Is the glass half-empty, or is the glass half full?
It's easy for cartoonists to make fun of how long it took to stop the oil leak.
Nonetheless, it will certainly be a lot easier to clean up the mess now that were not making more of it.
Here's to progress.
It was a strong week in the markets, all over the world. Here is a graphic that will show you how well everyone did. It comes from FT.
So, while things are looking better, let's look at a chart of what's happening on the Dow Jones Industrial Average.
Dow's Down-trend Is Still Clear.
May and June were volatile months for the stock market. The Dow moved within a 1400 point range in May and an 800 point range in June. Over the last seven days, the Dow moved from 10136 to 9614 and back to 10136. Basically, we saw two 500 point swings in seven trading days.
The Dow's daily Rate-of-Change is shown int the indicator below the main chart,. It illustrates another form of volatility. Moves outside of the -2% to 2% range (marked by the blue line) were rare from August to April. Notice how the Rate-of-Change dipped above 2% and below 2% numerous times since early May (marked by the pink highlight).
On the price chart, a falling wedge is taking shape. According to Arthur Hill, these patterns sometimes denote a correction within a bigger uptrend. However, they are clearly bearish as long as they fall. In other words, the trend is down as long as the wedge falls. The Dow needs to clear the April trend-line first, and then the June high, to reverse this downtrend.
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Initial Public Offerings are an indicator of market health. Well, here is some good news. More venture-backed companies have had IPOs this year than there were in the last two years combined.
The bad news is that the market has not been kind to these newly public companies. Scott Austin at the WSJ notes that only six of this year's venture backed IPOs are above their first day of trading.
For example, a recent IPO with a lot of "buzz" was Tesla. The enthusiasm generated for Tesla's stock during its first day on the market has waned. After reaching almost $30, Tesla faded fast. It's back down to $17.40. Here is the chart.
Nonetheless, I'm starting to see more articles about M&A activity too. I take the increase in IPO and M&A activity as a positive economic sign. What about you?
A record drop in pending home sales and a slowdown in the construction market contributed to a sluggish outlook for the economy last week, and highlighting the significance of government stimulus measures and job growth.
Market CommentaryThe Nasdaq Composite Index is showing a well-formed Head and Shoulders topping pattern. Price has broken beneath the neckline, which means it has triggered. Unless it can move back above that level, the pattern's target is the distance from the top of the head (2500) to the neckline (2100), which is 400 points lower.
Supporting the bearish case, new 52-week lows are expanding on the Nasdaq while new 52-week highs are drying up. Net New Highs (new 52-week highs less new 52-week lows) is an easy way to assess the battle for new 52-week extremes. An uptrend is unlikely as long as Net New Highs remain negative.
Technical Analysis is often easy to see after the fact. Here is a look at several Head and Shoulder top and bottom patterns. Click the image to see a bigger version.
Here's Something That Will Show-Up On Lots of Radar Screens.
On some level, Technical Analysis is a self-fulfilling prophecy because "everyone" is looking at the same thing. While lots of people are worried about the Head and Shoulders pattern, I suspect that far more are watching the "Death Cross" or "Dark Cross" that is being formed on our indices as the 50-day moving average falls below the 200-day moving average.
While I see the bearish implications, some trader's will be looking for the head-and-shoulders and death-cross patterns to fail because of a short squeeze. Failed patterns often result in bigger moves than the patterns that didn't work. Here is an explanation about why that happens.
The OOPs Trade:
When a well-known pattern fails, the response is often dynamic. This often happens with obvious, high profile situations like a "Head-and-Shoulders" pattern, a move through big Round Numbers (like Dow 10,000), crossing the 200-Day Moving Average, or violating a clear Price Channel. Just for the record, several of those are in-play at this price level.
An often violent reversal happens when the crowd realizes that it was wrong, and people rush to cover their painful losing positions. As the price of the stock increases, more short sellers feel driven to
cover their positions. This is very similar to a short squeeze;
and the move is often violent and prolonged.
The markets are
oversold here; lots of people know that we just made new lows, and we
have been bombarded with bad news recently. So, I'm not predicting that
the market will reverse here. I am just suggesting that it is
possible and something to watch.
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Today is July 4th. However, few flags were waving as I drove around our
neighborhood.
A few years ago, at least two-thirds of the houses had flags. Today I would estimate that number being 15% to 20% .
Around here, there is a relatively cheap service that provides flags for patriotic holidays (like Independence Day, Memorial Day, etc.). They provide the flags, set-them-up, take them down, etc. It requires no effort - other than to write a check.
So, did the economy make the outlay feel too extravagant? Or did the collective level of patriotism drop significantly, recently?
My guess ... a little of both; but it probably has more to do with the economy. What do you think?
The deficit, the war, and the oil spill are still in the news. While this cartoon jokes about how America achieves greatness, I suspect it is a topic that will get more attention.
