Market Commentary

Last week it started to feel like the markets were breaking-down.   Most of the major US equity indices broke down through their 50-day moving averages and also below their up-trend lines. Likewise, the Dow is back under 10,000 again.

The chart, below, shows that we are that an important support and resistance level that goes back to November of last year. In addition, we're back to price levels from late July. That means that we've had three months of rally, good news, and talks of "green shoots", with no real price advancement and a decrease of momentum.

From a technical analysis standpoint, this would be a good place to
reverse and rally. However, longer-term charts and the sheer size of
the recent rally suggests that we might have a little more market
correction to go before the decline reverses.

A Rising VIX Often Means Falling Prices.

The CBOE Volatility Index  (better known as the "VIX") is a measure of the implied volatility of
S&P 500 Index options, with very low numbers indicating extreme bullishness
and very high numbers severe bearishness. It is also referred to as the “fear
gauge” of US stock markets and is used as a contrary indicator as it moves
inversely to equity prices. So a rising VIX often means falling prices.  As shown below, the VIX spiked to its highest level
since early July.

I'm watching the VIX for clues about the direction of the next big move. If fear subsides quickly, then the rally will likely continue.  On the other hand, volatility will increase if the markets remain jumpy.

What's GDP Got to Do with It?

Going back to last week, Bears started jumping in on estimates that GPD would fall from 3.0% to 2.7%. Then GDP came in at 3.5%, and suddenly there were a bunch of headlines and news reports that the Recession was over.  As a result, the market blasts 2% higher in one day. My guess, that was more a result of massive short-covering, rather than actual bullish buying behavior.

It's worth noting that the GDP number was annualized. Real GDP growth for the quarter was 0.87%.

So far, the Stimulus spending/ Bailouts have
cost the US more than WWI, WWII, and the New Deal combined… and we get
GDP growth of 0.87% for Q3?    That's not a sign of a
strong economy.

Longer Term: How Does This Compare to Other Bear Market Rallies?

Here is an interesting inflation-adjusted comparison of three
Mega-Bear Markets. It
aligns the current S&P 500 from the top of the Tech Bubble in March 2000,
the Dow in of 1929, and the Nikkei 225 from its 1989 bubble high.

Something to keep in mind … while history doesn't always repeat itself … it often rhymes. If so, the next big move is down.

Business Posts Moving the Markets that I Found Interesting This Week:

• 2010 Economic Forecast: Don't Hold Your Breath for Fast Growth. (WP Carey)
• U.K. GDP Numbers Worse Than Most Thought – Down about 5% this Year. (WSJ)
• Bank Failures Hit 106 Year-to-Date -  Most Since 1992. (MarketWatch)
• Will Retailers Top Last Year's Holiday Sales? (WSJ)
• The Good, Bad & Exaggerated in Michael Moore's New Film 'Capitalism'. (Wharton)
• Venture Firms Making Bets On Forex Start-Ups. (WSJ)
• Ten Odd Economic Indicators: From Hot Waitresses to Men’s Underwear. (Time)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Ten Things Every Good Business Plan Must Have (Forbes)
• Google, Microsoft Intensify Search Rivalry with Music. (WSJ)
• E Pluribus Tunum: How Not to Price Online Music. (Economist)
• Online TV Leader Hulu Won't Remain Free, Official Says. (WSJ)
• Why We Lie to Our Spouses? (WSJ)
• White House's Fox News Boycott Prompts Network Revolt (HuffingtonPost)
• Secrets of the Centenarians – Life Begins at 100. (NewScientist)
• More Posts with Lighter Ideas and Fun Links.

Last week it started to feel like the markets were breaking-down.   Most of the major US equity indices broke down through their 50-day moving averages and also below their up-trend lines. Likewise, the Dow is back under 10,000 again.

The chart, below, shows that we are that an important support and resistance level that goes back to November of last year. In addition, we're back to price levels from late July. That means that we've had three months of rally, good news, and talks of "green shoots", with no real price advancement and a decrease of momentum.

From a technical analysis standpoint, this would be a good place to
reverse and rally. However, longer-term charts and the sheer size of
the recent rally suggests that we might have a little more market
correction to go before the decline reverses.

