The S&P500: it's coming

This are strange times. Whatever perspective you’re looking to these markets, it’s not easy to determine what direction they will go.
As far as stocks are concerned, our lighthouse remains the S&P500. Pressure is building. This is our take: we’re bullish as long as stocks stay within the wedge.But if the S&P 500 breaks below 975, then look out below. It's going to get ugly real fast.

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Correction?

We think that the correction is already over. Investors assume this is a buy opportunity and will act accordingly.
Life can be beautiful while the smell of bears grilled by this move is everywhere around.
This said.
The shake out was heavy in the financial sector. That section of the S&P500 tanked with more than 5% in 2 days. Is there more to come?
Possible. But not sure.

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Mind your step ...

Europe is off an average 0.7% after Asia did a make-over of the Red Sea. China lost 6.7% as credit is tightened. The Shanghai index lost 23% in the last four weeks. The Wall Street Journal published an article titled: Peak Theory in Government Bonds. Well hidden though, on page C2. So, not very important for the investment community. Is this a reason to be bullish on rates?

Over to the US. The S&P 500 is going for 4.0% real economic growth in the coming year. It is far from impossible to see that, but the odds are low — less than 20% in our view. An unprecedented eight point P/E multiple expansion during a five month based rally has left the market at its most expensive level (25x on operating, 130x on reported) in seven years. On a reported basis, this market is nearly three times overvalued as it was during the tech bubble!

The markets are trading as if we are in the second half of a recovery phase while there is not enough support to state that the recession is over. Dangerous stuff.

London is closed today. So if the US manages to stay in the black, London may open unchanged of higher tomorrow. If so, than the rest of Europe will rally.

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Natural Gas

How are they doing ? The commodity sector and the S&P500, we mean.
We have a chart whith the key commodity related ETFs and the S&P500 starting in March. The US Oil Fund ETF (ticker: USO) and the Base Metals ETF (ticker: DBB) were able to cope with the pace of progress of the S&P500. The Natural Gas ETF (ticker: UNG) was the weakest sector of this group.

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Earnings in the States

Earning season is almost done with 88% of all companies in the S&P500 having reported now for the second quarter of 2009. Earnings have declined over 98% since peaking in the third quarter of 2007.
Real earnings have dropped to a record low.
Why is this reality not captured by investors?
Because reported earning are beating the estimations set by various analysts. This is a relative performance. Versus expectations
But in absolute terms the situation is just horrendous.
Given the decidedly lackluster expectations, it’s relatively easy for a company to “outperform" those expectations. Secondly, much if not all of any gains in profitability are the result of slashing overhead (read "workers") and not a pick-up in sales. Finally, as you can see in the chart, in no sense are the earnings being posted anywhere remotely close to prior levels.

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More: overbought

According to report on Bloomberg today, traders are now betting that the rally is about to come to a screeching halt…

Aug. 10 (Bloomberg) -- Options traders are increasing bets that the steepest rally in the Standard & Poor’s 500 Index since the 1930s won’t survive September, historically the worst month for U.S. equities.
Traders were betting the VIX, a gauge of expected stock swings, would increase 13 percent in the next five weeks, according to futures prices at the end of last week compiled by Bloomberg. That’s the biggest spread since August 2008, before the S&P 500 suffered the steepest two-month plunge in 21 years. The indexes have moved in the opposite direction 81 percent of the time over the past five years, Bloomberg data show.

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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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Overbought

We have an interesting chart from Bespoke Invest where the current levels of the different sectors of the S&P500 are highlighted. OS and OB stands for overbought levels and oversold levels. The only sector not overbought, following the monster rally of july 10th is the energy sector. Even more: 6 out of 10 sectors are currently trading at or near extreme overbought levels.

So this cannot go on for a long time.

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Bulls and bears

When we look to what happened with the major indices on Wall Street the last 5 days, than we see the uphill battle of bulls and bears. For this exercise we take the candlestick version of the S&P500. These candles have very long shadows and a very small body. Meaning that both – longs and shorts – try to win the day. But no party is winning in this game and everything remains very well balanced.

