Capitalogix

Capitalogix Commentary for the Week of 03/01/10

The markets held-up well again this week despite lots of bad news on many fronts.  While there were several bouts of selling, each time buyers were there to prop things back up.

Here were some of the news items the market handled last week. 

• Housing had a tough week.  New home sales were the worst in nearly 50 years, while existing home sales dropped and average selling prices declined.
• Businesses are still feeling the recession as Initial Jobless Claims rose again, while orders and shipments of durable goods slipped.
• Consumer Confidence fell more than 18% according to the latest Conference Board Survey.

And then there is the economy and the deficit ...

So, let's use some technical analysis to see where the markets stand.

Three Views of the Market - and All Say the Same Thing.

Sometimes simple is better.  What follows is a top-down look at the Dow Jones Industrial Average.  It starts with a monthly chart for the bigger picture.  That is followed by a weekly chart, and then by a daily chart.  In all three the key level is just above where we are.

Here is the weekly chart.  It shows price re-testing the upwards sloping trend-line from below.

Here is the daily chart.  A sustained move above the orange line would be bullish.

Here is something else to watch.

Does the Euro Help Predict US Equity Market Moves?

This video suggests that the Euro is worth watching as an early indicator of likely movement in the U.S. Equity Indices (like the S&P 500 Index).

That is something I will keep an eye on to see how it works.  In the mean-time, here is a recent chart of the S&P 500 and the Euro.  It is showing a negative divergence because the Euro is continuing to show weakness while the S&P 500 rallied in February.

Time will tell.  Hope you have a good week.

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

• Bernanke Reaffirms "Extended Period" of Low Rates. (NYTimes)
• Recovery Focus: Which Banks Are Worth Betting-On? (WSJ)
• U.S. New-Home Sales Drop 11.2% - to 1963 Levels. (WSJ)
• Intel, VCs Investing $3.5 Billion In U.S. Technologies. (InfoWeek)
• Economic Annual Report of the President - An Interesting Read. (White House)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Putting a Face to a Name: The Art of Motivating Employees. (Wharton)
• Sleepy Heads: How Rest Helps Memory & Prepares the Brain to Learn. (Economist)
• U.S. Would Lose Cyber-War Says Former Intelligence Chief. (InfoWeek)
• Get Ready Sports Fans, Pole Dancers Eye an Olympic Stage. (Newser)
• Why the Olympics Might Not Be Televised in 2014. (InfoWorld)
• More Posts with Lighter Ideas and Fun Links.

Capitalogix Commentary 02/21/10

It seems like everywhere I look, there is bad news about the economy. Recently, however, venture capital and M&A activities have been picking-up.  Both of those are early indicators of economic optimism. In addition, here are two other signs that economic winter may soon give way to spring.

First, a Bankruptcy Partner in a major Dallas law firm just told me that he sees fewer filings in the pipeline. In addition, he says that credit has started opening-up to corporations, which is giving them the lifeline they need to start making progress again.

 Second, speaker bookings for corporate meetings seem to be picking-up again. I suspect that this is an indicator that corporations are willing to spend money on motivation, teamwork, and culture. In Maslow's hierarchy of needs, that's certainly a tier above food and shelter. In other words, when money frees-up for these types of activities, it suggests that corporations are starting to feel more comfortable about the short-term ... and more optimistic about the longer-term.

From a technical analysis perspective, optimism shows itself in the charts.

Where Are We?

In last week's commentary, I indicated that a holiday-shortened options expiration week was a likely time to expect a bounce. Well, even though the Fed announced a surprise discount rate hike to banks, the markets did rally.  While impressive on some levels, it happened on low trading volume and takes us to a resistance level.

It is decision-time for the S&P 500 Index. The weekly chart, below, shows the downward sloping trend-line from the 2007 highs, as well as the rally off the 2009 lows. More recently, we've seen a nice rally off the high volume reversal bar from several weeks ago (marked by the yellow highlight in the green circle).  Nonetheless, the bigger issue is whether price will be able to rally and hold above the down-trend line (marked by the red arrow)?

If the markets do sell-off soon, then many eyes will shift to the 200-day moving average (similar to the 40-week average marked in blue) as a likely support level.