A Rising VIX Often Means Falling Prices.

The CBOE Volatility Index  (better known as the "VIX") is a measure of the implied volatility of
S&P 500 Index options, with very low numbers indicating extreme bullishness
and very high numbers severe bearishness. It is also referred to as the “fear
gauge” of US stock markets and is used as a contrary indicator as it moves
inversely to equity prices. So a rising VIX often means falling prices.  As shown below, the VIX spiked to its highest level
since early July.

I'm watching the VIX for clues about the direction of the next big move. If fear subsides quickly, then the rally will likely continue.  On the other hand, volatility will increase if the markets remain jumpy.

What's GDP Got to Do with It?

Going back to last week, Bears started jumping in on estimates that GPD would fall from 3.0% to 2.7%. Then GDP came in at 3.5%, and suddenly there were a bunch of headlines and news reports that the Recession was over.  As a result, the market blasts 2% higher in one day. My guess, that was more a result of massive short-covering, rather than actual bullish buying behavior.

It's worth noting that the GDP number was annualized. Real GDP growth for the quarter was 0.87%.

So far, the Stimulus spending/ Bailouts have
cost the US more than WWI, WWII, and the New Deal combined… and we get
GDP growth of 0.87% for Q3?    That's not a sign of a
strong economy.

Longer Term: How Does This Compare to Other Bear Market Rallies?

Here is an interesting inflation-adjusted comparison of three
Mega-Bear Markets. It
aligns the current S&P 500 from the top of the Tech Bubble in March 2000,
the Dow in of 1929, and the Nikkei 225 from its 1989 bubble high.

Something to keep in mind … while history doesn't always repeat itself … it often rhymes. If so, the next big move is down.

Business Posts Moving the Markets that I Found Interesting This Week:

• 2010 Economic Forecast: Don't Hold Your Breath for Fast Growth. (WP Carey)
• U.K. GDP Numbers Worse Than Most Thought – Down about 5% this Year. (WSJ)
• Bank Failures Hit 106 Year-to-Date -  Most Since 1992. (MarketWatch)
• Will Retailers Top Last Year's Holiday Sales? (WSJ)
• The Good, Bad & Exaggerated in Michael Moore's New Film 'Capitalism'. (Wharton)
• Venture Firms Making Bets On Forex Start-Ups. (WSJ)
• Ten Odd Economic Indicators: From Hot Waitresses to Men’s Underwear. (Time)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Ten Things Every Good Business Plan Must Have (Forbes)
• Google, Microsoft Intensify Search Rivalry with Music. (WSJ)
• E Pluribus Tunum: How Not to Price Online Music. (Economist)
• Online TV Leader Hulu Won't Remain Free, Official Says. (WSJ)
• Why We Lie to Our Spouses? (WSJ)
• White House's Fox News Boycott Prompts Network Revolt (HuffingtonPost)
• Secrets of the Centenarians – Life Begins at 100. (NewScientist)
• More Posts with Lighter Ideas and Fun Links.

Traders are starting to sell into strength.  That is something to watch.

This Heat Map, from FinViz, shows that last Friday was a tough day in the markets.  Most everything was red.  However, Amazon was up almost 27%.  And Microsoft had a pretty good day too.  Realize that the averages would have been even weaker without those outlier performances.

But big up-moves on big down days are another sign of volatility, confusion and disagreement.  These are simply things I've learned to notice. 

Price is still the primary indicator.  So keep an eye on the trend-line of your choice.

Items In the Rear-View Mirror May Only Be Half as Big as They Seemed.

Why isn't the world beating a path to our markets, driving-up prices and volume?  Perhaps because they don't see our market the same way we do. 

This next chart caught my eye because it shows our 20% rally (since May) is less than a 10% rally, when it is measured in Euros instead of Dollars.

A similar phenomena is playing-out with Gold too.

Venture Capital Charts are Eye-Opening … But Not Wallet-Opening.

The third quarter was rough for VCs, with 17 firms raising just $1.6 billion. That's the fewest number of firms to raise money in 15 years; and it's the smallest amount of money raised since Q1 2003, says the National Venture Capital Association.

