August 14, 2011
Weekly Market Outlook
By Keith Schneider
It was considered a major feat this week that US Equity indexes only finished down about 1.5%. That was accomplished with the help of good news on the employment front as our jobless rate dropped to 9.1%, according to latest figures. Imagine if this report was negative or worse than expected! Even without an amazing 700 pt. bounce in the Dow Jones off the lows, the SPY’s (S&P 500) and IWM (Russell 2000) have entered into bearish market phases. Gold has gone parabolic. Interest rates plummeted again as the Fed announced that that they will keep rates low until the foreseeable future. I Like low rates as much as the next person, but this is a reflection of a weakening economy.
Most experts have got this wrong as legendary trader Soros recently exited massive gold positions early, as the yellow metal has just gone to a parabolic stage. Cramer has done it again, being in the worst place you could be during the storm….. The financial sector and BAC. Last time around it was Bear Sterns. Hey Jim, stay away from stocks starting with the letter B and in the Banking sector.
This feels like old home week for this trader who started his career trading commodities in the pits in the late 70’s. Pure fear and greed are driving this market. To borrow a phrase from “Wag the Dog” (a classic movie), what you have seen, well “that’s nothing” when compared to where we might be heading. The wrangling on Capitol Hill that produced our current market swoon certainly delivered the wakeup call. Unfortunately, no one is home on the Hill and the call was forwarded to every American citizen as well as around the globe. If the objective of those on the Hill was to highlight our malfunctioning political system to our creditors and cause a downgrade, then Mission Accomplished! It’s a new world order and the recent market activity is the beginning of this adjustment.
When fear and greed predominate, the charts tell the story the best, and although some of the markets responses to the downgrade seem counter intuitive, charts don’t lie. We can find out the fundamental reasons later and make money now. So on to the charts...
SPY (S&P 500) this key US Index broke down badly and has now entered into a bearish market phase and has also broken key long term support on our monthly charts. The speed and intensity of the decline highlights how the markets were complacent. Similar pattern for the IWM (Russell 200) although the monthly charts for IWM have not broken down yet. We are still hanging on to distribution phases in the DIA and QQQ, and those indexes still have intact monthly trends. Overall, a stunning reversal for the markets over the past two weeks and a change in trend.
$VIX.X (sentiment) this sentiment indicator went from bullish and complacent a few weeks ago to fear and panic. We now have the 200 and 50 day MA stacked positive, with the VIX trading well above both, bearish longer and intermediate term. Shorter term we moved back into the Bollinger bands indicating short term market is oversold. This indicates a continuation of this short term rally within this bearish longer term reading.
Up/Dn Volume This very short indicator (a few days) with the extremes in volatility requires constant monitoring. As you can see, oversold can get more oversold, overbought can get even more overbought and until the indicator reverses from extremes, the current trend is still intact. At this point, we are currently in neutral range, so we have plenty of room to move either way. Also, this is often how bear market rallies occur; they happen extremely quickly and are over just as fast. However, we still might have some more momentum to the upside.
McClellan Oscillator This intermediate term indicator moved from overbought in July to extremely oversold last week before generating a buy signal which we are currently on.
Up/DN Volume and AD/Decline indicators – Both of these shorter indicators are indicating a short term rally in in the works. Our volume component is throwing off a short term buy signal, and we are looking for confirmation on breadth (Advancing versus Declining Issues) as that is still weak. These are mean reverting short term indicators, and work best at extremes, good for several days to 2 weeks.
TLT (US 20 Year Bonds) Interest rates plummeted along with the market as fears about a weakening global recovery came into the spotlight. Looking at the long term chart, lower rates are the longer term trend and accelerating. A critical level is above 110, which indicates extreme stress on the financial system as well. It’s a level not breached on a closing basis since the financial panic in 2008. Trend is bullish but overbought. So far this indicates the downgrade by S &P has not affected the appetite for our debt, at least for now. It will be interesting to watch two powerful forces at play. There is still nothing to match the liquidity of US debt.
Gold (GLD ETF) and Silver (SLV) what more can be said about GOLD. As I have been highlighting, the correlation in the movements of GOLD, Dollar and Stocks would and have come to an end. In fact, Gold is now moving in the OPPOSITE direction of the stock market. This indicates a completely different market climate. Also confirming this new climate, gold has hit its highest levels on a relative basis to the $INDU since the 10 year bull market began in precious metals. It even exceeded the levels reached at the market lows in 2009.
Silver (SLV) is basing out and has a nice week of compression and looks poised to move again at any moment, assuming it can hold above last week’s low of 36. A move above 39 would mark the beginning of a new leg up. Still needs to clear 41 to get this going parabolic like Gold.
US Dollar ( UUP ) although our credit worthiness has been called into question, on a global basis the dollar has held up quite well as the chart below shows. We have been basing since late April againest a basket of world currencies. If we can move up and over the 50 day MA ( blue line) we might see a 5-7% rally in the greenback. Again, counterintuitive but the charts don’t lie.
Have a great Weekend!
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