Google & Geithner

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Please excuse the delay in getting our weekly commentary to you but I was in a bit of a quandary. Spend my last day on earth writing commentary to potentially non-existent readers or spend my last day on earth at a U2 concert in Denver? I chose the latter. So since we're all here to tell the tale, here's my fresh perspective on the markets.

So, last week two things occurred that when looked at as isolated and non related events are almost acceptable, but when examined together are upsetting and point to a dysfunctional financial system. First, the debt limit was reached last week and the Fed chief Geithner started "borrowing" money from federal pensions to make its interest payments of what it already owes. They didn't even ask! Second, GOOGLE, a company that has over $35 billion dollars in cash and equivalents with much of it in overseas accounts, went to the bond market to borrow $3 billion for mostly domestic usage. One might ask why would a company that generates billions in cash yearly and already has a massive cash hoard, borrow money. Reason number one is that much of that $35 billion dollar rainy day fund is sitting in overseas bank accounts tax free, and once its sent back to the US is taxed at the corporate rate of somewhere between 15-35%. Second, thanks to the Fed keeping interest rates at basically zero, it's cheaper for GOOG to borrow money here in the US than bring its existing money back home. Even more curious is why GOOGLE has to pay a higher rate than the Fed considering it has the better balance sheet by far.

So here we have one of our most successful companies, founded on research done in our universities and incorporated in the US, incented to keep money overseas to limit its tax bill. Meanwhile the FEDERAL government is so broke that Geithner has to "borrow" money from pensioners. Washington is fiddling as stocks are moving south. It's just hard to see a sustained recovery and a genuine bull market without some real change.

For specifics on our current technical outlook read on.

SPY (S&P 500), DIA (Dow Jones), IWM (Russell 2000) and QQQQ (NASDQ 100) Indexes

After the dust settled last week, all key indexes but the IWM kept their bullish phase intact, but closed poorly with good volume by Friday's close. The euro zone worries surfaced again on Monday with Greece, Italy, and Spain all having sovereign debt woes, causing all the key indexes to close down about 1.5%. NASDQ broke down from the consolidation we pointed out last edition, and now all indexes are in a warning phase with IWM confirming.

IWM - Leading Breakdown Of Major Indexes

Market Internals

VIX (sentiment): This sentiment indicator gave us early warning at the market top with its sell signal still in place. With today's action things have deteriorated even more as we now have closed above the 50 and 200 day moving average, potentially increasing intensity of the sell signal on this indicator to a longer term signal.

Accumulation/Distribution Volume: After the weak rally last week, we registered a distribution day on Friday with follow-thru selling today. Big players still selling.

Up/Down Volume: Our short term volume indicator now in a neutral zone and has plenty of room to move either way.

Sectors

Gold (GLD) and Silver(SLV): Gold broke out from its consolidation and trend line on Friday. Silver is still setting up and holding. With all the euro issues, gold is outperforming silver for now. Silver has a nice sideways pattern and coiling.

 

Silver coiling

XLF (Financial ETF): As we mentioned last issue, we were concerned that the financials, even with all the help from the Fed would have issues and might take this market down. Although it tried to hold, by the close of today, this sector is now breaking down beneath the 200 Day Moving average.

Join us at Mish's Market Minute as we have been playing this when we see some low risk setups.

Mini Swing Trade (featured trade from MMM Premium and CSTS)

The featured mini-swing trade last week was WTW (Weight Watchers). We liked the daily setup as it was one of the few stocks that had been holding up as a Condition 1 setup. It even gave us an inside day and then off to the races. With our overall view very cautious we took the money and ran getting a nice pop for about an 1 ATR before we sold out for the weekend.