Market Watch September 22, 2012

The market made a new high a week ago than pulled back just a bit.  So let's take a look at what the charts are telling us to gain some perspective on what the near term holds.  Below is a 60 minute chart of the S&P 500 fund (SPY).

From the chart above.  The 60 minute is in a neutral pattern neither overbought or oversold, just trending sideways at or above the moving averages.

The daily chart is overbought and can use some consolidation or a pullback to the 20 day exponential moving average prior to moving higher.

The weekly chart above, has just entered into overbought territory.  Prior to moving higher, I would expect to see some sideways to a small pullback. 

Bottom Line:  Charts are showing some overbought signals, so I expect next week we remain in a trading range to work off those conditions prior to resuming the predominant trend, which is higher.  Thank you for reading.
 

Fed Pumps More Liquidity With QE3

Just to show how slow the economy is recovering, the federal reserve announced on Thursday the release of QE3 (quantitative easing three).  Under QE3 the government will purchase up to 40 billion dollars of mortgage backed securities per month
I want to focus on how the overall market and some specific commodity related assets have already appreciated this year to date.  Below is a chart of the S&P 500 (SPY).

This ETF is already up 18% for the year.  This chart has the look of some extreme front running the QE3 announcement.  The chart is extremely over bought on the daily chart. 

The chart above is the price of oil / barrel.  Notice that this is the highest price per barrel at 96.25 that a QE program has been initiated.  

Above is a chart of food commodities which include soybeans up 44% year to date, wheat up 41%, and corn up 21%.  Perhaps more QE front running has occurred within this soft commodity sector as well.  

Bottom Line:  Just about all markets have been priced extremely high.  If this was a telegraphed call that many traders have made in front of the QE announcement, than we should get a good pullback from today's prices.  The stock market and some commodity sectors are being priced at extremely high risk levels. Thank you for reading.
 

Front Running QE3 - Part 2

This article was published here Front Running QE3 - Part 2 at Seeking Alpha.

Market Watch August 18, 2012

Divergence:  Is when the price of an asset and an indicator, index or other related asset move in opposite directions.  Divergence can be seen as positive or negative.  Three charts below show of such negative divergences against the S&P 500 making new yearly highs this past week.  First lets show the S&P 500 chart making a new high for the year below.  Click to enlarge.

The first divergence is against copper.  Copper is a leading commodity that is used in almost every building project whether residential or commercial.

Next is the transportation index.  This index is the most widely gauge of American companies moving products.  Again we see the negative divergence.

Lastly, the BPNYA is known as the bullish percentage of stock charts in the New York Stock Exchange.  Basically measures the breadth of the stock market.  With the market making new highs, breadth should confirm or be close to also making highs.

Bottom Line:  The market has made a new high for the year this past week. But there are some negative divergences as seen from the three charts above. The market can continue to move higher despite these negative trends, but eventually the negative trends will catch up, and stocks will face a correction. We will be sellers as the market continues to trend higher and eventually may initiate a short position in the market when the time is right. Thank you for reading.

Market Watch August 12, 2012

Last week I commented on the markets being overbought from a shorter term perspective.  Last week some of those overbought readings were worked off. Not much has changed with the charts below.  But let's have a look at the 60 minute chart again.  A pullback to the 60 EMA shown below would be a decent entry point.

The daily chart below gained 1.07% last week, on one of the lowest volume weeks of the year.

The weekly chart below has not changed much either.  It is moving higher into the area where we may consider shorting.

Bottom Line:  In the past week the markets were neutralized, with a slight gain higher.  From a risk to reward standpoint, I would like to see the markets pull back some before initiating long positions again.  For now, it is a waiting game and being patient is what we need to be, until we get the move we are expecting.  Thank you for reading.

Front Running QE3

This article was published by Seeking Alpha here Front Running QE3.  Which we are not allowed to republish on any other site including our own.

Spanish Bond Yields Rising

Markets sold off on Friday due to the stronger dollar and Spanish bond yields moving to the highest levels during the current debt crisis.  Below is a chart of Spanish 10 year bond yields, which is trading above the psychologically important 7% level.  Click to enlarge.

Bottom Line:  With Spanish yields moving higher, the whole union could be on the verge of unraveling soon.  As Spanish bond yields rise, investors are demanding more interest for the risk of buying those bonds.  The US markets have been range bound and holding up well under slowing growth and average earnings reports.  Thank you for reading.

 

Still Range Bound

Even with Fridays move higher, we are still in the same range that I reported about last week.  Volume has also been below average.  So I would rate this market range bound until we get a full look at earnings.  Below is a chart of the S&P fund (SPY) with fibonacci retracement levels. Please click to enlarge.

Bottom Line:  We increased exposure in portfolios during the middle of the week.  I think the market still has some upward momentum to take it to (per chart above) the 138.00 area.  Thank you for reading.

Range Bound Markets

Now that earnings season is upon us, let's look at a chart of the S&P 500 (SPY) to gain some perspective on where we may be heading.  Below is a daily chart showing the recent bounce high at 137.80 and the low on June 4th at 127.14.  

