Feeble Money

CNBC’s “Fast Money” show should be re-titled “Feeble Money”. At the beginning of the video below you can see the “traders” whine that the market is “way too confusing”, “extraordinarily difficult”, and “chopping everybody up.”

Pretty comical, right? If these people can’t trade, then why are they on my TV?

But has it really been that hard? On Monday night, I mentioned that the McClellan Oscillator was way overbought. So, you’re in a ranging market, and it runs up to an extreme overbought reading, and…what could possibly happen next? Could there be a pullback? WHAHH!!! WHAHH!!! IT’S TOO HARD!!! WHERE’S MY TRADING PACIFIER!!! WHAHH!!!

Well shoot. Instead of crying, why not just make a short trade or two? Here are my last two trades (click charts to enlarge):

Note: TLT is a bond fund, so it’s not really a short trade, but it’s usually a good bet when stocks are overbought.

Fundamental investors must endure long periods of bafflement because much of the time, stocks respond to nothing but technicals. But in a ranging market like this, fading overbought/oversold conditions is very easy. Of course, that won’t last forever. Eventually, the market will embark upon a powerful trend where it gets overbought or oversold and stays like that for an extended period.

Nevertheless, last week’s action was very easy for technical traders who have good overbought/oversold indicators.

Note: The Mac-OS is still elevated, though my other indicators have come down into the neutral range. So, short trades are not so easy now.

SPY Downside Targets

SPY’s plunge in the last half-hour of trading on Thursday makes me think that we might be looking at a bear-flag pattern. So, if the market doesn’t like Friday’s economic reports and continues downward, then this 15-minute SPY chart of the past week shows some likely targets (click to enlarge):

A 78.6% Fibonacci extension (red “X”) would have SPY testing its July rally line (red). You can’t see the whole line on this chart, but it is the same one as the lower line on the QQQQ chart below.

A 100% extension (black “X”) gets SPY into the vicinity of its July 22nd gap (black box), the top of which is 108.33.

And a 161.8% extension (blue “X”) would see SPY filling the gap at 107.10, which was SPY’s close on July 21st.

And now for a bullish scenario: At the black arrow on this 60-minute QQQQ chart, you can see that the Q’s successfully tested their July rally line Thursday afternoon:

Is that enough to satisfy Ms. Market? If so, and the market rallies, then the Q’s might head for the top of their rising-wedge pattern at the blue “X” up around 47.00.

IWM Downtrend Channel

The IWM is now in a bearish downtrend channel which is marked with red lines on this 60-minute chart (click to enlarge):

In the lower panel of the chart, I have added a slow-stochastic indicator. So, as you can see, IWM’s stochastic had been in oversold territory for three days and was due to unwind. The beginning of that process was signaled by the exhaustion-gap reversal pattern (blue box) on Tuesday morning.

And now, IWM’s stochastic is oversold. Will it be able to use that oversold condition to pop up and out of the channel? Or will it stay oversold for an extended period just like it stayed overbought on the way up?

A bearish attitude is appropriate until the gamblers come back to the small-cap casino, and the IWM busts out of this channel.

IWM Exhaustion Gap

The IWM did something fairly rare on Tuesday: it printed an exhaustion gap (blue box) up above the daily Bollinger Band (red line) (click chart to enlarge):

The IWM was down a modest 0.39% on the day. However, if you went long at the open like a giddy schoolgirl, your loss, from open to close, was triple that.

The previous such gaps were all the way back on April 30 and May 7, 2009. Both delivered instant pain and delivered a pullback, though the uptrend eventually resumed (see the blue arrows):

Prior to that, we have to go back to August 19, 2008 (blue arrow):

…not exactly a pretty picture there.

By time prices reach the upper Bollinger Band on the daily chart, the market is overbought and it’s not easy to “punch the BB”. So, such a punch usually indicates a euphoric peak – unless the bands are very tight, and in that case, the market has room to run.

