Remember the universal maritime distress signal?  Remember as Boy Scouts we could earn a merit badge by learning the morse code and click out messages on a telegraph key?  .. -- or was it -- .. for mayday?  I forget, but now we have the Plunge Protection Team & Homeland Security for emergencies.  A group of government professionals that will rush to the aid of all or most investors at the drop of a decimal point.  The reason I am relating all of this is the old adage about sell in may and go away.  Studies have shown that the stock markets will slow down much more often than speed up in the summer months and I believe that we are coming up on a period of a few months when some additional caution is well advised in investments.  However, just as the telegraph improved communications over polished mirrors, the Plunge Protection team has taken much of the short term risk out of the markets.

Having said that, I would also like to say that most of the major domestic stock indexs have recently moved down again from their respective established resistance levels.  The charts are telling me that there is no way for the stock market to move higher until it has dropped back and regrouped.  Testing recent lows again should be expected over the next 1 to 5 months.  That would mean roughly a 10% correction in the major stock index's.    

Commodities are not quite as clear.  The CRB index formed a double top in march and april at the 420 level.  A 10% correction would take the CRB to an established support level at about 380.  But the CRB is heavily weighted in oil and gas.  Both of these are trending up in a vigorous fashion, with oil setting a new high this week and Nat Gas setting a recent high.  Precious metals are confusing with gold dropping thru support today and seems to be heading to $800 per ounce, while Silver held above support and seems to want to move higher.  The USD which usually runs the inverse of precious metals has been stable with a 2 point trading range now established.  Is the stability of the USD taking some of the trading fluff off the commodities market???  Got me.  Someone has to draw a picture for me to understand anything.

I almost forgot about interest rates.  The five and ten year treasuries have also established some trading ranges recently with the swing of the 5 yr rate being about 100 basis points and the 10 yr range being about 60 basis points.  Both of them are near the top of their respective ranges, so I expect 5 to 10 year rates to come down for a while.  Since many bond rates and mortgage rates key off the 10 yr treasurey, we could see some increased borrowing activity in some sectors because of dropping rates.   

uh   

These two short FT videos on the Fed and on EMs aren't bad watching.  HERE. The global valuations trends are interesting - though a worry for S&P investors.

What a move in Latin America yesterday!
 

If a re-test of previous lows is likely, an aggressive trader would be looking to short the SPY at this point in time?

If a re-test of previous lows is likely, an aggressive trader would be looking to short the SPY at this point in time?

[/quote]

My feeling is that the Plunge Protection Team will make the correction very gradual and difficult to short.  Inverse funds have lost more money for me than they have made, so I rarely use them anymore.  Perhaps someone else has had a more productive experiance that they can post on the subject.

uh  

Hi UH

The TA monthly starting post is very good as usual.Thank you very much.

You touched upon the topic of selling in May and going away, The Halloween indicator.

Some more pointers regarding the indicator,
http://www.marketwatch.com/news/story/market-timers-attempt-improve-halloween/story
./market-timers-attempt-improve-halloween/story.aspx?guid=%7B7923307E%2D00C4%2D4779%2DAC6C%2D11F8805C99FC%7D&dist=msr_8 

An excellent article on the FIDO site by John Murphy a highly respected T/A expert discusses how using the T/A analysis of one market can predict trends in other asset markets. FIDO

These are the main intermarket relationships that have characterized the financial markets over the last thirty years according to Murphy:

	"The dollar trends in the opposite direction of commodity prices;
	Commodity prices trend in the opposite direction of bond prices;
	Bond prices normally trend in the same direction as stock prices;
	Bond prices, however, usually change direction before stocks;
	During a deflation, bonds and stocks decouple-bonds rise while stocks fall;
	A falling dollar becomes bearish for bonds when it pushes commodities higher;
	A falling dollar becomes bearish for stocks when it pushes interest rates higher;
	Rising commodity prices boost stock sectors tied to those commodities;
	Rising commodity prices are good for emerging markets; and
	Trends in commodities, interest rates, and stocks are global in scope."

Another aspect of May Day is that it is the labor day in most of Europe.  Many of the workers in many of the former Soviet Union countries take the entire month of May off.  In Russia there is a migration of middle class people away from their urban jobs to their Dacha's in the country.  This of course makes it very difficult to conduct any business or get much of anything else done.  The long term chart of EUROX [my favorite eastern europe mutual fund] shows that the funds nav begins to drop in april of each year and begins to come back up in june or so after everyone is back from their May Day celebrations.   That may be something to consider when working emerging markets. 

DI,  I am a big fan of Mr Murphy, but somehow I had missed that gem of an article.  I have it printed now and have the list taped to my PC.  Thanks..

uh 

I stand by my target of 2600 coming either before May options expiration or early June. Next target 2780 in 2-3 months. After this market takes a breather and rides between 2600 to 2800 before breaking higher in last quarter.

DI,  I am a big fan of Mr Murphy, but somehow I had missed that gem of an article.  I have it printed now and have the list taped to my PC.  Thanks..

uh 

[/quote]

UH -- I have it there too. They are very good basic reminders.

Interesting observation on EUROX.  Nice starting thread BTW.

The US$ is pretty strong today and energy and miners are getting hit a bit. So far I have not traded this week

Any thought of shorting the SPY or any other stock/fund is now forever out of my system...

Doesn't this model (market) come with turn signals?

DI, UH, and Norbert -

For us newbie T/A guys, what are the implications of crossing past 1406?

