Stock Market Sell Signals Abound

By: Anthony_Cherniawski

The NYSE Hi-Lo index went negative this morning and exceeded its two prior lows. This confirms the sell signal in SPX.

The VIX also confirmed its buy signal and inversely, confirmed the SPX sell signal as well. We may see an extended, super-sized minute Wave [iii] that could push it to its Cycle Top at 18.11 and send it on its way back to its inverted Head & Shoulders neckline at 24.00. The small Head & Shoulders pattern that was triggered yesterday (not shown) has a minimum target of 15.89.

SPX is back-testing its Broadening Wedge trendline. We could see further a bounce back to the Head & Shoulders neckline at 1802.76 before resuming its decline. That may be an indication of a more complex and possibly stronger decline.

1802.00 would be an excellent area to max out on the short side.

More to come later.

Regards,

Tony

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Bernanke/Yellen To Drive Stocks 30% Higher

by Lance Roberts

That's right, despite all of the recent "bubble talk," it is entirely possible that stocks could rise 30% higher from here.  However, it is not because valuations are cheap because as I discussed in my recent analysis of Q3 earnings stocks are trading near 19x trailing earnings.

"Understanding this it is easy to understand the flaw in using "forward" estimates as a valuation tool.  The use of forward, operating estimates, is only beneficial to Wall Street analysts who need to create a "valuation" story when none really exists.  Overly optimistic assumptions about the future spurs faulty analysis in the present as sliding earnings leads to sharp valuation increases. The chart below shows the progression of forward P/E estimates since the beginning of 2012.  Currently, with the S&P 500 valued at 18.89x reported earnings, it is hard to justify that the market is undervalued."

The primary reason that stocks are likely to climb 30% higher from current levels, over the next 24-months, is because that is what happens during the "mania" phase of a bull market cycle.  This is something that Richard Russell recently defined as:

"The third or speculative phase of a bull market is characterized by a wild and wooly and ever-increasing entrance by the retail public. This phase is characterized by hot tips, hype and pure greed."

As I stated previously it is probably too early to say that we are deep within "bubble" territory because simply too many people are talking about.  It is reminiscent of Alan Greenspan in 1996 uttering the words "irrational exuberance."  The fear of irrational exuberance was eventually quelled by a belief that "this time was indeed different" due to the "new era" of technology.  Ever higher levels of valuations were justified through "forward earnings expectations" and modified "valuation analysis" that, as always throughout history, ultimately failed to materialize.

Currently, individual investors are once again piling into equities under the belief, once again, that this time is different.  In 1999, it was the "tech boom,"  followed in 2007 by the "real estate/credit boom."  Today, it is the inherent belief that the "Fed's accommodative policy"  trumps all other issues.   "Don't Fight The Fed" has become the retail investor's call to arms as shown by the chart of money flows into retail equity mutual funds by ICI.  (Note:  Only the first two weeks of November are included which are already as great as the full month of October)

The support provided by the Federal Reserve has given investors a false sense of complacency regarding the risks of chasing yield in the financial markets.  However, that has always been the hallmark of the late stages of bull market cycles.

"The Beatings Will Continue Until Morale Improves"

Ben Bernanke has been very clear in his communications that the Federal Reserve will continue with its "ultra-accommodative monetary policies" until there are significant signs of improvement in the economic data.  One of his key phrases has been:

“When, ultimately, asset purchases do slow, it will likely be because the economy has progressed sufficiently for the Committee to rely more heavily on its rate policies,”

The term "ultimately" is the key phrase in this regard as it implies that there current stance could remain in place for quite some time to come.  This is especially the case when you consider that the Fed's biggest fear is actually getting worse; deflation.

"The [inflation] index is clearly warning of rising deflationary pressures in the economy, which has recently been seen in many of the manufacturing reports that have shown downward pricing pressures both on prices paid and received, there is no 'exit' currently for the Federal Reserve to reduce its monetary supports.  The real concern is that with the index at just 5.11%, which is well below the long term average of 11.62%, that the economy is far to weak to handle much of an exogenous shock.