So from the above chart we have a trading range of 8.38%, ( 127.14 low to 137.80 high ).  Volume has been lackluster lately probably from a holiday induced week.  Gold has not performed well during the month of June. We will be looking to buy gold on any dip down to prior support.  We believe that the Fed may act and give more Quantitative Easing (QE) stimulus when they meet in September, and gold should perfrom well if that is the case.  Below is a chart of Gold (GLD) and the zone we may be interested in buying.  

I would view a good risk / reward entry of GLD at the highlighted green area shown on the chart above.  I believe we may get there within the next 1-2 weeks.  

Bottom Line:  The S&P 500 looks to be range bound for now, but may gain better direction once earnings season is upon us.  Gold is heading down to it's support area again.  I expect that area to hold as support, making buying GLD a lower risk entry point.  

Obamacare Passes

In a 5-4 vote Obamacare also known as the "Affordable Care Act" (ACA) passed.  We will have Obamacare starting in 2014.  In plain english, here are some of the highlights of the program.

Americans must sign up for healthcare by 2014:

Congress did order Americans to obtain - and to keep up every month - what it called "minimum essential coverage".  Congress in the ACA made the mandate depend upon an assessment for those who do not sign up or maintain health insurance.  For those who do not signup and maintain health insurance a federal "tax" will be imposed and paid to the IRS.  Whether you obtain insurance or not, you will be treated under the new act.

What is the penalty and how will it work when it goes into effect 2015 for 2014 tax year?

The "Affordable Care Act" (ACA) uses complex formulas to determine how much the penalty will be, but in general it is calculated each month the individual does not have health insurance, and it is to be paid as a flat amount or as a percentage of household income.  If it is to be a flat dollar payment, the law starts at $95.00 a year in 2014, $325.00 for 2015, and $695.00 for year 2016 (each month's assessment is 1/12 of those totals).  After 2016, the monthly amount is to be adjusted for a cost-of -living amount.  If it is assessed as a percentage of household income, it starts at 1% of a base amount in 2014,  to 2% in 2015, and 2.5% after 2015.  The failure to buy health care insurance shifts the cost for the uninsured to health care providers, insurance companies, and everyone who does have health insurance.

Medicaid:

The courts decision on Medicaid expansion is divided and complicated.  The main focus is. 

A)  Congress acted in offering states funds to expand coverage to millions of new individuals;

B)  So states can agree to expand coverage for exchange of those new funds.

C)  If the state excepts those expansion funds, it must obey by the new rules and expand coverage.

D)  A state can refuse to participate in the expansion without losing all of its Medicaid funds; instead the state will have the option to continue with its current no-expanded plan as is.

Bottom Line:  Stocks did not like the outcome of this act, as markets initially sold off after the decision was public, but later rallied to close down just slightly.  Health care companies were down with the market on an even basis. 

 

Fed Continues Operation Twist

Back in September of 2011 the fed chairman Ben Bernanke announced Operation Twist, which I wrote about here  Fed Announces Operation Twist. Today the Fed announced a continuation of the same program and that interest rates will remain low through 2014.  The continuation program of selling shorter term treasuries and buying longer dated treasuries is an attempt to keep bond yields low.  The program will run until the end of 2012 and will total 267 billion. The initial program was estimated at 400 billion, which is set to expire.  Similar to the original Operation Twist, the fed's balance sheet will not expand as it did during the release of QE1 and QE2 (quantitative easing).  How did bonds react after the announcement of the continuation of this stimulus package.  Below is the 10 year bond TLT.

This move by the Fed looks like it was telegraphed and expected weeks early as bonds put in an all time high as seen from the chart above.

Under QE1 & 2, the feds balance expanded by purchasing mortgage backed securities and treasuries, and the liquidity found its way into stocks, commodities and bonds worldwide.  I don't see this stimulus continuation being as equity friendly as the prior two stimulus packages, that did not see a rapid economical improvement when all was said and done anyway.

Bottom Line:  I am not sure what another few basis points lower will do to spur the housing market.  Also, unlike QE1 and QE2, this package will not have a direct effect on stocks or commodities, but should lift longer maturing bonds (lower yields) in an effort to boost the housing market. Thank you for stopping by.

Greece Kicks the Can

All eyes were on the Greece elections last night.  Greece voters chose to stay on the Euro and accept the bailout money, kicking their problems further down the road.  The markets originally liked this outcome over night, but since then the euphoria has worn off.  The Euro crisis is far from over.  Forget the headlines, let's look into the credit markets of specific country bond yields to see what they are saying.  Below is a chart of Spain 10 year bond yields, which have reached new highs today.

So the cost of borrowing for Spain has increased to new elevated levels.  I would have expected Spain 10 year bond yields to come down some, given the Greece elections have been decided.  Italy 10 year bond yields have also increased today, but not as much as Spain.  Below is a chart of Italy 10 year bond yields.  Not an all time high, but still elevated at over 6%.

Bottom Line:  The Greece elections were an important event to see if they would stay within the Euro.  Even with the outcome to stay in the Euro, the 10 year bond yield in Spain reached a new all time high of over 7%. One has to ask, has anything really been solved. Has the sovereign debt crisis disappeared or have they simply borrowed more time?