Wishful Thinking on Economy and Europe Driving 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.


U.S. stocks had a major rally on Columbus Day based on the French and German leaders' mystery plan to recapitalize EU banks and on raised forecasts for U.S. economic growth in the second half of 2011. While both news items seemed to contain nothing but wishful thinking, that's often enough for short-term traders.

The Dow Industrials closed up 3.0% and Nasdaq 3.5% on low trading volume. Big moves in the market are more likely when many traders are away and the people who want to move the market know this. Huge rallies under such circumstances are common in severe bear markets. Nasdaq  for instance went up 4.9% on Friday July 5th in 2002 when almost everyone was off on a four day weekend. The market then had an ugly selloff later in the month and an even bigger drop in September and October.

It shouldn't be surprising that "good" news on the economy appeared on Columbus Day. The timing had probably been carefully planned. Goldman Sachs and Macroeconomic Advisers raised their growth forecasts for third quarter U.S. growth to 2.5 percent from about 2 percent and this created the predictable cheerleading coverage from the mainstream media that the U.S. was avoiding a recession. While it is certainly possible that the government will report GDP growth of 2.5% in the 3rd quarter, this does not mean that the U.S. is avoiding a recession, or even that the U.S. isn't currently in a recession. The original GDP numbers at the beginning of the Great Recession weren't that bad either, but they have since been revised down.... again ... and again ... and again. This is how GDP reporting works in the United States. Good numbers are released when everyone is watching and the downward revisions, which can go on for years, are reported when no one is paying attention.

Adding juice to the rally was the news that the German and French had a plan to recapitalize the EU's crumbling banking system. No details of the plan were available however. The lack of information can mean only one of three things. The first possibility is that there is no plan at all or the details are so sketchy that releasing them would make it clear that nothing significant had occurred. Alternatively, there might be a plan that could work, but the chances of getting it approved by everyone involved are close to nil. Or there could be a plan that has a good chance of being approved, but wouldn't be very effective. Regardless, there was no good reason for a market rally from this "recapitalization you can believe in" piece of news.

The EU banking/debt crisis has no easy solutions and will have an ugly ending of some sort despite the mainstream media's constant stream of upbeat "things are getting better" articles. ECB president Trichet admitted today that the EU's debt crisis has become systemic and has moved from the smaller countries to the larger ones.  The rumors of a possible 60% haircut on Greek debt (reported by the Helicopter Economics Investing Guide on Monday and in the financial pages throughout the EU on Tuesday) may even be optimistic. When Luxembourg's Prime Minister Juncker was interviewed on Austrian TV late yesterday about the rumors of a 50% to 60% reduction in Greek debt having to be taken, he replied "we're talking about even more."

A credit crisis can have a devastating impact on the global economy as was made quite evident in 2008. While a case can be made that the monetary authorities have learned how to handle a credit crisis from their recent experience, they have less to work with than they did three years ago. Fed funds rates have already been close to zero for almost three years in the U.S. Quantitative easing has already been done twice in the U.S. and is on its second round in the UK, although it's already run into a glitch there. The BOE refused to buy gilts for the first time ever on Monday because they were too expensive. Maybe money printing isn't the panacea it's supposed to be after all. If not, the global financial system is in a lot of trouble.

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.

Updating the Definition of a Bear 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.

While there is a lot of talk about the S&P 500 being in a bear market because it fell 20% from its high, this definition is not particularly useful to traders or investors. The focus should be on whether or not the market is trending down and will continue to do so. A market having fallen by so much, regardless of what the amount chosen is, does not provide that information.

The term bear market dates backs to at least the 18th century and was in common use on Wall Street in the 19th. All calculations were done by hand back then and changes in prices were all traders had to go on. Just as is the case today, much of trading took place based on momentum. Traders assumed that if the market was going down, it would continue to do so and vice versa. At some point a 20% drop became the rule of thumb that a drop was serious and likely to continue. While 20% certainly indicates a  major fall in prices, the markets may or may not continue to fall after that level is reached.

A much better approach, the concept of moving averages and the idea of using them as trading guidelines didn't develop until the twentieth century. The 50-day and 200-day moving averages became the standard benchmarks for determining bullish and bearish patterns. This approach could only be widely implemented after computers became generally available. A bear pattern was established when the price fell below and remained below the 200-day moving average (the price would be trading at or below the 50-day as well). The bear would be confirmed when the 50-day moving average crossed the 200-day from above and moved below it. This is nowadays referred to with the dramatic term "death cross".  This generally takes place before a market has lost 20% of its value.

The so called death cross took place for all the major U.S. indices in August and for many this confirmed that stocks were in a bear market. The 50-day, 200-day cross is prone to failure however. It tends to give too many false signals, as was the case in the summer of 2010 when all major U.S. indices also made this cross and then reversed shortly thereafter. Not only was there no bear market, but a major rally followed.

Instead of using the 50-day and 200-day moving averages as benchmarks, a more accurate bear market
reading can be obtained from using the 50-day and 325-day moving averages (or 10-week and 65-week moving averages).  While this will provide a bear market confirmation later, it will be more accurate when it does so. It takes a lot of selling energy to drive the 50-day moving average below the 325-day and if the market can't accomplish this, a real bear market doesn't exist.  Although this provides a later sell signal, it provides an earlier buy signal on the way back up.

The S&P 500 and the Russell 2000 made the 50-day, 325-day cross in mid-September, but had already made the 10-week, 65-week cross by the beginning of the month.  The Dow industrials and the Nasdaq made the daily cross at the end of September, but had already had a cross on the weekly charts by the middle of the month. Based on the weekly charts, the S&P was already in a bear market for a month before the 20% intraday drop took place on October 4th.

Investors and traders need not rely on just moving averages to find out whether or not a bear or bull market exists. Volatility can provide an important additional clue. The daily price swings for stocks in the summer of 2010 were relatively minor compared to those in August 2011. Volatility is bearish for markets and its presence recently is just another confirmation of a serious and prolonged downturn.

