And a Bounce is What we Got

November 25, 2012

Exactly as anticipated, the S&P500 bounced last week. While the jump was impressive, over 3.6%, the volume was abysmally low, meaning that this was more of a technical rebound rather than a fundamental rush by new money to buy stocks. Volatility, because it was already historically low, dipped only slightly.

Was there any significant news to aid the rebound? Not really. No progress was made in Greece or Spain. Japan is still sliding into recession. China is still in the middle of a hard landing. The US is still not struggling economically. And the tension in the Middle East, while lessened by the truce in Gaza, is still very much simmering.

In US macro news, existing home sales beat–slightly–expectations, but the prior month’s results were revised downward. Initial jobless claims stayed above the critically important 400,000 threshold; sure some of this is still explained by Hurricane Sandy, but perhaps not all of the recent surge above the mid-300,000 level we’ve been accustomed to for almost a year. Consumer sentiment missed expectations and leading indicators met expectations. Both of these measures, by the way, do not hold a lot of value because they’re highly subjective, subject to huge adjustments (ie. manipulation), or both.

Technically, the S&P500 is still in a downtrend that began in late September. And prices would have to rise well above 1460 to break this downtrend. This technical assessment holds, quite strongly, for both the daily and the weekly charts.

Interestingly, in only a week, the S&P has gone from being oversold to actually being somewhat overbought, because of the large magnitude of the jump. The McClellan Oscillator is now signalling a strong possibility of a pullback over the next several days.

What can drive this pullback? Well, for starters, the fiscal cliff is still far from being resolved. Adding to the pressure is the fact that Congress will be in session a grand total of only 12 days before the end of the year and the triggering of the fiscal cliff. The odds do not look good, at this time, that Congress and the president will come to a mutually agreeable solution, in time to prevent the markets from reacting negatively. Just as in the summer of 2011, perhaps it will take a panic in the stock and bond markets for the politicians to get scared into making a deal.

Also, as mentioned earlier, tensions in Greece and Spain are continuing to build. And even if the compliant leaders of these ailing states do satisfy the demands of the EU, the ECB and the IMF, there’s a growing risk that the citizens of these respective nations will not agree to the terms of any agreement. Civil unrest—or worse—is now a growing threat in Greece and Spain.

And the list goes on.

So while we enjoyed a strong bounce, one that could even continue for a while longer, the technicals and the fundamentals are still signalling stormy times ahead.

Time for a Bounce?

November 18, 2012

The S&P500 dropped again last week, this time almost 1.5%. Volume was moderate, but certainly not at any level suggesting that some sort of panic selling had taken place. Volatility actually declined slightly, also suggesting that last week’s selling was not very worrying. Breadth, however, deteriorated badly. New highs minus new lows dropped notably. And the percent of stocks above the 50 day moving average fell to its second lowest level of the year.

Macro fundamentals were not strong for the US last week. Retail sales, both headline and ex-autos, missed expectations. Initial jobless claims soared to the highest levels of the year, but some of this increase came from catch up filings after Hurricane Sandy. The Empire State Manufacturing survey disappointed, and the Philly Fed survey missed very badly. Finally, industrial production also missed consensus estimates by a mile.

But the week ended on a positive note….stocks rose on Friday. Why? Because there was a hint of a possible deal between Washington Democrats and Republicans on the fiscal cliff. And while there was nothing concrete announced, and while most folks in DC will be out of town until the week after Thanksgiving, this change in sentiment was enough to send stocks higher.

The major reason is technical. The S&P500 was very oversold by the end of last week. Over the course of the last 6 weeks, it had dropped over 100 points, slicing through the 50 day moving average and then the 200 day moving average, without so much as a breather.

So the market needed an excuse, any excuse, for shorts to cover and traditional longs to “buy on the dip”. And this one day rebound could last a little longer. It wouldn’t be surprising if the S&P bounced back to at least the 200 day moving average (around 1382) or even close to the 50 day moving average (about 1429).

Remember, such a bounce would not break the downtrend that began in September. It would merely be a normal and common reaction to oversold conditions, and one that should fail at either of the two major moving averages which will now act as resistance, or a ceiling, against further gains.

And further gains would require some major positive news News such as corporate earnings rebounding, US macro data turning around, reduced tensions in the middle east, improved fundamentals in Asia, real solutions to the euroland crisis, and meaningful US fiscal reforms.

Needless to say, than none of the above is very likely. And if any one of these political or economic risks flares up again in December or January, then selling would instantly resume.

Who knows, maybe this time the selling will be for real—with volume soaring and volatility spiking.

And if this happens, then some attractive buying opportunities would likely appear, at least for the short to medium term.