IWM also made an NR7 day on Tuesday, while SPY, QQQQ, and DIA made NR7-2 days. In the last episode on July 14th, I asked:

“The IWM printed an NR7 day. So, how will it be resolved? Roll or ramp? TWM or UWM?

And the right answer was TWM. What is the right answer this time? Will the market rock or roll? (Rock on, or roll over).

Tuesday’s Trading – 7/27/2010

Rarefied Air
The McClellan Oscillator closed over 300 on Monday. That’s the highest level since the burst of buying off of the March 2009 low. But even back then, it triggered a pullback. The Mac OS was last over 300 on March 18, 2009, and the SPX dropped 26 points over the next two days. And when you combine that with the narrow-range NR7 days that SPY, QQQQ, and DIA printed on Monday, one would do well to be alert for an elevator ride down sometime soon. And another bearish indication is that TLT made a 9/36/15 cross-up just before the close.

QQQQ Mission Acomplished?

Believe it or not, the QQQQ almost printed a narrow-range NR7 day on Friday. It didn’t expand its range until very late in the day. So, what was the hold up? Why a gap, of course. Here is a 60-minute QQQQ chart going back to June (click to enlarge):

The red box and arrow show the narrow gap that had persisted for over a month. The blue arrow points to the Q’s closing the gap permanently on Friday afternoon after a two-day struggle.

In the process of filling this gap, the market has worked itself into a short-term overbought frenzy. So, is that it? Has the gap-filling mission been completed freeing the market to get back to bearish business? Or has the market gone into bull-mode where it just stampedes right through overbought conditions? Film at 11.

I believe this rally was birthed by the “double-dip recessions are extremely rare” meme. I don’t know who birthed that meme, but I do remember it popping up just before the bottom in late June. Has that meme taken up residence in the brains of large investors? Are they now in dip-buying mode? So far, it certainly looks that way, but we won’t know for sure until we see how the market behaves on the next dip.

Breadth Breakout

The Advance/Decline line broke above its June peak on Thursday. See the red arrow on the chart, which has the A/D line in the lower panel and the SPX in the upper panel (click to enlarge):

The market made a top in January, and then plunged on the first episode of the sovereign-debt crisis. If you look at point “A” on the chart, you will see that the A/D line crossed above its January peak (blue horizontal line) on March 1st (blue vertical line). And that was a solid two weeks before the SPX surpassed its peak (purple horizontal line) at point “B” on March 16th (vertical purple line).

This breadth breakout will likely prove to be a bullish development as it was back in March.

SPX Triangle

Wednesday morning in the comments, I mentioned that a triangle was forming on the SPX 60-minute chart (click chart to enlarge):

And sure enough, the “Bernanke Tightening Talk” plunge in the afternoon bounced right at the lower line. How do you like that?

According to the textbook, there is only a 25% chance that the market can reverse off of this symmetrical triangle.

Correction Over

Note to bears: Sorry for triggering today’s reversal, and ending your correction. But it was fun while it lasted, right? Don’t give all your profits back by stubbornly fighting against this “unjust” rally.

How did I end the correction? Last night I sent out an email and a chart to my DailyJobsUpdate.com subscribers. I’m pretty sure that it got passed around amongst the movers-and-shakers because at 10:15am this morning I heard Scott Cohn repeating my main point on CNBC. Here is what I wrote:

“As you can see, withholding-tax collections continued to improve in the most-recent period accelerating to a 4.63% year-over-year growth rate from a 4.32% rate in the prior period. That’s an astounding performance when you consider that the Census Bureau discharged about 250,000 temporary workers during that time. No double-dip here, or even a slow-down. In fact, it looks like the private sector is enjoying a robust expansion.”

Cohn reported on the Labor Department’s state-by-state unemployment report this morning, and here is how he started out:

“That is particularly impressive in a month when the government, which is factored into this, has been hemorrhaging jobs between census workers and teachers out for the summer.”

That’s my meme, right? Cohn’s report was at 10:15am while SPY was falling, but then turned around and rallied all day, which you can see on this 5-minute chart (click to enlarge):

My subscriber list is small, but it is festooned with big shots at brokers, banks, hedge funds, and one large media organization (not CNBC). So, I think it is plausible that my email was gunned around trading desks this morning, and then when the Labor Department’s report came out, things took off.