 Just trying to learn,
-JavaJoe
 

It's bullish.  That level has been attacked several times and up to now the price has always fallen back.  Today the SPX popped past 1406 on decent volume & positive money flow.  The other index's seemed to confirm the move with the exceptions of the nasdaq and the small caps.  The nasdaq has it's own drummer that it is marching to and the smallcaps [RUT] have been lagging the market for some time.  The question is where do we go now??

My feeling is that the direction USD is key to what the other asset class's do. Today the USD, as measured against a basket of currencies, broke above it's most recent trading range with nearly a 1% gain.  When the buck goes up, commodities usually come down and the CRB index came thru with a 2.24% loss.  The CRB seems to be heading for that 380 level I mentioned before.  Lower commodity prices are generally bullish for stocks, except those that earn their livings from rising commodity prices such as many energy companies or precious metals miners.    The bond market is a bit confusing since the 5 yr treasurey went down while the 10 yr went up.   Stocks will probably not make a significant advance until long term bonds rally.  Since that has not happened yet, I remain skeptical of any advance in stocks, but I am watchful and waiting.  Most of my attention is focused on the USD and the longer term treasurey market.  This is no time to go short the S&P.

uh   

What are the implications of crossing past 1406?

[/quote]

Good question. Me, I see 1406 on the S&P as a key horizontal support & resistance level because it happens to have played a starring role in the past.  Therefore a lot of traders and investors worldwide are watching the same number and may act in concert. It's a "symbol". 1406 has been touched from one side or the other on literally dozens of occasions over the past 18 months:

• was first touched in Nov 2006 and took some effort to cross; then we bounced along it for two months;
  
• was the center of the early 2007 "W";
• was the August 2007 closing low;
• was the Nov 2007 bottom;
• was the scene of the Jan 2008 battle (which was lost)

Now we're back again - just - but on thin NYSE volume - though good NASDAQ volume.

Does it mean anything? Not yet and not just by itself.  I was out all day yesterday and very surprised to see the big gains.  The big manic / depressive reaction to the Fed is Mr. Market at his worst.  But yesterday's ISM number was stable, so that's something.  I await the jobs number and want to believe.

--- 

Bullish observations: 

• Transports are rocketing;
  
• Breadth is decent:  the A/D line is strong since the March low;
  
• Sentiment is still on the bearish side;
  
• Brazil and the Middle East EMs are at or near all-time highs;
• Asia EMs never broke trend and are looking strong again, having worked off bubble-like conditions from last Fall.
  

• The move to 1406 came on Fed talk; we're not through yet;
  
• The 200-day MA is still declining and the % of stocks above their 200-day MAs is still under 50%;
  
• The Russell (SCs) has so far failed to overcome any meaningful technical resistance; 
  
• The demand for 10-year Treasuries is still pretty high considering the 3.8% yield; the bearish "lower highs" trend is still intact here;
  
• Volume has been thin on the NYSE; not one above-average day since April 1st;
  
• No sign of a bottom on US housing price charts;
  

Neutral observations:

• The USD is showing a bit of strength, but the downtrend on the weekly chart is intact;  you can hardly even see the bounce;
• Like the S&P, the DJ World and European Indexes ares poised at key resistance; no breakthroughs yet;
  
• Some energy and GG plays were overbought and are now adjusting.

Conclusions:

I'm encouraged and am long the markets, but am still just holding positions bought at much better prices.  The bearish arguments have validity.  No open short-term trades.  Continued focus on EM and world growth using various approaches, hoping that the US can just muddle through.

Stock futures for the Nasdaq and the S&P seem to be reacting positively to the jobs numbers that were just released, so we should have a rising open to the stock market today.

An interesting article appeared briefly on Bloombergs this morning. It's gone now but   apparently Iran has doubled the amount of oil it has stored in tankers in the Persian Gulf.  Their reason is that demand for Iranian high sulpher crude has diminshed because of refineries being shut down for repairs and they don't want to slow production.  This action has doubled the daily rent on tankers, but has not effected the price of oil.  I think there is more to this story, but I am not sure what the rest is.  Is Canadian tar beginning to effect the demand for Iranian oil?  Anil, where are you?  Your comments on Tankers and high sulpher crude would be appreciated at this time.

uh 

There is a lot of resistance for the .SPX between 1406 thru 1450. I wouldn't expect the .SPX to blow through that quickly. .SPX crossed its 200 ema and that is positive as is the fact the 50 ema turned up. This AM the .SPX moved to short-term overbought.

I have been selling some into this rally -- mostly rebalancing and portfolio simplification. I am reducing my extreme overweight on energy, ag and commodities a bit so that I am just overweight and buying positions a bit more defensive if the recession proves to be more stubborn than Mr. Market seems to expect..

I opened a position in consumer staples which has defensive characteristics. It is a contrarian move since it was the only sector to lose money in April. It will benefit if the commodity Bull is over so it somewhat hedges my overweight position there. I think it is possible that companies like Coke, Pepsi and P&G are the undiscovered side of higher living standards in developing countries. -- At least the trade isn't crowded.:-)

Looking for a good inverse SPX etf.  Nothing high octane just a 1:1 etf.

Thanks

Gordon

http://www.proshares.com/funds/sh.html   is the addy for SH, pro shares 1x the inverse of the S&P 500.

I almost started a posirion in a regional bank today [WBS], but I backed off.  I am doing nothing until I read the weekend charts.

uh

Thanks UH

2509868 

2512733

This just looks like too much of a carbon copy of the Oct '73  and Nov '81 secondary crashes to have me believe anything positive is going to happen in the next 6 months.

SPX raised to the 400dma at the same time the 200dma crossed the 400dma downward.  Then all hell breaks loose to the downside.

 Looks just like a current version of the SPX chart.

