have been of particular concern.

Furthermore, concerns ahead of a heat dome spreading north from the South, bringing potentially too much heat, and temperatures above 100 degrees Fahrenheit, faded too.

'Market wants those soybeans'

The drier spell at the weekend prompted ideas that the report later on Monday will show corn plantings at or potentially higher than the 93-95% range investors were talking about last week.

"We expect corn planting to be close to completion this week, and in fact the wet weather can be beneficial to crop emergence," Joyce Liu at Benson Quinn Commodities said.

For soybeans, the talk was of a 70% completion rate, up from 57% the week before, and a strong pace would curb the need to persuade farmers to continue with sowings rather than file insurance claims when so-called "prevent plant" deadlines kick in.

Mike Mawdsley, at Iowa-based broker Market 1, flagged that the market had last week, in rallying, been "trying to buy needed acres.

"The market wants those soybeans and not prevented planting."

More data ahead

There were some extra factors to take account of too, including the USDA's Wasde report coming on Wednesday, which in which officials are expected to trim forecasts for the rebuild in US corn stocks at the close of 2013-14 to 1.83bn bushels, from a May estimate of 2.00bn bushels, factoring in the poor sowing progress.

Furthermore, the so-called Goldman roll is ongoing, in which index funds switch from near-term to forward futures contracts, so avoiding the expiry process, and in theory putting pressure on front lots – although other investors will have been well prepared.

Trade factors

On the trade front, Argentina's agriculture minister, Norberto Yauhar, said over the weekend that China had approved imports from the South American country of three further strains of genetically modified soybeans and one of corn.

However, the impact of that announcement was offset by a threat by farmers to strike, ie stop selling grains, with an announcement expected on Tuesday.

Also over the weekend, China revealed a rise to 5.1m tonnes in soybean imports last month, from 3.98m tonnes in April, although June is expected to be a bigger month, with some forecasting a figure above 7m tonnes.

The impact of that announcement was muted by Chinese markets' closure for a holiday, and with some concerns over the overall data, which showed overall imports down 0.3%, year on year, in May, with exports growing by only 1%.

'Will not be real impressive'

The impact in Chicago was in corn to see the December contract tumble 1.1% to $5.52 ½ a bushel as of 09:05 UK time (03:05 Chicago time) with the old crop July lot down 0.7% at $6.61 ½ a bushel.

For soybeans, the new crop November lot eased 0.4% to $13.25 ¼ a bushel, while the old crop July lot shedding 0.4% to $15.22 ¼ a bushel.

Where there was headway was in, Minneapolis-traded, spring wheat, which added 0.1% to $8.20 ½ a bushel for July delivery, with the weekend bringing more rain to plague sowings in North Dakota, the top US spring-wheat growing state.

Brian Henry at Benson Quinn Commodities said that in Monday's US crop progress data "the trade is looking for 90% completion on spring wheat seeding. I don't see it.

"Going into Monday afternoon, the trade will keep focus on the pace of planting, which isn't going to be real impressive."

'Merits attention'

As for winter wheat, there are some weather-related concerns here too, most recently focused on whether excessive rains will damage yields of soft red varieties, as grown in the Midwest (and traded in Chicago).

"There hasn't been much concern about rain-related quality issues to this point, but it merits attention," Mr Henry said.

"The trade expects hard red winter wheat conditions to show improvement and soft red winter wheat conditions to show a slight decline" in the USDA crop progress report.

Still, with the hard red winter wheat seen improving a tad, and some concerns still over the impact on US wheat exports of the discovery of unapproved genetically modified plants in Oregon, Chicago's July contract fell 0.5% to $6.93 a bushel.

Technically, the contract's fall below $7.00 a bushel in the last session, and further below major moving averages, did not help either.

Mixed palm data

Elsewhere, Kuala Lumpur palm oil was up 2 ringgit at 2,459 ringgit a tonne for August delivery as investors balanced disappointing May data from the Malaysian Palm Oil Board with an uptick in Malaysian exports so far this month.

The MPOB said that Malaysian palm oil stocks fell last month, to a one-year low of 1.82m tonnes. But that was not as big a decline as investors had expected, to 1.76m tonnes.

While production did not experience as large a seasonal recovery as forecast, exports dropped further from April than the market had expected.

However, cargo surveyor Intertek eased concerns by estimating Malaysian shipments so far this month up 10.3%.