Elections Over ….. Markets Sink

November 11, 2012

Not surprisingly, the S&P500 gave back recent gains last week. What was surprising was the magnitude of the loss…..almost 2.5% which is one of the worst weekly losses of the year. Volumes jumped, lending support to the price retreat. But volatility, while rising, only crept up slightly to end the week (VIX) at a level still well below 20. This suggests that true panic selling—and the formation of a tradable bounce—is still a risk to be concerned about.

On the macro front, the US economy continues to limp along….at best. ISM services missed expectations, and this is important because services represent the largest share of the US economy, far larger than manufacturing. Initial jobless claims beat expectations but were artificially suppressed due to the massive hurricane that slammed into the Northeast. Import prices were far higher than expected and this will hit corporate profits and hurt consumers. The trade deficit was better than expected, but as usual for the wrong reasons—it fell not because of greater exports, but because of decreased imports, which is a sign of a slowing economy.

Technically, the S&P500 is at a crossroad. On the one hand, the equity markets are oversold in the short-term. After several straight weeks of selling, a bounce would be very normal. On the other hand, volatility never hit a crescendo and the S&P is still not oversold on a weekly basis. This leaves analysts to wonder and worry about getting an oversold bounce; specifically, if a bounce does not materialize soon (as in next week or the next several weeks) then the stock markets can sell off much further.

How much further?

Well Marc Faber, one of the most well known and accurate market analysts in the world, is warning about the possibility of a major post-election sell-off.

Faber sees the obvious status-quo in terms of the presidency and the congress and concludes that the US will have a hard time not going off the fiscal cliff. And this will result in a recession, if one hasn’t started already.

Even the Fed’s additional easing programs will not, according to Faber, be able to prevent a recession and the consequent reduction in corporate earnings.

So Faber sees a 20% sell-off as the minimum, and a larger 50% sell-off sometime next year as a downside limit.

Where does he keep most of his money? His largest holdings, as a percentage of assets, is in gold and then high-grade corporate and government bonds. Sure he holds equities too, but they represent far less than 50% of his portfolio, which is exactly what you’d want to see if you expect a meaningful sell-off over the next several months.

Markets On Hold until the US Elections

November 4, 2012

The S&P 500 inched up slightly, very slightly. While it gained 0.16%, the Dow Jones Industrial Average and the NASDAQ both lost some ground. Volume was very light, continuing a multi-year trend where price rises are NOT supported by rising volumes. Instead, they’re actually contradicted by the eroding volumes. And volatility as measured by the 30 day VIX was essentially unchanged, and still stuck at relatively low and complacent levels.

US economic data is not improving, on average. The Dallas Fed manufacturing survey badly disappointed. Consumer confidence missed expectations. The Chicago PMI came in below 50, at 49.9, which was the lowest level in 33 months. ISM Manufacturing beat expectations, but only slightly. Initial jobless claims are still stuck in the upper 300,000 range which represents a weak economy. Unemployment ticked higher, back up to 7.9%. And while payrolls were larger than expected, half the jobs were conjured up by the birth/death computer model. What’s worse, average hourly earnings missed badly. This meant that after inflation, real earnings were negative on a month-to-month basis. And on a year-over-year basis, nominal earnings grew at only 1.1%, one of the lowest growth rates in US history.

This is a recovery?

Technically, the downtrend that began in September is still in effect. Last week ended on a down note and most stock indices ended the week in negative territory. Momentum is now getting stronger, but in the downward price direction. And breadth is still broadly weakening.

It almost seems as if the markets are holding their collective breath. And the key event that everyone is waiting for is the US presidential elections.

Up until the first presidential debate, Obama was comfortably in the lead and conventional wisdom was that he would at the very least comfortably stumble over the finish line as the winner. And since markets, and Wall Street, liked what they saw from this administration over the last 3.5 years—total and complete support for big banks, big business, and massive money printing by the Fed—then an Obama win would be considered market friendly.

But over the last 30 days, the race has tightened up considerably, to the point where it’s a dead heat. And since Romney has promised to curtail the Fed and its quantitative easing (the SINGLE most important driver of equity prices over the last three years) then they have good reason to worry.

Of course, should Romney actually win, it would be very hard to believe that he would really follow through on his promises to reign in the Fed. Big banks and big finance would be at risk of collapse, and since without their support Romney would not have been able to win the Republican nomination, then it seems more plausible than he, if elected, would be in debt to his bankster supporter and not likely to end the massive money printing programs.

But even if this stimulus continues, other major headwinds remain and will be taking center stage. The US fiscal cliff, the deepening euro crisis, the simmering tensions in the Middle East, and the economic and lately political tensions in Asia (and specifically between Japan and China) all need to be addressed.

And all of these issues are not market friendly.

So as soon as the US elections are over, brace yourselves for a gamut of other market risks.