Gordon

It was a good week as the Bears' case was damaged by some fine technical action:

• The S&P broke its "lower highs" pattern and it settled above 1407;

• The DJIA and NASDAQ 100 (LCs) both popped above their 200-day MAs;

• There was fairly broad US sector participation:
  
• DJ Industrial Goods, Retail, Telecom, and Tech made 2008 highs;
• Transports soared close to all-time highs;
• Financial Services and Banks lagged, but were stable;
• Resources and Oil & Gas correctly slightly from very overbought conditions;

• The DJ World Index is at 2008 highs, also taking on resistance;

• EM equities were very strong, particularly in Brazil and China;
  

• The USD stabilized as the Fed started acting more like the ECB.

It would be wrong to speak of a powerful break-out on the US indexes given that the big moves on Thursday and Friday came on fading, below-average NYSE volume.  The NASDAQ showing a bit more life.

It seems a bit surprising that the 5- and 10-year T-bill rates stayed in their recent trading ranges for the week.  But T-Bill buying could have several explanations.

The Vix declined well below its XMA - the first time that's happened in a long time.  That's not predictive of anything, however it is a prerequisite for a more sustained rally going forwards.

Says David Snowball's Fund Alarm commentary this month:

"By the way, my sudden realization that the S&P500 has indeed returned less than a good money market account over the past decade is modestly horrifying."

He goes on to talk about the new D&C Fund, and concludes with a general D&C observation:

"All of the Dodge & Cox funds suffered in late 2007 and 2008 as a result of two factors. One is fallout from the sub-prime meltdown. None of the D&C funds directly owns any of the troubled derivatives or any company central to the problem, but its investment in financials and in industrial companies with financial subsidiaries (General Electric comes to mind) hurt it. The other factor was poor performance in the health care sector, which Stock overweights. Being disciplined, the managers took the broad weakness in the sector as an opportunity to buy at depressed prices. As a result, they boosted their health care exposure by nearly 80% in recent months. It’s far too soon to say whether they’ll be vindicated – though Balanced, Stock and International performed excellently in March – but the odds are stacked strongly in favor of folks who trust D&C’s discipline.

And in an article in the NYT,

"Over all, 46,000 manufacturing workers were laid off last month, and 326,000 such positions have been lost over the last year, the Labor Department reported. Construction remained the focus of contraction, losing 61,000 jobs. Retailers eliminated 26,800 jobs.

Health care continued to be a rare bright spot, adding nearly 37,000 jobs. Restaurants and bars added 18,000 jobs. Professional and business services, which includes accountants, architects and management consultants, added 39,000 jobs."

No mention is made of the increase in government jobs (9,000 jobs) ; nor of the fact that although hourly rate went up a penny, weekly pay decreased $1.75 (fewer hours).

It's good to have more bartenders, burger flippers, and home/nursing home health aids; and they all do their part to making the employment figures good, which is what we want. And provide career opportunities for American youth as well as lesser qualified new citizens/visitors. After all, remember we need 150,000 new jobs each month just to stand still (population growth).

One thing that happened this week that is worth watching is what may be the beginning of sector rotation out of some of our themes -- energy, ags, miners and into beaten up sectors such as Fins and Tech.

If this trend continues it will need some help from earnings reports and several key themers reports earnings next week as do several laggards. Several miners and energy companies report earnings and outlook next week as does tech giant CSCO -- which killed a tech rally last quarter. In the energy sector the big one is probably RIG. If the rotation is sustainable it will need some fuel from these reports.

Unfortunatey Ag is quiet next week with the next biggie DE not reporting until something like May 14. Agrium however reported a bullish outlook this week.

Looking at my portfolio for the week there was very good performance among high divvie paying investments -- CEFs, BDCs and MLPs -- which I attribute to a continued search by investors for yield as MM rates dwindle. (This is not an area we tend to focus on much here.)

It is fair to note that the .SPX and EFA and many sectors are mildly overbought and facing overhead resistance. A bit of a consolidation would be helpful for this advance.

A good article on the Revised Sell in May strategy by one of its leading proponents is here. MAY and an historical perspective. HERE One thing proponents often fail to mention is that Seasonality has been very wrong quite often lately. For instance we just finished the Best Six Months on April 30 and if that was the Best, Heaven Help our portfolios.

For anyone like myself heavily invested in the global growth story it is comforting to know that now that the protracted Chinese fertilizer and iron ore negotiations are resolved the BDI has resumed its upward advance. BDI Except when influenced by unusual event such as commodity negotiations, the BDI seems to be an excellent indicator of global economic activity.

DI,

If I remember correctly, you dumped your DSX last month.  Given the BDI numbers, any thoughts on DSX at this point in time?

In an effort to follow up on DI's link, I checked the MACD indicators on the major stock index's and all are currently on a buy signal according to the MACD only.  A word of caution is that the MACD derives it's signals when one moving average cross's over another moving average.   Regardless of the # of days in each moving average, any moving average is a lagging indicator.  Consequently the MACD tells us what we should have been doing last week or the week before.  Price, volume, and volatility are real time indicators.

The price charts for the week and for friday indicate that the CRB index is in an intermediate term correction although it did rally on friday.  $TNX also went up on friday, but was flat for the week and is near the top of it's trading range. Stocks gained for the week, but were generally flat on friday.  WTIC and NG had about a 5.5% correction for the week but were flat on friday.  The USD gained about 1% for the week..