You can see Cohn repeat my meme at 00:26 into this video:

And, don’t go getting used to free premium charts, but here is the one that I sent out last night:

This doesn’t mean that the economy won’t double-dip, but if you look at payrolls, there is, as yet, no sign of such a thing.

The moral of the story is that you should subscribe to DailyJobsUpdate.com.

Monday’s Trading – 7/19/2010

Historically, double-dip recessions are about as common as unicorn sightings. We haven’t had one for 30 years. That’s the good news. The bad news is that the 1981 double-dip was engineered by none other than Obama economic adviser “Tall” Paul Volcker when he jacked-up interest rates to 20% to crush inflation. Volcker was chairmen of the Fed back then, so he had much more power than he does now. Here’s Jeffery Saut on the subject:

“Using industrial production as a “measuring stick,” there have only been three, out of the 38 recessions since 1880, which qualify as double-dips. Interestingly, all three of those double-dips were characterized by a mild first recession followed by a more severe secondary recession. Plainly, what we experienced in the 2007 – 2009 recession was anything but mild.”

So, we are probably safe from a double-dip. Probably. Of course, we are in uncharted territory: the USA has never adopted a policy of de-industrialization before, we have never attempted to export millions of jobs, and we have never tried to crush the middle class.

Miami Condos Filling Up
A few weeks ago, I mentioned a tiny uptick in the price of a particular condo here. Now, according to Bloomberg, “the Miami metro rental market is one of the strongest in the country” and the occupancy rate in the new high-rises has improved to 74% from 62% in May 2009. Occupancy rates for the whole city are up also, though we still lead the nation in foreclosures by a very wide margin, and have 11% unemployment.

Hot Air Show?
There is a lot hype for the Farnborough International Airshow. Airbus and Boeing say they are going to sell lots of giant airplanes. I don’t know if the market cares about this or not, but I suppose that it could be an important catalyst either way depending on whether or not the rumored orders actually materialize.

Crushed Under the Wheels of Free Trade

The North American Free Trade Act (NAFTA) went into effect 16 years ago on January 1, 1994. Let’s look at job-creation since then. The numbers cited are total private-economy jobs as of January of each year:

January 1994 – 93,327,000
January 2010 – 107,123,000

Jobs created = 13,796,000

Not bad, right? Well, let’s look at the 16 years prior to NAFTA:

January 1978 – 68,984,000
January 1994 – 93,327,000

Jobs created = 24,343,000

Since this “golden age” of free-trade began, the US economy’s ability to create jobs has almost been chopped in half.

But it’s not free-trade itself. The problem is free-trade with low-wage nations such as Mexico and China. China was given “most-favored nation” status during this period.

Ross Perot tried to warn us of the “giant sucking sound”, but at first, it looked like he was wrong because the US economy kept creating jobs at a nice clip after NAFTA was passed.

But did Mexico and China have the infrastructure necessary to accept a large portion of the US industrial base? No. It took them a few years to build-out their ports, roads, electrical grids, railroads, etc. And now they are sucking jobs out of the USA at a frightening pace.

The intelligentsia will have you believe that some huge disaster would occur if free-trade were disturbed. But the disaster is right here, right now: the economic decline of the USA.

Would rolling our trade policy back to that of the “protectionist dark ages” of the 1980s really cause a calamity? Hardly. In fact, it would be just the opposite: a massive construction boom as thousands of factories and millions of jobs come back home.

And keep in mind that when jobs are exported, so are tax revenues. The stream of income taxes from the former 1,100 workers at the Evansville, Indiana Whirlpool refrigerator factory has been diverted from Washington to Mexico City. Multiply that by tens of thousands of factories and millions of former workers/taxpayers, and it is no wonder that our government is plunging toward bankruptcy.

Our people need jobs and our government needs tax revenue. The solution is very, very simple: just bring the factories home.