Modern technical analysis also provides a whole bag of tricks to help determine if a bear or bull market exists. The DMI (directional movement indicator) is the most directly applicable. Investors want to look for a  clear sell signal with a rising trend line on the DMI  on the weekly charts (the daily charts are too "noisy"). A sell signal was given in late July on the S&P 500, the Russell 2000 and the Dow Industrials. The trend line has been going up since then indicating a strengthening downtrend. A sell signal appeared in August for Nasdaq. It then failed, but a new sell signal was given in September.

There is more than enough reason to believe that U.S. stocks are in a bear market regardless of what percentage drop has taken place. Moving averages, volatility and technical indicators are all indicating that a bear market started in the U.S. somewhere between late July and mid-September 2011. This bear will not end until the 10-week moving averages cross back above their respective 65-week moving averages, volatility calms down, and DMI buy signals are given on the weekly charts.  

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.

S&P 500 Joins Global Bear 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.

Markets opened October with almost all assets declining everywhere. The S&P 500 entered bear territory on Tuesday.  Few assets other than treasuries and the U.S. dollar are doing well, as is typical during a credit crisis.

The big talk on Monday, the first trading day of October, was about the S&P 500 making a new closing low for the year. The intraday low was only slightly lower than the previous one in early August, so peak to trough the index was off 19.8%. The big drop on the opening on Tuesday created a 20% loss, putting the S&P 500 officially in a bear market.

The small cap Russell 2000 already entered bear territory on August 8th. The Russell had another mini-crash on Monday, dropping 5.4% on the day. That was its fourth mini-crash since August. Mini-crashes are common during credit crises, but not at other times.

The selling on Tuesday first showed up in Asia with the Hang Seng in Hong Kong losing 3.4% to close at 16,250 and South Korea's KOPSI dropping 3.6%.  The ugliness then spread to Europe with the German DAX, the French CAC-40 and the UK FTSE down more than 3% during the  trading day. U.S. stocks opened then opened lower with the Dow losing more than 200 points in early trading.

As usual in Europe, banks were at the epicenter of the market quake. Franco-Belgium bank Dexia was down 22% at one point. Deutsche Bank (DB) was down more than 6% in Frankfurt after announcing it would miss its profit target for the current year.  American banks have not avoided the carnage affecting financial stocks elsewhere; just take a look at Bank of America (BAC) and Morgan Stanley (MS), both trading at two-year lows.

While the behavior of banking stocks makes it clear that a credit crisis is taking place, falling commodity prices clearly indicate that the global economy is turning down. Copper prices fell as low as $3.01 a pound early Tuesday. Copper sold for well over $4.00 at its high in February and dropped sharply throughout September. Oil is also indicating weakness, with WTI crude closing at $77.61 on Monday. It traded as low as the $75 range on Tuesday. Oil is heading into a period of seasonal weakness and this is likely to exaggerate any price drops. Next strong support is around $70 a barrel.

Money continues to move into safe haven treasuries. The 10-year yield was as low as 1.725 before selling began in the bond market. The U.S. dollar index traded just under 80 at its high. The euro, which moves opposite to the dollar, hit a low of 1.31.62 Tuesday. Further weakness should be expected until there is some resolution to the debt crises in the EU.

 In bear markets, the bigger trend is down, but this is frequently accompanied by huge volatility. This is what has taken place since August and until there is a good reason that the trend should change, investors should expect that prices will be moving lower.

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.

German Flash Crash Shows Vulnerability of 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.

Between 3:30 and 4:00PM Central European time the DAX, the major German market index, lost around 250 points. This is roughly equivalent to a 500 point drop in the Dow Industrials in half an hour. Prior to that, the DAX had been slowly drifting lower. Then suddenly it dropped like a rock.

The pundits were quick to come up with possible explanations. A fat finger error was cited as a possibility (this is when a clerk accidentally puts an extra zero or two or three after the number of shares when entering a sell order). This was pure speculation on the part of the media however. While it is certainly possible that this was the cause of the drop, there is as of yet no evidence supporting this claim.

New problems with the evolving and unending Greek debt crisis were also thought to have led to the floor falling out of the market. Greece's central bank activated the Emergency Liquidity Assistance (ELA) program to help its struggling banks stay afloat. ELA is only for emergencies, so its use indicates that Greece is teetering toward default. So what else is new?  At this point, anyone who isn't in a coma should realize a Greek default is inevitable.  

The Bank of England also announced that it was extending a swap line to the ECB. The swap line allows the ECB to borrow British pounds at low interest rates in order to maintain liquidity in the Eurozone's banking system. Investors should ask themselves what exactly is going on that the ECB needs help maintaining liquidity. This is of course is always a problem during a credit crisis.

There were apparently also rumors about Germany banning short selling. Not so farfetched considering that France, Italy, Spain and Belgium extended their short-selling ban on financial stocks, which would have ended this week. Traders dislike restrictions and their initial reaction is to get out of the market when they appear. Authorities also don't make these bans unless there is good reason that traders want to engage in heavy short selling. They are an admission that something is rotten in Denmark or in this case, Greece, Portugal, Ireland, Spain and Italy. This news was out around the time the DAX had its precipitous fall.

If today's drop was an isolated incidence it wouldn't necessarily be anything to worry about. However, there has been at least one serious market problem each week for several weeks now. The Nasdaq and Russell 2000 in the U.S. have had three mini-crashes. The DAX has had a few itself. The U.S. Dow is moving up and down in multi-hundred point increments. The situation is not stable yet and the market is making that abundantly clear. 

 Disclosure: None

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. Investing is risky. If you don't feel that you are capable of doing it yourself, seek professional advice.

Three Crashes and a Second Credit 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.