It Is a Matter of Perspective ... But the Real Story is the Lack of Selling.

I read an article that claims to outline the three basic causes of the market rally since March of 2009.

1. The first is that the Fed has recently chosen to pump liquidity into the financial systems during options expiration week.
2. The second is that markets closed higher on approximately 75% of Monday's since the recent market low (with 80% of the gains, since those lows, happening on Mondays).
3. The third is that virtually all of the Q4 2009 market gains occurred in the overnight futures session, when US markets are closed. 

The chart, below shows the gains and losses that occurred during the normal trading session versus during after-hours sessions.

My first reaction was that this probably was the result of government action or manipulation by some unseen hand. Pushing the market higher during light futures trading periods (like weekends or after-hours) resulted in bigger gap-up openings.

After a little thought, however, these actions make sense. Even if these after-hour pushes were the result of the government, it was easier, took less capital (and thus cost less to do it) after-hours than it would have during periods of thicker trading. So, it was smart to do it that way.

More importantly, this is a free market; so if the market "disagrees" with the push higher, then sellers can freely take their profits or positions. The bigger issue is that even though the markets have been pushed higher, we still haven't gotten to the point that triggers selling volume.

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

• Fed Raises Rates to Banks; Signals Pivot to Normal Policy. (NYTimes & MarketWatch)
• Which Banks Are Worth Betting-On During the Recovery? (WSJ)
• Bailout Hustle: Banks Pocketing Trillions & Re-Creating Conditions For Crash. (Taibbi)
• Fund Flows: Equity Investors Find the Exits Again. (BusinessInsider)
• M&A Picking-Up: Google Buys Aardvark. (InformationWeek)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Utah Mulls Eliminating 12th Grade to Save Money. (Newser)
• Herbal Medicines Can Be Lethal, Pathologist Warns. (MedicalNews)
• Dan Ariely: Bonuses Boost Activity, Not Quality. (Wired)
• Evil Kneber Malware Seeks to Mine Financial Data. (TechNews & PCWorld)
• MetaCritic - Interesting idea. One Place to Go for Reviews. (MetaCritic)
• More Posts with Lighter Ideas and Fun Links.

Capitalogix Commentary 02/14/10

The markets did rally, a little, last week.  However, they are still beneath the overhead resistance and the longer-term downwards sloping trend-line. 

The Dow Jones Industrial Average has been able to hold above the 10,000 level. Is that important?

Does Dow 10,000 Really Mean Something?

The WSJ published an article called "Milestone Figures Grab Attention, but Their Impact Is Hazy".  A similar message comes from Barry Ritholtz; that Dow 10,000 has become “a meaningless number, without any impact technically or quantitatively. It's no surprise that the Dow did not hold over 10k for very long. It's been over 26 times, starting in 1999. And hear it is, 10 years later — zero progress. Why anyone — other than TV producers and silly hat manufacturers — cares about Dow 10k is quite simply beyond my comprehension.”  If you are curious, here is the chart that shows what that looks like.

If big round numbers don't mean anything, is there something to potentially point the way?

Is Lumber Sending a Bullish Signal About the Broader Market?

If you are looking for a potentially bullish early indicator, then Lumber may be sending you a signal.  It has continued higher, even during the recent equity market decline (marked by the orange rectangle).  Why do traders consider lumber an early indicator for the broader market?  Since lumber is a primary raw material in the early stages of new construction, the logic is that lumber purchases signal new construction.

What Can Copper Tell Us?

Like Lumber, traders also look to Copper as another early indicator of new construction because it commonly used in things like wires and pipes.  Recently, several commentators have mentioned that the Copper/Gold Ratio is an interesting composite measure of economic activity.  The chart below shows weakness and a negative divergence of the Copper/Gold Ratio (in comparison to the S&P 500 Index) since last summer.  Most recently, price has been falling steeply.  We will see if that is an early indicator of broader market weakness?

A similar flattening of trading range occurred in the Financial Sector as well.

What Does the Financial Sector Tell Us?

