Overbought - overbought - overbought

The S&P500 Bullish Percent Index (A popular market breadth indicator that is calculated by dividing the number of stocks in a given group (an exchange, an industry, etc.) that are currently trading with Point and Figure buy signals, by the total number of stocks in that group. BPI can be used to determine overbought/oversold conditions and can generate buy/sell signals. It is important to note that the Bullish Percent Index is not something that can be applied to a single stock but rather an index that is calculated for a group of stocks) stands at 80% or the highest level since February 2007. Above 70% this indicator is telling us that the markets are overbought.

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Dr Copper

The copper future contract closed at 5350 yesterday. The candlestick formation formed a ‘shooting star’ or ‘nagareboshi’ . In the candlestick theory this is a bearish reversal pattern suggesting that a financial instrument may be reaching a top and the possibility of a correction is high. The copper price is currently trading at the very upper-end of the Bollinger Band, so the odds are even higher

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Corporate bonds

Risk appetite is returning in the markets. Everybody says: ‘yes we know’. But do we realize the consequences? No. Because we can’t. The best we can do is guessing.
In the mean time we observe that corporate credit is back. The US CDX five year investment grade index is now on levels prior to the Lehman debacle. The spreads have tightened sharply.
This goes to the expense of another segment of the credit markets: government bonds. Rates went up last weeks.
We know it’s the intention of the FED to keep rates in this asset class low. So will this lead to another round of quantative easing. We place a positive bet on that one, this afternoon at Paddy’s.

We don’t know if this is a positive sign. Unprecedented money creation is causing this ‘normalization’ which is not for real anyway…

To illustrate we mention this morning news, coming from Belgium and illustrating that not all is well with European banks so far:

Business newspaper De Tijd is reporting that the Belgian government is working on a new rescue plan because KBC - market value €8bn - is set to write down the value of its CDO portfolio by a further €1bn. This fresh hit seem to have been triggered by a downgrade of bond insurer MBIA.

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Don't bank on banks

Spring time. But it is not so clear if our Irish banks are participating. Some banks on the continent doubled in value last couple of weeks. And also in the States. But no joy on the Emerald Isle as our financial institutions are decimated and crippled..
Fromm Egan Jones, the rating agency (what’s in a name, these days) we received some comments on the resurrection of the Citi share price.

Accounting and government magic - the recasting of FASB157 enables financial institutions to defer the recognition of losses with the result that C's March trading profits swung from a $6.8B loss to a $3.8B gain. Another item worth reviewing is the decline in interest expense from $16.5B last year to $7.7B this year.
Nonetheless, much more equity capital is needed. Beyond the conversion of preferred to common, watch the form of any additional capital. The Fed and Treas. have guaranteed $306B of C's assets, have injected $45B in preferred and converted to common leaving few additional options. The problem is that C has $2T of assets ($3+T including off balance sheet assets) whose values are depressed by 10% to 20%. C needs to be watched.

We see a developing trend which is worrying: liquidity seems to dampen once again. Apparently funds are deleveraging when they can. So every uptick serves them well. But while doing this they are reducing the liquidity in the market.
Fewer dollars are available to fund the liability side.
A stronger dollar is the result. This is not boding well.
Now, the higher the market goes, the more shorts are trapped.
It seems like a remake of the past-Lehman days is in the making.

Be careful, gals and lads.
This remarkable chart was published by Tim Knight.
Remarkable in the sense that the Russell 2000 seems to do exact the same thing as this index did a couple of months ago.
Exact the same gains in exact the same time span.

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The Goldman boys are doing it again

Suddenly all Americans banks – amongst others – start posting good first quarter figures. After Wells Fargo pre-announced last week, it’s now up to Goldman Sachs to drum good news: a 1.7 bln USD profit, 4.7 bln USD set aside for salaries and bonuses and a 5 bln USD equity offering to free itself from the TARP. With 12 trln handouts fro the US government there cannot be a problem to finds money for this placement in order to let the bonuses flow again.
I suppose that’s the reason why GS prefers to pay back the government first instead of Warren Buffet.

You have to love these Goldman Sachs boys
On those quarterly results – this is the press release from Well Fargo:

“Business momentum in the quarter reflected strength in our traditional banking businesses, strong capital markets activities, and exceptionally strong mortgage banking results — $100 billion in mortgage originations, with a 41 percent increase in the unclosed application pipeline to $100 billion at quarter end, an indication of strong second quarter mortgage originations,” said Chief Financial Officer Howard Atkins.

Mortgage originations… thank you, US government.
But there is more. Since January 1, 2009 new accounting rules are in force. This is rule FAS 160 which allows certain liabilities to shift to the asset side of the balance as non-cash transactions via paid-in capital, thereby going into the earnings accounts and boosting reported equity.

There you have it: the government is handing out capital injections and changes the fair value accounting rules and suddenly the visibility on the bank books is reduced to something close to zero.

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Is the rally fading?

Yesterday we stated that the rally on the exchanges is nearing a top. Here are some pictures to illustrate this thought.We have:

1. the number of shares above their 50-day average

2. the bullish percent index on the NYSE

3. De McClellan summation index

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Let's walk south

It seems that the run-up of the most important indexes is coming to a halt. Based on the 60-minute renko chart, we are alerted that the upward trend is broken and we are experiencing a kind of consolidation/correction. As we are prudent we are going for the former first, before we switch to the latter if more undoing of the rally becomes clear. We pay attention though: it’s month end. Never a good point to set-up positions if you’re not a daytrader.
As an illustration we show the Dow Jones Transportation index (ticker: TRAN):

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Asia leads the US

We live in strange times indeed.
The S&P futures are up another 1.5%. On their way to 820, this is a resistance hurdle of some importance.
What is so strange? It seems that US indexes are following the Asia session instead of the other way around.
The Nikkei is leading, not only the regional stock exchanges but also the US, although there are no particular reasons or drivers.
We also want to mention the squeeze in the final hour on Wall Street yesterday.

And than we have some news from Zimbabwe.
We read in an article that the local authorities are shifting away from the dollar and has chosen instead for the South African Rand as the countries reference currency.
Zimbabwe offers a timeless picture what can happen when the debasement of currency is running out of hand

One of the consequences is that the local stock index is not crashing at first but goes higher instead.
A false positive, as it is called

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Halliburton

After the huge blow-up on Monday we had some pause yesterday and it seems more has to come. But for the moment we think it will be rather a consolidation than a new attack of the bears.
We’re looking for some long set-ups.
If there is a rally coming, will this be a big one? No one knows, but there is a fat chance that some money of the huge sums governments are throwing to banks will find its way to Wall Street.
One picture we like is the chart of Halliburton

This is what we call bottoming…

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