Dollar Clears Resistance as Euro Falls Below Support

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

As the U.S. trade-weighted dollar (DXY) breaks out from a four month consolidation pattern, the euro (FXE) is falling below major support. The movements of these currencies have important implications for the rest of the market.

The dollar has been stuck trading roughly between 79 and 82 since January. There is strong chart resistance at these levels both from recent times and two decades ago. In the last couple of years, the dollar made a double top at just under 82 in late 2010 and early 2011. In the late 1980s and early 1990s the dollar made a triple bottom at three different points in this year's trading range. The dollar finally broke above 82 on May 23rd. While there is minor resistance just under 84, major resistance is from 88 to 89 — the highs during the Credit Crisis in late 2008 and early 2009 and in mid-2010 during the first phase of the Greek debt crisis. It should be assumed the dollar will get to that level again (and possibly higher). How long it takes to do so is still an open question.

As is almost always the case, the euro is moving opposite to the dollar. The euro has strong support at and just above 125. It made a double bottom at this level while the dollar was peaking during the Credit Crisis. Recently in January, it made another low at this level. There was a clear break below on May 24th. Next stop for the euro is the low around 119 established in June 2010 when the dollar was just above 88. If the euro breaks this support, it will try to head toward parity with the dollar. The powers that be will of course do everything possible to try to prevent this.

The commodity markets are heavily influenced by the dollar/euro price actions. All commodities are priced in dollars, so a rising dollar will lower commodity prices all else being equal. Oil (USO) and gold (GLD, IAU) are generally at the forefront of this price dampening. This is one reason spot gold was down 30% during the Credit Crisis, despite its safe-haven status. WTI Oil dropped almost 80% at the same time. Stocks of the commodity producers usually fall even more than the commodity itself. Multinational stocks in general are also negatively impacted by a rising dollar because their earnings are mostly made in other currencies.

Since large moves in major currencies are destabilizing, central bankers are always concerned when they happen. They will continue to do everything possible to prop up the euro, although the currency union cannot continue to exist in its current incarnation. There is a long history of governments trying to prop up weakened currencies however and while devaluations can be delayed, they can't be avoided altogether.  

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Gold and Silver Plummet as Dollar Rallies on EU Woes

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The euro fell to a yearly low on December 14th as Italian interest rates at auction hit new highs. Collateral damage to the EU crisis is showing up not only in stock prices, but in the precious metals markets as well. 

The euro fell below the psychologically important 1.30 level in European trade and is testing support from last January. If it breaks that support (and it is pretty certain that it will), the 125 level is the next stop and 1.20 after that. The euro can be tracked through the ETF FXE. At the same time the euro is breaking down, the trade-weighted dollar has broken out. The dollar has been stuck at key resistance at 80 since September. It tested  this level both in September and in November. It traded as high as 80.67 in early morning trade. There is still strong resistance just under 82. A break above that will cause the dollar will head toward 88. The dollar can be tracked through the ETF DXY.

As the dollar rises, gold and other commodities fall. Spot gold was as low as $1562 an ounce in early New York trade. Gold plummeted after the New York open and was down as much as $68 an ounce.
Gold can be tracked through the ETF GLD. Gold decisively broke its 200-day moving average (which is very bearish) and this was the first time it has traded below this level since early 2009. The next level of support is the 65-week moving average, which is currently in the high 1400s.

While gold in general should go up during a crisis, this did not happen in the fall of 2008 -- gold was down around 30% at the time. During credit crises -- and the situation in Europe is a second global credit crisis -- it is reasonable for gold to decline. Central banks lease gold cheaply to banks and large hedge funds and they sell it on the market to raise quick cash (I have explained how this is done is some detail in my book "Inflation Investing"). This time around, there is the added danger that the IMF will sell some of its large hoard of gold to raise money for a eurozone bailout.

Gold's companion metal silver is much more volatile than the yellow metal and is influenced by the economy as well as financial market events. Silver traded as low as $28.47down $2.37 after New York trading opened. This was more than a 7% drop. Silver can be tracked through the ETF SLV. It has strong support around $26. If it breaks that, expect it to head toward the $21 level.

The EU debt crisis is not over and is likely to continue for a while longer and possibly for many more months. EU leaders have come up with one "solution" to the crisis after that has failed shortly after it was announced. Look to the markets to see whether or not their future gambits will create some viable end to their problems. So far the markets have made it very clear that the situation in Europe is continuing to deteriorate and it is dangerous to be on the long side of almost any investment except the U.S. dollar. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Are Gold and Silver Breaking Out?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Gold hit an all-time high yesterday. Silver is trying to challenge its high from March 2008. Both are inflation indicators and new highs indicate paper money is losing its value.