Financials often lead rallies higher.  The logic is that banks make more money when they are lending, doing deals, and helping companies go public.  The past six months have shown the hesitation investors have to buy into further gains in this sector.  However, price is now at the bottom of its six month trading range.  In bull markets, this is where the buying comes in.  So, let's see how this sector responds.  A move down from here would hurt the bullish case.

This is a holiday-shortened options expiration week.  Recently, those have been rally triggers.  Best wishes for a great week.

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

• Google Revenues Reach $1.34 Million Per Employee. (BusinessInsider)
• CME Buys 90 Percent of Dow Jones Index Unit for $607M. (NYTimes)
• The Birth of BRIC & a Few Other Countries to Watch. (SeekingAlpha)
• Does George Soros Think Gold is an Asset Bubble? (Slate)
• Putting Apple's Giant Pile of Cash In Context. (BusinessInsider)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Easy = True: How ‘Cognitive Fluency’ Shapes Our Beliefs & Investments. (Boston)
• New and Easier CPR Technique from Mayo Clinic. (YouTube)
• Google's Experiment: Leapfrogging ISPs to Deliver Ultra-High-Speed Web Access. (ZDNet)
• Angry at Obama Regulation Proposals, Wall Street is Donating Less to Democrats. (Newser)
• Clever Questions You Should Ask Every Job Candidate. (BizMore)
• More Posts with Lighter Ideas and Fun Links.

Valentine's Day Cartoons as a Sign of the Times

It is often a bit of uneasy truth that spices up the best editorial cartoons.

Here are a few cartoons that capture the spirit and sentiment underlying our economy and markets.

Belt-tightening and under-employment are a focus when Cupid needs a pawnshop or gets laid-off.

 

And it is tough to fix the structural issues when politics become more important than progress.

For more cartoons, click here to visit Cagle's site.

Capitalogix Commentary 02/07/10

How easy will it be to pass the $3.8 Trillion Dollar Budget?  Well, here is a chart that shows President Obama's Job Approval ratings. So, harder than it would have been.

Perhaps this is a better graphic to explain what is happening.

It is interesting that markets have gone up while President Obama's popularity continues to go down.  Apparently, sentiment is not caused by what happens in the markets.  Beware, however, if market price is caused by sentiment ... because sentiment is not pretty right now.

Critical Juncture for the Equity Markets.

Markets are often confusing.  This is one of those relatively rare times where the main issue is staring the world in the face.  I say that because so many of the world equity market charts look the same.

This chart shows a weekly view of the S&P 500 Index.  There is a pretty clear down-trend line starting from the market's high in October 2007.  The market rallied back to the underside of the line, and has fallen from there.

In order for the market to meaningfully rally, it must get past that overhead resistance (marked by the big red arrow).  In the short-term, bulls can take some comfort on the way the market rallied off the lows to close Friday's session.  That is often a sign of a bullish reversal.

We'll see what happens.

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

• Will Obama's Proposed 3-Year Freeze on Some Types of Spending Work? (NYTimes)
• Bernanke to Testify on Fed Exit Strategy this Week. (Bloomberg)
• Taleb: "Every Single Human Being" Should Short Treasuries. (BusinessInsider)
• Money Market Funds Can Now Prevent Redemptions. (MoneyNews)
• Rep. Barney Frank Calls for Abolishing Fannie Mae, Freddie Mac. (USAToday)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Amazon Losing the E-Book Pricing Battle. (ZDNet)
• A Different Type of Telescope That Sets Its Sights On Cyber-Crime. (NewScientist)
• 'American Idol' Wants Howard Stern to Replace Simon Cowell as Judge. (NYPost)
• Innovation - How Far Can You Trust an AI Assistant? (NewScientist)
• Priest Checks Fingerprints of Mass Attendees. (Reuters)
• More Posts with Lighter Ideas and Fun Links.

This Post Will Help You Predict the Future of Our Economy

Have you ever seen a funny photo that was captured just before a "something bad" happens? The tag-line is usually something like ... This isn't going to end well.

Well, after the news came out about President Obama seeking a $3.8 Trillion budget.  I remembered seeing this chart; and it isn't so funny.

Federal Spending Is Growing Faster Than Federal Revenue.