The Fed left rates unchanged, citing overseas threats and "developments abroad." Do you see that as a sign that cooperation is waning? Likewise, despite seeking further stimulus at the G20 Meetings this week in Toronto, the US found that world leaders were more concerned with trimming deficits.
Meanwhile, US Treasury Secretary Timothy Geithner told the BBC that the US can 'no longer drive global growth'; and the world
"cannot depend as much on the US as it did in the past". Instead, he said that other major economies would have to grow more for the global economy to prosper.
With that in mind, there are three big bearish macroeconomic stories hanging over the market:
The big question is - to what extent is the bad news already priced-in to the market?
Let's Look at the Charts.
The markets moved lower, as the economic news from housing
to retail sales to revised Q1 GDP continues to confirm the weakness.
The weekly chart of the S&P 500 Index shows that we are still beneath the down-trend that started in late 2007. While price has held above the 1040 support zone (marked by the green highlight), last week's pattern (marked by the orange circle) is considered bearish. The week started higher, yet closed lower, than the prior week's range (this is called a Bearish Engulfing Pattern); and often signals a trend change.
A Leading Indicator of Economic Activity is Dying-Up.
If you are looking for insight into global supply and demand trends, the Baltic Dry Index is one of the purest leading indicators of economic activity. It offers a real-time glimpse at global raw material and infrastructure demand, as well as the supply of ships available to move this type of cargo.
Since making a short-term peak in late May (about a month after equity markets peaked), the index has declined 38%, and has just dropped below its February lows.
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On the first day of June, the total U.S. public debt crossed the $13 trillion mark. In the 20 some days since then, it has already grown more than another $52 billion. The debt number is currently equal to just under 90 percent of the entire size of the U.S. economy.
The national debt is growing at $45,000 per second. That’s more than $5,000 more than the annual U.S. income per capita — every second.
I was looking through some clippings I'd saved and a few of them caught my eye.
The first is a graphic from the Chicago Tribune about understanding the National Debt. It speaks for itself.
A Trillion is a hard concept to grasp. That is a million millions. Here are two videos that put the number in perspective.
The first is from Mint. It's official, Trillion is the new Billion. No longer is government spending talked about in terms of a mere ten digits. With the recent flurry of government spending, we are going to need another three zeros to make sense of it all. One trillion dollars is a number that few people can comprehend, let alone your standard nine digit calculator. So what does one trillion dollars look like?
The second video is from CNN. They ask a Temple University mathematics professor John Allen Paulos to explain how much $1 trillion actually is. The story notes Senate Republican Leader Mitch McConnell is correct when he says that if you spent $1 million per day starting in the year 0, you still would not have spent $1 trillion by 2009.
Initial Public Offerings are an indicator of market health. We got an interesting look through the IPO window last week, with six offerings.
While some were weak, the long-awaited stock market debut of the Chicago Board Options Exchange had a strong opening reception.
In general, though, it has been a tough market for IPOs. However, the WSJ argues that this has more to do with fundamentals of the deals than a weak market.
So, how is the market doing?Fighting the 200-Day Moving Average.
Even people who are not big fans of technical analysis tend to look at the market's 200-day moving average. This is the simply the average of the closes for the previous 200 days. The 200 DMA has a decent track record -- when the market is above the 200 DMA, it tends to rally, below it, not so much.
In the daily chart of the S&P 500 Index, below, the 200 DMA is drawn as a red line. The recent trades, back above the 200 DMA line, are circled in green with a yellow highlight.
In the past few weks, the S&P 500 has tried to break out above its 200 DMA several times, but each attempt has sputtered out. Let's see if it holds this time?
There are a few other bullish reasons for it to hold. The market has stayed above the light green 1040 support level, despite three tests (marked by the orange circles). The last two tests count as a double-bottom, which indicates a bullish reversal (especially with price back above the orange-dashed down-trend line and 200 DMA).
Sentiment towards the U.S. Markets is also getting better.The Pendulum Swings: Investors Starting to Pick U.S. Over BRICs.
Bloomberg reports that the U.S. has supplanted China and Brazil as the most attractive market for investors as confidence in the global economic recovery wanes in the wake of the Greek debt crisis.
Almost four of 10 respondents picked the U.S. as the market presenting the best opportunities in the year ahead. That’s more than double the portion who said so last October.
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The fear, right now, is whether the recent down-turn will continue. Meanwhile, there are signs of strength giving hope to the bulls.
For example, disappointing U.S. retail sales data, last Friday, failed to dent the stock market as it closed higher on the day and the week. That marks the first weekly gain in nearly a month.
Last week's market action sets-up some pretty clear decision-zones to watch.
First, Let's Look at the Dow.
Despite the recent market correction and fears surrounding Eurozone sovereign debt defaults, the bottom line is that the Dow Jones Industrial Average is only down 10% from its recent peak. That is not bad, especially considering the length of the preceding rally.
