At the end of the week, the markets were pretty much where they started. So nothing happened, right?
Sometimes weeks like this are important. The Japanese candlestick chart pattern this type of action produces is called a Doji. After a long up-trend, this pattern often marks a turning-point.
Here, there is a Doji resting on the recent up-trend line (drawn with the red arrow) and the support-resistance level (noted with the orange dashed line). This creates an easy decision-zone to watch.
From my perspective, a little pull-back would be welcome here.
Earnings Season Is Here.
During the past few quarters, companies have shown that they can cut-back and save money. Now may be the time investors want to see some sales growth.
The results are not as important to me as the market's response. Are people going to keep buying, or start selling the news? Here are a few items that caught my eye this past week.
JPMorgan Earns $3.3 Billion in 1st Quarter, a 55% increase of Profits. (DealBook)
On a related topic, according to the WSJ, major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public. Here is an interactive graphic to illustrate what happened.
More Banks Are Closing.
Also, Regulators shut down eight more banks last week; that makes 50 so far this year. Last year saw 140 bank failures, the highest annual number since the 1992 Savings & Loan crisis. In comparison, only twenty-five banks failed in 2007 or 2008. Another chart to put this in perspective is here.
Expect to
Hear A Lot More About the Need For More Regulation.
My Internet provider recently doubled the speed of service in our area. Seemingly everyone I tell makes a joke about quicker access to porn. In that spirit, here are two videos poking fun at that.
First, the Onion jokes that Congress passed the Pornographic Media Concealment Act, to hide this generation's porn habit from future generations.
The Dow Jones Industrial Average traded above 11,000 for the first time since 2008. The real question is whether that is a sign of continued strength or that the rally has climbed too far, too fast?
The chart, below, compares the bets made by small traders (a.k.a. the "Dumb
Money"), to those of large commercial hedgers (a.k.a. the "Smart
Money").
In practice, Confidence Index readings rarely get below
30% or above 70% (they usually stay between 40% and 60%). When they
move outside of those bands, it's time to pay attention.
Even
more noteworthy is when there is a wide confidence spread with bullish bets by the Dumb Money and bearish bets by the Smart Money. This type of
sentiment
spread only happens a few times a year. We
often get substantial bullish reversals when that happens.
Conventional trading wisdom says that Crowds are
usually wrong at turning-points. That doesn't mean they are wrong all
the time (yet I take special notice when the Smart Money clearly disagrees).
Consumer Credit Woes Adding Fuel to the Doubt Fires.
Here is a chart from BusinessInsider showing the Fed's latest consumer credit reading. After starting to recover, total outstanding consumer credit had a massive month-over-month decline.
It is tough to stage a lasting recovery without consumers.
So Where Is the Money Coming From?
U.S. Federal debt has increased rapidly.
In a related chart, Doug Short created an
inflation-adjusted view of the debt and an overlay of the tax brackets. With the 2001 and 2003 tax cuts expiring this year, the question is whether the gross
federal debt will be a factor in determining the direction of future tax
rates? Perhaps, like a young household with good jobs buying a home, the
US can afford the rising level of debt? What do you think?
Speaking of Debt-Laden Countries.
European governments on Sunday offered debt-laden Greece a rescue package worth as much as 45 billion euros ($61 billion) at below-market interest rates as they try to end Greece's fiscal crisis and restore confidence in the euro.
The rally continues, and the S&P 500 has gotten back to new highs for the past year. Pretty
impressive on many fronts. How does it compare to other markets
though? This chart shows how several other world markets have done in the past twelve months.
This quick glance around the globe shows remarkably similar performance across the markets. Note how closely the price patterns and peaks and valleys are to each other.
It brings up two questions:
Are these countries each really doing the same things right and
wrong?
Are world-wide expectations and responses really this similar?
Perhaps more importantly, it brings up a
third question: What's really causing the markets to behave so
similarly?
Recognizing What Is Happening, Is the First Step to Profiting From It.
To profit in trading, it's more important to recognize what's happening,
rather than to understand what's happening.
The strength of the rallies don't make sense to me based on logic. However, trends don't depend on logic. So, I dusted-off my copy of Trend Following and will simply ride the bucking
bronco.
But I Still Want to Know Why ... Don't You?
Occam's Razor suggests that the simplest explanation is most likely to be correct. So, when markets move in a virtual lockstep (despite many unsettling global variables), let's look for simple explanations.
Here are a few ideas (ranging from silly to plausible).
After watching the movie 2012, world leaders decided the one who dies
with the most toys wins.
Human nature is consistent across cultures.
The recession is over, and we have begun a new global bull market.
Something unusual is happening, and we just don't know what it is.
With consumers mostly out of the market, institutions figured-out how to buy and sell from each other, making relatively easy profits with minimal risk.
Governments agreed to temporarily suspend speculating in each other's
markets, other than in the normal course of business.
