Saturday, February 27th, 2010 at 3:44 pm

Market Rallies Getting Weaker and Weaker

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David Banister is the Chief Investment Strategist for ActiveTradingPartners.Com and for the soon to launch TheMarketTrendForecast.Com.  You can review all of our offerings at www.thetechnicaltraders.com

This is a commentary on the SP 500 index and the broader NYSE index.  As I often mention here for Partners, we try to work in probabilities and then plan accordingly with our investing and trading.  I look at Elliott Waves, Fibonacci levels, oversold and overbought patterns, cycles, and other indicators to give me some clues.  Today, we look at an indicator called The Force Index.

The Force Index:  Developed by Dr Alexander Elder, the Force index combines price movements and volume to measure the strength of bulls and bears in the market. The raw index is rather erratic and better results are achieved by smoothing with a 2-day or 13-day exponential moving average (EMA).

  • The higher the positive reading on the Force index, the stronger is the bulls’ power.
  • Deep negative values signal that the bears are very strong.
  • If Force index flattens out it indicates that either (a) volumes are falling or (b) large volumes have failed to significantly move prices. Both are likely to precede a reversal.

That last explanation I bolded because we may be under that type of condition.   Below are two charts, one with the SP 500 and the other is the NYSE composite index.  Recently, the NYSE composite has managed a light 45% re-tracement of the Jan/Feb decline, whereas the SP 500 has managed a stronger 67% re-tracement of the prior decline.  Some have surmised the SP futures are being manipulated most every monday morning by strange and heavy futures buying in pre-market.  22 of the last 25 weeks this has been the case, yet the overall internals of the market are not showing as being very strong if you look at the Force Index.  They especially show up weak if you view the larger NYSE composite index, which would be much harder to “paint” as it were.

My point on these charts is to look at the brown color for the Force index as it relates to the market movements over several months.  As that brown graph gets weaker with each rally, it means the bulls have less and less power and volume and money pushing the market higher.  Most recently, this last market rally has been the weakest in months according to The Force Index indicator,  and again, helps to provide me with clues that a C wave down is still due.

This may help you all understand my apprehension near term on the broader markets and why we have positioned or recommended positioning in the EDZ and/or the TZA ETF’s.  The market may bounce a bit higher early in the week to complete the zig zag bounce from the Feb lows, but I expect a re-test of the Jan/Feb lows to commence.  If I’m wrong, it won’t be the first time nor the last…

SP 500 Weekly Chart, (Click to Enlarge)

spy weekly force chart

NYSE Composite Chart- Click to Enlarge (Daily Chart)

nya force chart

David Banister is the Chief Investment Strategist for ActiveTradingPartners.Com and for the soon to launch TheMarketTrendForecast.Com.  You can review all of our offerings at www.thetechnicaltraders.com

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Saturday, February 27th, 2010 at 12:23 pm

Pictures of a Market Crash: Beware the Ides of March, And What Follows After

Courtesy of JESSE’S CAFÉ AMÉRICAIN

There are a fair number of private and public forecasters that I know who anticipate a significant market decline in March.

Let’s review where we are today.

The Bear Market of 2007-2009, marked by the Crash of 2008, was a massive decline in equity prices precipitated by the bursting of the credit bubble centered around housing prices and packaged debt obligations of highly questionable valuations.

Even today, I think most people do not appreciate the sheer magnitude of the decline, and the damage it has done to the real economy. This is the result, I believe, of three factors:

1. An extraordinary expansion of the Monetary Base by the Federal Reserve not seen since the aftermath of the Crash of 1929, and a swath of financial sector support programs from the Fed and the Treasury, resulting in a spectacular fifty percent retracement from the bottom.

2. A comprehensive program of perception shaping by the government in conjunction with the financial sector to raise consumer confidence and prevent a further panic.

3. An understandable preoccupation with the details of breaking news, and a short term focus on particular events and even exogenous controversies, without a true appreciation of the ‘big picture,’ in part because of some very effective public relations campaigns.

This is resulting in a remarkable case of cognitive dissonance in which the victims of a spectacular man made calamity are opposing remedies and aid as too costly, as they walk around bleeding in the carnage.

For those who read the contemporary literature in the early Thirties, this is nothing new. In the early Thirties there was no sense of the magnitude of what had happened, except for a few notable exceptions, and the sense of ‘life goes on’ seems almost eerie to a modern reader. Indeed, Herbert Hoover could dismiss a delegation of concerned citizens with the advice that they were too late, the crisis was past.