The tech heavy Nasdaq and small cap Russell 2000 crashed again yesterday, August 18th. Nasdaq was down 131 points or 5.22% and the Russell 2000 was down 42 points or 5.90%. This is the third crash for both of them since the beginning of the month. Repeating crashes (drops of 5% or more in one day) were  common during the Credit Crisis in the fall of 2008 and indicate severe stress in the global financial system.

As in the fall of 2008, bank stocks are leading the way down. The only difference now is that bank stocks in Europe are getting hit the hardest, whereas it was U.S. and UK banks three years ago. So far, U.S. markets are holding up better than those in the EU. The Dow and S&P 500 have had only one mini-crash so far. The German DAX has had several. While continental European markets have been hit the hardest, Asian markets have continued to suffer the least from the current turmoil. The Hong Kong markets are being more impacted than those in Japan.

While U.S. banks Morgan Stanley and Wells Fargo were down somewhat more than 4.5% yesterday and Bank of America and Citigroup 6.0%.  This was much better than the 10% drop in Germany's Commerzbank, the 11.5% drop in the Britain's Barclays and the 12% drop in France's 

Société Générale. As of August 18th, the EURO STOXX Financials index was down 38% from earlier this year.

Just last week, French banks were supposedly in trouble, but this was denied by them and one major French news outlet retracted a story that claimed this was the case. Yesterday, the ECB (European Central Bank) said one bank, which it didn't identify, had paid above-market rates to borrow $500 million a day for seven days. Today, it was reported that the U.S. Fed supplied $200 million of liquidity to the Swiss National Bank in the form of forex swaps. These are two separate issues. Switzerland is suffering from a skyrocketing currency (which is going to cause massive loan defaults in Eastern Europe if it continues since many loans there are denominated in Swiss francs), whereas the ECB is trying to keep banks afloat despite the fallout from the Greek debt crisis.

The chances of a full Greek default  (a selective default with bondholders taking a 21% haircut was already part of the second bailout deal reached in July) intensified on Thursday. Finland insisted that Greece provide a cash deposit equivalent to its share of the second bailout guarantees. Four other countries then made similar demands. This of course undermines the bailout by taking away money with one hand that the bailout is providing with the other.

Financial crisis behavior was also evident in the U.S. treasury markets. The yield on the 10-year fell as low as 1.9872 on Thursday, taking out the low from 2008. The two-year treasury has been hitting a series of new lows and has been significantly below its Credit Crisis bottom for some time now. One thing that is different from the 2008 Credit Crisis is that gold is rallying strongly and is in a blowoff. The December gold futures contract hit another all-time high  at $1881.40 this morning before U.S. stocks opened.  Gold has always been a safe haven throughout history and despite claims to the contrary, it will remain so.
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.

Today's Stock Market Action Looks A Lot Like August 1998

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.

Something is seriously bothering the stock market and the news that's out there isn't enough to justify what is going on. Such was the case in August 1998 as well. What caused the sudden bear market to appear out of nowhere in 1998 became fully evident only after the fact. The same could be the case in August 2011.

Perhaps the flash crash in October 1997 was a warning of things to come, just as the flash crash in May 2010 may have been a prelude to today's stock market drop. In the second half of July of 1998, stocks began to nosedive suddenly, just as they did in 2011. Some stabilization took place in the market toward the middle of August in 1998 and then a new deeper plunge began. Today, the Dow Jones industrials were suddenly down over 500 points this morning on what could only be considered minor bad news.

There were actually two problems causing the market debacle in 1998. Everyone knew about one of them - the Russian debt default and devaluation of the rubble, which took place on August 17th (less than half of the eventual market decline took place before this date).  Only Wall Street insiders knew about the second one - problems at Long-Term Capital Management (LTCM) - that almost brought down the financial system. 

Trouble in Russia was evident as early as October 1997 and it resulted from the fallout from the Asian financial crisis, which in turn started as a currency crisis in Thailand in July of that year. Today, Europe is undergoing a crisis with the euro that began in Greece in 2010. By August 1998, the Russian central bank had spent a great deal of its dollar reserves defending the ruble and decided to give up. The default had a number of ripple effects, but the most important one on LTCM wouldn't be known by the public until late September, only days before the market finally hit bottom.

After the Russian debt default, stocks plunged until the beginning of September. The market was close to its ultimate low at that point, but only because of the subsequent successful rescue of LTCM.  Stocks then rallied for approximately three weeks. A bailout of LTCM was arranged by the Federal Reserve on September 23rd. The market then sold off until early October hitting a new low and then the decline  was over.

In the rally that followed the stock market experienced huge gains led by a bubble in tech stocks. This was a consequence of the Fed lowering interest rates and pumping too much money into the financial system. The Fed had a lot of leeway to do both in 1998 and still there were serious negative results between 2000 and 2002 when the tech bubble collapsed. Inflation wasn't a concern back then because commodity prices had been declining for almost two decades and were around their lows. It should be assumed that a failure to have successfully rescued LTCM would have caused a much bigger drop in stocks (as happened when the Fed didn't bail out Lehman Brothers in September 2008).

The Fed has a lot less ability to maneuver in August 2011. Fed funds rates have been at zero since December 2008. The Fed has already expanded its balance sheet by approximately $2 trillion since the Credit Crisis began. Commodities are closer to their all-time highs now, not their lows. Another bailout like the one in 1998 (which was minor compared to what occurred during the Credit Crisis) could send inflation assets into a bubble. Gold is already trading over $1800 today and seems to be leading the way.  

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.

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.

Inflation Makes Economy Look Better; Stocks Soar on the News

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.


Despite a number of economic reports at the beginning of the month indicating continued problems, stocks rallied strongly on September 1st. The Nikkei was up over 1% and the major European markets were up between 1% and 2%. The U.S. markets were up over 2% in morning trade.

U.S. stock futures were up strongly in the pre-market and not even an incredibly weak ADP employment report indicating a loss of private sector jobs in August could derail the rally. In a rare moment of candor, even news service coverage found the rally odd. One article stated, "The sharp jump in U.S. stock futures is surprising given the domestic economic reports due out later in the morning. Often investors don't make big bets ... heading into key economic reports, particularly in recent weeks as data has consistently showed growth is slowing." And this was before the ADP report indicated that job losses in the U.S. are accelerating again after three challenging years and despite trillions of dollars of government stimulus spending.