Since 1965, federal tax revenues and spending have soared. Revenues have increased by more than $1.5 trillion, and spending is up by $3.3 trillion. In 2009, federal revenue will drop, while federal spending is expected to increase by nearly $1 trillion.

To give you some context for this issue, here is an interactive U.S. Debt Clock.

Click the picture and you'll see a version that updates in real-time.

One Small Step for the Saints, One Giant Leap for New Orleans

Mardi Gras does not officially start for another week ... but the party has already started.

Watching with my son, I was amazed how many times he would tell me he wanted Doritos ... right after seeing their ad.

Here is a link to watch all the 2010 Super Bowl Ads in one place.

An Even-Tempered Apology, SNL Skit

Andy Samberg channels White House Chief of Staff, Rahm Emmanuel, in this bleep-ridden skit.

The premise is that the White House Chief of Staff offers his apologies for some recent comments. 

It made me laugh out loud and wonder what politics would be like if people actually said what they were thinking.

Here is a link if you want to read a transcript.

Capitalogix Commentary 01/31/10

We Do Live In Interesting Times.

The markets pulled-back a little last week.  To be fair, the correction was small in comparison to the size of the rally since last March.  In many cases where the recent trend has been bullish for so long, people use this type of weakness to add to positions.  So, an oversold-rally would make sense here.

However, some traders have doubts about the health of the market. 

There is a fear that things may not be what they seem.  For example, the GDP number came in higher than expected, but still resulted in selling.  OK, GDP didn't tell us useful things (this time) because the better than expected number was the result of accounting and statistics, rather than real economic growth.  Traders saw through that, and also see that there are still troubling data points coming in ... like that Durable Goods Orders and Weekly Unemployment Claims were both weaker than expected; and Consumer Spending continues to decline.  Still, the Markets sold "good news" again last week.  And even though the moves weren't violent or extended, I take that as a bearish indicator.

Is It Possible That the Market is Still in a Down-Trend?

Right now, the issue is whether price can get back above the down-trend line (marked by the red arrow) that started in October of 2007. 

Is that down-trend line really valid?  It will be if price fails to rally here.

What's Causing the Market to Wobble?

As you examine the markets, it is easy to become near-sighted.  By that I mean that it is easy to look at the ups and the downs, and to assign a cause based on what's happening in America (for example, the crisis of faith in Bernanke, Geithner, or even a jobless recovery).  However, it is harder to believe that any of those issues is the real cause after you look at the next chart (or collection of charts).

How Can The Economies Of This Many Countries React the Same?

A quick glance around the globe shows remarkably similar performance in many markets.

It brings up two questions:

1. Are each of these countries really doing the same things right and wrong?
2. Are world-wide expectations and responses really this similar?

To get a closer look for yourself, here is a link to the charts.  That brings up a third question: What's really causing the markets to behave so similarly?

HBR Shows that Countries Did Deal With the Crisis Differently.

The economic crisis will influence business long into recovery.  This Harvard Business Review visualization puts various bailout and stimulus programs in perspective. Calculating these interventions as percentages of GDP helps identify which economies will be stressed and which will have the resources to bounce back.

Is This Time Different?

Lots of people are reading Reinhart & Rogoff's book, This Time is Different. It examines the trend towards public debt that balloons in response to financial crises. Here is an excerpt from PIMCO's summary of the book:

1. The true legacy of banking crises is greater public indebtedness, far beyond the direct headline costs of bailout packages. On average a country’s outstanding debt nearly doubles within three years following the crisis.
   
   
2. The aftermath of banking crises is associated with an average increase of seven percentage points in the unemployment rate, which remains elevated for five years.
   
   
3. Once a country’s public debt exceeds 90% of GDP, its economic growth rate slows by 1%.

These examples tend to confirm that banking crises are followed by a de-leveraging of the private sector accompanied by a substitution and escalation of government debt, which in turn slows economic growth and (perhaps) lowers returns on investment and financial assets.

