Let's Get Technical

On the surface thus far, September has seemed to be a very normal month.  Below the surface, it has been far from it.   Coventional wisdom is aware that, historically, it is the weakest calendar month in terms of average stock market performance and, therefore, there was a decent level of angst about what would happen when traders and portfolio managers returned from their summer vacations in the Hamptons.

The market has been up 9 of the last 11 days.   These extreme strings of near-consecutive days up or down are very often signs of exhaustion.  Market tops tend to be rolling like an upside down arc or parabola.  Significant bottoms, on the other hand, are very often V-shaped, characterized by panic selling.

If we put those two observations together we can form an educated opinion as to the technical health of the stock market.  In the last 11 days, the Dow Jones Industrial Average has gone up a mere 6% the Standard & Poors 500 has risen 7%, the Russell 2000 8% and the Nasdaq 100 11%.  If the market was firing its thrusters for a huge move up, we ought to have seen gains of about double those just experienced.

A 9 of 11 exhaustive string on the downside could potentially result in drops of 20% or more. 

Somewhat disturbing is the behavior of the Gold Bugs Index (HUI), especially in light of the move in Gold itself.  The HUI is up only 1% despite a 3% advance in Gold and a 10% gain in Silver.  In addition, the Dollar index is down 2%, which should have provided a modest tailwind.  This is NOT healthy action.  The breakout of Gold above $1,250 was NOT accompanied by a breakout of the HUI above 500.  For a true bull market to have begun, the twin conditions of Gold above $1,250 AND 500 on the HUI should have bene met.  That a breakout didn't occur was quite surpising. I guess Gold 2K will have to be put on hold.

Therefore, while the likelihood of a MAJOR drop in Gold or the HUI is small, we ought to remain on alert that a correction of some sort has become highly probable.  In combination with a waterfall decline in stocks, precious metals are better avoided than ridden-out except with long-term money. More importantly, whatever correction occurs will represent yet another low risk entry point.

The other key reason to argue for extreme caution at this time is the major headwind created by the plunging money supply.  The most recent figures and the implications are covered here:  (http://markostake.blogspot.com/2010/09/turning-economic-titanic.html).

The deflationary forces are confirmed by the action of the bond market which has made new highs after a nearly 30 year bull market.   In addition, longer rates have come down much more than short-term rates flattening the yield curve.  The slope of the yield curve is particularly critical to the financial sector as the bulk of borrowing is done on the short end, while lending tends to be longer term.  The spread between the two creates the level of profitability.

So, it continues to make sense to stay liquid.  There will be a better time to take risk.

Marko's Take

I See The Bad Moon Arisin'

Last night was a full moon.  A BAD moon.  With the recent solar eclipse window still open, coupled with the full moon, the anticipated crash, should it happen, ought to take place imminently.  A review of the significance of astro-harmonics can be reviewed by clicking here:  http://markostake.blogspot.com/2010/07/hindenburg-omen-confirmed-or-was-it.html.

Now that earnings season has encouraged investors, it's time for the economic reality to splash cold water in the financial markets' faces.  The news is exceptionally poor.

The Richmond branch of the Federal Reserve’s measure of manufacturing activity for the  mid-Atlantic region plunged by about 30% . The fall was less than economists were predicting, but the decline strongly suggests tha one of the US’s only area of strength has an empty gas tank.

The economy’s weakest sector, housing, got yet more bad news.  Sales of existing homes fell 27.2%  in July, the steepest monthly drop in 15 years and past consensus expectations of a 12%  decline.

The Richmond Fed’s index came in at 11, versus 16 the previous month.  Last week, the Philadelphia branch registered a disappointing index of factory activity that sent markets reeling, as it suggests a potential dip in the August reading of the broader Institute of Supply Management’s index.  The Chicago Fed’s index is due next week.

And this is just the beginning.  In today's trading, it appears that we will have yet another Hindenburg Omen.  This makes at least 3, depending on whose definition of it one ascribes to.  What's a few New Highs and New Lows among friends, anyway?

The equally ominous head and shoulders pattern gives us at least an idea of what might be reasonable to expect here in terms of the next intermediate low.  A good rule of thumb is that once the neckline is broken, the downside target is equal to the decline that immediately preceeded it.

Thus, one could look to these levels for the market to take its next breather:  525 on the Russell 2000, 925 on the Standard & Poors 500, 1900 on the Nasdaq Composite and 8500 on the Dow Jones Industrial Average.  And, these levels, or some approximation thereof, should be reached BEFORE the actual crash occurs, if there is one.

The only safe places to hide capital are Utilities, Oil Companies with a high dividend, Gold (physical), the Dollar and ultra-safe Bonds.  For the aggressive, inverse ETFs such as FAZ and TWM ought to provide at least a good hedge, but also a very risky, but potentially very profitable trade.

I see the Bad Moon Arisin', I see trouble on the way....

Marko's Take