A Closer Look At the Financial Sector

One of the main lessons I learned from reading some of the older market analysts like Gartley, Gann and Schabacker is the importance of long-term trends. You have to know where you are in a particular cycle, be it an index, sector or individual security. Bearing that in mind, let's look at the financial sector to see where we are now.



In late 2002 and early 2003 the sector formed a double bottom. It rose from this bottom at about 20 to 30 in early 2004. That's an increase of 50%. The sector consolidated its gains from 2004 to 2005. The sector started rising at the end of 2005 until mid 2007, moving from 30.5 to 38, or an increase of roughly 23.5%. The sector formed a double top in mid-2007 and has been dropping on heavy volume since.



From a simple moving average perspective, notice the index has used the 200 day SMA for support for the last year and a half. It bounced off the 200 day SMA twice. But now the index is below that index indicating we're in bear market territory.



Notice the sector has sold-off about 50% of it's total 4.5 year rally. It has done so quickly on heavy volume. The sector is also between important price levels established during its 2004 - 2005 consolidation.



On the short-term chart, notice that

-- the shorter SMAs are below the longer SMAs

-- prices are below the SMAs

-- all the SMAs are headed lower.

In other words, expect the sell-off to continue.

Read More

FOMC Minutes

Yesterday, the Federal Reserve issued the minutes from their last meeting. It is very informative and shows what the Fed is seeing which supposedly gives us a window into what they are thinking.



Notice the breadth of the slowdown. This isn't just about housing; we're seeing a slowdown in consumer spending and business activity as well as an increase in inflation. In short, this is not a good time to be a Fed governor.

Read More

Lending Tightened

The Bank of England (BOE) has warned that the number of households defaulting on their mortgage payments is expected to rise over the next three months.

The BOE also noted that banks were now less willing to lend, because of the higher cost and reduced availability of credit.

Add this to the very gloomy New Year message from the Prime Minister, and it is clear that 2008 is not going to be at all pleasant for those seeking credit or those already in debt.

Read More

Today's Markets

Happy new year. Well, not really.

The markets opened the new year with a whimper. They gapped down on the ISM news (which came in at recessionary levels) and then continued to drop as oil spiked.

Here's the 5-day SPY chart.



Note:

1.) The gap down on the Chicago news

2.) The heavy volume

3.) The increase in the steepness of the move down compared to the previous 4 days.



The same points from above apply, with the addition that the QQQQs may have formed a double bottom today.



The IWMS (Russell 2000) have been in a weaker, downward trajectory for the last 5 days. They simply continued their pattern today.



On the daily SPY chart, notice prices are now at the lower trend line of either a triangle or a diamond top (pick your pattern). Also notice the volume really picked-up today.



Technically, the QQQQs are still in decent shape. They are still consolidating within a range.

However, before we go an get excited about the NASDAQ because it doesn't have any exposure to real estate:

45 of the 100 NDX stocks have 200 DMA that are already declining (they are in intermediate to long term down trends).

56 of the 100 NDX stocks are below the 200 DMA.

68 of the 100 NDX stocks have a declining 50 DMA (short to intermediate term down trends).

67 of the 100 NDX stocks are below the 50 DMA.
and last but not least 50 of the 100 NDX stocks have 50 DMA that have crossed under the 200 DMA.

Of the 33 stocks above the 50 DMA only 14 of them are what I would consider strongly above (making new highs) and 5 of those 33 stocks above the 50 are still below the 200 DMA.

This doesn't paint a pretty picture for tech being a safe haven for investors with only 14 stocks in strong technical positions.

This is why market breadth is so important. Fewer and fewer stocks are responsible for the market's advance.



On the IWMs, remember the blue line is a 4 year support line for the market's rally.

Read More

Oil Hits $100/bbl

From Bloomberg:

Crude oil reached a record $100 a barrel and gold soared to the highest ever, leading a commodity surge as the dollar's slump against major currencies enhanced the appeal of raw materials as hedges against inflation.

Spot gold climbed to $860.10 an ounce, and wheat and soybeans jumped more than 3 percent. The UBS Bloomberg Constant Maturity Commodity Index gained as much as 2.2 percent today after climbing 22 percent in 2007. The dollar fell on speculation the Federal Reserve will cut borrowing costs in an attempt to bolster the U.S. economy.