Governments and central banks agreed to cooperate. Don't fight the Fed, especially when it's a cartel of Feds.
From a Traders Perspective ...
There are still many things to watch, from a trader's perspective, despite the strong correlation among markets. For example: divergence patterns can provide early indications of moves in either direction; relative strength comparisons can show which markets are more likely to over or under-perform; and volume spikes can indicate something unusual happening. Nonetheless, the simple observation is that markets are trending higher, so the safest assumption is that the trend continues until evidence proves otherwise.
My grandfather used to say: "you can fool some people, some of the time; but you can't fool all of the people, all of the time." He was not an exceptionally well-educated man, but he was a professional wrestler ... so he knew something about stagecraft. My guess is that one of the actors breaks character soon. That tends to happen in most cartels.
President Obama played a game of H-O-R-S-E with former NBA star Clark Kellogg during the Final Four telecast yesterday. My expectations were low, and I expected it to be corny.
Unlike the North Korean Supreme Leader's penchant for hitting fictional hole-in-one shots on the golf course, Obama started slow and was willing to show some weakness. Nonetheless, throughout the video, he seemed confident and athletic. Moreover, the bantering and interplay seemed to provide some insights into the President's psyche.
All-in-all, I thought it was a good move by him ... and that it did a nice job of polishing-up his image and reminding people why he is so popular.
The terms "Internet
of Things" and "System of Systems" are concepts that help to explain a great deal about what
is happening, now, where the digital world meets the physical and
intellectual.
In the video below, from IBM, you get a glimpse of it ...
Imagine if your alarm clock talked to your calendar and knows you
need to catch the
ferry in 1-1/2 hours to get to work, so it wakes you up. But, a half hour before it wakes you, it turned on the heater in your bathroom; and other sensors started your morning coffee and de-iced
the windshield in your car.
Here are some excerpts from the film:
“Over the past century, but accelerating over the past
couple of decades, we have seen the emergence of a kind of global data
field. The planet itself – natural systems, human systems, and physical
objects – have always generated an enormous amount of data, but we
didn’t used to be able to hear it, to see it, or to capture it. Now we can
because all of this stuff is now instrumented. And it’s all
interconnected, so now we can actually have access to it. So, in
effect, the planet has grown a central nervous system.
Look at that complex set of relationships among all of these complex
systems. If we can actually begin to see the patterns in the data, then
we have a much better chance of getting our arms around this. That’s
where societies become more efficient, that’s where more innovation is
sparked.
When we talk about a smarter planet, you can say that it has two
dimensions. One is to be more efficient, less destructive, and to
connect different aspects of life which do affect each other in more
conscious, deliberate and intelligent ways. But the other is also
to generate fundamentally new insights, new activity, and new forms of
social relations. So you could look at the planet as an information,
creation and transmission system, and the universe was hearing its
information but we weren’t. But increasingly now we can, early days,
baby steps days, but we can actually begin to hear the planet talking to
us.”
This framework applies to many other things (for example, trading and markets). Expect to hear more about this type of insight and automation.
March Madness is in full force. What's a $ Trillion here, or a $ Trillion there?
A Look at the Markets.
Most people consider it "bullish" when markets go up 14 of 16 days. That should make people happy, right?
Recently, though, I've had conversations with several "old-pro" traders who expressed a sense of frustration. They view the recent push higher with skepticism. Trading discipline is allowing them to make money on the upside, but it's not as satisfying as being "right".
What do the Charts Show?
Let's look beyond the obvious up-trend. The following chart and video, from Brian Shannon's Alphatrends site, shows that price is now below the volume-weighted average price paid since Fed Decision to leave rates unchanged.
There is now a lot of support under our recent highs, so many expect the market to correct a little, then resume its move higher.
How Far Can the Rally Go?
On a basic level, the recent market rally shows that there's more buying
demand than selling pressure. However, when there is little selling
pressure, it doesn't take much demand to keep prices going higher.
At this point, the rally has gone on long enough that many of the participants who profited
from the extended move up are now becoming defensive.
Also, some trading
relationships that tend to move together have decoupled. The following
chart shows the recent weakness of the China Shanghai Index and the Euro
in comparison to the U.S. Markets.
Some see the U.S. Market's continued relative strength as a precursor to a new leg of the bull market, while
others see it as a temporary anomaly.
Adding to the bearish case is that several sentiment indicators show
very little fear. The VIX
is moving back to the extreme levels of complacency. Odd-lot shorts
recorded a 13 week low, indicating that the "little guy" has virtually
given up on shorting. Likewise, the lack of fear is downright scary when
you look at CBOE's
Equity Put-to-Call
Ratio. These readings are contrary indicators, meaning they often occur at
turning points in the market.
And with quad-witching
expiration behind us, and an unpopular health-care issue in
the news, the bears will have another chance to show their conviction ... or lack of it.