How tough was it?  Venture Capital funding fell 42% through the third quarter compared with last year, and had an 81% drop quarter-to-quarter from a year ago.

The more I think about this, the less it worries me.  There is a lot of money sitting on the sidelines, and I believe that we just aren't in the stage of the cycle where late-majority money flows to speculative investments.  There is a similar situation going on in the M&A cycle too.

When the longer-term economic recovery gets moving, so will the money.

The Jobs Flu.

The real virus affecting the economy is unemployment. 

For example, Sun says it is about to cut 3,000 jobs.  Frankly, I hear chatter from a number of companies planning to reduce headcount in meaningful and painful ways.  Bottom Line: Without a clear path to more sales, the pressure to make numbers is driving further reductions.

It seems several things are thinning the workforce.

President Obama declared swine flu a national emergency.  Officials described the move as similar to a declaration ahead of a hurricane making landfall; though perhaps it was more a "call to action," like how they hand out Nobel Peace Prizes.

Business Posts Moving the Markets that I Found Interesting This Week:

• What Happens When the Fed's Buying Binge Ends? (WSJ)
• McKinsey Says Global Capital Markets Entering a New Era (McKinsey)
• Sharp Drop in Start-Ups Bodes Ill for Jobs & Growth Outlook. (WSJ)
• Bank of America Lost $1 Billion in Q3, & It's Now Testing Support. (NYTimes)
• Great Chart of Google's Long Road Back To $500 (BusinessInsider)
• Nokia Slaps Apple with Lawsuit about Wireless Patents. (Forbes)
• Some Reasons Not to Care about Dow 10K. (CuriousCapitalist)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• A $1 Million Research Bargain for Netflix, & Maybe a Model for Others. (NYTimes)
• Forbes Lists the 50 Most Influential Management Gurus. (Forbes)
• Does Social Media Mark the End of the Email Era? (WSJ)
• 54% of CIOs Forbid Use of Social Networks at Their Companies. (WallSt&Tech)
• Gout: The Missing Chapter from Good Calories, Bad Calories. (Ferriss)
• Study – Touch Money And You Feel Less Pain. (CreditCards)
• Disney Offers Refunds on Baby Einstein. (TDB)
• More Posts with Lighter Ideas and Fun Links.

Traders are starting to sell into strength.  That is something to watch.

This Heat Map, from FinViz, shows that last Friday was a tough day in the markets.  Most everything was red.  However, Amazon was up almost 27%.  And Microsoft had a pretty good day too.  Realize that the averages would have been even weaker without those outlier performances.

But big up-moves on big down days are another sign of volatility, confusion and disagreement.  These are simply things I've learned to notice. 

Price is still the primary indicator.  So keep an eye on the trend-line of your choice.

Items In the Rear-View Mirror May Only Be Half as Big as They Seemed.

Why isn't the world beating a path to our markets, driving-up prices and volume?  Perhaps because they don't see our market the same way we do. 

This next chart caught my eye because it shows our 20% rally (since May) is less than a 10% rally, when it is measured in Euros instead of Dollars.

A similar phenomena is playing-out with Gold too.

Venture Capital Charts are Eye-Opening … But Not Wallet-Opening.

The third quarter was rough for VCs, with 17 firms raising just $1.6 billion. That's the fewest number of firms to raise money in 15 years; and it's the smallest amount of money raised since Q1 2003, says the National Venture Capital Association.

How tough was it?  Venture Capital funding fell 42% through the third quarter compared with last year, and had an 81% drop quarter-to-quarter from a year ago.

The more I think about this, the less it worries me.  There is a lot of money sitting on the sidelines, and I believe that we just aren't in the stage of the cycle where late-majority money flows to speculative investments.  There is a similar situation going on in the M&A cycle too.

When the longer-term economic recovery gets moving, so will the money.

The Jobs Flu.

The real virus affecting the economy is unemployment. 

For example, Sun says it is about to cut 3,000 jobs.  Frankly, I hear chatter from a number of companies planning to reduce headcount in meaningful and painful ways.  Bottom Line: Without a clear path to more sales, the pressure to make numbers is driving further reductions.

It seems several things are thinning the workforce.