The parallels with the Thirties and the Teens (today) are many, and uncanny.

There is the reformer President, elected to redress the policies of his Republican predecessor. In the Thirties they had FDR who was a decisive and experience leader. In the Teens the US has a community organizer much more in the sway of the Wall Street monied nterests, who is trying to work through indirection and persuasion.

There is a Republican minority in the Congress which opposes all new programs and actions in both cases. In the Thirties they were over-ridden by a powerful President, who created a “New Deal” set of legislation, much of which was later overturned by a Supreme Court which had been largely selected by the previous Republican Administrations.

Indeed, the remaining New Deal programs that were successful, the reforms of Glass-Stegall and the safety net of Social Security, are being overturned and are under attack in an almost bucket list fashion.

So what next?

Another leg down in the economy and the financial markets is a high probability.

Although one cannot see it just yet in the fog of corrupted government statistics, the economy is not improving and the US Consumer is flat on their back.

There are still far too many otherwise responsible people who are not taking the situation with the high seriousness it deserves. They would like to see the US economy collapse, inflicting serious pain and deprivation because it may:

1.suit their investment positions and feed their egos,
2. satisfy their philosophical and emotional needs to see punishment administered, almost always to others, for the excesses of the credit bubble, even if they are unwitting victims, and/or
3. the sheer nastiness and immaturity of a portion of the population.

They know not what they do, until they do it, and see the results. It is often a good bet to assume that people will be irrational, almost to the point of idiocy and self-destruction. And some of them never wake up until they are overrun, and then will not admit their error out of a stubborn sense of pride and embarrassment.

There most likely will be a new leg down in the financial assets, as reality overcomes often not-so-subtle propaganda. It may start in March, or we may just see a ‘market break’ that provides a subtle warning for a large decline to begin in October 2010, with a multi year progression to lows that are as of now almost unimaginable, at least in real terms.

The Fed is acting in a way so as to mask quite a bit of this. One would hope that they would not re-enact the policy error of their predecessors and raise rates prematurely out of fear of inflation.

But the error might be emulated by a failure to stimulate the economy effectively and reform the highly inefficient and impractical financial system. The global trade system is a farcical construct that favors a few national elites and multinational corporations. Public policy discussion has been trumped by a handful of economic myths and legends that, even though disproved every day, nevertheless remain resilient in public discussions and reactions.

A more serious market crash might cause people to recognize the severity of their problems, and the thinness of the arguments of the monied interests for the status quo which is most clearly unsustainable.

The outcome is difficult to predict precisely because there are multiple paths that events might take at several key decision points, and some of them might be rather disruptive and upsetting to civil tranquility.

But as the dust continues to settle, the probabilities will continue to clarify.

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Saturday, February 27th, 2010 at 11:35 am

Bombshell In AIG 10Q: “Capital Relief”

The Market Tickeraig

Now that I’ve had to time to read the entire AIG 10Q there’s a nasty ditty in here that in my opinion goes materially beyond the “going concern” language.  It’s here:

A deterioration in the credit markets may cause AIG to recognize unrealized market valuation losses in AIGFP’s regulatory capital super senior credit default swap portfolio in future periods which could have a material adverse effect on AIG’s consolidated financial condition or consolidated results of operations. Moreover, depending on how the extension of the Basel I capital floors is implemented, the period of time that AIGFP remains at risk for such deterioration could be significantly longer than anticipated by AIGFP.

A total of $150.0 billion in net notional amount of the super senior credit default swap (CDS) portfolio of AIGFP as of December 31, 2009, represented derivatives written for financial institutions, principally in Europe, which AIG understands to have been originally written primarily for the purpose of providing regulatory capital relief rather than for arbitrage purposes. The net fair value of the net derivative asset for these CDS transactions was $116 million at December 31, 2009.

So AIG “understands” that $150 billion of credit-default swaps were written by AIGFP to European Institutions (no note by the way as to exactly what’s in there – or who owns them) for the explicit purpose of getting around capital requirements – either by banking regulators or (possibly worse) EU sovereign regulations.

When did they come to “understand” this?  Did they write these swaps originally knowing that their essential purpose was to evade capital requirements, or was this a “recent” revelation of some sort?

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Indeed, the section goes on to say:

In addition, although AIGFP receives periodic reports on the underlying asset pools, virtually all of the regulatory capital CDS transactions contain confidentiality restrictions that preclude AIGFP’s public disclosure of information relating to the underlying referenced assets.

Isn’t that nice?  So AIG insists that we trust them, and in addition, that everyone else trust them, as to the precise composition of these “assets”, their performance, and who is on the other side of the transaction.