What supposedly started the global stock rise was 'good' news on China's manufacturing index (PMI). The official government number was 51.7 in August versus 51.2 in July. While that may seem OK, albeit rather mediocre, the details indicate big trouble on the horizon. One component of the report was disproportionately responsible for the index not falling below 50 and indicating contraction. That component was the Input Price Index, which rose from 50.4 in July to 60.5 in August. Isn't that an inflation indicator? Doesn't that mean that input prices went up around 20% in only one month? Couldn't this possibly indicate that China is on the verge of experiencing major inflation and this is masking a big drop in manufacturing activity there? Then the U.S. PMI was released at 10:30AM and it unexpectedly rose.  Of all its components, the highest number was Prices, also an inflation indicator.

In the U.S., the market was also pleased that home prices were rising.  This news however was more laughable than ominous. According to Case-Shiller, U.S. houses prices in select cities were up 4.4% in the second quarter. The entire time period included the $8,000 home-buyer tax credit. According to other sources, an increase of $8,000 in the median average U.S. home price would be about 4.4%. So what happened was the government gave homebuyers $8,000 and they then spent an average of $8,000 more to buy the same home they would have without the tax credit. This obviously didn't make real estate any more affordable, all it did was create the illusion that this was the case. It wasn't just naive and gullible homebuyers that fell for this scam either. One prominent mainstream economist commented on the data, "Even with concerns about near term developments, we recognize that the housing market is in better shape than this time last year." Home sellers of course got an extra $8,000 courtesy of the U.S. taxpayer (if you check your bank account and notice $8,000 missing, this is where the money went).

So how is it possible that stocks are having a massive rally on the above news items?  The state of the economy is not the short-term reason stocks rally or sell off. Stocks rally on liquidity. And it is obvious that central banks are injecting huge amounts of liquidity into the global financial system at the moment. The liquidity free lunch doesn't last for a long time however. It has to be paid for periodically with withdrawals of liquidity to prevent a huge inflation spike. This causes lots of volatility with stocks experiencing big price rises followed by sharp drops. We saw a lot of this in the second half of 2008 when the market went up and down like a yo-yo on crack cocaine. While this resulted in an eventual market collapse two-years ago, this is not likely to deter the Fed from continuing to play the same dangerous game again until the November 2nd election. Investors should brace themselves for a rocky market during the next two months.


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.

Will September be the Cruelest Month for Stocks?

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.


U.S. stocks are set to close out August with the Dow Industrials dropping more than 4% on the month. If the economic numbers continue to indicate a possible double-dip recession however, stocks are likely to fall by a much greater amount in September.

Historically, it isn't crash-prone October when U.S. stocks have their worse performance, but September. Stocks are entering the month in a technically weakened state that began earlier in the summer. In July, all four major indices - the Dow Industrials, the S&P 500, the Nasdaq and the Russell 2000 - began a bear market trading pattern when their 50-day moving averages fell below their 200-day moving averages (sometimes referred to hyperbolically as a death cross). This is not enough to confirm a bear market however. The 200-day moving average needs to also start moving down. This has happened on the Dow Industrials and the S&P 500 in the last few trading days. The 200-days on the Nasdaq and the Russell 2000 have been moving sideways for a week or more and should start dropping soon. The Dow Transportation Average also needs to have a 50-day 200-day cross to confirm the negative action on the Industrials. As long as there isn't a massive rally, this will happen today. So stocks will be entering September in a technically vulnerable condition.

If more negative economic reports that indicate the economy continues to deteriorate then take place, the mix could be combustible. More hints of a double-dip recession from jobs or manufacturing would be especially damaging. Housing numbers this fall probably won't affect the market as much because things simply can't get any worse (with the exception of housing prices, which still have a lot of room to drop). The bad news on housing from the summer - numbers worse than those at the bottom of the Credit Crisis - may have a delayed impact on stocks though. Jobs have been the perennial weak spot of the attempted recovery and numbers have continually been at recession levels for over two years. Worsening unemployment figures would not be viewed kindly by stock traders. Falling manufacturing numbers won't be either since manufacturing led the economy up from its bottom in the fourth quarter of 2008.

U.S. stocks may also be following Japanese stocks down. The Nikkei dropped 325 points or 3.55% in its last day of August trade. It is now at 8824 and could easily test its Credit Crisis bottom, which is around 2000 points lower. U.S. investors need to watch the key 10,000 level on the Dow Industrials and 1000 on the S&P 500. Stocks moving and staying below these key points would damage sentiment severely. The only thing left at that point to hold up the market would be the Fed's liquidity injections. These might work until the election on November 2nd. If so, you may not want to own stocks later that week.


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.

Japan Leads Global Stock Market Drop

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 Nikkei closed at 8995 last night, 77% below its final price in December 1989. The rising value of the yen is what is causing the stock market drop. The yen just hit a 15-year high against the dollar and 9-year high against the euro. A richly valued yen is a big negative for Japan's export-based economy.

Japan has been trying to grapple with its real estate and stock market bubbles from the 1980s for over twenty years now. Its approach has been a zero interest rate policy (ZIRP) and an unending serious of stimulus programs (it was recently announced yet another one is being considered). The United States is currently following these same failed policies, but Washington is expecting that somehow they will work here. It is true that the U.S. real estate and stock bubbles in the 1990s and early 2000s were not nearly as bad as those that took place in Japan earlier. So maybe it won't take U.S. stocks 19 years to hit their lows (that would be 2026 by the way) as was the case for the Nikkei - or at least the case for the Nikkei so far. It cannot be said for certain that the 6695 low in March 2009 will hold.