``The most salient buzzword in 2008 is going to be inflation,'' said Michael Pento, senior market strategist for Delta Global Advisors Inc. in Huntington Beach, California, which manages about $1.4 billion. ``The Fed is lowering interest rates and vastly increasing the money supply. They're further fueling inflationary expectations.''

Here's the chart, via Futuresource:



Notice oil had been in a rally for the last year. Today's move breaks through technical resistance. If oil closes above $100/BBL, we'll officially be in new territory -- there is no technical resistance keeping prices from moving higher.

Here's a chart of the dollar:



Because oil is priced in dollars, a decrease in the dollar's value is a de facto price increase in oil. Notice the dollar dropped hard a few days ago. A gap is an indication of a meaningful change in sentiment. Notice the dollar gapped down after a decent rally.

And here is a long term chart of the dollar:



That shows it's clearly in a major downtrend.

And gold is spiking:



Gold consolidated in November and December and has since broken out -- an indication that inflation expectations are increasing.

And here's a long term chart of gold:



Which shows it's really breaking out in a big way.

Read More

Beginning of The Year Analysis, Projections, Predictions and Other Stuff

With the beginning of the year upon us, it's time to look back and forward. Some posts from around the blogsphere do a great job.

The Big Picture offers a 2007 performance review.

Afraid to Trade looks at commodities 2007 charts.

ETF Trends has a great ETF round-up

Bespoke offers the Rolaids list, the anti-Rolaids list and all sorts of other analysis.

Business Week offers the best and worst of 2007

Minyanville has a great roundup of 2008 possibilities

Read More

Will The Correct SPY Analysis Please Stand Up?

Reading charts is an art as much as a science. In fact, it may be more an art than anything else. The more you look at charts, the more you see multiple interpretations. The current SPY chart is no exception. Sometime over the last few months, I argued the SPY was in a double top formation. This was one of the reasons I argued a bear market was developing. Considering the overall economic backdrop -- a slowing economy with the possibility of a recession occurring -- this analysis made sense.

Since I speculated the SPYs were in a double top the economic news has continued to disappoint. Christmas sales were fair but not great as the consumer is still hemmed in by increasing gas and food prices, durable goods disappointed, regional Fed surveys showed weakness, housing is still a mess and the credit market shows little sign of unfreezing. However, the SPYs now offer multiple possible interpretations.



Here's the original analysis, which still stands. The market formed two tops -- one in early July and one in early October. Since then the market has drifted lower, but has not convincingly entered bear market territory.

But there are other ways to look at this chart.



The second possibility is a diamond reversal, which is defined as:

A technical analysis reversal pattern that is used to signal the end of an uptrend. This relatively uncommon pattern is found by identifying a period in which the price trend of an asset starts to widen and then starts to narrow. This pattern is called a diamond because of the shape it creates on a chart.

I first got this idea from the blog afraid to trade which identified the broadening pattern which is the first part of the diamond top formation. After reading that analysis, my first thought was, "why didn't I see that?" Then I looked at the post broadening pattern and thought, "that looks like a diamond top".



Finally, we have a possible triangle consolidation as well.

There is one important concept at play here and that is two of these patterns are recognized as reversal patterns (the double top and the diamond top). The third -- the triangle pattern -- is either a reversal or a continuation pattern. What matters here is the market's move after it breaks from the triangle pattern.

However, the evidence is leaning fairly heavily towards a reversal of some sort.

Read More

Insured Mortgage Defaults Increasing

From IBD:

Nov. defaults on privately insured U.S. mortgages rose 34.7% vs. the year before to 61,300, as more homeowners fell behind on payments. That's the most since the Mortgage Insurance Cos. of America began tracking data in '01. Mortgage insurers such as MGIC Investment Corp., (MTG) PMI Group (MTG) and Radian Group (MTG) lost money in Q3.

Happy new year, housing industry. It's going to be a difficult year....