Oh, it gets better.  The weighted average maturity of these transactions is 1.35 years, we can’t tell what’s left in there, and we also can’t know who’s on the other side of the transaction, but what we are told is that the essential financial purpose of these transactions was to evade regulatory capital requirements.

Net notional?  Oh, that’s nice.  Since the claimed underlying “net derivative asset” is essentially nil against this “notional”, one wonders what the real risk is on the table here in terms of the firm.  Seeing as it’s in the “risks” section of the 10Q, it has to be material to results, right?

Why do I smell sulfur?

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Saturday, February 27th, 2010 at 7:45 am

Rogoff: America Has Defaulted Before And It Will Run Into Trouble Again

Kenneth Rogoff spoke with CNBC today about the threat of sovereign debt crises today.

The Key Points:

  • When countries hit gross government debt as 90-100% of GDP, problems are bound to arise.
  • If countries go too long with stimulus it can leave them in a debt trap and with prolonged slow growth.
  • The U.S. has been in ‘default’ before — when it went off the gold standard — and there is no reason why it won’t have problems again.
  • Banking crises inevitably lead to sovereign debt crises as governments take on the debt.
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Friday, February 26th, 2010 at 9:08 pm

THE CYCLE OF DEFLATION

Courtesy of The Pragmatic Capitalist

By Comstock Partners:

We have been strong believers in the deflation theme since we have been writing these reports beginning in early 2000 (and even before).  We are attaching a chart depicting the “Cycle of Deflation” which you should print out and refer to as you read this comment.

As you can see by the chart, the typical deflation starts with savings and investment which produces strong sustainable growth in the economy.  However, when “greed” gets added into the equation, things sometimes change into non-sustainable growth.  This is what happened in the late 1900’s when the dot com bubble mania convinced every man woman and adult child to believe that they were all supposed to be multi millionaires.  They became so jealous of their neighbors who boasted about all the money they made in the market, that they also jumped into the market by buying such things as Internet Capital Group, CMGI, Iomega, JDS Uniphase, and many others of the same ilk which are now worthless.

com THE CYCLE OF DEFLATION

The unraveling started taking place in 2000 and it looked to us like the American public came to their senses.  We expected to have a significant recession where Americans could rebuild their balance sheets as the cycle of deflation took hold.  But,  instead the Fed lowered interest rates to 1% and kept them there for a year causing the public to again become jealous of their neighbors making thousands and millions of dollars on their homes. And also, believe it or not, the housing bubble brought about another bubble in the stock market. We couldn’t believe our eyes!!!

After the housing bubble burst, the stock market also collapsed causing a financial crisis “heard ’round the world”.  Then, we were sure the markets and economy would fall to levels that would repair balance sheets of the household sector and allow the economy to get back to the tried and true savings and productive investment that built this great country.  We still need to repair the household balance sheets that were, and still are, in the worst shape since than the Great Depression.  What will it take to get to the debt repayments and debt defaults (see the last stage of The Cycle of Deflation) that has to take place before a sustained recovery can be accomplished?

We understood that the stock market was extremely oversold in March of 2009 and that there had to be a rally.  But we found the 70% to 80% rally which occurred to be incredulous.  The market is up so far from the lows in March now that they have discounted a V shaped recovery.  We have to wonder if the public and financial institutions will ever learn.

We are now in the “competitive devaluation” part of the cycle of deflation and we should be getting close to repairing the balance sheets that are so out of line with history.  But, there is a stumbling block to the normal competitive devaluations that typically take place. In the past, a country that incurred too much debt just did what they could to devalue their currency in order to export their way out of the dilemma by exporting their goods and services to their trading partners.

Now, however, it is not so simple.  The Chinese have linked their currency to ours, so as we debase our currency, one of our major trading partner’s currency is also declining and China becomes the major beneficiary of the debasement of our dollar. Because of this peg (and the Euro tied to 22 countries) the typical method of debasing the currency of debt laden countries (or countries that just want to get even) have swung down in “The Cycle of Deflation” past competitive devaluations to “beggar thy neighbor” policies.  We explained many times that “beggar-thy-neighbor” policies essentially go much further than just currency debasement, but actually do whatever a country has to do to protect its jobs and its economy.  This means “dumping” goods and services on their trading partners (selling  goods and services below cost and subsidized by the government), increasing tariffs, and anything else in its power to help the economy at their trading partners’ expense.