'Stuck in the downtrend'

In New York, soft commodities struggled for gains too, although this was not such a surprise when the Brazilian real, a key influence on prices for ags in which the country is a major player (eg arabica coffee, orange juice, sugar), made a weak start, easing 0.3% against the dollar.

"Fundamentally, the outlook for sugar remain bearish as global excess weighs and weakening Brazilian real translates lower prices in US dollar," Phillip Futures' Joyce Liu said.

"Appreciation in Brazilian real is unlikely in the short term as Standard &Poor's had just revised Brazil's long-term sovereign debt ratings outlook from stable to negative."

Raw sugar for July was flat at 16.43 cents a pound.

"Technically, sugar prices are still stuck in the downtrend with some signs of abating but no sign of reversal," Ms Liu said.

Arabica coffee fell 0.6% to 126.20 cents a pound, getting perilously near three-year lows.

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Strong Africa coffee outlook boosts bean surplus

by Agrimoney.com

Africa's coffee producers are coming good just when ample supplies are depressing international market prices – although values in Kenya are so strong that stealing beans has become a major industry headache.

Africa's eastern coffee-growing heartland, Ethiopia, Kenya, Tanzania and Uganda, will produce a record 11.9m bags of beans in 2013-14, US Department of Agriculture foreign staff said.

The crop, sufficient to support exports of nearly 8.5m bags, also an all-time high, will add extra supplies to a world market already struggling to cope with existing availability - especially of the arabica beans most commonly produced in the region.

The region is actually regarded as the birthplace of both the main coffee varieties, arabica, which is believed to have originated in Ethiopia, and robusta, in Uganda.

Outside of east Africa, Cameroon and Ivory Coast are Africa's only other notable coffee growing countries.

Relative price immunity

Arabica futures have more than halved in the last two years in New York, and London-traded robusta futures lost nearly one-quarter of their value.

However, African producers have been sheltered somewhat from the international market weakness, which prompted demonstrations in Colombia, by factors including a low cost of production – some cherries in Ethiopia, for example, are still picked from the wild – and government willingness to support growers.

Coffee is an important export for the main east African growing region, accounting for 45-50% of export earnings for Ethiopia, the continent's top producer, with Kenya and Uganda both drawing up fresh coffee development plans.

Furthermore, some African beans gain a premium, particularly those from Kenya, which in 2011 attracted more than $1,000 per 50-kilogramme bag.

While prices had dropped back to a maximum of $319 a kilogramme at last week's auction in Nairobi, that was still equivalent to 290 cents per pound, far more than arabica futures trade at in New York.

Theft problem

"The high quality Kenyan coffee is sought after for blending with other varieties from other countries," the USDA staff said.

The demand for the beans has meant that "coffee thefts have occurred at almost every stage of the coffee value chain - at farm, factory, warehouse including in the auction floor – owing to the favourable world prices and lack of a tracking system".

In one raid last week, guards claim they were gagged by the gangsters who covered their mouths masking tape, although police have voiced suspicions that the theft was an inside job.

Robusta vs arabica

Weather help has come in the form of "favourable rainfall" during the so-called Bulg rainy season in Ethiopia between mid-March and May, the USDA staff said.

They also flagged the growing popularity of robusta in the region which, while absent from Ethiopian production, is the subject of a drive for reintroduction into Kenya.

Tanzania's robusta supplies are particularly prized by Italy, which became the top importer of the country's coffee in 2012-13, with a 29% market share, and which uses the robusta beans in production of expresso coffee.

Robusta, while traditionally viewed as a lower quality coffee than arabica, has been viewed in a more favourable light in many coffee growing countries of late, such as India, in part thanks to price outperformance compared with arabica, but also down to resistance to the rust fungus devastating Central American arabica output.

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What are the answers to the big Wasde questions?

by Agrimoney.com

Will they or won't they?

US Department of Agriculture officials will on Wednesday unveil their latest monthly Wasde report, giving much-anticipated estimates of world crop supply and demand.

However, of all the figures that will be revealed, investor focus is centring on a handful, surrounding US corn and soybean supply.

Midwest farmers have made a tremendous effort to catch up on plantings of corn, after a historically slow start, but remain behind the pace, raising fears of farmers abandoning acres they had allocated to the grain, or at least switching them to other crops.

For soybeans, plantings are at their slowest in 17 years. (More on plantings will be revealed in a weekly USDA crop progress report late on Monday, June 10).

Will USDA forecasters adjust their yield or planting area estimates – or both – to account for the threat to crop potential from the historically wet spring?

"I think this is really what investors are going to be most interested in," Bill Tierney chief economist at AgResource said.