President Obama declared swine flu a national emergency.  Officials described the move as similar to a declaration ahead of a hurricane making landfall; though perhaps it was more a "call to action," like how they hand out Nobel Peace Prizes.

Business Posts Moving the Markets that I Found Interesting This Week:

• What Happens When the Fed's Buying Binge Ends? (WSJ)
• McKinsey Says Global Capital Markets Entering a New Era (McKinsey)
• Sharp Drop in Start-Ups Bodes Ill for Jobs & Growth Outlook. (WSJ)
• Bank of America Lost $1 Billion in Q3, & It's Now Testing Support. (NYTimes)
• Great Chart of Google's Long Road Back To $500 (BusinessInsider)
• Nokia Slaps Apple with Lawsuit about Wireless Patents. (Forbes)
• Some Reasons Not to Care about Dow 10K. (CuriousCapitalist)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• A $1 Million Research Bargain for Netflix, & Maybe a Model for Others. (NYTimes)
• Forbes Lists the 50 Most Influential Management Gurus. (Forbes)
• Does Social Media Mark the End of the Email Era? (WSJ)
• 54% of CIOs Forbid Use of Social Networks at Their Companies. (WallSt&Tech)
• Gout: The Missing Chapter from Good Calories, Bad Calories. (Ferriss)
• Study – Touch Money And You Feel Less Pain. (CreditCards)
• Disney Offers Refunds on Baby Einstein. (TDB)
• More Posts with Lighter Ideas and Fun Links.

This was a good week for bullish traders.  Sure volume was light for the rally.  But selling was even lighter.  In a trending market, thinking too much can be detrimental to your wallet.  And from March until now, the trend points up.

What Does the Bigger Picture Show?

A weekly chart of the SPY, which is the ETF for the S&P 500, shows price coming into a cluster of resistance.  There are three things that jump out at me.  First, we are at the 50% Retracement of the October 2007 to March 2009 downswing.  Second, price is also are trying to break through the long-term downtrend line from that bear swing.  And third, there is a significant Gap (which often acts as resistance) at that same level from last October.

Can We Move Higher?

The market does not directly reflect the economy.  So price can go
higher, even without a real economic recovery.  For traders, the
question is how long the rally will be sustainable?  The answer is
simple; it is sustainable until price breaks the trendline. 

It is a little tricky, here, because we have the battle of two trendlines. 

What About the Economy?

As for the economy, consumer spending has been weak, so expect that corporate revenues will continue to drag. And companies straining to realize their inflated expectations for 2010-11 earnings will continue to focus on cutting costs, which translates into cutting jobs.  Unfortunately this likely results in even less consumer spending …

Where Are Consumers Spending?

This chart from the New York Times tells an important story.  It shows where consumers are spending … and where they aren't.  Last year, consumers pulled back on spending and the retail sector suffered. But not all retailers are faring worse than they did a few years ago. 

Against a baseline of spending levels in 2003, sales in computer stores have continued to rise. Restaurant and liquor-store sales are at much higher levels, and purchases at warehouse stores are up nearly 50 percent.

Still, in major retail divisions like home furnishings and clothing, sales faltered in 2007 and are now below their levels of 2003.

Does a Weak Dollar Matter?

This chart series from Bespoke highlights one reason that a weak dollar matters.  While gold is at record highs in dollar terms, the commodity is still down 10% from its highs when priced in Euros or Yen.  This indicates that the strength is a function of a weaker dollar rather than a real increase from demand.

The same logic applies to the recent market rally.  If the dollar gets stronger, expect the market to move down.  Consequently, many traders are watching the dollar as it tries to bottom.

Business Posts Moving the Markets that I Found Interesting This Week:

• What's Luck Got to Do With It? The Math of Gambling. (NewScientist)
• Women, Testosterone & Finance – Risky Business? (Economist)
• Private Equity's Return Dilemma – Hope Dwindling for a New Buyout Boom.(WSJ)
• Please Do Feed the Bears – The Financial World Needs Its Pessimists. (Economist)
• Return of Day Traders Drives Volume; But Who Is Sitting-Out? (WSJ)
• Uncommonly Clever Economic Indicators. (Forbes)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Microsoft Offers Free Security Essentials Anti-malware Package. (InformationWeek)
• More Cases of Autism in U.S. Kids Than Previously Realized. (CNN)
• A Credible Kindle Killer? Competitors Team-up to Take on Amazon. (Forbes)
• Tracing the Origins of Human Empathy. (WSJ)
• Allocate Hours for Maximum Productivity in Your Perfect Day. (ETR)
• Samurai Mind Training for Modern American Warriors. (Time)
• More Posts with Lighter Ideas and Fun Links.