Being the perennially weak sister, problems with global economic imbalances are showing up first in the Japanese market. The Nikkei first broke key support at 10,000 in mid-May.  It managed to trade just above that level for a few days in June, but then fell back and has traded below it ever since. The chart is very bearish.  U.S. investors need to worry about the Dow Industrials holding the same 10,000 level. The Dow is only slightly above this level in today's morning trade. The Dow Transportation Average is also on the verge of a significant breakdown. The Dow Industrials closing and staying below 10,000 at the same time that the Transportation Average gives a sell signal would be a strong negative for U.S. stocks. The S&P500, the Nasdaq, the small-cap Russell 2000 and the Dow Industrials have already given sell signals in July.

The other major development in Japan during its two lost decades was a massive bond bubble, which caused even long-term rates to approach zero. This same type of bubble is now developing globally, although the powers that be are denying that this is taking place. When massive government stimulus causes interest rates to drop, it is because of a liquidity trap - money does not flow into the real economy and so the economy doesn't significantly benefit from stimulus. Eventually a steep depression develops (what has prevented the depression phase so far in Japan is that its population had enough savings to pay for the last 20 years of stimulus - sort of like rich people who have no income, but still manage to live well by slowly selling off all of their assets). The only way out of this depression is to reignite economic growth with inflation. The Japanese have yet to figure out how to do this and U.S. monetary authorities are still reluctant to pursue this option.

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.

Wall Street Journal’s Flawed Reasoning For Possible Crash

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 Wall Street Journal published an article entitled, “Is a Crash Coming? 10 Reason to Be Cautious” on Friday, August 13th. While a crash is certainly possible, the reasons given by the Journal have little to do with why one could occur.

The Journal did make it clear that it was not predicting a crash. The article’s author specifically stated, “I don’t make predictions. That’s a sucker’s game.” Indeed it is a sucker’s game for almost all mainstream financial journalists, just as professional basketball is for midgets – it’s just not an area of natural talent. That of course doesn’t mean that no one can do it, but the author nevertheless made this illogical leap and this nicely set the tone for the rest of his article.

Most of the reasons given in the article for a possible crash were actually arguments for a double-dip recession. These include (my comment follow in italics):

The Fed is getting nervous (more like catatonic).

Deflation is already here (if so, it will be the first time in history money printing created deflation).

People still owe way too much money.

The job picture is much worse than they’re telling you (one of the ‘they’ referred to is the Wall Street Journal itself by the way).

Housing remains a disaster.

We’re looking at gridlock in Washington (so don’t expect any more big spending programs that accomplish little and raise your taxes)

All sorts of other [economic] indicators are flashing amber (actually bright red).

This is an implied assumption in the article that market crashes are related to recessions, also an illogical leap not supported by the facts. The worse U.S. market crash of all-time took place in October 1987, five years after a recession had ended and almost three years before another one began. There were also mini-crashes in 1989 and 1997. The economy was not in recession during these crashes either, nor was it during the recent flash crash.

Economic downturns are more properly associated with bear markets – a long, slow decline in stock prices as opposed to the sudden, sharp drops that take place during crashes. They require very different trading approaches. Even bear markets can take place outside a recession however. The 1998 bear market due to the Russian debt default and the implosion of Long-Term Capital is a good example. Both crashes and bear markets can be caused by global liquidity events and as we saw recently during the Credit Crisis, global liquidity events can also lead to recessions. This did not happen in the U.S. in the 1980s and 1990s however.

Perhaps the Wall Street Journal should have entitled its article, “10 Reasons Why We Are Headed Into a Recession”. They would have to find three additional reasons of course and they would also have to be a bit shameless as well since I already wrote that article on July 8th and it was published on a number of blog sites that day. Well, at least the Wall Street Journal is making some efforts to try to keep up with the blogosphere, even though those efforts are confused and coming weeks later. Now, what can we predict from that?


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.

This Week's Selling Indicates Bear Market Still in Play

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.


All four major U.S. stock indices began to form a bear market trading pattern during July. The rally that started early in the month paused the formation of that pattern, but didn't reverse it. Then the selling this week added more evidence that stocks are in a bear environment.

The most basic definition of a bear market is a 50-day moving average trading below the 200-day moving average for one or more stock indices and the 200-day moving down. Frequently, people only look for this pattern on one index such as the S&P 500, but that isn't enough. All the major indices - the Dow Industrials, the S&P 500, Nasdaq and the Russell 2000 - should have this pattern before a bear market can be declared.  You might also add the Dow Jones Transportation index to the list as an additional confirmation.

In early July, the simple 50-day moving average fell below the 200-day for both the S&P 500 and the Dow Industrials. Then in the middle of the month the same thing happened on the Nasdaq chart. By the end of the month, the Russell 2000 also experienced this cross (sometimes referred to the cross of death by technical analysts). However, stocks had been rallying since early July and the Russell's cross was very tentative. The 50-day barely dropped below the 200-day and then traded in tandem with it for two-weeks. The selling this week put some space between the two lines and prevented the 50-day from rising back above the Russell's 200-day.

So the 50-day crosses are in place for all the four major stocks indices. The falling 200-day moving averages are still missing however. This line is still rising, although just barely, for the Dow Industrials, S&P 500, Nasdaq, and the Russell 2000. Watch for the 200-days to turn down. The 50-day has also not crossed the 200-day on the Transportation Index. When this happens and the 200-day moving averages start declining, the bear market picture will be complete.

While a large number of economic reports for the last two months have shown a faltering U.S. economy and the Federal Reserve has confirmed that things look gloomy, stocks nevertheless managed to rally for 5 weeks in July and early August. Investors should keep in mind that there is a major election in the United States in early November. Other hard to explain bullish rallies are therefore possible until that time, so be prepared for anything. Reality eventually triumphs in all markets however and that favors the bearish view.
   
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.

What the Bear Market in Chinese Stocks is Telling Us

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.


China has been the economic engine powering the global recovery, but the engine may be sputtering based on the behavior of Chinese stocks. The Shanghai Composite has been trading in bear market territory since May 6th.