The risk, as discussed recently with relation to Japan, is that the Fed is now caught within a 'liquidity trap.'  The Fed cannot effectively withdraw from monetary interventions and raise interest rates to more productive levels without pushing the economy back into a recession. The overriding deflationary drag on the economy is forcing the Federal Reserve to remain ultra-accommodative to support the current level of economic activity. What is interesting is that mainstream economists and analysts keep predicting stronger levels of economic growth while all economic indications are indicating just the opposite.

Despite the Fed's recent communications that they are planning to "taper" the current monetary program by the end of this year - the index is suggesting that their interventions, in one form or another, are unlikely to end anytime soon as the threat of 'deflation' remains the Fed's primary concern."

Of course, it is not just Bernanke that maintains this stance but also his replacement Janet Yellen who has already indicated that she very much supports, and will maintain, Bernanke's current monetary policy regime.  As I stated recently in "Yellen Promises More," the lack of "economic success" will likely mean that the Fed remains engaged in its ongoing QE programs for much longer than currently expected.  The real surprise in 2014 could very well be an increase in size and scope of the current quantitative easing programs if interest rates remain elevated, deflationary pressures continue to increase and economic growth stalls. The injection of more liquidity could very well drive asset prices to the irrational extremes of a true market bubble.  However, if that occurs, the majority of market analysts and economists will not be talking about a "bubble" in asset prices but why "this time is truly different."

Jeremy Grantham of GMO, via ZeroHedge, more eloquently discussed this idea:

"My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up. And then we will have the third in the series of serious market busts since 1999 and presumably Greenspan, Bernanke, Yellen, et al. will rest happy, for surely they must expect something like this outcome given their experience. And we the people, of course, will get what we deserve. We acclaimed the original perpetrator of this ill-fated plan – Greenspan – to be the great Maestro, in a general orgy of boot licking. His faithful acolyte, Bernanke, was reappointed by a democratic president and generally lauded for doing (I admit) a perfectly serviceable job of rallying the troops in a crash that absolutely would not have occurred without the dangerous experiments in deregulation and no regulation (of the subprime instruments, for example) of his and his predecessor’s policy. At this rate, one day we will praise Yellen (or a similar successor) for helping out adequately in the wreckage of the next utterly unnecessary financial and asset class failure. Deregulation was eventually a disappointment even to Greenspan, shocked at the bad behavior of financial leaders who, incomprehensibly to him, were not even attempting to maximize long-term risk-adjusted profits. Indeed, instead of the 'price discovery' so central to modern economic theory we had 'greed discovery.'"

The following chart, which I have used many times in the past, supports this idea of a continued liquidity driven market melt-up.  It is simply an extrapolation of the correlation between the S&P 500 index and the Federal Reserve's balance sheet.

At the current rate of balance sheet expansion, and assuming that correlations remain, the markets could well rise to 2329 by the end of 2015.  This would also mean the Fed's balance sheet would have also expanded beyond $6 Trillion.  This would likely imply that the Fed would own more than 50% of the treasury market.

The problem with this analysis is that it assumes that everything else remains status quo.  The reality is that some exogenous shock will come along that causes a more severe reversion in the markets as current extensions become more extreme.   As Grantham noted:

"What can go wrong for the market? There is a slow and for me rather sinister slowing down of economic growth, most obviously in Europe but also globally, that could at worst overwhelm even the Fed. The general lack of fiscal stimulus globally and the almost precipitous decline in the U.S. Federal deficit in particular do not help."

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Engulfing bearish patterns in Europe…Will it spill over to the States?

by Chris Kimble

CLICK ON CHART TO ENLARGE

The above 3-pack looks at long-term patterns in France, London and Germany. Each chart reflects attempted breakouts is at hand, for these major markets.

The gray boxes take a very short-term snap shot of each market at the resistance and the red oval highlights "engulfing bearish patterns" in these key markets.

What goes up in a down market?  Correlation!!!

The Power of the Pattern reflected that the majority of the key worlds index were all "attempting breakouts at the same time!" (see post here)

If the worlds markets don't succeed breaking out at the same time, could the majority of the turn weak at the same time since correlation is so high?  Stay tuned...