(The payrolls number that I used above are from this Bureau of Labor Statistics page using the “Total Private Employment – CES0500000001” option.)

Friday’s Trading – 7/16/2010

The 3-day moving average of the NASDAQ TRIN, the TRINQ, hit a very, very low (overbought) reading of 0.38 on Wednesday. When the market is coming off of a deep oversold level, such low TRINQ readings are not guaranteed to be an impediment. But when they occur after an extensive rally, as in this case, chances are good that the rally will moderate or top out. However, we do have two potentially potent catalysts today: the capping of the crudecano, and the capping of GS’s legal liability. Will those be enough to power the SPX above 1100?

Crudecano Capped

Today, BP finally managed to cap the deadly ocean-threatening crudcano on the floor of the Gulf of Mexico.

While everybody carries on about what a terrible environmental disaster this was, and all the poor fish and pelicans killed, we got off easy. It is now clear that the amount of “peak oil” beneath the ocean is a deadly threat to the planet itself. How is it possible that the Earth has not exploded?

Once deep-water drilling is perfected, how many more crudcanoes will be found? How many sub-sea Saudi Arabias? Since 70.8% of the Earth’s surface is covered by water, there’s got to be two or three Saudis down there, right? And a couple of Iraqs, Irans, Alaskas, North Seas, etc.

Will anybody on this planet live to see the day when the Earth’s oil is depleted? No. Not a chance.

The Great Simon-Hobbs Rally of 2010

On the eve of the SPX’s greatest six-day rally in seven years, CNBC anchor Simon Hobbs tried in vain to explain to the psycho-bearish “Fast Money” traders why they were a classic case of a contrary sentiment indicator. At 4:30 into the video below, you can see Hobbs exclaim:

“You’re all bearish! This is a classic case of buy the market.”

If you watch the show from the beginning, you will see a level of cluelessness on the part of the “Fast Money” traders so breathtaking that you just might stop breathing and die. You have been warned. As I have said for many years, the best information you will get from CNBC is sentiment of the contrary variety.

I don’t know if the great man has a “Fast Money” nickname yet, but obviously it should be “Super” Simon Hobbs. Click chart to enlarge:

Tuesday’s Trading – 7/12/2010

Cramer Predicts Loss for Alcoa
At one minute into yesterday’s episode of “Stop Trading” on CNBC, you can see Jim Cramer predict that Alcoa would report a loss, and that the profit estimates of stupid analysts should be ignored. After the bell, Alcoa in fact reported beats on both the top and bottom lines. Nice call, Cramer.

America Abdicates
Here is a Financial Times article on how China is projected to surpass the USA in industrial production. Until proven otherwise, industrial production is what determines superpower status. We have voluntarily sent a large portion of our industrial capacity to countries like China and Mexico. We are abdicating. Let the record show that I am against this policy.

Today’s Market Drama
On Friday, SPY closed its June 29th gap. And like I said the day before that:

“If any of the three indexes is able to recapture their closing price from June 28th, which is the top of their gaps, then that increases the odds that the others will follow suit. “

And on Monday, the NDX did indeed follow. In the first hour of trading, it ran up but couldn’t quite fill the gap. The Alcoa earnings report gave the Q’s a boost in the post-market, but not enough to close the gap. The Q’s need to tag 45.11 to close it. Now that Alcoa has refuted the bears’ “Apocalypse Now” thesis, this is the type of situation where an “echo gap” might occur. In that scenario, the Q’s would gap right over 45.11 at Tuesday’s open.

This rally is suspect, not only because of the weak volume, but also because it has not left behind any sizable gaps. A proper bull will gap-and-go; it doesn’t shillyshally around with gap-filling. So, we have a bullish catalyst. Now let’s see if the market can gap-and-go.

Unlike the Q’s, the IWM is still a long way from filing its June 29th gap. The fact that it actually lost ground during Monday’s upside action is an important red flag. So, bulls will want to see the IWM get with the program on Tuesday, and ideally outperform in order to catch up and get into range of its gap way up at 64.25.