We'll see what happens. I hope you have a good week.
The Markets are showing signs of health and strength. These charts, from Stockcharts.com, show the internal strength and breadth powering the move higher and supporting the current rally.
Here is an intra-day chart of the S&P 500 Index for the past three weeks. It is a modified version of something I saw on Breakpoint Trades' site. It shows the decision-point; price has pulled-back to the trend-line.
In bull markets, this is where Buyers tend to appear. In contrast, Sellers probably see the bearish wedge and negative divergence as signs of waning momentum. Add the potential sell-signal from over-bought stochastics, and we have an interesting set-up for next week.
Even if the markets sell-off from here, there are now a number of support levels close by.
The markets have continued to do well, what about the economy? I think the Employment situation is a primary indicator.
We Stand Out - With Respect to the Severity of our Under-Employment Situation.
There is disagreement about whether the recent jobs number was a positive sign. Some are focusing on the slowing decline; others are focusing on the continued weakness ... still others are focusing on the continued downwards adjustments. Nonetheless, this chart makes something clear. Compared to other recessions, the job losses (and lack of job gains), of this Recession are truly unprecedented.
Here is a different way to look at what that chart means.
The markets put on a show of strength this week, blasting through overhead resistance. The chart below shows the S&P 500 Index is approaching its recent highs, and now has two nice levels of support beneath it (marked by the light and dark green lines).
As long as price is above these levels, it seems prudent to use
bull-market techniques. That means to expect buying on dips.
On the other hand, trading often induces paranoia. So, there is some part of me looking for the next areas that would trigger the most stop-losses. Coincidentally, this weekend I talked to a money manager who told me they were going to exit their short positions if the markets get above the recent highs (marked by the orange line). That seems like a pretty widely followed level. So, a spike above that ... followed by a sharp reversal, might find some of the selling volume we've been missing lately.
Could We Possibly Still Be in a Bear Market?
A fresh view is often helpful. The next chart is not designed to be predictive. Instead, it simply provides an alternative context to view the recent price action in relation to historic market cycles.
Below is an inflation-adjusted overlay of three secular bear markets put together by Doug Short. 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.
The nominal all-time high in the index occurred in October 2007, but when adjusted for inflation, the "real" all-time high for the S&P 500 occurred in March 2000.
There is a Lot of Deal-Making Going On.
Increased merger and acquisition activity and the freeing-up of corporate assets (usually measured by increased corporate spending) are both typically bullish signs. Why? Both indicate that decision-makers are optimistic (or at least projecting optimism). There's been quite a bit of evidence showing that this is happening on a global corporate scale and all the way down to the local level.
One thing holding-back the optimism is the lack of lending. Here is a look at that.
Nonetheless, companies with cash are starting to use it.
Here's a story that is a bit humorous, though still shows those green shoots of growth.
In Kansas, the city of Topeka changed its name to Google. Supposedly part of a local effort to convince Google to make Topeka a test site for an ultra-fast Internet connection and set Topeka apart from other cities vying for Google's attention.
Hope you have a good week, even if you used to live in Topeka.
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Capitalogix Commentary for the Week of 04/19/10
At the end of the week, the markets were pretty much where they started. So nothing happened, right?
Sometimes weeks like this are important. The Japanese candlestick chart pattern this type of action produces is called a Doji. After a long up-trend, this pattern often marks a turning-point.
Here, there is a Doji resting on the recent up-trend line (drawn with the red arrow) and the support-resistance level (noted with the orange dashed line). This creates an easy decision-zone to watch.
From my perspective, a little pull-back would be welcome here.
Earnings Season Is Here.During the past few quarters, companies have shown that they can cut-back and save money. Now may be the time investors want to see some sales growth.
The results are not as important to me as the market's response. Are people going to keep buying, or start selling the news? Here are a few items that caught my eye this past week.
Of course, the news that the government was suing Goldman Sachs also moved the market. How it ultimately moves Goldman is still to be seen. Again, though, what I'll be watching is whether this will become a buying opportunity or a trigger for further selling. That will likely tell us how healthy the rally remains.
Banks Were Masking Risk Levels From the Public.On a related topic, according to the WSJ, major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public. Here is an interactive graphic to illustrate what happened.
More Banks Are Closing.
Also, Regulators shut down eight more banks last week; that makes 50 so far this year. Last year saw 140 bank failures, the highest annual number since the 1992 Savings & Loan crisis. In comparison, only twenty-five banks failed in 2007 or 2008. Another chart to put this in perspective is here.
Expect to Hear A Lot More About the Need For More Regulation.
Business Posts Moving the Markets that I Found Interesting This Week:
Lighter Ideas and Fun Links that I Found Interesting This Week
Posted at 12:49 AM in Current Affairs, Market Commentary, Trading | Permalink | Comments (0) | TrackBack (0)
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