More Dollar Strength Ahead

Tuesday, August 31st, 2010

As we move into the fall it sure looks like we are going to enter another bull phase in the US Dollar. As evidenced by the chart below the technicals seem to be pointing to a minimum move back up to the 87 level. The Dollar index needs to break above its recent highs to confirm that this move is in effect or its just another set-up.

A move back to the upside is also consistent with my view that we are going to see more deflation ahead. This should also correspond with a reversion to risk and a continued move out of equities and risky assets in general over the next few months.

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Big CEO’s Bash Obama

Thursday, August 26th, 2010

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Euro/Yen Signaling Major Market Weakness

Monday, August 23rd, 2010

The Euro/Yen cross has been one of the best indicators of risk and stock market direction for the past few years. It is now moving towards making new lows since its peak in 2007.  This can’t be seen as a positive sign moving into the next few months which are typically the worst for equities.

Here is the chart and notice the break towards new lows today:

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The Banks Look Weak

Monday, August 23rd, 2010

The stock market as a whole looks like it is just starting another correction phase led to the downside by the banks. In my opinion the banks are the lynch pin that will move this market either up or down. Right now with the current head and shoulders pattern on the bank index, see chart below, I think we are in for a double dip. The banking sector is one of the most important to the economy and is also the sector that lead both decline in 08 and the advance in 09.

While many market pundits are quick to dismiss the double dip as a possibility the fact remains that every stock market decline as large as the one we saw in 08-09 led to a double dip. Just look at the 1930′s, the 1970′s, and Japan in the last 20 years. They all experienced a double dip and this time is no different.

Don’t believe me…take a look at JP Morgan, Bank of America, and Wells Fargo. They are all trading at or near 52 week lows.

Here is a chart of the bank index:

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Deflation Starting to Take Shape

Monday, August 2nd, 2010

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Leading Indicator Confusion

Sunday, August 1st, 2010

What are the leading indicators telling us right now? Short term confusion…

Well, copper which is said to have a masters degree in economics is suggesting things are getting better as of late:

Bonds on the other hand which are said to have a PHD in economics are suggesting things are getting a lot worse. Here is a snapshot of the 10 year yield which is declining to levels not seen since the stock market lows.

I tend to favor bonds because copper tends to move with China and inverse to the Dollar whereas bonds move based on real economic fundamentals, period. The Dollar has been getting killed and China has been rebounding both of which are very favorable for copper. I happen to think things are getting a lot worse and that this bond move is clearly signaling longer term deflation and sluggish economic growth. Over the short term we may see more upside in commodities but until yields turn higher the move is probably limited.

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Todd Harrison on Socioeconomics and the Markets

Tuesday, July 20th, 2010

Todd Harrison is one of my favorite market analysts and I always listen when he speaks. I also happen to agree with most everything he says in these two videos. They are worth a watch:

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Confidence Is Gone and Mortgage Debt Dwarfs Assets

Monday, July 19th, 2010

Michigan consumer sentiment came out Friday with its biggest drop since September 11, 2001. The index dropped from 76 to 66.5. The biggest thing to point out as evidenced by the chart below is that 66.5 level is the point at which has signaled recessions in the past 30 years. Is this time different? I doubt it!

Source: St. Louis Fed

This morning  home builder confidence came out at 14 which is the lowest level since March 2009, the depths of the bear market. It seems very obvious from my vantage point that things are getting worse not better. Case in point, look at the chart below that shows that mortgage debt dwarfs assets by more than $4 trillion! Yes that’s Trillion with a capital T.

Source: bloomberg

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Why This Market Is Very, Very Dangerous…Its All One Big Liquidity Trade

Wednesday, July 14th, 2010

After looking at the graphs below it doesn’t take long to see that all the markets are correlating and acting like one trade. Typically, when this happens we tend to see a major stock market correction. This is not a timing indicator and I am not suggesting that it happens tomorrow. My point is that this is not the time to be taking a tremendous amount of risk especially unhedged risk.