This was a good week for bullish traders.  Sure volume was light for the rally.  But selling was even lighter.  In a trending market, thinking too much can be detrimental to your wallet.  And from March until now, the trend points up.

What Does the Bigger Picture Show?

A weekly chart of the SPY, which is the ETF for the S&P 500, shows price coming into a cluster of resistance.  There are three things that jump out at me.  First, we are at the 50% Retracement of the October 2007 to March 2009 downswing.  Second, price is also are trying to break through the long-term downtrend line from that bear swing.  And third, there is a significant Gap (which often acts as resistance) at that same level from last October.

Can We Move Higher?

The market does not directly reflect the economy.  So price can go
higher, even without a real economic recovery.  For traders, the
question is how long the rally will be sustainable?  The answer is
simple; it is sustainable until price breaks the trendline. 

It is a little tricky, here, because we have the battle of two trendlines. 

What About the Economy?

As for the economy, consumer spending has been weak, so expect that corporate revenues will continue to drag. And companies straining to realize their inflated expectations for 2010-11 earnings will continue to focus on cutting costs, which translates into cutting jobs.  Unfortunately this likely results in even less consumer spending …

Where Are Consumers Spending?

This chart from the New York Times tells an important story.  It shows where consumers are spending … and where they aren't.  Last year, consumers pulled back on spending and the retail sector suffered. But not all retailers are faring worse than they did a few years ago. 

Against a baseline of spending levels in 2003, sales in computer stores have continued to rise. Restaurant and liquor-store sales are at much higher levels, and purchases at warehouse stores are up nearly 50 percent.

Still, in major retail divisions like home furnishings and clothing, sales faltered in 2007 and are now below their levels of 2003.

Does a Weak Dollar Matter?

This chart series from Bespoke highlights one reason that a weak dollar matters.  While gold is at record highs in dollar terms, the commodity is still down 10% from its highs when priced in Euros or Yen.  This indicates that the strength is a function of a weaker dollar rather than a real increase from demand.

The same logic applies to the recent market rally.  If the dollar gets stronger, expect the market to move down.  Consequently, many traders are watching the dollar as it tries to bottom.

Business Posts Moving the Markets that I Found Interesting This Week:

• What's Luck Got to Do With It? The Math of Gambling. (NewScientist)
• Women, Testosterone & Finance – Risky Business? (Economist)
• Private Equity's Return Dilemma – Hope Dwindling for a New Buyout Boom.(WSJ)
• Please Do Feed the Bears – The Financial World Needs Its Pessimists. (Economist)
• Return of Day Traders Drives Volume; But Who Is Sitting-Out? (WSJ)
• Uncommonly Clever Economic Indicators. (Forbes)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Microsoft Offers Free Security Essentials Anti-malware Package. (InformationWeek)
• More Cases of Autism in U.S. Kids Than Previously Realized. (CNN)
• A Credible Kindle Killer? Competitors Team-up to Take on Amazon. (Forbes)
• Tracing the Origins of Human Empathy. (WSJ)
• Allocate Hours for Maximum Productivity in Your Perfect Day. (ETR)
• Samurai Mind Training for Modern American Warriors. (Time)
• More Posts with Lighter Ideas and Fun Links.

The Trend Is Up; So Discipline Says Buy the Dip.

Most of the U.S. Equity Indices (Dow, S&P 500, Russell 2000 and the MidCap Index) have pulled-back to their 50-Day moving averages and short-term support.  So have many sectors, including: Financials, Metals, Energy, Drugs, Materials, and Consumer Discretionary.  This would be a likely place for bulls, looking for a continued rally, to put some extra cash to work in the markets by buying the dip.