Unlike the U.S., UK and EU, which have service based economies, China's economy is heavily industrial. What takes place in China provides important information about the state of the global manufacturing. Activity in China is a key driver of the markets for industrial metals, materials, and energy. It was just announced in the media that China has become the largest consumer of energy commodities globally; pulling ahead of the United States, but the Chinese government has denied it.

Since the major Western economies and the Chinese economy have different compositions, it is reasonable to assume that their stock markets could trade in different patterns. The bull market peaks came at about the same time however. The Shanghai market hit a bottom around 1000 in mid-2005 and entered a bubble pattern in 2006, which continued until a high of 6036 was reached on October 17, 2007. As the bubble burst, Chinese stocks fell 72% until the market reached 1707 on November 4, 2008.  Unlike U.S. stocks, which continued to fall until they reached their bottom in early March 2009, the Shanghai composite then began to rally. The prices for metals, materials, and the companies that produce them tended to follow the Chinese market and not Western markets - investors should keep this in mind for future reference. Oil didn't bottom until mid-February 2009 though.

Not only did the Shanghai Composite hit its low four months earlier than the U.S. market, its high from the rally that followed took place well before the top in Western stock markets. So far, Chinese stocks topped at 3471 on August 4, 2009. U.S. stocks peaked on April 26, 2010. By the end of August 2009 the Shanghai index was down more than 20% on a closing basis, but only briefly. After some recovery, stocks entered bear market territory again for a few days in the end of September. They then moved up and traded with less than a 20% drop from the August peak for many months until May 6th of this year. Chinese stocks have continued to trade at a bear market loss since that date.

Poor performance of Chinese stocks indicates weakness in the global industrial economy. Most commodities are likely to suffer declines as a result. This has more significance for the U.S. currently than it usually would ordinarily because the industrial sector of the economy has performed best during the recovery. The much bigger service sector has remained fairly anemic despite $3 trillion of federal deficit spending in fiscal years 2009 and 2010. If U.S. manufacturing turns negative, and behavior of Chinese stocks indicates is might, the U.S. economy is likely to follow.

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.

Nasdaq Gives Bear Market Signal

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 mix of good earnings and weak economic reports continue, Nasdaq gave a bear market trading signal on Wednesday. It joined the Dow and S&P 500, which gave their own sell signals earlier this month.

While the technical picture for the market has improved somewhat after seven days of rally, the rally didn't prevent Nasdaq's simple 50-day moving average from falling below its 200-day. The Nasdaq closed at 2249.84, its 50-day fell to 2251.39, and its 200-day was at 2254.88. This means Nasdaq is also at a strong resistance point that it needs to break and stay above. Trading in the next ten days will determine if the Nasdaq continues to fall apart (and the rest of the market with it) or manages to turn around with a rising 50-day average. The recent rally has taken place with below average volume on Nasdaq every single day. The volume on the Dow Industrials was even weaker. From a technical perspective, this is another negative for the market.

Mixed news for the economy and earnings continues. JP Morgan reported a 77% Q2 rise in profits. Mainstream media accounts explained that "a slowdown in losses from failed loans helped offset a difficult spring in trading and investment banking". Huh?  Makes you wonder who does their numbers. Anyone who happens to believe that the big banks earnings reports have anything to do with reality should recall that Bear Stearns in March 2008 was rushing to get its positive first quarter earnings numbers out early, but the company went under before it could release the good news.

Meanwhile, the weekly unemployment claims rose last week, but the Labor Department reported they fell by 29,000. Huh? Makes you wonder who does their numbers. Apparently the magic of seasonal adjustments led to this 'sows ear as silk purse' news. Automakers aren't closing down for their usual summer retooling this year. Based on recent reports, there is no evidence that business in the sector is so good, or even good at all, that they can't afford the down time.

Industrial production figures in the U.S. were up by 0.1% in June. The number was only positive because of a big increase in utility output caused by increased use of air conditioning during the unusually hot month. Consumer goods seem to have been down across the board. As a reminder, consuming spending was 72% of the U.S. economy before the Credit Crisis hit. Business and industrial equipment were up, but it is likely we have exports to China to thank for that. The Chinese economy expanded by 10.3% in the second quarter, but this was below expectations. Even at the bottom of the Credit Crisis Chinese GDP was up over 6%. It was down by almost that amount in the U.S. The economy in China seems to be slowing and if this continues, watch out below.

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.

Alcoa and CSX Earnings: Not as Positive as They Look

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 Q2 earnings season began with aluminum company Alcoa and rail freight operator CSX reporting on Monday. The stock market reacted jubilantly to the news. Careful examination however indicates there is very little reason for economic optimism based on these releases.

On the surface, comparisons looked good versus the Q2 2009. However, Q2 2009 was right off the Great Recession bottom and it would be almost impossible not to do a lot better. Alcoa's (AA) revenue was up 18% and CSX's (CSX) was up 22%. A 44% increased in metals freight shipments by CSX were seen as verification that Alcoa should be doing better. Automotive shipments by CSX were up 63% by volume year over year and vehicle manufacturing requires a lot of aluminum. It all looks really good as long as you don't look any further.

New car sales were in the dumps in Q2 2009 with only around 9.6 million vehicles sold. By Q3 2009 however around 11.5 million vehicles were sold (thanks to Cash for Clunkers), so comparisons next quarter are going to be difficult for both CSX and Alcoa. Approximately 11.2 million vehicles were sold in the U.S. in Q2 2010, but sales dropped 11% between May and June (the usual seasonal drop is 3%). So it looks like the summer will be weak for auto sales and sales for Q3 2010 will possibly be much lower than the previous year's level. This can only negatively impact next quarter's earnings for both Alcoa and CSX.