Read More

Economic Outlook 2008

Let's start with what I think is going to happen in the upcoming year. But let me first note that I am not a big fan of projecting what specific numbers will be, or where the market will wind up or where interest rates are going to be, or any of that jazz. There are simply too many variable to consider for there to be any hope of accuracy.

With that being said, I do think it is possible to see general trends with the understanding they could change at a moments notice depending on what is happening in the economy at large.

Trend number 1:

Hopefully, housing will stabilize at some point in 2008, but not until the last two quarters. Housing still has a long way to go before it hits bottom so I don't think it's even possible until the end of the year. Here's the bottom line: inventory is sky high, the credit markets are frozen the underwriting standards are getting tighter. In addition, there is the foreclosure issue. The main estimate I have seen in this area is 1.2 million foreclosures are possible in 2008. The most liberal estimate I have seen for the number of homeowners that will benefit from the Paulson plan is 600,000. Assuming both those numbers to be true, we have an additional 600,000 homes hitting the existing home inventory numbers. That's on top of the people who want to sell for other reasons.

So -- we already have a super-glut of inventory on the market with the possibility of more homes coming on the market and it's harder to get a loan.

Econ 101: Increasing supply + decreasing demand = lower prices.

Trend number 2:

Slowing consumer spending. While I don't think Americans will stop spending (largely because Americans never stop spending) I do expect the combination of the housing market mess and a slowing economy to lower consumer spending for most of the year. Also add in the possibility of higher gas and food prices and you have further hits to discretionary spending habits.

Keep a close eye on the Christmas numbers; these will give us a decent indicator of consumer sentiment and desire to spend.

Trend number 3:

Commodity inflation will be with us for most of the year. Agricultural prices are in the middle of a three year rally:



Oil is in the middle of a year long rally:



There is no reason to think this will change anytime soon. With India and China coming on line there are now two billion more people who want food and energy. That's an awful lot of demand and I think it's enough to keep prices moving higher.

Trend number 4

A hemmed in Fed: Boy would it suck to be a member of the Federal Reserve right now. On one hand the economy is under enormous downward pressure. On the other hand, we have commodity inflation that will probably be getting worse as I detail above. I think commodity inflation is the primary reason the Fed has opted for a liquidity injection rather than a more aggressive rate decision. I would expect more outside the box thinking from the Fed on this issue. Because of commodity inflation I am very wary of aggressive predictions for Fed action.

Trend Number 5

Credit market turmoil continuing: The predictions for total writedowns in the credit markets range from $300 -- $500 billion. But there have only been about $100 billion in total writedowns so far. Assuming the $300 - $500 range is accurate, that means we have an additional $200 billion more of writedowns to go at a minimum. So long as that problem is out there, expect institution to institution level lending to be a problem. And as long as that goes on the credit markets will have a hard time getting anything done.

It's taken us about 6 months to get through about $100 billion in writetdowns. Assuming that time line holds and assuming the $300 - $500 billion of total writedowns is accurate, we've got about a years worth of bad news to go, assuming the pace of announcements during 2007 holds for 2008.

Trend Number 6

Increasing Exports: Thanks to a decreasing dollar US exports are doing quite well. Here is a chart from the Census Bureau of total monthly exports. Notice it has been increasing for the last three years.



All of this being said, let me add this one caveat. There are plenty of plausible reasons why none of these will play out for the entire year. There are simply too many unknowns over a 12 month period to effectively predict the validity of these predictions. So don't assume any of these are golden. They are all based on the information we have as of January 1, 2008.

SO -- keep these in mind, but remember to stay flexible.

Read More

Welcome Back and Happy New Year

Well I'm back. December was just crazy for me. I'm in graduate school for international and domestic taxation so I had finals in December along with a ton of cases coming to an end. As a result, I was just flooded with stuff. By the last week I was pretty exhausted and took a much needed end of the year break.

As you can see, there have been some changes. I am using a new template to change things up. I also have a schedule printed on the right hand side. I have been debating on how to deal with the demands of work, getting married and blogging. So on the weekends I'm going to do a week in review on Saturday and a week in preview on Sunday. That was I can still write and get some time to myself and the future Mr$. Bonddad.

So, happy new year and let's get started.

Read More