'Recognises the problems'

There are plenty of investors who believe a downgrade to corn estimates, at least, is on the cards in Wednesday's Wasde, Allendale's Rich Nelson among them.

"The USDA will be taking some steps to show that it recognises the problems the weather has caused farmers, and what this might mean for crops," Mr Nelson said.

"It generally does not make changes unless there is a serious problem," as in 2011, also a year of rain-delayed plantings, when the USDA in its June Wasde cut the corn area forecast by 1.5m acres.

This year's setbacks are sufficient in Allendale's view to warrant a cut of 2.25m acres in the forecast for corn planting, besides a drop in the yield estimate of 2.0 bushels per acre to 156.0 bushels per acre to factor in the dent to productivity hopes from a shorter growing window for late-planted crop.

All told, this will prompt a cut of nearly 600m bushels in the USDA forecast for the US corn harvest, downgrading the all-important end-2013-14 stocks number – which in indicating the availability of supplies has a big impact on pricing – to 1.68bn bushels, the Illinois-based broker believes.

'Such a wrong turn'

But not so fast. Others have a different take.

After all, while the USDA did in 2011 cut its corn acreage forecast in its June Wasde, by 1.5m acres, the downgrade proved premature.

By the end of the season, the USDA had returned all but 300,000 of those acres back to its corn area estimate.

As for yield, the USDA has been wrong-footed on that too of late, with the department in 2012 raising its estimate for corn yield to 166.0 bushels per acre, compared with the trend yield pegged at 164.0 bushels per acre, only to have to back track as drought set in, and the yield tumbled to a 17-year low.

"They put the yield up from a high figure to an unbelievably high figure," said Jerry Gidel, chief feed grains analyst at Chicago broker Rice Dairy.

"That was such a wrong turn, I can't think they will be so enthusiastic about making changes this time yet."

'Wait for more evidence'

And, after all, there is an important report coming up at the end of month - a survey of actual plantings, as well as a much-watched one on US grain stocks - which will give a better idea at least of what farmers have actually managed to get into the ground.

"I think they will wait for more evidence of what has actually gone one before they make any changes to area," Don Roose, president of Iowa-based broker US Commodities said.

"It is only a couple of weeks away. And that will give make a far better informed acreage figure."

Then there is what actually happens to factor in, including the 2011 result.

At RJ O'Brien, Richard Feltes compared trade talk of a loss of 2m-3m acres of US corn sowings, compared with the 97.3m-acre figure revealed in a planting survey released in March, with historical precedent.

"Large March to Final declines in corn area are rare - most recently 1993 and 1996 which posted 2m-3m acre declines."

'Duty calls'

AgResource's Bill Tierney has also looked at historical precedent, and found that in the last 30 years or so, the USDA has nine times cut corn yield or acreage estimates in a June Wasde – only twice, in 1995 and 2002, doing both.

Not that the rarity of this double-revision option means it is out of the question this time.

In the May Wasde report, after all, the USDA proved more proactive that many investors had expected - publishing a 158.0-bushels-per-acre yield figure which was far short of its estimate for trend yield they unveiled in February, and below market expectations too.

"People were ready for some downgrade from the initial 163.4 bushels per acre, but not to go as low as the USDA went," Mr Tierney said.

And officials "have a duty to provide their best estimates with the data available", he added, opening up the potential for some proactivity this time too.

'Still early days'

At least on soybeans, there is greater consensus that the Wasde will not make any major changes, if any at all.

Sure, Allendale believes that soybean sowings will turn our 1.75m acres above the USDA forecast, topped up by a switch by farmers to the oilseed, which is slightly later sown, from corn.

But with US farmers still having a hefty chunk of soybean plantings to go, and with insurance dates not yet passed for plantings, allowing farmers to claim, as they have for corn in most states, "it is still early days" for the USDA to be revising its soybean forecasts, Allendale's Rich Nelson said.

Mr Tierney noted that, even if the USDA's Wasde forecasting committee for corn cut its forecast for sowings, that did not mean the soybean figure would be adjusted too, potentially upwards to account for a switch in sowings.

"The soybean committee does not make forecast changes just because the corn committee does so," he said.

Mass soybean plant closures?

There is some talk about what changes the USDA will make to old-crop supplies too, with a weakness in the pace of soybean exports being counterbalanced by strength in the domestic crush, spurred by demand for soymeal, one of the main processing products both domestically and abroad.