The market also got excited about Alcoa's revising its global demand forecast up 10% to 12%. While this would certainly be good news if it happens, traders seemed skeptical based on the action in the stock. Alcoa peaked in January and has been trading in a bearish pattern since mid-May. The stock is up only a very modest amount so far today. After a six-month drop, a more enthusiastic reaction should be expected on good news.

The stock market is supposed to look forward at least six months. Earnings are backward looking. They are only significant to the extent that the underlying trends that created last quarter's earnings continue to hold. There is a lot of reason to believe that this will not be the case. Big government stimulus programs are fading and the economy is weakening, not strengthening as it was a year ago.

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.

Dow Industrials to Give Bear Market Signal Today

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 big cap Dow Industrials will be giving a bear market trading signal today.

The Dow's 50-day simple moving average will be falling below its 200-day. The happened for the S&P 500 last Friday, July 2nd. While this has not occurred for the Russell 2000 yet, the index simply confirmed small caps were already in a bear market with a close-to-close loss of 20.5% as of yesterday, July 6th. This puts it in a bear market by the strictest definition.

Trading on the U.S. markets started out with a strong bullish bias in the morning, but as the day progressed the rally lost its momentum. This is a trading pattern typical of bear markets - strong in the morning, weaker toward the close. While the Dow was up as much as 170 points early on, by around 3PM it was in negative territory like all the other major stock indices. A last minute rally pushed the Dow, S&P 500 and Nasdaq into positive territory. The Russell 2000 closed down 1.5% however. The Dow managed to close up 57 points, the S&P 500 5 points and the Nasdaq 2 points - not exactly a sterling performance after two weeks of severe losses.

The 50-day moving averages for all the indices are dropping rapidly. The 200-day's are still moving up, but just barely. They should begin to move down soon to complete the bear market picture. The 50-day almost crossed the 200-day on the Dow yesterday, but missed by coming in at 10,361.77 versus the 200-day's 10,360.60. There is no doubt that the cross will take place today.

It makes sense that small caps should enter a bear market first since they are more volatile and risky. The big cap Dow usually enters bear market territory last because it consists of what are perceived to be the safest stocks. The Nasdaq should be next to follow the Russell 2000 into the jaws of the bear, but it's trading signal is not likely to happen until the end of this next week at the earliest. Only one bad trading day though could provide it with a bear market loss. It has already declined 18.7% peak to trough. So the Nasdaq could actually be in a bear market before it gives its trading signal, just like the Russell 2000.

The market has provided investors with a number of clues, indications, and signals that the bull market it over and we have entered a rough patch. About the only thing that is missing so far is someone putting up a giant neon sign in Times Square that flashes 'Stocks are in a Bear Market'. If you need that much notice, perhaps you should try paying more attention.

Disclosure:

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.

What's Driving Today's Market Rally

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.


Major European stock indices were up two to three percent today after Asian indices rose around one percent last night. The U.S. markets then had a strong opening after the three-day holiday weekend. Mainstream media is citing bargain hunting as the source of the rally, whereas money-pumping operations to support the euro is likely the major contributor to the market's bullish behavior.

Stocks were devastated in the last two weeks and some rally at this point is reasonable in order to resolve an oversold condition. Strong buying in the U.S. though would be inconsistent with the bear market signal being giving by the S&P 500 on Friday and the small cap Russell 2000 having experienced a bear market loss of over 20% the same day. This is not the type of market environment that traders can't wait to plunge into on the long side. Liquidity pumping by the major central banks would be most effective (and likely) at a key market juncture like this however.

Central bank efforts to support a faltering global financial system began in earnest on Sunday May 9th after the Flash Crash three days earlier. The EU announced its $915 billion euro rescue plan and at the same time the U.S. Fed opened unlimited liquidity swap facilities with the European Central Bank, the Bank of England and the Swiss National Bank. A swap facility up to $30 billion was opened with the Bank of Canada. The Fed stated, "These facilities are designed to help improve liquidity conditions" and that the Bank of Japan was considering similar measures. The swap arrangements were authorized until January 2011.

Stock markets around the world then skyrocketed on Monday, May 10th since increased liquidity shows up immediately in stock prices. Investors should expect intermittent market impact both from euro rescue money and swap generated liquidity for the next few months. For the full text of the Fed's announcement, see: http://www.federalreserve.gov/newsevents/press/monetary/20100509a.htm.

It is fortunate for the markets that liquidity is on tap when needed. Not only is the technical picture of the market deteriorating, but the economic news isn't supporting stocks either. Little noticed last Friday was the announcement of a decline of 1.4% in U.S. industrial production. The ISM Manufacturing index for June, which came in at 56.2, indicated a slowing expansion (over 50 indicates growth). Almost every component, except for those related to inventories, was down. New orders, an indication of future activity, dropped 7.2 from the previous month. The ISM Service index fell to 53.8, which was below forecast. The employment component was 49.7 dropping below 50 and indicating job losses. The service sector is four times bigger than the manufacturing sector in the U.S.

Investors should enjoy the rally while is lasts. The rally after the flash crash in May lasted four days. Within ten days, stocks were lower than they had been during the crash. Liquidity induced rallies can be powerful, but they don't last very long.

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.

Stocks Weaken With the Economy

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.


U.S. stocks are in sell off mode this morning with all major indices trading below their 200-day moving averages. If current trends continue, the Dow and S&P 500 will give a bear market trading signal next week.

Problems in Europe continue to be a drag on the markets. The prices of Greek debt credit default swaps (CDSs), a type of bond insurance, are rising rapidly again. Experts say they are now indicating a 57% chance of default. Meanwhile, strikes are planned throughout France because the government is trying to raise the retirement age to 62. Investors should assume that EU attempts to reduce the socialist gravy train will be fought tooth and nail by the populace everywhere on the continent. Good news came out of Australia however. Prime minister Kevin Rudd was forced out because of his unpopular 40% super-tax on the mining industry (a key part of the Australian economy).  Australia doesn't have the debt problems that exist in the U.S. and Europe.