Spot gold came within a whisker of $1275 an ounce yesterday and was up 2% at its high. Spot silver traded around $20.54 at its peak and has so far been a bit higher today. Unlike the U.S. stock indices, both gold and silver are in secular (long-term) and cyclical (short-term) bull markets. Their recent rise was based on reports that the Federal Reserve would likely engage in more quantitative easing. The trade-weighted dollar (ETF: DXY) dropped significantly on the news and fell below its 200-day simple moving average. The dollar has been in a secular bear market for many years and usually moves in the opposite direction of the precious metals.

The technical indicators for gold (ETF: GLD) are somewhat overbought and look like they are losing strength. Silver (ETF: SLV), is more clearly overbought than gold, but the technicals look better overall. In strong bull markets, rallies can continue on weakening technicals however. News, as is always the case, can override all other considerations - although it will have to be news about liquidity and central bank money pumping and money printing.

As I have stated many times, there is already a lot of liquidity flowing into U.S. stocks and other investment markets in the last few months. Prices for almost all assets are rising because of this. Stocks continually went up on bad economic news during the summer and while some incorrectly interpret this to mean that the market is forecasting a better economy, this is wishful thinking. Look inside a number of economic reports and you will notice that rising prices are an important reason they don't look worse. The mainstream media does not report this however because the Federal Reserve keeps telling them that 'there is no inflation'. Apparently though, the Fed forgot to inform the gold and silver markets. Perhaps they should get a memo out right away and put 'rush delivery' on it.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Will There Be a Summer Rally This Year?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Summer officially begins next week and many investors expect this to be a bullish period for stocks. Markets are trying to rise from a very oversold condition, so early summer shouldn't disappoint. The underlying problems that created the recent sell off are still with us however and they are likely to weigh on the markets once again.

The debt crisis in Europe and the drop of the euro have been the major force controlling market action for the last couple of months.  The euro (FXE) has traded down from an intraday high of 151.27 on November 25th to a low of 118.79 on June 8th. It has been rallying the last few days, but despite mainstream media reports about improving economic conditions in Europe, the reasons are technical. The bad news has not ended either, but perhaps it is now expected and already priced in the market. Yesterday, Moody's downgraded Greece's credit rating four notches to Ba1. S&P had already downgraded Greek debt to junk status on April 27th, so Moody's move shouldn't have been surprising. France also announced a three-year budget plan to cut its deficit to GDP ratio to 3% by 2013. It will be around 8% this year (still less than the estimated 8.8% in the UK). Budget cutting is pervading EU countries in an effort to maintain the maximum 3% deficit limit, which was established during rosy economic times and became impossible to meet because of the Credit Crisis. Eurozone leadership apparently made no contingency plans in case anything went wrong, nor do they seem capable of handling a crisis when one occurs.

The other issue weighing on the market this spring has been BP's deep-sea oil spill in the Gulf of Mexico. This is already the biggest oil related environmental disaster of all time and the oil leak is not likely to be stopped anytime soon. Fitch downgraded BP six notches today to BBB (still above junk). President Obama will be addressing the nation tonight and will demand BP provide $20 billion in funds that will be used to pay off damages. This should be considered only a token sum of the actual final costs. Many of the biggest potential lawsuits against BP haven't even been filed yet. It took 20 years to resolve all the litigation from the Exxon Valdez spill, so BP could be in court until 2030. BP leadership apparently made no contingency plans in case anything went wrong, nor do they seem capable of handling a crisis when one occurs.

Budget cutting in Europe is only going to hurt the still fragile and highly socialized economies of the Eurozone. A return to recession is quite likely there if the cuts are actually implemented. In the U.S., reports indicate that the Federal Reserve is now putting together plans on what to do in case of a double dip recession.  So far, the good GDP numbers have been based on inventory restocking (or even inventories dropping at a lower rate) and not an actual growth of the U.S. private sector. The American economy has been expanding with the expansion in federal government deficits. The economic numbers could easily turn south again in the fall, as the deficit is supposed to decrease for fiscal year 2011 (beginning this October 1st). At least the Fed is making contingency plans in case something goes wrong, but it is not clear that they will be capable of handling a crisis when one occurs.