Take a look for yourselves and you’ll notice that stocks are the most correlated they’ve been since 1987. You might also note that the last time we got this correlated was…yep you guessed it, 2008 which was just before the onslaught of the global credit crisis.  As far as I’m concerned you’ve been warned!!!

Source: Wall Street Journal

Source: Wall Street Journal

Source: Bianco Research

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Time For A Bounce?

Tuesday, July 6th, 2010

Whenever I see articles in the New York Times that are extremely bearish we are usually in for a bounce even if it is short term. In Friday’s edition this article appeared:

A Market Forecast That Says ‘Take Cover’

WITH the stock market lurching again, plenty of investors are nervous, and some are downright bearish. Then there’s Robert Prechter, the market forecaster and social theorist, who is in another league entirely.

Mr. Prechter is convinced that we have entered a market decline of staggering proportions — perhaps the biggest of the last 300 years.

In a series of phone conversations and e-mail exchanges last week, he said that no other forecaster was likely to accept his reasoning, which is based on his version of the Elliott Wave theory — a technical approach to market analysis that he embraces with evangelical fervor.

Originating in the writings of Ralph Nelson Elliott, an obscure accountant who found repetitive patterns, or “fractals,” in the stock market of the 1930s and ’40s, the theory suggests that an epic downswing is under way, Mr. Prechter said. But he argued that even skeptical investors should take his advice seriously.

“I’m saying: ‘Winter is coming. Buy a coat,’ ” he said. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”

His advice: individual investors should move completely out of the market and hold cash and cash equivalents, like Treasury bills, for years to come. (For traders with a fair amount of skill and willingness to embrace risk, he suggests other alternatives, like shorting the market or making bets on volatility.) But ultimately, “the decline will lead to one of the best investment opportunities ever,” he said.

Buy-and-hold stock investors will be devastated in a crash much worse than the declines of 2008 and early 2009 or the worst years of the Great Depression or the Panic of 1873, he predicted.

For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people “from buying stocks for 100 years,” he said. This time, he said, “If I’m right, it will be such a shock that people will be telling their grandkids many years from now, ‘Don’t touch stocks.’ ”

The Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end, he said. That unraveling, combined with a depression and deflation, will make anyone holding cash “extremely grateful for their prudence.”

Mr. Prechter is hardly the only market hand to advocate prudence now, but nearly everyone else foresees a much rosier future, once current difficulties are past.

For example, Ralph J. Acampora, a market analyst with more than 40 years of experience, said he moved entirely out of stocks and into cash late last month. Now a partner at Alverita, a wealth management firm in New York, he said recent setbacks suggested that the market would drop another 10 or 15 percent, probably until September or October, before resuming another “meaningful rally.”

Over the next several years Mr. Acampora expects an “old normal market,” characterized by relatively short-lived swings that will provide many opportunities for smart investors — one that resembles the markets of the 1960s and 70s. “I’ve lived through it,” he said.

Like Mr. Prechter, he is a past president of the Market Technicians Association, the leading organization of technical market analysts, and he said that his colleague has done “some very good work.” But Mr. Acampora doesn’t agree with Mr. Prechter’s long-term theories, either intellectually or emotionally.

The “mathematics don’t work,” Mr. Acampora said, because such a big decline would imply that individual stocks would need to trade at unrealistically low levels. Furthermore, he said, “I don’t want to agree with him, because if he’s right, we’ve basically got to go to the mountains with a gun and some soup cans, because it’s all over.”

Still, on a “near-term” basis, he said, “We’re probably saying the same thing.”

Similarly, Larry Berman, who co-founded ETF Capital Management in Toronto and recently ended his term as the president of the technicians association, says he sees a “classic” short-term negative market trend developing now. But he doesn’t use the Elliott Wave theory, saying Mr. Prechter is trying to “measure the market in decades, which is too long a time frame for practical trading purposes or for risk management.”

Source: The New York Times

While I tend to agree with Prechter, although I am not as bearish as he is, this should produce a short term market bounce. Let’s see how long it lasts…

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