 

Tech is still leading the rally.  So I'm watching that area closely for continued strength.  A lack of buying here is a warning sign.

The Market Is Getting Jiggy.

One thing tempering my confidence in the "buy the dip" strategy is that I noticed a lot more "mischief-bars" recently.  These head-fake moves show-up on charts as jaggy spikes, and often shake-out weak holders … only to reverse sharply.  Here is a chart of the S&P 500 from Tim Knight's Slope of Hope site.  The yellow sections highlight areas where it is easy to see the spikes in volatility. 

This type of behavior often happens near major trend changes, and reflects the disagreement between bulls and bears.

Does the Recent Weekly Buying Climax Signal Exhaustion?

For those looking for further evidence of a turning point, Investors Intelligence recently released a chart showing major buy and sell climaxes in the S&P 500.  As you can see, they often come at major turning points for the markets.  The Blue Bars show Weekly Buying Climaxes, which occur when a stock makes a 52-week high and
then closes lower for the week. This represents distribution from strong
hands to weak ones and most often occur around market highs.  And the Red Bars mark Weekly Selling Climaxes, which occur when a stock makes a 52-week low and
then closes higher for the week. This represents distribution from weak
hands to strong ones and most often occur around market lows. 

This chart shows that there were 380 total Weekly Buying Climaxes as of the end of last week (see the blue bar at the bottom right of the chart). This was the highest buying total since June 2007 (which is the blue bar circled in red, towards the bottom left of the chart) and eclipses the extreme reached at the October 2007 top. Investors Intelligence notes, that after four months, climax signals for those who sell into buying climaxes and buy into selling climaxes are correct about 80 percent of the time. So another indicator has flashed a “warning” that suggests we be especially attentive to a trend change.

Employment Numbers.

Of course the other thing weighing down the hopes of economic recovery is unemployment.  The numbers haven't been improving.  Moreover, I expect to start hearing about the next wave of big cuts (that cut muscle, and not just corporate fat). Recent quarterly results showing corporate profits were often based on cost-cutting, which may not be sustainable. Revenue is a more telling indicator.

 

This is something that bears watching.  The next topic bears watching too.

All You Need to Know About High Frequency Trading.

Here is a short video from the Jon Stewart Show.  It portrays High-Frequency Trading in a less than flattering light. It was funny; yet made some non-trivial points.

The Daily Show With Jon Stewart	Mon – Thurs 11p / 10c
Cash Cow – High-Frequency Trading
www.thedailyshow.com
Daily Show Full Episodes Political Humor Ron Paul Interview

Ultimately I believe that innovation and intelligence can lead to competitive advantage. And, generally, that is a good thing. However, even a good thing can be taken too far. This is an area that needs some common-sense legislation and oversight. High Frequency Trading makes it too easy to manipulate price and markets.

Business Posts Moving the Markets that I Found Interesting This Week:

• S&P Says Stock Buybacks At Lowest Level On Record. (StreetInsider)
• Is Wall Street Taking a Chance on Risk, Again. (DealBook)
• Fretful Investors Sidelined by Rally. (WSJ)
• Kass – Pokes Some Fun at the "Dumb Money" Behind the Rally. (TheStreet)
• More Than Half of Residential Mortgages Made by Just 3 Large Banks. (WSJ)
• If Lehman Hadn't Failed, Would the Crisis Have Happened Anyway? (Economist)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Did Kindle edition of Dan Brown's 'Lost Symbol' Out-Sell Hardcover Editions? (WSJ)
• The "Lost Symbol" Shines Spotlight on Freemasons in Washington. (USNews)
• Leading Research Universities Launch Futurity Online Research Portal. (Duke)
• Simplifying Supplements: Modern Diet is Energy Rich, Yet Nutrient Poor. (Ode)
• Four Things that May Sabotage Your Weight-Loss (USNews)
• Business Intelligence Gives Way to Operational Intelligence. (Forbes)
• More Posts with Lighter Ideas and Fun Links.

The Trend Is Up; So Discipline Says Buy the Dip.