In the short-term though, the stock market seems to want to trade on the technicals, with possibly a little money pumping from the major central banks helping it along. The euro is overbought and needs to rally to resolve this condition and the U.S. trade-weighted dollar (DXY) is oversold and has hit major resistance in the 88 area so it needs to sell down. The period around the July 4th holiday is usually a positive one for U.S. stocks. Late July can be quite negative however. It is best to look at the markets with a short-term perspective at the moment.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Monday Update on the 2nd Global Financial Crisis

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


It's Monday May 17th and the Euro is heading lower, having broken its low from Friday. The trade-weighted dollar has hit new highs for this move. European stocks are having a mild rally, while U.S. stocks are mostly flat. Asian stocks sold off on Sunday night. The ECB is withdrawing liquidity from the market and this should be a negative for stocks going forward.

If there is to be a near-term recovery in world stock markets, it is important that the euro rallies back to and above the 125 level - its low during the Credit Crisis.  The euro (FXE) traded as low as 123.24 on Friday and today has been as low as 122.71 in New York morning trade. A significant break in support has taken place and this is a major development. In all likelihood it indicates a much lower low in the future. What that low will be and when it will take place are of course the key questions that need to be answered. The euro's next support is at 1.20, and it is now heading to that level. That support is relatively minor however. A number of technicians claim better support around 1.07. The equivalent strong support that existed at 1.25 would be at 1.00 however. What unfolds in the future depend on how the EU continues to handle matters affecting the currency. Up to this point, we have only seen world-class ineptness coming out of Brussels.

For its part the ECB (European Central Bank) announced that it would launch a program on Tuesday to re-absorb the liquidity that it pumped into the market early last week. They intend to withdraw $21 billion (16.5 billion euros) through this operation. If the liquidity injection was good for stocks (the market did indeed have a huge rally coincident with the ECB's move), investors should consider the withdrawal of liquidity should be bad for stocks.

In Asia the Nikkei in Japan was down 2.17% last night and the Hang Seng in Hong Kong fell 2.14%.  European markets had a modest rally today, with the FTSE in England and the DAX in Germany rallying about half a percent. U.S. markets were basically flat in morning trade (they turned down dramatically just around noon). The trade-weighted dollar (DXY) was as high as 87.06.  The U.S. markets had a massive gap up on Monday May 10th. This can be seen most clearly by looking at Nasdaq, where no specialists delay the open to balance buying and selling. Prices fell into the gap on Friday and the very short-term technicals in the day's trading were ugly. The rule of thumb it that once a gap is partially filled, it will be completely filled (prices will go down to the bottom of the gap in this case).

Investors need to realize that the world's central banks are well aware of this crisis. How much comfort this should be to them is open to debate. The central banks all saw the global financial disaster that resulted from Lehman's failure in the fall of 2008. They all know that a small currency crisis in Thailand in 1997 spread throughout Asia and then damaged world stock markets for more than a year thereafter. This knowledge though didn't prevent the ECB from sitting on its hands for more than six months while the situation in Greece escalated into an international problem. The central banks then finally acted with a trillion dollar bailout (likely to be just the beginning). So, we can conclude the central banks haven't learned to react in time to prevent a future crisis, but they do know how to print money - a talent that has some serious downside risks if you don't like inflation.

Disclosure: No positions.

Daryl Montgomery Organizer,
New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Euro Problems Threaten World Markets

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


These days a trillion-dollar bailout just doesn't seem to go that far. Spending that amount to rescue the euro made the markets euphoric for only a couple of days. While stocks rose sharply immediately after the announcement, they are now selling off again. The euro itself is testing its low made in the fall of 2008.

The euro is being rattled today because of reports that French president Sarkozy threatened to pull France out of the currency union. This allegedly happened (the French deny that it did) at a May 7th meeting of ministers before the bailout plan had been worked out. If it did happen, it's old news. If you only read the press headlines though, you would think it had just occurred and is a new development. It didn't and it isn't. The source for this news item came from Socialist leaders in Spain. They may wish to see the euro system fall apart to further their own anti-capitalist agenda and to increase their personal power. So can you believe what they are saying?