A perfect example of this lies in the recent accusations from China that the U.S. has been “dumping” chicken products into the Chinese market.  It at first threatened imposing heavy trade duties on U.S. chicken companies, and just recently China did impose the heavy duties.  They imposed duties of 64.5% on Sanderson Farms, 80.5% on Pilgrim’s Pride, and 43% on Tyson Foods which just happens to be an active investor in China.   These types of “beggar-thy-neighbor” policies are an extension of the past policies they have used to support exports. But now they feel that they have to go further since China now accounts for 9% of global exports.  Earlier this month China filed a compliant to the World Trade Organization against the European Union tariffs on imports of Chinese shoes.  “The dollar peg of the rinminbi has put additional pressure on lower end Asian exporters.  This has led to charges of unfair trade from across Asia,” said Jamie Mezl, executive vice president of the Asia Society.  Even nations in Africa and the Middle East are complaining.  “When we look at the reality on the ground we find that there is something akin to a Chinese invasion of the African continent,” Libyan Foreign Minister Musa Kusa said in November.

China’s exports were helped enormously by repegging their renminbi to the dollar in mid 2008.  Their exports got a further boost once the dollar started falling from March of 2009 by about 10%.  Now that the dollar has started up they could be close to reversing that decision.  Despite all the hoopla of China trying to slow down their growth, the above policies don’t support that at all.  The Chinese total debt to GDP is very difficult to quantify, but with the enormous stimulus undertaken last year ($550 billion) and government supported bank lending ($1.3 trillion), we know they are not in great shape.

America has retaliated by imposing punitive tariffs (as much as 99%) on Chinese tires and tubular steel (used in oil and gas wells).  The Chinese government weighed in by condemning the U.S. tariffs as an “abuse of protectionism”.

These examples of Chinese actions illustrate how difficult it is now for debt ridden countries to simply devalue their currency in order to export their way out of the dilemma. And just think about the situation in Europe, where this problem is exacerbated by 22 fold, since they now have 22 countries tied to one currency.

The problem is not confined to America, Asia, and Africa-Look at what is taking place in Greece presently.  In the past, a country like Greece that over indulged and got caught with their “hands in the cookie jar,” would just debase their currency in order to export their way out of the problem.  But, now that their currency is tied to the Euro like 22 other of its trading partners, they don’t have the same option as they did in the past to bail themselves out.

In summary, due to the debt related problems many countries worldwide are struggling to help their own economies at the expense of their trading partners.  In the past this has been accomplished by debasing their currencies in order to export their goods and services.  Because of currency pegs and one currency used by 22 countries (Euro Zone), this means of debt relief is not as easily accomplished.  The next stage of the Cycle of Deflation is the much more onerous “beggar-thy-neighbor” policies in order to support the economies of debt burdened countries.  This is not good news and could have the same effect for the global economies as Smoot Hawley did (a bill in 1929 that became law in 1930 which raised the tariffs on the U.S’s. major trading partners).   Therefore, the main problem of reducing the debt of major economies throughout the world is even more complicated and makes us even more convinced that the secular bear market that started in 2000 is still intact.

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Friday, February 26th, 2010 at 5:15 pm

FAS Breaks 76.00 / 100-day could see this one much higher from here

fas

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Friday, February 26th, 2010 at 5:03 pm

Worry about California, not Greece

By Tim Ianoco

Barron’s reports that JP Morgan chief Jamie Dimon is a lot less concerned about Greece and the euro than he is about California and its growing budget troubles. Like the Greeks, officials in the Golden State had to cancel a bond sale this week and the two are competing for the top spot as poster-child for government overspending.

“Greece itself would not be an issue for this company, nor would any other country,” Dimon said, according to Dow Jones’s Matthias Rieker. “We don’t really foresee the European Union coming apart.”

However, given California’s size, “there could be contagion” if the state were to have problems servicing its debts, Dimon warned.

In a related story, there seems to have been Greek-like unrest in Berkeley last night as a budget cut protest party turned violent. Campus property was reportedly damaged and then the 200-strong protest moved out onto city streets where trash cans were set on fire, windows were smashed, and the police were called.

Ironically, this was just the pre-protest planning party, not the protest itself that is (or, at least, was) scheduled for next week. Two people were arrested, alcohol was apparently involved, and there was no word on how this might impact next week’s demonstrations.

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Friday, February 26th, 2010 at 5:00 pm

Can Palm save itself?