Using Mr Murphys work on how various asset class's affect each other, we can see that interest rates have been rising, weighing on stock and commodity prices, but adding some strength to the USD.  If those trends continue, MACD will begin to make crossovers on the major index's,  possibly late next week.  An additional thought is that inflation is the boogeyman of bonds.  If the bond market senses any increase in inflation, interest rates will go higher and bear more weight on stock and commodity prices.

uh    

I got curious this weekend when as I posted earlier Consumer Staples was the only sector to lose ground during April.

 I constructed a simple Recession Fear Indicator a ratio of the Consumer Staples sector to the Consumer Discretionary Spending sector. Conventional wisdom says Consumer Staples thrive during a recession whle DIscretionary Items thrive in "good times".

Using that Indicator shows an interesting pattern. Recession fear began to build in July 2007 and continued to build until the first week of January 2008 when the recession fear trade apparently peaked. That roughly coincides when Congress passed the rebate package as recession fear dropped.

Recession Fear then rose in February and March as the subprime and housing crisis worsened. However beginning in April Recession fears moderated and once again there was a sector rotation out of staples and toward discretionary spending items. FEAR

The question in my mind is this sector rotation sustainable because apparently Mr. Market has concluded the recession will be short and mild and is beginning to anticipate a recovery. I have doubts. This is a consumer led slowdown. The consumer is badly strapped by a number of factors and more challenges are coming such as higher taxes at federal and state levels. Housing has not given a hint of a bottom I can find. While I don't underestimate the willingness of politicians to throw money at the problem many obstacles remain. The rebates and refunds will help but they are temporary and the question for me --- is the light at the end of the tunnel which Mr. Market sees a trend or a train? The party feels premature to me.

Bythe --On DSX I closed my position in part because the volatilty was taking too much energy to manage given the small size of the position. I thought it would have difficulty breaking through resistance at $30 and was obviously wrong. SInce I own two other shipping companies I won't buy DSX back without a strong  selloff but global trade looks solid and DSX will continue to benefit from that. DSX appears to be a well managed company with a thoughtful and knowledgable management.

I sold my SPY Friday 5/2/008 and look to buy SDS Monday. I doubt that the low of 3/17/08 will be reached. 1409 could be the critical area for the S&P.

chili 

This is a consumer led slowdown. The consumer is badly strapped by a number of factors and more challenges are coming such as higher taxes at federal and state levels. Housing has not given a hint of a bottom I can find. While I don't underestimate the willingness of politicians to throw money at the problem many obstacles remain. ... The party feels premature to me.

[/quote]

Yes.  And another problem is valuations:  the S&P 500 is not that cheap.  

It's a bit simplistic, but looking at a good domestic fund like DODGX I see the Mar 31 forward-looking PE estimated at 12.4, long-term earnings at 11.4, and historical earnings at 6.4. And this in an environment where it's very difficult to see a consumer resurgence, food & energy costs are rising, and the budget deficit is exploding again. 

Compare that to an EM fund like SSEMX.  Forward-looking PE at 12.7, long-term earnings at 17.9, and historical earnings at 22.3!  Plus we're looking at countries with strong balance sheets and healthy foreign currency reserves.

Looking at home price futures, I see another tick down for California cities and elsewhere in early May. Boston is an exception.

The rapid increase of household debt since 2000 ...

So, I am cautious. Eveillard thinks this may have been a sucker's rally. El-Erian says the mess has a long ways to run. The technicals show the advance occurred on fading volume.

Not a bad moment to buy some downside protection on the S&P? 

Asian markets closed mostly green for the start of a new week, but most European exchanges are in the red.  S&P and Nasdaq futures are signaling a downward move at the open for the domestic exchanges.  For reasons already mentioned, I agree that the recent rally was or is most likely a head fake.  The most likely event that would begin another leg down would be an uptick in inflation.  If we get it, the bond market should lead the way down.  Our next report that will have some clues about the direction of inflation will be on wednesday when the produtivity report comes out.   I am not ready to hedge anything just yet, but I have some profits that I should probably cash in.   

uh 

Not a bad moment to buy some downside protection on the S&P? 

[/quote]

I am not excited about hedging right now because the market has shown good short-term momentum going into today.

I am content to continue to selloff a bit into this rally in small increments and raise more cash.

I'm hedged, sort of.  I picked up a few shares of SLW in case we get a move in precious metals.  My reasoning is that the silver to gold ratio is favorable at this time.  This ratio is leveraged by a favorable ratio between the metals and the miners.  The USD may easily drop to the bottom of it's most recent trading range which would be about a 3% drop. Precious metals and the miners should amplify that move in the inverse and I can then cash out with a nice profit....  Neat, huh?

uh 

I like this list of trading rules.  Click HERE.  Note n° 4. 

It's actually more of a guideline than a rule. - "Ghostbusters"

---

Why was March 17 significant?  For 2008 it represents the:

• USD index low
• S&P 500 index low
• Gold price high
• 10-year Treasury rate low

Why was yesterday significant:  For 2008 it was the:

• WTIC price high
  
• ADRE Emerging Market index high
  
• Amex Steel index high
  
• DSX high
  
• US major city home price futures low
  

---

Senator Clinton explains why cutting the gas tax is a good idea.  I didn't understand the middle part.

Quote of the day:

Petroleo Brasileiro SA, Brazil's state-controlled oil company, may pump oil a year earlier than expected from the Western Hemisphere's biggest find since 1976, increasing supply at a time of record prices. The field isn't as difficult to tap as predicted, lying no more than 7.1 kilometers (4.4 miles) beneath the ocean's surface, Petrobras Chief Executive Officer Jose Sergio Gabrielli said.

Tupi, located 250 kilometers off the Brazilian coast, is one of seven or eight prospects in that part of the Atlantic Ocean that Gabrielli said may be ``very, very, very large.''

