Market Story I: 3/1/11

Tuesday, March 22, 2011

The Start Of A Major Distribution Phase

During the past several trading days, equity markets rallied back from deeply oversold conditions, filling the downside gaps the markets had opened after the severe earthquake in Japan. I believe we are witnessing the first part of a huge distribution phase, that will mark a cyclical top in 2011. This could lead to spectacular moves in Indices, to the up- as well as to the downside. It will take some time until markets start to roll-over and resume the secular bear-market. We could even see a new high in the S&P500 this year, but if this is the case, I expect negative divergences setting up, confirming that a big top is under way for equities in 2011. The technical condition remains strongest in the big cap sector, which could be an indication that investors start to shift from small- to big caps and build their portfolio in more defensive names.

For those of you who have not seen the documentary movie "INSIDE JOB", I would recommend you to watch that. As you are probably are aware, we have not setup any meaningful regulation for Investment Banks and Derivative Trading. On top of that, the Swiss National Bank is celebrating that it cut losses on EURCHF trades, by selling "toxic assets" with a profit. This sounds like as if you wake up in intensive care and your doctor is telling you: We implanted this cancer successfully into your body.

"INSIDE JOB" : http://topdocumentaryfilms.com/inside-job/ all the culprits are still in charge.

FTSE: Starts to under perform, there is a danger of a substantial top here

Biotech Index: Showing relative strength, a break above 1310 would give a buy signal

Volatility: After the triple witching option expiry, we are back in the "neutral zone".

The Bullish Percent Index (BPI) is a breadth indicator based on the number of stocks on Point & Figure buy signals within an Index: We have a bull correction S&P500 and some bear alerts NASDAQ COMP. NYSE COMP., but not a new bear confirmed yet.

SPY: I expect a retest of the lows in the coming days.

The Nasdaq QQQQ tracker has to test and hold the 53.85 level

USD: Testing the important support, but still no signs of live...

The DAX has a good chance to build a bottom within its uptrend

SMI: Good Support around 6000. Investors could buy the support in defensive names.

Eurobanks: Still very resilient, but I would avoid this sector

Dow Jones Industrial: Big Caps start to outperform

Eurostoxx50: Could build a bottom around 2750, still within it's uptrend.

Syngenta: Broke uptrend: Also here, some bottom building above 291 needed.

Kali & Salz: Merrill Lynch initiated a sell-off after buying the SDF stake from BASF, stop-loss 48

XLE Energy Sector ETF: The uptrend is broken and there is a possibility for a short term top

Gold: At resistance, but momentum does not favour a break-out.

Monday, March 14, 2011

Bull Correction or Bear Market Ahead?

The Bulls had not much to cheer about during the past week, as tons of bad news flooded the markets, starting with renewed fears of an European Debt Crisis getting out of control, followed by more unrest in the middle east and on top of that, we witnessed one of the strongest earthquakes in History, which hit Japan on Friday just after the closing bell. The tragic news out of Japan is now what weights the most on international equity markets. Ultimately, here comes the most important question for investors: Is this rally over? I would say no.

The economic recovery that started in the US almost 2 years ago, is in full force and there are no signs that this recovery is weakening. We probably have to worry later in the year, when the FED ends its QE2 Programm. We will get comments on monetary policy from the FED later in the week, but for now, no change in wording is expected.

I strongly believe that after some back and forth action during the month of March, equities will continue to rally, with the S&P500 trading above 1400 in Q2. It is very important that we get some high bearish sentiment readings in the coming 2 weeks, confirming that investors have liquidated positions and raised cash and the market can continue to climb the so called wall of worries. My preferred downside target for the S&P500 is 1250.

I updated the charts at 10:00 CET to take into account the recent overnight market action in Japan. After a 3rd. explosion in the nuclear power plant of Fukushima, the Nikkei plunged almost 15 % to a day low of 8227.63 and to close at 8605.15, down 1015.34 points. Traders in Zurich are saying that the citizens of Tokyo are not fully aware of the situation, since the Japanese Government is not telling the full truth about the situation.

UPDATE: There is fear of a nuclear meltdown in Fukushima. Marc Faber gave an interview on CNBC that makes the situation very clear: Meltdown or not.

http://bit.ly/gVOGXr

VIX: Chances are high that we get this break- out.