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Oil drama flares after Ukraine protests

By Phil Flynn

While everyone thought all the drama in the oil market (NYMEX:CLF14) would be coming from OPEC, it seems that it is coming from Ukraine that is moving markets. As the President of Ukraine faces protest as he snubs the EU in favor of Russia, it seems that Russia is diverting some supply to try to add to the tensions. The Orange Revolution is turning to Russian red as protestors who don't take kindly to Russia take to the streets as Russia plays hard ball using its energy resources to try to coerce former Soviet territories into joining their union. It's the EU versus Russia as Vladimir Putin tries to reassert control over former Soviet territory.

The Voice of America reported that the European Union on Friday criticized Russia for pressuring Ukraine into abandoning a landmark free trade deal with the European bloc. The snub by Ukrainian President Viktor Yanukovych, announced last week, reverberated through an EU summit in the Lithuanian capital, Vilnius, where German Chancellor Angela Merkel was captured Friday on video telling the Ukrainian, "We expected more." Mr. Yanukovych responded, telling the German leader, "The economic situation in Ukraine is very hard. And we have big difficulties with Moscow." The summit, which ended Friday, was expected to showcase the signing of the agreement. But as last minute negotiations failed, thousands of opposition protesters in Kyiv gathered for a second time this week in the center of the city to demand the president's resignation.

Yet now he is having second thoughts, but it may be too late. The Wall Street Journal reported that "President Viktor Yanukovych, facing the biggest political crisis in Ukraine in nearly a decade, reached out to the European Union on Monday in an apparent attempt to placate thousands of pro-Western demonstrators angry over his pivot toward Russia. But the EU's executive reacted coolly to the request for new talks, telling Mr. Yanukovych that the sweeping trade deal he refused to sign last week after six years of talks wasn't open for renegotiation—and warning him against using force to disperse the crowds barricaded on Kiev's main square."

Oil was ignoring the Ukraine turmoil until Reuters reported that Russian Urals crude reversed to a premium from a discount to benchmark Brent after Russia diverted some oil from export destinations to neighboring Belarus. Reuters reported that said Russian oil companies Lukoil and Rosneft have cancelled loadings of two Urals cargoes on Dec. 13-14 and 14-15 from the Baltic ports of Primorsk and Ust-Luga. Reuters says that the exports of Urals had been expected to drop in December after Russia approved a boost in deliveries to Belarus by as much as 750,000 tons after tensions eased in a separate dispute between the two neighbors over potash prices.

It seems if you play ball with Russia you get the supply that you need. If not then they will put the squeeze on you. The diversion of that supply means less oil for other countries, which gave Brent crude a boost. At the same time Russia was trying to send a message to the protesting masses that life will be easier if they decide to play ball. Yet the Ukrainian people value their independence and still have memoires of the dark days of Soviet domination. They also remember in 2004 during the Orange Revolution when the Russians tried to rig an election and poison Viktor Andriyovych Yushchenko.

Russia is also threatening Yugoslavia to cut off gas supply unless they pay a hefty amount for the gas or sign up for this new Russian trade union. Yet for OPEC at least in the Eyes of Ali Naimi Saudi Oil minister the world is just a beautiful place. Oil glut? What oil glut? The Saudi Oil minister says that demand for oil was "great," that global economic growth was improving and, indeed, that the market was in the best possible situation. He is not worried about more oil from Iran because that is a what-if scenario. The oil minister has continued to downplay the impact of surging U.S. production, which has caused some rare criticism of the OPEC leader.

Yet Naimi says that "I am not pessimistic about the market. The market is doing well for the past two years. Inventories are right-positioned. The market is in the best situation it can be. Demand is great, economic growth is improving, why do you want to be so pessimistic? "Why cut production? Demand is there," he said. "I want you to go with one message. Be an optimist. There is good economic growth, there is good demand, the market is big, and everybody is going to supply what they can to satisfy the demand." As far as Iranian oil a point of contention he says "'If,' 'if,' 'if.' Stay away from if. I want whatever he is having!