Gabrielli declined to estimate how much oil may be trapped in the Carioca prospect, southwest of Tupi. Brazilian oil regulator Haroldo Lima said last month that Carioca may hold 33 billion barrels of oil, a figure he later attributed to a magazine article.

Excellant link.  Between our bear market rules, John Murphys asset class relationships, and the 20 trading rules, I won't be able to find my P C.  I hate to file all this good stuff away and never see it again..  LOL.

All indications are that we will have a rough open in NY this morning.  It is looking like my SLW was a good idea.

uh

Why didn't someone tell me that crude was going to spike like this?

I would have loaded up on OIH calls.

There are some interesting charts over at Intrade.  Click HERE.

• The "Chance of 2008 US Recession" trade has fallen from 75% to 29% in one month.

• Obama's chances for the nomination just popped up to 87% on good betting volume.  We can get 6-to-1 odds on Hillary with the British sports betters. 
  

WTIC just went over $122 - even though EURUSD fell below $1.55.  But that's old news.  Except the Hang Seng really hated it this morning.

Interesting charts.  Spitzer's potential indictment at 17 surprised me.  I had thought it would be higher, but after further thought, the price is probably about right.   I would be a seller of McCain sometime before the convention.

Stock futures are flat this morning indicating we may have a dull day before us.  Productivity numbers and new home sales are due out today.  All the pundits are focusing on housing, but productivity trends might be more important. 

uh

Upon further review, stock futures are now dropping and the bond market has opened on a downward tick.   Things might not be as dull as I first thought. 

Productivity rose 2.2% which should be good news, so something else must be bothering the markets.

uh

UH,

Productivity is up but the change appears to be a reduction in the denominator (hours worked)...

Perhaps Mr. Market views this as an indication that the employment market is softening further?

BytheNbrs

The FT's Authors speaks HERE about the upcoming impact of tightening credit.

To my dismay, Morgan Stanley agrees.  Read HERE.  Snippets:

Over the past week, better-than-expected economic US economic data and the disbursing of consumer tax rebates have buoyed hopes that the worst is over for the economy and recovery is coming.

We disagree.  In our view, the recent run of better data does not signal that recession risks are receding.  If anything, there is a renewed disconnect between market pricing and our view of the economy: We think the economic fallout and resulting downturn is only beginning.

But as we see it, those data mask a significant underlying deterioration in economic activity, and we expect the growth in Q1 to give way to a 2% contraction in Q2.  Domestic final sales declined in the first quarter for the first time in 17 years, reflecting weakness in both housing and business investment and tepid growth in consumer outlays.  Only inventory accumulation kept output growth in positive territory, and we suspect the stockbuilding was involuntary.

But as we see it, those data mask a significant underlying deterioration in economic activity, and we expect the growth in Q1 to give way to a 2% contraction in Q2.  Domestic final sales declined in the first quarter for the first time in 17 years, reflecting weakness in both housing and business investment and tepid growth in consumer outlays.  Only inventory accumulation kept output growth in positive territory, and we suspect the stockbuilding was involuntary.

As we see it, the wider credit spreads and reduced credit availability of the past few months is just starting to hit the economy.

After all, Mr. Market usually sniffs out changes in the economic landscape before economists and strategists do.  Nonetheless, our strategy team and we are sticking to our discipline and our calls.  For risky assets, the recent rallies imply that a worsening economy is now no longer in the price.

But the biggest risk for bullish investors now is that downside surprises in the economy and earnings prove that the recent upswing was a bear-market rally after all.

As posted last week, El-Erian agrees with this frankly bearish point of view.  If it were just the perma-bears, it wouldn't bother me.  Speaking yesterday to a Southern California friend whose Real Estate opinions I completely trust - he called the 25% dip that is now reality - he says, "More downside to come."

Should we imitate Senator Clinton and just tell the economists to go to Hell? 

Certain technical accomplishments have been encouraging.  Unfortunately, we have that pesky low volume problem, Banking Sector relative weakness, and the sluggish SC action.

A sure sign of a bear market is when everything goes down, regardless of asset class.  That seems to be what happened today.  While I don't have data on all of the commodities, the CRB index dropped back from it's current high.  The major stock indexs all went down as did interest rates.  Of course when interest rates go down, bonds go up.  The USD also climbed against a basket of currencies.  Most of my portfolio also went down, which is unusual because I usually have something that zigs when the others zag.   Perhaps another leg down has begun for the stock market, but I am at a loss about what has triggered it.  Just exhaustion perhaps.

uh  

Today was Day 1 of a Hindenburg Omen signal -- one of the most elaborately constructed T/A signals and as its name indicates perhaps the most ominous of all signals. It is named after the Hindenburg airship disaster of 1937. Its primary distinguishing characteristic is a larger number of new highs and new lows on the same trading day which is considered abnormal and indicative of future turbulence and a possible change of direction may be imminent.

For those that don't remember the Omen last summer that proceeded the market selloff as we discussed then while not infallible the Hindenburg Omen has a good track record of predicting declines. It is not a signal to be frivolously dismissed. According to one T/A source:

"Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen within the next 41 days after its occurrence was 77%, the probability of a panic sellout was 41% and the probability of a major stock market crash was 24%. The occurrence of a confirmed Hindenburg Omen does not necessarily mean that the stock market will go down, although every NYSE crash since 1985 has been preceded by a Hindenburg Omen."

To be valid a Hindenburg Omen must be confirmed by a second such day within 36 days of the first omen day. Tomorrow is thus Day One.