So far in New York trade this morning, the euro (FXE) has traded as low as 123.24. This takes out the Credit Crisis low of 124.04 on October 27, 2008.  The euro has major technical support around the 125 area. A break of that level is a serious problem. The next step down is to around 120. A nose-diving euro is not just a problem for Europe however. In our globally interconnected economy, it will spread around the world like a financial tsunami. Not only is there a danger of dropping stock markets, but economies will be damaged as well. While the euro was falling this morning so were U.S. stocks. The Dow was down almost 200 points and the Nasdaq 60 points. The trade-weighted dollar (DXY) traded up as high as 86.24.

The euro has gotten to its current troubled state because of a complete lack of planning, an inability to face reality, failure to consider intelligent alternatives and a delay in taking action on the part of the eurozone leadership. Instead of making the hard decisions to handle the problems that began with the Greek debt crisis, they have engaged in stonewalling and dealing with the PR aspects of the problem, instead of solving the problem itself.  Unfortunately, this type of economic leadership is not unique to Europe, but is typical in most of the world today. If the euro blows up, Americans will be very much aware of it because of the big hole it leaves in the U.S. economy.

Disclosure: No euro or dollar postions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Similarities Between the 2010 and 1997 Market Crashes

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


My blog post on May 4th mentioned the stock market was rolling over and on May 5th, I made the comparison between the problems in Europe today with those of Asia in 1997. I specifically pointed out that the Dow Jones Industrial Average had a one-day 7% drop because of the Asian crisis. The next day, the Dow was down 9.9% intraday on the current European crisis.

The Asian crisis in 1997, frequently referred to as the Asian contagion because it eventually spread from country to country, started with a currency crisis in Thailand. It soon engulfed most of East and South Asia. While Thailand's economy was small, it had been vibrant for many years. Its currency was overvalued though and this is where the problem began. Few people would characterize Greece as having a vibrant economy at the moment, though it is certainly represents a very minor part of overall eurozone economic activity. As the Asian situation in 1997 demonstrated, problems that show up in small countries can easily spread throughout an entire region and have global consequences.

So what did the EU leadership do? Despite this recent historical lesson, they decided to continually postpone dealing with the situation in Greece. Not surprisingly, contagion began to spread to the other PIIGS countries (Portugal, Ireland, Italy, and Spain), the euro tanked and this in now endangering the export based economies of currency union, and finally, world markets have sold off. Fortunately, EU authorities weren't faced with an outbreak of bubonic plague - otherwise we'd all be dead.

The U.S. stock market drop in 1997 mostly took place on October 27th.  The Dow Jones Industrial Average closed at 7715 on Friday the 24th. It then dropped 554 points on Monday, closing just off its low for the day. The loss was 7.2%. The bottom wasn't hit until intraday on the 28th however. At the low, the Dow had lost another 225 points and was trading at 6936. From top to bottom, the index was down 10.1% in a little over a day. On Thursday, May 6, 2010, the Dow at its intraday low was down 9.9% from the previous day's close. So far at least, the percent of the two drops is almost identical.

The 200-day moving average was an important barrier in 1997 and probably will be so in 2010 (at least for now).  The markets were trading way above the 200-day before the drop in 1997, as they have been recently. There was some piercing of the 200-day both times. It could happen again in the next few days, but the 200-day should be considered an important support level that the market will try to hold or return to quickly on a break.

The VIX, the volatility indicator, spiked into the high 40's in 1997. In 2010, it rose to 42.14. While the highs are somewhat different, the rallies of the VIX in both cases are very similar. In October 1997, the VIX had been slowly rising for almost two years from a low of around 10 and was trading around the 20 level. The low of 15.23 in 2010 was hit in early April. The VIX rose approximately 47 points from its value a few weeks earlier during both crashes.

The important question now of course is what is going to happen. The markets recovered rapidly in 1997, but this was during a long-term secular bull market. We are now in a low-term secular bear market and such buoyancy can't be assumed. The 1997 crash was not the end of the market's problems either. Regional financial crisis after all can easily cause problems for a couple of years. A deep, but short, bear market followed in August 1998 caused by the collapse of Long-Term Capital. Central banks reacted by pumping liquidity into the financial system and the tech stock blow-off followed. If they do that this time, and they most certainly will, expect a commodities blow-off instead.

Disclosure: None relevant.

Daryl Montgomery
Organizer, New York Investing meetup
 http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Dollar, Euro, Gold, Oil, and Treasuries

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Problems in Greece are still impacting the market with the seemingly never-ending on-again off-again possible bailout. Some resolution, even if temporary, is of course inevitable. Problems in the euro zone have set the tone for U.S. dollar and euro trading for almost four months now. These have in turn affected U.S. long-term treasuries, gold and oil. Long-term treasuries and oil have been trading in a sideways pattern since around May 2009. Gold sold down and has been in a sideways trading pattern since December. The U.S. dollar has temporarily broken a long-term downtrend and the euro a long-term uptrend because of the Greek crisis.