Dow reports Turkey said on Monday that it stands by a bilateral oil deal with Iraq's Kurdistan region that bypassed central government but sought to appease Baghdad by drawing it into the arrangement.

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Orange juice drops as markets fend off cold weather

By Jack Scoville

FCOJ (NYBOT:OJF14)

General Comments: Futures closed lower as the weather in Florida remains generally very good. There is usually some speculative buying that appears at this time and as soon as the cold air starts to filter in from Canada, and cold air is coming again at the end of the week. Current above normal readings in northern areas will be replaced by much below temperatures this weekend. No one is predicting any freezing temperatures for Florida. Traders are expecting USDA to lower production even more in coming production reports. The greening disease has affected crops in a big way and could cause reduced production for the next few years. Growing and harvest conditions in the state of Florida remain mostly good. It has turned drier, which is seasonal, and reports indicate that crops are in good condition. Irrigation water is available. Harvest is increasing. Brazil is seeing near to above normal temperatures and showers.

Overnight News: Florida weather forecasts call for mostly dry conditions. Temperatures will average above normal.

Chart Trends: Trends in FCOJ are mixed. Support is at 137.00, 135.00, and 131.00 January, with resistance at 141.00, 143.00, and 145.50 January.

COTTON (NYBOT:CTH14)

General Comments: Futures closed lower. Prices remain in a trading range, and it seems like the market wants some demand news. Prices are still getting support from the storm that hit the production areas last week. Quality has suffered with the storm, and there is potential for some yield loss as well. There are questions about demand in China as the government there has offered its supplies into the domestic market. It sold half of its offer at the auction last week and will most likely offer more soon. Wire reports indicate that some production has been lost in China after recent bad weather in some growing areas. Brazil conditions are reported to be very good in Bahia. Harvest continues this week in the US, but should get interrupted again late in the week when the cold and snow and rain arrives.

Overnight News: The Delta and Southeast should see dry weather through the middle of the week, then some showers and snow late in the week. Temperatures will average near to above normal early in the week, then near to below normal. Texas will see dry conditions early in the week and rain and snow at the end of the week. Temperatures will average above normal early in the week, then below normal. The USDA spot price is 74.94 ct/lb. today. ICE said that certified Cotton stocks are now 0.237 million bales, from 0.237 million yesterday.

Chart Trends: Trends in Cotton are mixed. Support is at 78.00, 77.40, and 76.65 March, with resistance of 79.65, 80.50, and 80.95 March.

COFFEE (NYBOT:KCH14)

General Comments: Futures were higher in London, but lower in New York and Sao Paulo. London was higher on reports of light offers again from Vietnam due to recent rains and low prices. Ideas are that producers will have to start selling in the next month or so, but they are not selling now and futures are rallying as roasters and others look for supplies. The Arabica market is seeing only light offers as well and also saw some short covering, but buying interest for Arabica overall remains very limited. Brazil said last week it is considering new measure to support producers if needed. Brazil has a lot of Coffee to sell, but the market there remains quiet as producers wait for prices to rally above the cost of production. The rest of northern Latin America was quiet, but there is talk of a lot of Coffee there as well. Colombia has been more active, but sales have tailed off lately Central America is showing light offers as the harvest progresses under mostly good conditions. New York is trading in a range, but London continues moving higher in the short term.

Overnight News: Certified stocks are lower today and are about 2.675 million bags. The ICO composite price is now 103.62 ct/lb. Brazil will get scattered showers today and this weekend. Temperatures will average near to above normal. Colombia should get scattered showers, and Central America and Mexico should get mostly dry weather. Temperatures should average near to above normal.

Chart Trends: Trends in New York are mixed. Support is at 107.00, 105.50, and 104.00 March, and resistance is at 112.00, 115.00, and 117.00 March. Trends in London are mixed to up with objectives of 1690 and 1760 January. Support is at 1630, 1550, and 1520 January, and resistance is at 1675, 1695, and 1730 January. Trends in Sao Paulo are mixed. Support is at 132.00, 131.00, and 129.00 March, and resistance is at 136.50, 138.00, and 140.00 March.