Until confirmed there is no need to Panic or to use UH's lead-in phrase for the month send out a "May Day". However please don your life jackets and women and children should proceed to the lifeboats.

DI-

You are bringing tears to my eyes... every time I start to feel good about my portfolio, the market goes to pot (again).  This is getting old!!!

I look forward to the day when you can spread some good cheer instead of these fearful omens...

;-(((

erryl

Good Morning everyone.......

That Hindenberg Omen might be warning us about something that is more than a month down the road.  Of course it may be warning us about something just around the corner too.  However, in the mean time, indications are that the stock market will rise today.  Asia and Europe were a mixed bag last night, but the stock futures are pointing to a higher open.  With precious metals and oil stable we should drift up today.

uh

The Hindenburg Omen was easily confirmed today. That means the Omen window of a possible decline or worse extends from tomorrow through approximately July 7. It can of course be extended if the Omen continues to appear.

Please don't tell Erryl.:-)

The Omen confirmation doesn't surprise me as it occurs most often in bifurcated markets. Since as I have previously posted I have been selling into the strength of this rally to trim volatility, rebalance my portfolio and simplify it and buying low or non correlation defensive assets I am already defensively positioned.

I spent a decent amount of time today using Riskgrades to analyze how much risk I currently had in my portfolio. Given the Omen confirmation it may be time well spent. For those that haven't used it the Riskgrades tools present a reasonably good worst case for modeling risk in various downside scenarios such as September 11 and the 1987 Crash. It says my portfolio will perform at .4X the volatility of the .SPX which is within the satsifactory range for me given the market outlook.

It is fair to note we also have a decent short-term double top for the .SPX at 1422.

With a 70%+ possibility of a 5% correction, prices will be somewhat discounted for those of us trying to build a longer term "buy and hold" portfolio...

Well, it was the most cheery thing that I could think of given DI's Hindenburg warning...

 "When you are King, you must look for the good in any situation."

Longshanks, Braveheart

Bifurcation continues. Though it's difficult for me to understand why both the Energy Sector and Transports have been rising in tandem.  The FT comments that both are betting on an inflationary boom with many transport companies thinking they'll be able to pass on their costs.

Russia investors were rewarded for their patience with a 6% index move this week while last week the Bovespa lept to 70,000 after trying to break 65,000 for over six months. The Middle East / Africa region continues on course.  These resource-heavy plays have moderately attractive valuations and pegs compared to the biggest Asia growth markets on which their success is dependent.

I've now cut even more of the equity exposure taken on when the Vix spiked in January and March.  "Don't be greedy!" is my mantra (bear market rules and all that).

Aside from the "Hindenburg" omen, my historical seasonality model says to get out in May or June.  You can laugh if you want, but this model backtests very well in both up and down markets with a 7-to-1 profit factor (gains vs losses) back to 1960 on the S&P. 

Adding to the Hindenburg, the seasonality, the nasty macro picture, the oil shock (WTIC just touched $125), and the weak volume, we see that the S&P has failed to hold 1407 and that SCs never broached resistance. 

Oh, I forget to mention the bond yield reversal pattern.  See Nicole Elliott's US 2-year Treasury chart HERE with her "double top" comment.  Ugh.

---

There's a cheerful version of "Tomorrow" from Annie HERE ... not that it will help.

There's nothing better than to hear that the lending continues and the debt keeps mounting up. And what better thing to invest in than folks who've already been thru bankruptcy. But then again, there's the positive - real estate values are saved! (Talk about marking to price/value slight of hand). Well, for once, I agree with Bush in vetoing this nonsense. Despite what Barney Rubble says, things would be better if prices adjusted and those folks sitting on the sidelines with the down payment and a steady job were able to buy - rather than continuing ownership by those that obviously don't know what they're doing. Banks would be no worse off either.

And what about that moral hazzard thing? Do we just trash that? And what do we - or the Fed - do if "keeping folks in their homes" results in a second round of mortgage failures? Should we lower the mortgage balances even more? (Has anybody recently checked the U.S. Capitol for air quality?)

I don't know what this has to do with T/A; but T/A doesn't live in a vaccuum, so it must mean something. It seems we have a policy these days of dealing with financial 'mishaps' by throwing money at them - i.e., taking on more government debt (since the U.S. government really has no wealth whatsoever - unless they want to sell the Grand Canyon!). Problems are then moved out of sight/under the rug. And the 'players' agree to keep doing what they're doing. This may work in the short term (like the consumer's financial plan with home equity loans and credit cards); but it creates a false sense of well being. We are more and more broker and broker.

Good Morning everyone... 

  Apparently most of the exchanges on the planet had a bad hair day last night.  Both Asian and European stock markets where down in overnight trading with only a few exceptions.  S&P and Nasdaq futures trading indicates that the U S markets will have a nasty open.   Norbert has already commented on the 2 year treasurey rate chart.  I can add that the 5 yr and 10 yr rate charts also have double tops.  In addition to all that, the USD is dropping against the Yen and the Euro, while oil and precious metals are rising.

A quick look at a couple of major index charts indicates that if we test the march lows, we will have had about a 10% correction.

uh 

and I haven't even had my coffee yet this morning... now you make me want to put something in it.  Maybe something Irish... how is Ireland doing?

I don't mind the oil and gold... I am over-weight there... but it can't carry my whole portfolio... does ease the pain a lot, though.  Financials just continue to disappoint, don't they? 

Seriously. I don't blame the messanger... keep up the good work and keep us informed.  I can hope for better news, can't I?  My micro caps have just been decimated...  One of them had horrible earnings in the last quarter, because they didn't hedge the dollar. 