The U.S. trade-weighted dollar(DXY)traded down to its 50-day moving average recently and then bounced sharply off of it. The 50-day is above the 200-day, having made a bullish cross in mid-February. It seems that the trend indicators are trying to reconfirm the uptrend. On the flip side, the euro's(FXE)technical picture is the mirror image of the dollar. The 50-day moving average made a bearish cross of the 200-day in mid February. The price rose toward the 50-day recently - an expected move since the 50-day tends to act as a magnet on the downside as well as on the upside. The euro though didn't even reach the 50-day before a sharp drop. Trend indicators look like they are moving to reconfirm the downtrend

Gold (GLD, IAU, SGOL) is apparently trendless at the moment and trading around its 50-day moving average, which is above the 200-day moving average in a bullish configuration. The price pattern seems to be forming a triangle on the charts. A break out could take place either on the upside or downside. Seasonals for gold tend to be weak in late spring and early summer. As seasonals weaken for gold however, they strengthen for oil . Oil (DBO, USL, USO, OIL) is also trading in a sideways pattern and looking for a breakout. The bullish 50-day cross took place between late June and late July 2009 depending on which proxy is being considered. Oil has been stuck in a trading range since last May and needs to break out of that range, the top of which is around $83 a barrel for light sweet crude.

The 30-year Treasury interest rate ($TYX or ^TYX) has been in bullish pattern since May 2009 with the 50-day trading above the 200-day. It has gone nowhere fast during that time period, trading in a sideways pattern on the chart. Technically, it has extremely strong resistance from a 30-year downtrend line in interest rates. A rally in interest rates on the long-term treasuries (and sell off in the bond price) doesn't look imminent at the moment based on the technical picture. When it does, bullish trades on long-term treasury interest rates can be made through TBT and TMV.

Sideways trading (also known as basing) shouldn't surprise investors. It is the norm and not the exception. Most of the time markets are trendless and you need to be a short-term trader and willing to enter and exit your positions quickly to make money under those circumstances. Trends (either up or down) are where the real money is made. You can't make them happen however, you just have to watch and wait until they come along.

Disclosure: None

NEXT: U.S. Stock Market in the First Quarter of 2010

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Fourth Trading Day of 2010 - The Message From the Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The first four trading days of the year provide investors with an important message of where the big money is flowing in the market. More investing money gets moved around at the beginning of the year than at any other time. Overall, the picture has been very bullish. U.S. stocks, foreign stocks, emerging market stocks, large cap, mid cap and small cap stocks have all rallied. So have commodities, with inflation sensitive energy and precious metals being particularly strong. Even U.S. government bonds and the U.S. dollar have been relatively flat. How is it possible that almost nothing has gone down?  There is only one way this can happen. The liquidity available for investing purposes is increasing substantially, as has been the case since 2008. The zero or just above interest rate policies of the world's central banks are flooding the global financial system with cash. As long as this continues, global stock markets and commodities should continue to rally.

The major U.S indices were up between 1.4% and 2.7% in the four days since the close of 2009. Nasdaq did the worst and the small-cap Russell 2000 the best. A small cap versus large cap performance difference shouldn't be read into these numbers. The big cap S&P 500 was up 2.4%, doing almost as well as the Russell and the even bigger cap Dow Jones was up little more than the Nasdaq. Of the nine sectors of the market, only two were lower than their last price in 2009 - Utilities and Technology, down
-0.8% and -0.1% (essentially unchanged) respectively. The best three performing sectors were Financials, Energy and Basic Materials up 6.3%, 5.1% and 4.5%. Liquidity should have an outsized impact in these sectors and it looks like it did. Industrials put on a decent enough rally, closing up 3.5% after the first four days of trading. Government statistics indicate that manufacturing is reviving in a number of countries thanks to all the stimulus money being spent globally. Stock prices are reflecting this money pumping effort just as they are likely to reflect the withdrawal of stimulus spending when it takes place.

Stock markets outside the United States outperformed. Developed markets overall did about the same as the S&P 500, while emerging markets did somewhat better, rising 3.3%.  The BRIC markets all did well with Brazil, India and China rising between 3.1% and 3.8%. Russia led the pack though, rallying 6.4% in the beginning four days. Commodity based markets were stronger than others. Australia was up 4.1% and Canada was up 3.3%.