When will this change?
The answer, my friend, on that question is blowing in the wind.

Hat tip to Tim Knight

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I want my bonus back

Yesterday was another trading day that can serve as an example how ridiculous markets have become lately. Regulated, well observed, big markets.
The S&P500 was trading lower by 1% throughout the day on very low volume and suddenly some institutionals bought massive blocks of the SPY. It were the comments of Paul Krugman, some yelled. No, the Chrysler news did it, was written by others. It’s just old fashioned manipulation.

Today there is TARP news: an announcement will be made which banks are allowed to pay back the TARP money and are in to repay bonuses again.

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The Coppock curve

From Bloomberg:

The gauge was named for E.S.C. Coppock, who introduced what he described as a “very-long-term buying guide” in an October 1962 story for Barron’s. Coppock, who died almost two decades ago, wrote that his indicator gave “a picture of the emotional factor” behind stock swings. He advised investors to buy shares in anticipation of “an important, sustained advance” when the guide started to increase from less than zero.

That kind of shift occurred last month, according to data compiled by Bloomberg. The guide climbed to -409.4 from April’s -417.2, the lowest reading since June 1938. Calculations based on the Dow Jones Industrial Average showed a similar reversal.

Coppock calculated the difference between an index’s value at the end of each month and its closes 11 months and 14 months earlier. He added these figures together and computed a 10-month average that gave greater weight to the latest numbers. The S&P 500 sent more accurate signals than the Dow in the postwar era, Bloomberg’s data show. U.S. stocks advanced 16 of 17 times in the first year after the broader index’s Coppock curve turned higher. The exception followed a December 2001 reversal. For the Dow, the success rate was 13 of 19.

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What we are not told

As usual newspapers linked the action on the American stock markets yesterday to the better than expected consumer confidence figure. I am always wondering why media are not able to educate people better how the action on those markets is generated.
This comment comes from a trader, fed up with blatant manipulation of the S&P500 future.

All I know is that every time the technicals tell me to sell, I get crushed. (I trade ES futs) Case Schiller came out this am at 830 and we sold off 3 or 4 handles and then rallied 10 handles + right on the open even before the consumer confidence came out @ 10 for no reason other than to create a BS short squeeze in the ES. It was as if the people that needed to know to move the market knew in advance the CC#, and i'm pretty sure if that # had been terrible we would have rallied anyways. We have tested the 875 - 880 level in ES now 7 times. This market wants to go lower. There is no legit equity buying above 900. Real money sells above 900 and takes us down to 880 where futures traders set up short positions and get crushed and forced to puke and take us higher. See 5/18 ... and today. How else do you explain a 4% rally from open lows on NO NYSE volume... the first 25 handles of the rally today (up to 905) was entirely ES short covering leading equities. Notice when ES volume died at 1035 and everyone finished puking we only managed to rally 5 more handles the rest of the day. It really just makes you wonder who is controlling these ES futures like this. I never bought into the whole PPT thing…thought it was a crutch for shitty traders, but someone is definitely manipulating these things to induce short covering rallies at key points when we traders are positioned short and we would normally roll over. At this point with no equities volume I can't see a way this market ever sells off.

We saw Rick Besignor of Execution LLC on CNBC. This is what he heard:

The market is up 2.75% and sell-side desks are completely dead. You’ve got computers doing all this buying.

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The dollar is sailing south

Related they all are: the dollar, interest rates and the commodities. Of course we’re hoping that for gold this will be the big one, but then the dollar has to go down further (which I don’t believe) or gold needs to rise as a stand alone.
We believe we still are in a disinflationary environment, so the dollar will not run too far and the FED will cough up more QE by buying up bonds.
If the dollar continues to decline, how are specific asset classes reacting? What’s the historical correlation to the dollar of the 10 sectors within the S&P500.
From David Rosenberg:

• Basic materials 87% inverse correlation
• Consumer staples 79% inverse correlation
• Industrials 62% inverse correlation
• Consumer discretionary 34% inverse correlation
• Utilities 28% inverse correlation
• Financials 22% inverse correlation
• Health care 18% inverse correlation
• Tech 5% positive correlation
•Telecom 13% positive correlation

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It's a long way to Tipperary...