Indeed, for soymeal, the total of completed exports and orders from foreign buyers has already exceeded the USDA's current total for shipments in 2012-13.

As for soybeans themselves, "the USDA currently has a very low number for the domestic crush," Mr Nelson said.

"For it to end up that low means the domestic crush hasl fall 23% below last year's for the rest of the season - we have to shutter almost one quarter of the plants in the US."

'Not a good correlation'

For wheat, expectations are for not too much in the way of revisions, with the USDA's hard red winter wheat estimates already including some damage to drought in the southern growing areas, such as Texas, where early harvest results have yet to reveal a conclusive trend on yield either.

"With wheat, there is not a good correlation between moisture and temperatures and what we see for yields," Mr Nelson said.

"After the next two or three weeks, we will have a better idea of what is going on."

Uncertainty to linger

It will take longer than that to resolve the uncertainty in corn and soybean forecasts.

And not just because the weather later in the summer will be crucial to determining yields.

US Commodities' Don Roose, while flagging the importance of the US crop area report due at the end of the month, also acknowledged its limitations.

"The cut-off date for data is June 15. In a season like this, that is quite early," especially given that, for many states, the prevent plant date for soybeans, when farmers can claim insurance on lost acres, is around then, or later.

"We are going to have a lot of uncertainty around for a while yet," and perhaps until August.

"The August Wasde looks like being particularly serious report for acres and yield."

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Technical reaction sets expectations for stock market bounce

By Jeff Greenblatt

Another month, another employment report. The jobs number came in at 175K and 7.6% where the anticipation was 169K and 7.5%. It did a little bit better than projected given the weak number in the private sector on Wednesday. Is this a good number? No, it could have been a whole lot worse and 4 years into a recovery you can make a case it should have been a whole lot better. But this proves one thing; you can’t listen to the extreme right who were anticipating 110K.

Okay, you’ll remember from last week we were looking for a low originally on Friday with the jobs number way back on Monday and we were only a day off. On Thursday night I hypothesized we had good readings for a low but you never know what happens in a news event. We could have easily tested the low again with a wash and rinse but it didn’t happen. Instead we got one of the best market days in recent memory. Why? The number certainly wasn’t THAT GOOD. Perhaps traders were happy about the idea the rate went up to 7.6% from 7.5% which would indicate the Fed isn’t quite ready to pull the plug on the sugar just yet. The good reaction came AFTER THE LOW which means there’s a reasonable chance the recent correction is over.

As you know I’ve had quite a bit to say about the austerity program going on in this country. But the bigger picture is the Democratic think tanks are finally coming to the conclusion that austerity doesn’t work. They do have 69,000 bridges in need of repair. According to the Global Competitiveness Report released in May the US infrastructure rating has dropped from a 6.10 score in 2008 to 5.81 this year. A score of 1 is extremely underdeveloped while 7 is top score. More importantly, we were rated 7th best in the world 4 years ago and now only considered 14th best in the world. In another new report US bridges scored a C+ by the American Society of Civil Engineers due to a lack of planned funding and inadequate maintenance. One engineer in the study suggested now is a good time to invest in repairs due to low interest rates. I suppose Congress hasn’t studied that bond chart carefully enough.

What usually happens is state and local governments pick up the tab but so many have problems balancing their own budgets so in normal times Congress picks up the difference. As you know they aren’t doing that now.

They are also cancelling those NIH grants we discussed last week. It was announced this week they are going to lose the 700 grants and $1.7 billion in funding. That takes care of infrastructure and future technology competitiveness.

Finally there was a big report on Thursday in the Huffington Post that a key Democratic think and has come to the conclusion they are taking the ‘grand bargain’ off the table. The Center for American Progress is walking away from idea of negotiation with the right on the ‘grand bargain’ as a means of deficit reduction. They want to see Washington get back to an agenda where the focus is on growth as opposed to deficit reduction.

The Obama administration does not have to follow this lead but if they don’t and things don’t work out they run the risk of candidates distancing themselves in the midterm elections. But I view this as a change in posture which will influence both houses of Congress and the President. It means the debt debate has the potential to get nasty. I’ve heard the country is okay with the current deficit configuration until September. Know what else kicks in at that time? Our big time windows. They should get back to growth and start fixing some of those bridges. What are they waiting for, the Brooklyn Bridge to crumble?

This is a sneaky bull and markets were looking for an excuse to rally on Friday.