Commodities were up 2.5% - on par with the major U.S. stock indices, but there was a mixed picture inside the group. Silver was one of the stars, rising 7.9%. Light sweet crude oil was up 4.2% and natural gas was up 3.8%. Gold rallied 3.0%. The agricultural commodities were the laggards. The dollar was mostly unchanged during early year trading thanks to remarks by the new Japanese finance minister (an expert in health care issues and not economics by the way) who commented that he wanted the value of the yen to come down. This led to a strong rally of the U.S. dollar against the yen. Without that, the dollar would have been down in early 2010 trading. Long-term U.S. treasuries were mostly unchanged after a sharp drop in price and big gain in interest rates in December. Yields on the 10-year and 30-year were 3.82% and 4.69%  compared to 3.84% and 4.66% at the end of December.

Rallies that take place in early year trading tend to have pullbacks later in January. Investors who want to buy into the sectors that performed the best in the first four trading days should watch for these pull backs and use them as an entry point.  Some rallies are likely to go on longer than others of course. The stock market also tends to have a seasonally weak period in March and April. The current rally has already gone on for ten months and this is a long time to not have had some significant give back in price. Watch interest rates for a hint of when this might happen.

Disclosure: Long gold, silver, and natural gas and short long-term U.S. treasuries.

NEXT: U.S. Employment Figures Indicate More Stimulus Ahead

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The First Trading Day of 2010 - The Message From the Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Observant investors can find moneymaking opportunities if they pay attention to what takes place during the first four trading days of the year. This idea was already part of market lore over a hundred years ago and was confirmed by academic research decades ago. The reason the beginning of the year is more important is that more investment money gets allocated or reallocated on those days than at other times. Whether we like it or not, investing is influenced by a quarterly calendar with the beginning of the first quarter having outsized significance. Which parts of the market money flows into or out of as annual trading begins indicates the aggregate opinion of investors on each sector of the market and the various asset classes. If you want to know what they are thinking, follow the money.

The best way to approach this analysis is with a top down approach. First look at how the major asset classes - stocks, bond, commodities, currencies - are trading. For U.S. stocks you can look at the four major indices: the Dow Jones Industrial Average, the S&P 500, the Nasdaq and the Russell 2000 or their respective ETFs, DIA, SPY, QQQQ (actually the Nasdaq 100), and IWM. For stocks outside the U.S., EFA (Europe, Far East and Australia) and EEM (emerging markets) can be used. For bonds, intermediate maturity U.S treasuries are a good place to start. IEF can be used for treasuries in the 7 to 10 year range.  Overall commodity performance is best tracked through DJP, which is the ETN for the Dow Jones AIG Commodity Index. The two major commodities gold and oil should also be watched. Either their spot prices or GLD and USO can be used to do this. For a quick read on currencies, DXY gives the performance of the trade-weighted dollar.

This initial cursory view can then be refined further based on what assets are doing best or by an investor's particular interests. For stocks, the next step is to look at performance by country, market cap and the nine major sectors of the market. This can then be refined one more step by looking at sub-sectors for the sectors that have done the best. In the end, investors should look for opportunities in the top performing countries and sectors by market cap size (small, mid or large). While stocks are the most complex to analyze, commodities and currencies are the easiest because there are only a small number of them. The performance of each one them can be ranked and it is immediately apparent which ones are the best. Keep in mind seasonal factors can create bullishness or bearishness though, especially for commodities. Bonds are of course more complicated since they can be government or corporate, have a number of maturities and exist in a number of countries.

As can be seen below, based on the first trading day of the year, money was flowing into almost all markets. Stock markets outside the U.S. did the best with emerging markets being the strongest. Small cap stocks did better than large caps. Commodities generally did better than stocks. Interest rates were barely changed. The U.S. dollar lost ground, while other major currencies rallied.

STOCKS:               DIA             Up        1.5%
                               SPY             Up        1.7%
                               QQQQ        Up        1.4%
                               IWM            Up        2.5%
                               EFA             Up        2.6%
                               EEM            Up        3.0%

BONDS:                 IEF              Up        0.3%

COMMODITIES:   DJP             Up        2.0%
                               GLD            Up        2.3%
                               USO            Up        2.4%

CURRENCIES:      DXY           Down    0.5%

Please see 'The Second Trading Day of 2010 - The Message From the Market' to find out more.