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

• The Ups & Downs of Obama's 1st Year. How Did He Do? (CNN)
• Did the State of the Union Address Actually Change Anyone's Mind? (Slate)
• IMF Sharply Raises Global Economic Growth Forecast in Developing Countries. (Reuters)
• Is the Worst Yet to Come in VC? The Strong Will Survive. (WSJ)
• AT&T Reports 2.7MM New Wireless Users & is iPad's Sole US Data Carrier. (Forbes)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• The Pope and Social Media: Give Us This Day Thy Daily Post. (NPR)
• How Technology Enhances Collaboration. (Forbes)
• How the U.S. Enabled the Chinese Hacking of Google. (CNN)
• U.S. Says Free Access to Internet is a Foreign-Policy Priority. (ZDNet)
• Will There be iLust for the Apple's New iPad? (Forbes)
• More Posts with Lighter Ideas and Fun Links.

Capitalogix Commentary 01/24/10

Last week several news items caught my eye as potential "sign-of-the-times" indicators.   With markets still near recovery highs, the amount of fear and loathing is surprising.  Here are some examples.

1. Bernanke's 2nd term confirmation ran into opposition. The magazine cover curse strikes again.
2. Kennedy's Senate seat went to a Republican.This was not the change Dems hoped for.
3. Harley-Davidson posted its first loss in 16 years.  Also,
4. Google was down even though its profit quintupled. Selling good news is bearish in my book.

Let's Look at the Market.

For a number of weeks, the rally was holding-up even though there were a number of signs indicating underlying weakness.  That means buyers bought the dip.

Well, last week price finally broke beneath the trend-line from the March lows.  It is a bearish sign, unless price can get back above the trend-line quickly.

 

Currently, price is still above the support level marked by the orange dashed-line.  A move beneath this level would be another bearish sign.

The next question is whether the move will find the selling power that has been so noticeably absent during the rally?

Perhaps A Little Bit of Fear Will Be a Good Thing for Trading Volume.

The CBOE Volatility Index (VIX), often thought of as the market's fear gauge, capped its biggest three-day run-up since February 2007.  Recently (until last week) it was more of a complacency gauge.  Here is a chart showing the steady decline, and then the surge.

So, short-term, we'll see if that shakes-out some Bulls who are questioning their conviction.

Rembember, however, that market rallies often happen after a fear spike subsides.  So if we don't get selling volume, the next question is whether Bulls will buy the dip?

At this point I am watching the VIX, because while the spike of fear was big ... it came when the VIX was at an extended low.  Fear and Greed (or Bears and Bulls) collide, here, as a result of the conflict between the short and longer term views of the market.  Which side wins will likely have big consequences, because a move higher in the VIX will likely coincide with a bigger move down in the markets.

The U.S. Dollar might also provide some clues to market direction.  The Dollar and equity markets often move opposite each other.  Currency speculators increased bets against the Dollar in the latest week, according to Commodity Futures Trading Commission data released on Friday. The value of net short positions in the dollar rose to $3.12 billion in the week ending Jan. 19, from a net short position of $2.7 billion the previous week, according to Reuters calculations. 

The Markets Are Oversold in the Short-Term.

This chart shows the percent of stocks in the S&P 500 Index that are trading above their 10-day moving average (in other words, what percent are in an up-trend on a short-term basis?).  Right now, less than 10% are.

As you can see, we don't get extreme readings like this often ... and when we do, the market tends to bounce.  To see an interactive version of this chart with an overlay of the S&P 500 Index (so you can see how often the overbought and oversold readings work) click here.

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

• Obama Takes the Fight to Rein-in Big Finance on Wall St. (WSJ & TDB)
• Goldman Earned $4.95B in Q4 - That's Almost Real Money. (NYTimes)
• Bernanke's Burn Notice: From Man-of-the-Year to Scapegoat. (NYTimes & EWave)
• Op-Ed Piece: Obama's Power-Outage On the Edge of the Abyss. (TDB & Newser)
• Surprise, Everyone at the Barron's Roundtable is a Bull. (Business Insider)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Can Strategic Alliances Help Us Innovate Our Way Out Of Recession? (Forbes)
• The Rise of Machine-Written Journalism. (Wired)
• One Step Closer to the Jetsons: Skype In Your TV. (NYTimes)
• Netflix Expects to be Mailing DVDs for Another 20 Years. (Business Insider)
• Bacteria Offer Insights Into Human Decision Making. (PhysOrg)
• More Posts with Lighter Ideas and Fun Links.