NIKKEI: Heading towards heavy support zone

SPY: From a consolidation into a correction...127.84 support

QQQQ: 53.85 is the next good support

Dow Jones: Support is 11850 & 11664

Eurostoxx50: 2750 & 2650 support

DAX: Good support at 6350

SMI: 5950 is next tradable support

DXY: The negative events could have positive impact on the USD

EURUSD: Topping out, waiting for a break of 1.3780 to short

Gold: Stalling at resistance

Crude: My target is still USD 120

Corn: Waiting for some bottom building,

Wheat: Trading at support

Tuesday, March 8, 2011

Some Similar Patterns In The 60' Timeframe

The week started with some back and forth moves, but overal the action is absolut trendless. Below I posted some 60' Charts, so we can zoom in and understand short term price moves. Several Indices display triangles. Triangles are a result of agressive buying and selling. On a technical basis, there is no way to tell in advance if the market will break to the up- or downside. The Eurostoxx50 is the first market that moved out of it's triangle, but the support of 2925 is still holding up well. The market has certainly started a consolidation, but for a stronger move to the downside we need to break the supports mentioned below.

SPY: support is 131.08 & 129.56(minor) &127.4 (bigtime)

Dow Jones: support is 12035

QQQQ: Resistance is 58.58 / support is 55.25

Eurostoxx: Already out of the triangle, support is 2925

SMI: Support of 6400 is important

DAX: Support is 7190 & 7080

Crude: Fading momentum, consolidating above support

EURUSD: Negative divergence in the 60' the same could happen

in the daily time frame

Monday, March 7, 2011

Spring Time For Hitler

If you want to make something really bad, it can happen that suddenly the whole world agrees that this actual outcome is the best thing that ever could have happenened. Like in Mel Brook's "The Producers" where a financial consultant presents a failed Producer, Max Bialystock, an excellent idea: Making the worst Brodway Musical of all times: "Spring Time For Hitler". After some calculations, he realizes that "under the right circumstances, a producer could actually make more money with a flop than he can with a hit. ... You could've raised a million dollars, put on your $100,000 flop, and kept the rest!" Max proposes the ultimate scheme:

Step 1: We find the worst play ever written.

Step 2: We hire the worst director in town.

Step 3: We raise two million dollars. One for me, one for you. There's a lot of old ladies out there!

Step 4: We hire the worst actors in New York and open on Broadway and before you can say

Step 5: We close on Broadway, take our two million, and go to Rio.

A comparable Idea was probably QE, and the outcome is as surprising to most of us as on Broadway. Mr. Gross from Pimco wrote in his latest comment:

"No clue or outright signal could have been any clearer than the one given in December 2008, labelled “Quantitative Easing.” While the term was new, the intent was obvious: (1) pump public money into the financial system to replace private credit that was being destroyed in the process of deleveraging; (2) lower interest rates on intermediate and long-term mortgages/Treasury bonds and in the process flush money into risk assets – most visibly the stock market; and (3) forecast publically then hope that higher stock prices would lead to a wealth effect, and in turn generate new private sector lending, job creation and a virtuous circle of economic expansion that would heal the near-fatal wounds of Lehman and its aftermath. If that was the game plan, then so far, so good, I’d say. Interest rates are artificially low, stocks have nearly doubled since QE I’s first announcement in December of 2008, and the US economy will likely expand by 4% this year, although a $1.5 trillion budget deficit must share QE’s Oscar for most stimulative government policy of 2009/2010."

In my view, first of all, the wealth effect is not very important, since about 18 % of the U.S. population owns almost 90 % of the country's wealth. But as the US accumulates more and more debt, PIMCO is probably asking the right question:

"What an unbiased observer must admit is that most of the publically issued $9 trillion of Treasury notes and bonds are now in the hands of foreign sovereigns and the Fed (60%) while private market investors such as bond funds, insurance companies and banks are in the (40%) minority. More striking, however, is the evidence in Chart 2 which points out that nearly 70% of the annualised issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns. Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn’t?"

With the recent rise in commodity prices, as well as the hawkish comments made by the ECB, the USD came under heavy selling pressure this week, and as a result of this, the discussion on reserve currency status is reemerging. If the FED & the Treasury do not take steps to protect the USD against it's devaluation, it will be extremly difficult for the US to sell Treasuries at the current market rates.

As for the overal market action over the past 2 weeks, most Indices display volatile sideways action. Despite the rise in Oil prices, equity markets remain resilient, and we still don't have one single sell signal in place, neither in Europe, nor in the United States Of America. For now, the worst idea, creating more debt to heal a debt problem is working for the markets. Probably a phenomenom like in Mel Brooks Brodway act. The producers of QE are certainly surprised how well it worked on the short run, but the side-effects are just starting to show up now, and they are not very welcome.

Vix: out of the downtrend, but resistance at 23 remains intact.