July 31, 2011
Weekly Market Outlook
By Keith Schneider
Back in the day when I was a very young NYU student, I took a few Art History classes and discovered M.C. Escher, famous for his drawings of optical illusions. The drawing above was one of my favorites. Notice how in this building there is no ceiling in sight and just an endless maze of stairways leading nowhere in an impossible configuration. Does this somehow remind you of our current situation? There is no debt ceiling in sight as Capitol Hill can’t agree on how to solve the problem of balancing the books. That’s the real problem surfacing here, as we are in a maze of our own creation with no way out. The raising of the debt ceiling is a puppet theater and sideshow. The real issue is actually reducing current deficits, paying off what we owe while trying to rejuvenate the economy. The treasury market is telling the story. There is no flight out of US Treasury’s ( signaling that debt default is a non-issue) , and in fact, by Friday’s market close, the short term yield dropped to their lowest levels since the financial meltdown in 2008. The longer end of the curve moved down even more with 20 year bonds dropping 4%, bringing yields down 2.78% from 2.91%, the lowest yield this year. Many smart players were caught betting on higher rates and there was near panic as many closed out losing positions. So if you are bewildered by the fact that market players are rushing in US Treasuries while we are theoretically barreling into default, the more important factor concerning the market is the faltering economy and the fact that the Fed will be forced to keep rates low for quite some time. That was not unexpected with bad news on the economic front and the debt ceiling issue still looming. Hence, the US Equity market took a big hit this week, while Gold and the Swiss Franc surged to new highs. We have highlighted that continued tandem movements in Gold and the Stock Market were unlikely and with this week’s action it came to fruition. If this persists, it will be signaling significant climate change in the markets.
SPY (S&P 500), DIA (Dow Jones), IWM (Russell 2000) and QQQ (NASDQ 100) Indexes
QQQ (NASDQ 100) this narrow based index of the leading 100 NASDQ stocks has continued to outperform all other US Stock indexes and only fell -2.7% for the week. It failed the top of the channel we highlighted, but is holding its bullish phase, with a modest positive slope in its key 50 day moving average. This index is the most encouraging and if we can hold current levels this might be signaling the gathering storm is abating.
IWM (Russell 2000) as we mentioned last week this broad based index was troubling as it was lagging and had an inside day signaling compression and big follow thru . We got that in spades. We were down 5.1% for the week. We hung on to the 200 day Ma, maintaining a strong warning phase by the close on Friday. This index is most vulnerable, but looking oversold in the very short term.
DIA (Dow Jones Industrials) Performed poorly this week as some of its components such as UTX took a hit in anticipation that we might reduce spending on defense. We closed in a strong warning phase this week but we are bit oversold at the bottom of the channel that extends to 2008. Of course things can always get a lot more oversold. Note the declining 50 day ma which is the blue line.
Swiss Franc (FXF Swiss Franc ETF) As a potential downgrade of US debt looms, this currency hit new highs again. All this indicates severe stress on the financial system and of all assets the Swiss is second only to silver in its performance this year. Look to this currency and gold to see the emotional frame of mind of the global markets.
Interest Rates (IEF 7-10 year Bonds) If you have any doubts about market concerns of a default these charts should dispel those fears at interest rates broke out and made new highs. Depending where you are in the yield curve the charts vary but this part is clear. The Yield is the lowest since October of last year. Inflation adjusted bonds (TIP) are at all-time new highs suggesting further easing by the Fed and more inflation and of course higher Gold.
Market internals
VIX (SENTIMENT) What a difference a day makes and we moved from bullish and complacent to near panic this week as we sold off. Not since May 2010, when the most serious correction of this bull market took place have we stayed 4 consecutive days over the trading bands. We also closed with confirmation above the 50 and 200 day ma, all bearish. On the lighter side, we are bit over extended short term therefore due for a relief rally from here and then let’s take another read. As you can see, these markets change on a deflated dime and take constant monitoring.
McClellan Oscillator- This intermediate term breath reversed quickly with the sell off this week and is now in oversold regions but needs to hook to the upside to reverse the current bearish outlook
Adv. /Decline–This shorter term breadth indicator shows lots of inherent weakness and is making new lows along with the market. It is in an area where significant rallies can occur but while this is trending down, the road is bearish yet still, if can see a close above -2000, to start probing for the next rally.
Up/Down Volume – Like the other indicators the sell off quickly reversed some positive readings; however one bright spot is the volume on the downside is abating and potentially setting up for a nice divergence. Neutral to bullish.
Gold – (YG Gold Futures) Gold once again hit new historic highs and more importantly broke off its relationship with the stock market and the dollar. This is indicating even more stress on the global financial system. However with that said, the breakout from the recent compression suggested a bigger move this week. It is possible that we might have run out of steam? Or is this the pause before we shift into overdrive? Silver paused and had a bearish engulfing pattern Wednesday that is still intact.
Mish’s Mini Swing (option) Trade of the Week-Mish was stalking ISRG as it flagged down but held the gap from its blow out earnings. The lower open on Friday morning allowed us to buy August 390 calls at 10.70, when ISRG was trading down with the rest of the market . By the day’s end ISRG closed up +3% and we booked almost an 70% return on some of those options by the end of the day.
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