In the U.S., the economic numbers continue to be less than impressive. After the disastrous New Homes Sales report yesterday indicated a 33% drop in sales in just one month, the Durable Goods report showed a 1.1% decline in May. Weekly claims fell to 457,000, still well within recession levels, and this got some positive commentary from the cheerleading section of the press. The stock market didn't seem impressed however. While weekly claims have been much better this year than the depression levels they were at early in 2009, they have yet to indicate that the U.S. has recovered from the recession that began in December 2007.

The technical picture for stocks turned south again this Wednesday with the Dow and S&P 500 falling and closing below their 200-day moving averages. The tech heavy Nasdaq dropped below its 200-day yesterday, but managed to close just above it. It looks like it will close below it today. The small cap Russell 2000 is trading below its 200-day today for the first time since earlier this month. The 50-day moving averages for all the indices are still above their respective 200-days in a typical bull market pattern. The 50-days are all falling however and in the case of the Dow and S&P 500, it looks they will be crossing below their 200-days next week. This is a classic bear market signal.  Investors should be watching this carefully.

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.

Quadruple Witching Tops Off Weekly Trading

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.


Friday was a quarterly quadruple witching day with stock options, options on futures, single stock futures and index futures all expiring. While volatilty frequently takes place on expiration days, this one was uneventful. Expirations can move markets starting days before however, with prices tending to move in the opposite direction of their recent trends during the week of expiration.

The week of June 14th was bullish for U.S. stocks, the euro, oil and gold. The euro gained 2.7% on an oversold rebound. Gold hit a record high, with GLD closing up 2.5% on the week. There was little difference though between gold's performance and that of the major U.S. stock indices. The Dow rose 2.3% on the week, the S&P 500 2.4%, the tech heavy Nasdaq 3.0% and the small cap Russell 2000 3.2%. Oil was a much bigger winner than gold, gaining 5.2% from last Friday's close. The one notable loser was economically sensitive copper, which dropped 1.5% in the last five days.

The euro, stocks, gold, oil and copper have very different technical pictures. On the daily charts, the euro looks very bearish, with its simple 50-day moving average well below its 200-day. The euro is moving up because of 'regression toward the mean'. It went down too far in too short a period of time, so it is trying to return to a trendline. The trade-weighted U.S. dollar has a mirror image picture. It has gone up too far, too fast and is coming down for that reason. Many oil ETFs/ETNs, including OIL also have their 50-day trading below their 200-day, but it is not nearly as pronounced as is the case for the euro.

U.S. stock indices are still in a bullish pattern with their 50-days above their 200-days, but the 50-days have been fallen particularly for the Dow and the S&P 500. The Russell 2000 is in the best shape of the indices. All of the indices are trading above their 200-days, but below their 50-days. The Dow and S&P 500 spent 18 days in a row below their 200-days in the last month though. Stocks can be characterized as clinging to a bullish pattern. In contrast, Gold is unquestionably bullish, trading above both its 200-day and 50-day and its 50-day is well above its 200-day. Next week could be critical for whether or not gold's rally continues based on patterns forming in its technical indicators.

Copper is changing from a bullish to bearish trading pattern. It's 50-day is touching its 200-day and will fall below it on Monday. This is a classic bear signal. Since copper trades with the economy, its behavior is supporting the possibility of a global slowdown and a double-dip recession in the United. Investors should watch copper closely. If it continues its bearish trading pattern, assume a recession could show up as early as this fall.

 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.

Market Sells Off Even Though Bernanke Is Bullish

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.


Fed Chair Ben Bernanke stated last night that he is 'hopeful' the U.S. economy will not fall into a double dip recession. After a tremendous drubbing on Friday, stocks somehow managed to sell down to even lower levels yesterday. They are down again this morning following Bernanke's comments - a fitting response to his forecasting acumen.

Few people in the United States seem to be as oblivious to the condition of the American economy as is the guy who is in charge of the Federal Reserve. Bernanke notoriously stated that subprime borrowing wouldn't cause any problems only weeks before it blew up into the biggest financial crisis the world has ever seen. Following this, the Fed released a number of statements in the spring of 2008 about how it was hopeful that its policies would prevent the U.S. economy from falling into a recession. Unfortunately, the economy had already fallen into recession months before, but the Fed was blissfully unaware of this even though it has more access to economic data than anyone else. The buffoonish Bernanke has been beating the drum of economic recovery for a long time now, even though analysis of U.S. statistics indicates the private sector is still struggling. The only recovery that seems to have taken place is in increased government spending.

At the moment, the markets don't seem to share Bernanke's rosy view of the future. The Dow dropped 115 points (1.2%) yesterday and most of the selling took place around the close, as is typical in bear markets. The Dow's ending price of 9816 was well below the key 10,000 level. The S&P 500 fell 14 points (1.4%) and closed at a new low for 2010, as did the Dow. Selling was even more pronounced in the tech heavy Nasdaq and the small cap Russell 2000. The Nasdaq lost 45 points (2.0%) and the Russell 15 points (2.4%). As of today, the Dow and S&P 500 have spent 13 trading days below their simple 200-day moving averages, a bearish pattern. Selling was also widespread with market breadth close to three to one negative on the NYSE.

The only areas of the market that did well yesterday were utilities, gold/ gold miners, and treasuries - safe havens. Financials were hit hard with Goldman Sachs (GS) falling 2.5% and Bank of America (BAC) losing 3.4%. U.S. bank failures have reached 81 so far this year and look like they are going to handily exceed 2009's very high figure. Credit card debt has fallen for 19 months in a row and May's employment report indicated private sector hiring has disappeared. Once the 1.2 million temporary Census workers are dismissed, the U.S. unemployment rate should go above 10%. These are not signs of economic recovery and yet the Fed chair keeps spouting one cheerleading remark after another about how recovery is taking place. Herbert Hoover did the same thing in the early 1930s as the Great Depression was developing. Consequently, he is now treated as a historical laughingstock. History may take the same view of Ben Bernanke. 

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.