However, a quick look at the chart shows a series of lower highs and lower lows. This is the classic definition of a down-trend. Two other bearish things to notice are that price is still under its 200-Day Moving Average and that volume has been weaker on the recent up days.
On a bullish note, the Dow spent a good day-and-a-half below the 9,900 level, yet, sellers did not appear in force ... and buyers once again prevailed. Analysts are likely to see a sustained break above the 10,300 level as a bullish sign.
RSI Indicates That We Are Still in Bearish Territory for the S&P 500, as well.
A chart of the S&P 500 ETF indicates that we may have some upside left in the recent bounce. While the Relative Strength Index indicator remains bearish below its center-line for the SPY, it is close to turning positive.
According to Arthur Hill at StockCharts.com, bounded momentum oscillators trade within a defined range. RSI trades between zero and one hundred, with fifty as the center-line. Think of this level as the 50 yard line in a football game. The bulls (offense) have the edge when RSI is above 50. The bears (defense) have the edge as long as RSI is below 50.
In the chart, below, the yellow areas show periods with RSI below 50, which correspond with declines. RSI met resistance near 50 during each decline (red arrows). In fact, RSI met resistance near 50 twice during the current decline, and it is at that level again.
So, while momentum remains bearish as long as RSI is below 50, this chart shows we are approaching a decision point.
What Does the Extreme Fear Shown by Option Purchasers Mean for the Market?
The public often uses the VIX as the standard measure of “fear” in the overall market. Some prefer to look at option skew instead. Skew tells the investor how much out-of-the money puts are being bid up versus out-of-the money calls.
If an investor is scared about the downside, then they buys puts. If an investor thinks there is room for upside, then they are willing to buy calls. SurlyTrader posits that when the difference between the implied volatility of OTM puts dwarves OTM calls, then investors are fleeing for the exits. As the chart below shows, on May 20, 2010, the skew of 3-month options hit a five-year-high.
Depending upon valuations and underlying market conditions, the skew can signal either prescient fear or undue panic. Consequently, if the spike on May 20th is a positive signal, then we should soon find our own local bottom.
SurlyTrader advises: "If you believe we are close to a bottom, selling OTM puts and buying OTM calls looks very attractive with a steep skew. Always think about selling insurance when the building is on fire rather than buying insurance after the major damage has already taken place."
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Capitalogix Commentary for the Week of 07/19/10
If only everything could be fixed this easily.
It is earnings season again. However, note that the year-to-year comparison no longer refers to the recession. Instead, the comparisons get harder than last year. Moreover, the economic data has been ugly ... and so has sentiment on quarterly earnings. The question becomes: how tough will it be for Wall Street to battle back from the latest sell-off?
Market CommentaryThe chart below shows a daily view of the Nasdaq composite index since January. Note, however, that this market has been making lower highs and lower lows since April. That is the classic definition of a downtrend.
In addition, chart watchers often pay attention to a pattern called a Death Cross. This occurs when the short-term (50 day) moving average crosses beneath the longer-term (200 day) moving average. As you can see, a death cross happened last week. It is highlighted in yellow and circled in orange. Since then, the market has fallen further.
Is a Leading Indicator of Economic Activity Drying-Up?
If you are looking for insight into global supply and demand trends, the Baltic Dry Index is one of the purest leading indicators of economic activity. It offers a real-time glimpse at global raw material and infrastructure demand, as well as the supply of ships available to move this type of cargo.
According to Bloomberg, Commodity shipping rates ended their longest losing streak in almost 15 years on speculation owners are refusing to offer vessels at current hire rates.
The index has had a particularly bad run of 35 consecutive drops, the longest since November 1995, during which the measure lost 60 percent of its value. Since making a short-term peak in late May (about a month after equity markets peaked), the index has declined about 60%.
Just in case you wanted more fear fodder to chew on, Here is a chart that is making the rounds.
De-Leveraging the Credit Bubble.
It purports to show that the total leverage within the world financial system currently stands at 60 to 1, where we are leveraged 60 to the 1 of real reserves we actually have.
Christopher Laird explains this chart as follows:
The point of emphasizing it's from the end of WW2 is that we are not talking merely about a banking crisis, or whatever. We are talking about the deleveraging of the greatest economic/finance bubble in history. Once the level of leverage reached 60 to 1, it becomes impossible to stay ahead of the deleveraging, even for central banks. The implications are staggering. Every major economy in the world is involved. The outcomes of deleveraging this monster bubble, represented by the green oval, will be what I term Credit Crisis II. At 60 to 1 leverage, a loss of 1 to 2% wipes out the capital.
Let's hope that doesn't happen. On the other hand, there has been a lively debate about what the chart really means. For further insight on this, check-out the comment section on the Business Insider's Chart of the Day post about this topic.
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Lighter Ideas and Fun Links that I Found Interesting This Week
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