Disclosure: Long gold.

NEXT: The Second Trading Day of 2010 - The Message From the Markets

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Market Sells Off as Dollar Rallies...As Usual

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The U.S. dollar is rallying today for a change. Yesterday DXY, the ETF that represents it, fell as low as 75.83, below key support at 76.00. As of this moment DXY is 76.73. There is strong resistance at 78.00. The key breakdown level is 78.33, which was the multi year low made during the dollar sell off in the late 1980s and early 1990s. For the last two years the U.S. dollar has usually illogically rallied the day after the Fed meeting. There is also danger that some statement will come out of today's G20 meeting about the desire for a stronger dollar. If this happens, the talk is unlikely to be met with any action.

Gold was strong first thing in the morning, but sank to below a $1000 as trading progressed. Silver was selling off even more and may have resolved its overbought condition. The key breakout level for gold is $1003.50. It has closed above this level eight days in a row. So far, it doesn't look like today will be the ninth.

A number of gold and silver stocks have gaps made approximately ten trading days ago. These gaps may have to be filled. Nova Gold (NG) filled this gap four days ago. It was trying to test it today. It is not unusual for a stock's price to fall somewhat below the bottom of a gap. This is frequently a very profitable buy point. Nova Gold has made a cup and looks like it is making a handle. Many gold and silver miners' charts have similar patterns.

About the only thing up in today's market is UNG. The Natural Gas report seemed bearish this morning. GAZ is down. Both UNG and GAZ should move together, but they don't. HZBBF, introduced in this blog 2 weeks ago now trades under another ticker symbol: HNUZF (special thanks to New York Investing member Joyce K. for first reporting the change). The new trading symbol can't be found on Big Charts yet. The symbol changed after a 5 to 1 reverse split. This split and the symbol change make no sense whatsoever. Both have made it much harder for the individual investor to trade natural gas. Perhaps that the idea.

NEXT: So Much for That Recovery

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

U.S. Dollar,Stocks,Bernanke and Natural Gas

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The U.S. dollar fell below its breakdown point again on Friday. DXY, the ETF for the trade-weighted dollar, closed at 78.01 and spent much of the day trading in the 77 range. This is the second time the dollar has traded below the key breakdown point of 78.33. Last time it was below this price for 5 days. It's inability to stay above this level is a sign of weakness. Gold of course rallied and was as high as $957 during the day. It is once again trying to get back to the important $1000 breakout level.

As the dollar fell, stocks rallied. This has been a typical pattern since this March. In the larger scheme of things it is unusual however. For the first time since this phase of the rally began in July, volume was noticeably above average (average volume has been declining during the entire rally however). The rally has looked sickly so far because volume started out light and continually fell - a very negative pattern. It seems that if stocks rally, the U.S. dollar has to sell off and vice-a-versa. Something has to give soon.

What fueled the rally on Friday was existing home sales supposedly being up 7% and bullish comments by Ben Bernanke about how the recession is ending. The home sales figures are of course suspicious, but no amount of fantasy has managed to disturb the market rally so far. Bernanke, who has continually been wrong in his pronouncements on the Credit Crisis and recession is also being believed by the market for no apparent reason. Bernanke was incredibly self-congratulatory in his speech, giving the major central bankers full credit for saving the world from global recession. The proof that this has happened is minimal to say the least and exists mostly in manipulated government statistics that lack any credibility. Lost in the coverage was the failure of four more U.S. banks on Friday, including one with $13 billion in assets. So far this year 81 U.S. banks have failed, compared to 3 in 2007.

Natural gas is staying at its impossible price levels. The near-term futures contract fell as low as $2.75 toward the close on Friday. UNG was down 1.4%, while GAZ was up 1.3%. Their price movements should be almost identical and certainly they shouldn't move in opposite directions. But that is only true in reality, something which the market has become completely detached from.

NEXT: Bernanke Reappointed, Court Order and FDIC

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Bonds, Bernanke and Immoral Hazard

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The U.S. is auctioning off $235 billion in debt this week, which surpasses the $104 billion record set in a week in late June. There is some concern among the participants that foreign demand may be weak - and it probably will be. That doesn't mean the the paper won't be sold. The U.S. will simply print the money to buy it. But don't worry, the mainstream media will as usual assure us that this won't be inflationary even though it has been every other time throughout history.