Most of the U.S. Equity Indices (Dow, S&P 500, Russell 2000 and the MidCap Index) have pulled-back to their 50-Day moving averages and short-term support.  So have many sectors, including: Financials, Metals, Energy, Drugs, Materials, and Consumer Discretionary.  This would be a likely place for bulls, looking for a continued rally, to put some extra cash to work in the markets by buying the dip.

 

Tech is still leading the rally.  So I'm watching that area closely for continued strength.  A lack of buying here is a warning sign.

The Market Is Getting Jiggy.

One thing tempering my confidence in the "buy the dip" strategy is that I noticed a lot more "mischief-bars" recently.  These head-fake moves show-up on charts as jaggy spikes, and often shake-out weak holders … only to reverse sharply.  Here is a chart of the S&P 500 from Tim Knight's Slope of Hope site.  The yellow sections highlight areas where it is easy to see the spikes in volatility. 

This type of behavior often happens near major trend changes, and reflects the disagreement between bulls and bears.

Does the Recent Weekly Buying Climax Signal Exhaustion?

For those looking for further evidence of a turning point, Investors Intelligence recently released a chart showing major buy and sell climaxes in the S&P 500.  As you can see, they often come at major turning points for the markets.  The Blue Bars show Weekly Buying Climaxes, which occur when a stock makes a 52-week high and
then closes lower for the week. This represents distribution from strong
hands to weak ones and most often occur around market highs.  And the Red Bars mark Weekly Selling Climaxes, which occur when a stock makes a 52-week low and
then closes higher for the week. This represents distribution from weak
hands to strong ones and most often occur around market lows. 

This chart shows that there were 380 total Weekly Buying Climaxes as of the end of last week (see the blue bar at the bottom right of the chart). This was the highest buying total since June 2007 (which is the blue bar circled in red, towards the bottom left of the chart) and eclipses the extreme reached at the October 2007 top. Investors Intelligence notes, that after four months, climax signals for those who sell into buying climaxes and buy into selling climaxes are correct about 80 percent of the time. So another indicator has flashed a “warning” that suggests we be especially attentive to a trend change.

Employment Numbers.

Of course the other thing weighing down the hopes of economic recovery is unemployment.  The numbers haven't been improving.  Moreover, I expect to start hearing about the next wave of big cuts (that cut muscle, and not just corporate fat). Recent quarterly results showing corporate profits were often based on cost-cutting, which may not be sustainable. Revenue is a more telling indicator.

 

This is something that bears watching.  The next topic bears watching too.

All You Need to Know About High Frequency Trading.

Here is a short video from the Jon Stewart Show.  It portrays High-Frequency Trading in a less than flattering light. It was funny; yet made some non-trivial points.

The Daily Show With Jon Stewart	Mon – Thurs 11p / 10c
Cash Cow – High-Frequency Trading
www.thedailyshow.com
Daily Show Full Episodes Political Humor Ron Paul Interview

Ultimately I believe that innovation and intelligence can lead to competitive advantage. And, generally, that is a good thing. However, even a good thing can be taken too far. This is an area that needs some common-sense legislation and oversight. High Frequency Trading makes it too easy to manipulate price and markets.

Business Posts Moving the Markets that I Found Interesting This Week:

• S&P Says Stock Buybacks At Lowest Level On Record. (StreetInsider)
• Is Wall Street Taking a Chance on Risk, Again. (DealBook)
• Fretful Investors Sidelined by Rally. (WSJ)
• Kass – Pokes Some Fun at the "Dumb Money" Behind the Rally. (TheStreet)
• More Than Half of Residential Mortgages Made by Just 3 Large Banks. (WSJ)
• If Lehman Hadn't Failed, Would the Crisis Have Happened Anyway? (Economist)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Did Kindle edition of Dan Brown's 'Lost Symbol' Out-Sell Hardcover Editions? (WSJ)
• The "Lost Symbol" Shines Spotlight on Freemasons in Washington. (USNews)
• Leading Research Universities Launch Futurity Online Research Portal. (Duke)
• Simplifying Supplements: Modern Diet is Energy Rich, Yet Nutrient Poor. (Ode)
• Four Things that May Sabotage Your Weight-Loss (USNews)
• Business Intelligence Gives Way to Operational Intelligence. (Forbes)
• More Posts with Lighter Ideas and Fun Links.