The mood at Palm Inc. is darker than at any time in its recent history. Last year Palm bet its future on WebOS, a new smartphone operating system that wowed analysts and tech reviewers. But sales have not followed. After the company warned its revenue would fall short of expectations, investors are openly discussing whether Palm can continue as an independent concern. Read MarketWatch’s story about Palm. More losses from Palm Inc. kept the smartphone maker in the spotlight Friday, but the broad tech sector gained enough steam in late trading Friday to end the week, and the month on an upbeat note.

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Friday, February 26th, 2010 at 4:11 pm

The S&P is becoming tightly coiled

The action in the market this week has been reminiscent of the classic movie, Rocky IV. Rocky takes punch after punch directly on the chin from Ivan Drago but simply refuses to go down. His opponent, tired and despondent, eventually succumbs. A wave of negative economic news stories has hit the airways this week, but this resilient market just isn’t having it. Nothing is going to keep the bulls down. Last week we got a surprise discount rate hike from the Fed. This week we have seen the Greece fiasco boil over, a negative consumer confidence reading, and a dreary jobs report, still the market has absorbed the blows and continued on its path of destruction.

The market bounced strongly of March 2008, topping out in January despite a chorus of doubters. The viability of the economic recovery has been questioned, but we are not in the business of having unfounded biases as to market direction. We let the price action do the talking, and right now, it is giving us some not-so-subtle hints. Since the 9% correction, stocks have clawed their way higher and begun to digest some of the volatile action of 2010.

The S&P is becoming tightly coiled and we see a tight wedge consolidation developing that will need to resolve itself next week. A wedge pattern is a pattern of indecision, so we will wait for the resolution to come before sinking our teeth into trades. But all signs point to that resolution coming to the upside. Tech leaders like AAPL, BIDU and RIMM have refused to break down amid broader market weakness, other perennial leaders MSFT and CSCO now look bullish and new tech names are surfacing to give the sector some additional juice. We have been hammering the table on CREE and VMW, stocks with recent strong reports that broke strongly to the upside out of tight wedges in the last couple weeks. Also, the financials are finally perking up a bit, and Gold has put in a higher low.


If we can get a strong move higher next week on good volume, this market should take off and resume the longer-term uptrend. Again, we will look for confirmation from our growing list of leaders that another strong push is in the cards. The strongest indication of future strength may just be the resiliency this market has shown in the face of possibly damning news. No matter how long the odds, you should never underestimate Rocky. And we have learned since the Spring of 2008, don’t underestimate this market recovery, either.

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Friday, February 26th, 2010 at 4:09 pm

Use Bar Chart Patterns To Spot Trade Setups

By Nico Isaac

For Elliott Wave International’s chief commodity analyst Jeffrey Kennedy, the single most important thing for a trader to have is STYLE– and no, we’re not talking business casual versus sporty chic. Trading “style,” as in any of the following: top/bottom picker, strictly technical, cyclical, or pattern watcher.

Jeffrey himself is, and always has been, a “trend” trader; meaning: he uses the Wave Principle as his primary tool, along with a few secondary means of select technical studies. Such as: Bar Patterns. And, of all of those, Jeffrey counts one bar pattern in particular as his absolute, all-time favorite: the 3-in-1.

Here’s the gist: The 3-in-1 bar pattern occurs when the price range of the fourth bar (named, the “set-up” bar) engulfs the highs and lows of the preceding three bars. When prices move above the high or below the low of the set-up bar, it often signals the resumption of the larger trend. The point where this breach occurs is called the “trigger bar.” On this, the following diagram offers a clear illustration:

For a real-world example of the 3-1 formation in the recent history of a major commodity market, take a look at this close-up of Cotton from Jeffrey Kennedy’s February 5, 2010, Daily Futures Junctures.

As you can see, a classic 3-in-1 bar pattern emerged in Cotton at the very start of the new year. Then, within days of January, the trigger bar closed below the low of the set-up bar, signaling the market’s return to the downside. Immediately after, cotton prices plunged in a powerful selloff to four-month lows.

Then February arrived and with it, the end of cotton’s decline. In the same chart, you can see how Jeffrey used the Wave Principle to calculate a potential downside target for the market at 66.33. This area marked the point where Wave (5) equaled wave (1), a common relationship. Since then, a winning streak in cotton has carried prices to new contract highs.

What this example tells you is that by tag-teaming the Wave Principle with Bar Patterns, you can have a higher objective chance of pinning the volatile markets to the ground.

To learn more, read Jeffrey Kennedy’s exclusive, free 15-page report titled “How To Use Bar Patterns To Spot Trade Set-ups,” where he shows you 6 bar patterns, his personal favorites.

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