SUGAR (NYBOT:SBH14)

General Comments: Futures were lower in both New York and London and made new lows for the move. Brazil said it plan is to introduce Corn ethanol produced locally in an effort to support Corn farmers in northern Brazil. The move would hurt Sugar ethanol demand. Petrobras left the market confused on prices for gasoline, and that depressed Ethanol there yesterday. All this coming on the heels of very high Sugarcane production in Brazil from a harvest that never seems to end. The market needs some demand news, but is not getting any. Chart trends remain generally down in New York and London. Countries like India and Thailand are selling as much as possible. Weather conditions in key production areas around the world are rated as mostly good. There is no news of losses to Sugar areas in Vietnam and China, but some losses are possible due to big rains a few weeks ago. India could see some losses from unseasonal cyclone activity in the northeast and east part of the country. Eastern growing areas have now seen three or four cyclones in the last couple of months. Weather in Brazil appears to be mostly good, with showers to support new crop development.

Overnight News: Brazil could see showers and near to above normal temperatures.

Chart Trends: Trends in New York are down with objectives of 1715 and 1680 March. Support is at 1715, 1695, and 1685 March, and resistance is at 1730, 1750, and 1765 March. Trends in London are mixed. Support is at 460.00, 458.00, and 452.00 March, and resistance is at 466.00, 467.00, and 469.00 March.

COCOA (NYBOT:CCH14)

General Comments: Futures closed higher, but held in the recent trading range in London. Support came from the increased deficit production forecast from the ICCO. New York was also mostly in the range, but posted a new high close. There were reports of increased selling from Ivory Coast last week, and supplies should be available. Ideas of very strong demand are supporting prices, and certified stocks keep dropping in New York. Reports indicate that rains are less this week in West Africa, which should help harvest progress and processing progress. Much of West Africa is now reporting reduced production due to stressful conditions earlier in the growing season, but this has yet to bear out in official data outside of Nigeria. The overall fundamental picture should support generally higher prices as the supply situation should be tight once the harvest selling is done. Midcrop production conditions are rated as good.

Overnight News: Scattered showers or dry conditions are expected in West Africa. Temperatures will average near to above normal. Malaysia and Indonesia should see scattered showers. Temperatures should average near to above normal. Brazil will get dry conditions and near normal temperatures. ICE certified stocks are unchanged today at 3.418 million bags.

Chart Trends: Trends in New York are up with objectives of 2880 and 2960 March. Support is at 2800, 2770, and 2755 March, with resistance at 2845, 2860, and 2890 March. Trends in London are mixed. Support is at 1730, 1710, and 1680 March, with resistance at 1775, 1790, and 1800 March.

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Chinese Yuan Surpasses Euro, Becomes Second Most Used Currency In Trade Finance

by Tyler Durden

Slowly but surely the Chinese currency is catching up to the world's reserve and moments ago, according to SWIFT, the Yuan just surpassed the Euro in trade (remember trade: that's how countries once upon a time would generate capital flows in a time when central banks weren't there to literally print domestic funding needs) finance usage leaving just the USD in front.

• YUAN OVERTAKES EURO IN TRADE FINANCE USAGE: SWIFT
  
• YUAN IS SECOND MOST-USED CURRENCY IN TRADE FINANCE: SWIFT

More from Bloomberg:

• Chinese currency had 8.66% share in letters of credit and collections, or trade finance, in Oct., Society for Worldwide Interbank Financial Telecommunications says in statement today.
• Euro’s shr in trade finance was 6.64% in Oct.
• Top 5 countries using yuan for trade finance in Oct. were China, Hong Kong, Singapore, Germany and Australia
• Yuan mkt shr in global payments was 0.84% in Oct. vs. 0.86% in Sept.
• Yuan payments value rose 1.5% in Oct. vs. 4.6% growth for all currencies: Swift

And so while the "developed" world is busy crushing its fiat through trillions in annual currency dilution and debasement in an attempt to make its exports cheaper and outtrade its peers through beggar thy neighbor policies (not to mention inflate away its debt), the leader of the "emerging" world, China, is doing just that.

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