You have 2 great reasons for a turn here. Number one is we have a 161 leg which if I showed you the intraday qualifies as an abc down where c is 161 of a as measured from the high. Then it held the 50day which you can see has the buffer all throughout this year. How many times can you go to the well? One of these times it’s not going to work. But traders will keep trying until it’s proven not to work. This might be the last one. There’s no reason not to go with this buy the dip mentality because people waited until it got to the exact right spot.

You can take the contrarian view that it’s all too easy, too predictable and that’s going to spell trouble for those adding on because the market is never supposed to make things easy. You would be right with that kind of thinking. But in a raging bull there will be some doubters and that’s what makes the bull so sneaky. But if it’s this easy and it works next time people are going to continue to think it’s easy and they’ll end up getting burned. I know all of this sounds elementary dear Watson but this is the exact kind of thinking when it comes to financial markets. Don’t be surprised if the net result of this bounce gives us some sectors that hit new highs and others that don’t confirm. It all depends what you trade and how you get positioned. See this nice candle configuration on the SPX? Now look at the HGX. It’s not as good and it has much further to go to get not only back to the top of the range but pierce through to set a new high. If I’m paying close attention to only these 2 charts, I already see the potential for bearish non-confirmation.

If we really want to press another scenario, the HGX certainly looks like an ending diagonal triangle, doesn’t it?

If that’s the case we still could be in for one more high as its probable we have waves 1-3 already in place. If we do get the next high and it only marginally takes out the prior high then what I just told you about going to the well one too many times will kick in on the next round. Traders may get away with it this time. The takeaway is the 50dma buy signal is attracting a lot of noise and this has to be late in the game.

At the end of the day, I see a continuation of what started on Thursday with upper testing this week. Coming up later this month in a couple of weeks is the June seasonal change point. That point on the calendar usually produces something important so keep close tabs on any turn that materializes around the 21st. The turn we have now could conceivably create a rally that peaks around that time.

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Nikkei Up 5%: The Eurocrisis is Over!

By tothetick

You have got to hand it to them, haven’t you? Past masters these politicians at bull. Call it what you will: baloney, rubbish, pulling the wool over our eyes, lying through their teeth and still smiling. Can we believe it? Do they actually think we’re that naïve? Come on guys, we weren’t born yesterday.

Just a few hours after French President François Hollande stated on a state visit to Japan that the Euro crisis was over, the Nikkei rallied 5% today!

But, I think that Monsieur Hollande’s speech will have to go down in history as the scam of the 21^st century. Okay, so we need to be upbeat about the economic recovery. So, we need to sell ourselves. We need to tell everyone just how great we all really are. They might just believe us if we say it loud enough. The US has been doing it for years now, and people are still believing them, aren’t they? Well, almost! Mr Hollande is like the guy that sold London Bridge in 1968 to a guy from Arizona for a £1.63 million because of some smooth-talk. He actually thought it was Tower Bridge. Imagine his surprise when he opened the box to find it was a shoddy, recent, dull looking bridge that was pretty worthless. Imagine the surprise of the rest of the world Mr. Hollande when they open the box and find that there is nothing inside that you have been talking about for the past few days.

I always learnt that if you have to shout it from the rooftops, you can’t be what it is that you are yelling at people. I can hear you Mr. Hollande! The Eurozone crisis is well and truly over. Except, the figures are telling me otherwise. Or is he just trying to get his name into the papers?

Whatever happened, thank you Mr. Hollande, the Japanese have gobbled it up faster than they can say Sushi. That’s a 5% rise in the Nikkei, the biggest daily increase in two years! The Yen also dropped to ¥98.3 against the US dollar, from ¥97.5. That means a weakened yen and fuel for a rise in exports from Japan. Technology firms such as Sharp Corp increased by +15.21%. Fuji Heavy Ind. Increased +12.91% and Tokuyama rose by 12.68%, for example.

Mr. Hollande believes that the Eurozone will come out all of this stronger and better. Strength in the face of adversity, united we stand! Sounds like Mr. Hollande has just found the new slogan for the EU27. We never believed the first one Mr. Hollande (“United in Diversity”), so there’s no point changing it. Europe has never been so divided!

Has Mr. Hollande been looking at the figures? New figures on debt-to-income ratios in the Eurozone show that Ireland, Greece and Portugal all have levels of 300% in terms of indebtedness. Ireland has a debt of €192bn, which is 340% of government income. Greece is at 350%. The UK has a debt-income ratio of 212%.

Still, that looks pretty damn good when you look at the debt-income ratio of the USA, which is 560%. Hey, he was right after all, we’re doing fine!

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