How do I love this song written in 1912.

But a long way it is.

I have a friend who’s a bond dealer at D.
I spoke him this morning and he confirmed what is becoming clear the last couple of days in the market: the demand for good credits is booming.
It seems that credit markets are on their way back.
This theme is also reflected in the Credit Derivatives Swap markets where spreads are tightening. No, not all is lost. But it will take a long time.

Having said this, friends, I as you attention as the bull movement is overbought with the minute now.

All technical indicators are screaming now that the equity markets are overbought. Look to this indicator showing how many stocks of the S&P500 are humming above their 50-day moving average... Spooky

So, be careful out there

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An odd couple

What’s this?
It’s a very odd relationship.
What could be the relation between the ratio of long term yields versus short term yields and between gold and silver?
On a monthly basis - and maybe this is a complete coincidence – we observe that as the yield curve is inverse, silver is rising more quickly in price than gold. And vice-versa.

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Stampede of the bulls?

We like this picture from Tim Knight about the S&P500:
It’s a very good illustration of what is happening in the markets lately.
We recognize the first bullish move and then the 2 ever weakening consolidation phases.

The latest phase was not positive. Until yesterday, when the declining trend line was broken to the upside.
The bulls are running everywhere today. But the indexes are overbought, so where will they find the strength to overcome this hurdle?

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Bull run - part 1

FED Day.
Nobody pays attention anymore, these days, to the FED action. Rates are zero… so what. However it’s worth to mention that the last three FOMC sessions, stocks performed very well every time.
So, come on FED, throw us some quantitative easing.

The hourly renko chart of the Standard & Poors 500 seems ready for another break-out in the early trading hours. Nothing can hold these markets back. Signed: Goldman Sachs who takes as a liquidity provider more than 20% of the daily volume for his own account….

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A hanging man

A hanging man is a very powerful candlestick formation. Now, if there ever was a better textbook example of this phenomenon than what we can observe with the weekly action of the S&P500, please let me know.
A hanging man it was.

Now, just waiting for the FOMC.

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Is the magic gone?

Look out for the financials. On our bullish percent index chart of the 10 S&P500 sectors we mention that the financial sector took a dive during the most recent sessions.

Atention is needed here.

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Stuff and penny stocks

I like DBC and DIG. Two ETF’s involved with companies making stuff.
I like stuff.
I like this too.
a recent report by Bridgewater Associates titled, "The Performance of Individual Stocks During the Great Depression."The best 20 performing large companies sailed through the depression relatively unscathed. Their earnings were roughly flat from the peak in 1929 until the bottom in 1933. On the other hand, the earnings of the worst 20 performing large companies fell so much that the losses were nearly as big as the prior profits. Despite this radical difference in earnings performance, the prices of the best 20 and worst 20 earning companies fell by similar amounts, -80% for the best and -96% for the worst.

This is happening. Right in front of our eyes.

This one is from Barry Ritholtz:
Here’s a short list of only the highest quality, bluest of blue chip, penny stocks:
AIG (39 cents), Citigroup (98 cents), E*Trade (66 cents), Fannie Mae (39 cents),
Freddie (39 cents), Unisys (37 cents)
Given the trading volumes, you might think these were real firms or something!
Now, for the not-quite-penny stocks:
Ford ($1.83), GM ($1.83), Las Vegas Sands ($1.97), MGM ($1.99), CIT ($2), Kodak ($2.50), Bank of America ($3.15), New York Times ($4.00), News Corp ($6.15), Xerox ($4.36), International Paper ($4.22), Alcoa ($5.55), GE ($6.75), Dow Chemical ($6.56), Wells Fargo ($7.95), Dell ($8.50).

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