I was wondering if we might see some bad quarterly reports from all those companies that have been benefiting from the weak dollar in foreign business.  That would hit a lot of the market favs of recent months.  Any thoughts on that?

I wish foreign markets were doing better...

erryl

 Financials just continue to disappoint, don't they? 

I was wondering if we might see some bad quarterly reports from all those companies that have been benefiting from the weak dollar in foreign business.  That would hit a lot of the market favs of recent months.  Any thoughts on that?

erryl

[/quote]

I still believe that at least as to the major Financials their future earnings model is broken and therefore I avoid them. In many cases 75% of their "profits" came from dealing in these exotic instruments which have crashed so ignominiously. That has two effects it means past earnings are somewhat illusory and it is not clear what their future earnings stream will be or even where it will come from. In short what replaces the profits from the now defunct high margin, high volume businesses? A broken business model is not a good place to invest in my opinion

 I don't think that the dollar will have an adverse effect on exporters earnings in Q3 or Q4 at least on a YOY basis. First of all the $US may or may not have bottomed.That is unclear.  But to have an adverse impact on earnings comparisons of a year ago the $US would have to roughly gain 10% from here for Q3 and about 5% or more for Q4. That is unlikely IMHO and if that conclusion is right the $US will provide a favorable wind on a comparative basis not adverse. Of course what the "analysts" may have modeled into their assumptions is anybody's guess including theirs.:-)

On the Barney Frank bill, Bernanke indicated support for this kind of action.  I prefer targeted initiatives to big rate cuts and helicopter money (think "tax rebates") because they get to the heart of the problem without decimating the US dollar.

If I understand the bill correctly, the idea is that banks accept a mortgage write-down and the homeowner gets an affordable fixed-rate mortgage. It's a compromise.  Up to 500,000 homeowners - residents only - might get to keep their homes.  That's a lot.  If we're going to see 500,000 foreclosures, I'd rather have this plan.  If there is home value appreciation later on, the profits do not go to the homeowner. 

This does not seem so different from the Bear Stearns intervention to me. 

While some homeowners certainly got in over their heads, there's a thin line here between individual fault and a regulatory failure related to lending abuse.  Coupled with tighter lending rules - such as those proposed by Hank Paulson - the Frank bill would go a certain distance to correcting the damage of the past few years.

I want financial discipline, but don't think that this is a bad bill.  However, I have not studied it enough to be sure.

We should know more when the weekly charts are available, but I rolled out of most of my long positions today and into GLD, SLV, SLW, and cash.  I am curently sitting on about 40% cash with the thought of shorting oil with DUG.  I doubt that the PPT will come to the rescue of oil and it looks a little overbought right now.  I will probably wait until monday before I try it.

uh 

If I understand the bill correctly, the idea is that banks accept a mortgage write-down and the homeowner gets an affordable fixed-rate mortgage.

[/quote]

How would that work? My understanding is that most of these mortgages have been packaged and re-sold many times to the point the homeowner doesn't know who owns his mortgage. As a result the right to agree to a mortgage reset is diffused or unclear and in the normal case is a multi-party discussion and a debate as to who has authority to do what. I have been led to believe there is no simple reset mechanism.

 Personally I favor a cheaper solution: let's mandate that these homeowners grow corn instead of grass as a cash crop and give then a subsidy for doing so. 500,000 homes probably adds 200,000 or more acres of corn production. Solves two problems at once.:-)

How would that work? My understanding is that most of these mortgages have been packaged and re-sold many times to the point the homeowner doesn't know who owns his mortgage.

[/quote]

How dare you ask me a tough question like that? 

All I know is this is that the FHA would refinance about $400B in mortgages if the current holder of the loan agrees to reduce the principal.  Don't go asking me "how this" and "how that".  Was Columbus asked on what date he was going discover America?  No. 

You just need to have faith.  Anyway, I digress. 

The Republicans (excepting for their Florida and California representatives) are digging in their heels now that the economic data has improved so much.  Clearly these people don't know what we know.

Your proposal to solve America's energy crisis via a revolution in home gardening is very original.  Me, I just walk everywhere. 

[quote user="DeerIslander"] let's mandate that these homeowners grow corn instead of grass as a cash crop  [/quote]

 But...an ounce of grass is worth so much more than an ounce of corn that it'd be hard to persuade the homeowners :-) 

This is just like Freddie Krueger. Yes -- we had another one today.

On a serious note to show how perfectly bifurcated the market is the NYSE had 83 new hi's and 86 new lo's.

In one of the early posts on this thread, UH asked a good question about oil, shipping and their impact on various & sundry items. I was away for about 10 days (trip to India). With our wide charter on this T/A thread, let me take the liberty of explaining "slowdown in refining activity", oil storage by Iranians in tankers etc. Here goes:

• Worldwide demands are seasonally at their lowest point in 2Q (particularly in April/May). This is the time that the industry builds inventories for use in 3Q & 4Q which all tend to draw down stocks.
• The demand for crude oil is thus at a seasonal low in 2Q. There is also a lot of refineries in the Fareast that shut down for maintenance in April/May. Thus, the demand for crude oil by refiners is also down in 2Q.
• All Persian Gulf (PG) producers know this well and they store oil wherever they can find temporary storage. Usually it is the hired supertankers, the really old and cranky ones that they can "rent" for a song and dance (since these storage vessels just need to stay afloat, and not go anywhere). Thus, this is pretty commonplace for many producers to do this.
• The Canadian tar sands have no way of competing economically with most PG grade crude oils (including Iranian oils). Canadian tar sands produce a super heavy tar-like oil that has almost double the amount of sulfur and other pollutants compared to most PG crude oils. The Canadian oil also has very little of light distillate as compared to PG crudes. The light distillates, when refined, produce gasoline & diesel. Lastly, because of the tremendous costs of extracting oil from sands, Canadian heavy oil production costs is about 4 to 6 times higher than that of conventional crudes.
• Lastly, current high oil prices are because of very tight crude oil fundamentals. The PG producers are the only ones that have any spare production capacity left and it is razor thin. All this tremendous amount of money we pay for oil is going into PG govt coffers, from where most of it used for non-oil related causes. Thus, they are NOT reinvesting the extra cash to add to their production capacity, so the tightness continues. They have no incentive to add more production capacity. Why would they shoot themselves in the foot?
• The rest of the world is producing oil "Flat Out" - No spare capacity. So the oil price keeps rising .....