'No inflation' has been the mantra of the U.S. monetary authories since 2007. One reason that has been cited for the last few days of the stock rally is Bernanke's testimony before Congress last week that the economic recovery is widening (where this is happening I don't know) and it won't likely include inflation. Bernanke also said that there would be no subprime crisis one month before it blew up. He then proceeded to continually misjudge the extent of the problem and mishandle it over and over again. So of course, he knows what he's doing now.

Bernanke also has a town hall meeting in Kansas City on Sunday night to get in touch with the people and to help further misinform them. He was repeatedly asked about the Fed's 'too big to fail' doctrine. His response was that he had to "hold his nose" to rescue such institutions during this crisis. Fortunately, Bernanke isn't Pinocchio or his arm would have had to reach out to the planet Neptune. The 'too big to fail' doctrine was actually established in the U.S. in the early 1980s because of the South American Debt Crisis, when the 17 biggest U.S. commercial banks got into trouble because they had lent substantial amounts of money there. Continental Illinois actually failed in 1984 and was essentially nationalized by the government. The other 16 banks were indirectly bailed out. At that point going forward the big banks knew they could do no wrong. A much bigger bailout was necessary during the Savings and Loan Crisis and a now a much, much bigger bailout has been necessary because of the Credit Crisis (something that Moral Hazard theory predicted would happen). Does the deeply concerned Bernanke have any plans to fix this problem? It doesn't appear so.

The trade-weighted dollar ETF was at 78.50 the last time I checked, just above the 78.33 breakdown point. Something is almost certainly going on behind the scenes. Gold was as high as 956 this morning, but had a sharp drop the moment U.S. trading opened - something that happens over and over and over again. An academic study analyzing the pattern concluded that this could only take place because of market manipulation. The regulatory body CFTC is not likely to hold hearings however even though they recently claimed that they were out to stop market manipulation (it's similar to Bernanke being concerned about bailing out the big banks). Apparently though, they can't find it if it is being done by the big players, just as the SEC couldn't realize that Bernie Madoff was a crook.

NEXT: Durable Damaged Goods

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Dollar Watch; Bad Earnings are Good; Natural Gas

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

While no one was watching, the U.S. dollar got awfully close to its break down point yesterday. The low for the trade-weighted dollar index ETF DXY was 78.58. A drop below 78.33 would be technically negative. Meanwhile, earnings season will be winding down soon and so far the picture is dismal overall and even worse for the financials. You would never know it though, from the mainstream media reports which have been glowing and gushing with good earnings news. Many commodities have started to rally again, with natural gas still being very under priced.

Almost without exception, the large financial companies have had dismal earnings in their banking business, which continues to erode. Trading and accounting gimmicks have made the top line numbers look rosy however. Massive money gifts from the federal government don't hurt either. Imagine if someone deposited $45 billion into your bank account. You would look a lot more financially sound as well. Wells Fargo is out with earnings this morning, with quarterly profit up 47%! Looks good on the surface, although acquiring the giant albatross Wachovia was responsible for much of this. Within the report was the statement, "the bank expects credit losses and nonperforming assets to increase". It is also generally acknowledged that Wells Fargo needs to raise more capital. Even the 'see no evil' government stress test found that it had a $13.7 billion capital shortfall. But hey, earnings are great, except in the bank's banking business of course. For some reason, I think this doesn't make any sense.

Natural gas has been getting a lot of press in the last few days. UNG the natural gas ETF is awaiting approval from the SEC to issue more shares. They already made 300 million additional shares available on May 6th. The CFTC is trying to limit UNG's role in the natural gas market based on excessive speculation driving up prices even though natural gas is trading at a multi-year low. Seems to be rather contradictory. Media reports are filled with commentary from traders and 'experts' about how you should stay away from this market. They rarely if ever point out that natural gas tends to hit some type of low in July. I have yet to see any discussion of the production costs for natural gas and whether the price has fallen below this level. There is every reason to believe this is the case. The number of active U.S. rigs pumping natural gas has fallen to a seven year low of 665 from a peak of 1606 last September 12th. When the market cost gets too close to the production cost for a commodity, production shuts down and this is clearly happening with natural gas.

The dollar will either bounce soon or fall below its break down point and the powers that be will try to then save it. Note that once again that the stock market has been rallying when the dollar has been dropping. Will a government induced dollar rally cause the opposite? We will have to wait and see.

NEXT: Bernanke and Natural Gas

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.