I know this is bitter medicine, but the only way we can impact oil price is by being more efficient from "Well to Wheels". It is the total efficiency of the system that matters. Electric cars don't do it because they just shift the inefficiency from the gas driven car to the electric power plant which blows 60 to 70% of the input energy as useless "Heat" that just adds to global warming (via heating either air or water thru those giant concrete cooling towers). If we are able to save just 10% of that rejected heat and use it productively (thru cogeneration or something along those lines), we can cut global energy consumption by a few Million barrels per day (and allow a doubling of the spare oil production capacity cushion). This WILL reduce prices at least by a little from current levels.  

Ethanol and other fad fuels don't do it. Perhaps the hybrids, fuel cells, wind power and solar power could solve a small part of the problem of oil dependence. However, even in the best case scenario for these alternatives, we may just be able to stop supply/demand balances from getting even more stretched (and the oil price from rising). The only hope is that mankind as whole find another major volume energy source such as nuclear fusion energy or something along those lines. Hope that helps ..... Anil

Technical Analysis is mostly the study of price action - it's about what investors do, not about why they do it or what they say.

So, when I heard some crazy prediction about $200 crude I dismissed it as your typical speculative chit-chat.  Unfortunately, I see that there has been a surge on Dec 2008 $200 NYMEX crude call options.  Read HERE.  People are buying these things (though they are actually very cheap).

I can not recall a week when the "global growth" story (energy, food, steel, etc) so clearly dominated our investment results:

• The average Nat Res / Energy fund is up about 5% for the week, while a typical domestic or international LC stock fund is off about 1-2%.

• Growth themes like Ag, Metals, Coal, Engineering and Renewables are up 3-14%, while sectors like Air Transport, Health Care, Education, and Banks are down 4-8% on the week.  That's huge!
  

• Country wise, a resource-rich exporter like Russia is up about 6% for the week, while resource-poor Asia is down 3-7%. (It was Brazil's turn last week.)

Admittedly, there are other factors at play: Medvedev took power in Russia, US health care may be reformed in the Dems gain control, Brazil's financials were upgraded, the subprime monster keeps reawakening, etc.

But the trend is clear:   global prosperity is straining energy, food, and infrastructure resources worldwide.  When you have to pay more for the basics, there may be less cash left over for discretionary items. Business models have to change.

Longer term all this will one day lead to the invention of a cheap "Mr. Fusion" or "Mr. Solar" device to power our cars and homes.  Shorter term ... we see fireworks. 

---

I'm letting my GG positions run, but continue to ponder alternative energy - including the potential implication of the Israeli electric car experiment.

I don't find it easy to invest in renewables given their volatility and valuation ratios.   There are high growth rates in some of the renewable energy funds, but we also see PEs in the 20s and 30s.  Some of the best work is being done by diversified companies like GE.

Electric Power Research Institute (EPRI) US Electric Power Generation Vision:

First, here's a Congressional Budget Office Estimate:

http://www.cbo.gov/ftpdocs/91xx/doc9190/hr5830.pdf

It's a good read and brings in the issue of Alt-A mortgage holders, second liens, and other factors of the problem.

Coincidently, an article appeard in the local paper. A 'real-life' case:

http://www.courant.com/news/politics/hc-mortgage0512.artmay11,0,4907398.story

A few comments about the piece - it's a sad story, but one that - I am sure - plays out again and again across the land. The proposed H.R. 5830 would 'forgive and refinance' the mortgage for situations like this. And it states that current mortgage holders must be willing to settle for 'no more than 85%'- - ha! more likely less than 60%!

But, over the next 2 years there are projected to be millions more that will be close to this situation if we factor in Alt-A mortgages.

The BIG ASSUMPTION is that after all that, we will be home free. (Enter Tinker Bell). Well, maybe not. And as an investor (just the facts, mam), would YOU like to write the new mortgages to folks that have a hard time keeping up? What are the chances that it will happen again in a few years to these same folks? What are the chances that others 'close' will see an opportunity to knock off $50,000 or more from their mortgage balance, and will start jockeying into position over the next year or so? (This is part of the moral hazzard that is never talked about)

DI raised the issue of 'who owns the mortgage' - a real issue. There's also the issue of 2nd mortgages, and high credit card debt - will those be paid off also to 'create' an acceptable mortgage applicant? And in today's 'recession leaning' environment, how 'closely' will we look at 'income sources'?

What I find especially troubling in all this is the complete absence of consideration of any losses suffered by the current holders of the mortgage paper - innocent investors who believed S&P and Moody's and 'Investment Houses'. There's reference to the FBI and other 'ominous' threats; but really, just wallpaper. (This is another part of the moral hazzard - who will trust all these 'sellers of mortgage paper' in the future'? who will want anything to do with mutual funds that buy this stuff? maybe a hedge fund, but not an average investor).

There are a lot of young people who are