Archive for June, 2011
Market in DOWNTREND, June 2
It only took the market one day to understand that the reason why they partied, possible extension of the Greek bailout, was indeed not a reason to party, but rather to mourn.
So, as I am sure that most of you have correctly anticipated, yesterday’s market action quickly ended the uptrend that was initiated by the positive signals from the previous days. Very frustrating, but this is how the stock market is sometimes. The markets yesterday saw their biggest declines for the year and not since August last year have the indexes fallen this much. All three indexes ducked under their 50-day moving averages again. Yesterday was another 90 percent panic selling down day, quite surprising after indicators signaled a new uptrend on Tuesday. So we are back in a DOWNTREND again after the shortest uptrend possible.
Research shows heavy selling days on the first or second day after a new uptrend signal will end it 95% of the time. This means that another uptrend is still a possibility in the coming days. But as I stated in the previous market update, sometimes 90 percent panic selling days come towards the end of declines: When that selling was what was needed to exhaust the bears.
Watch the trend-lines on a chart for help to see were the market is heading. A decisive break below that lower boundary trend-line would be bearish, and would raise the likelihood for a further fall. If bottom boundary holds, and prices rise decisively above the upper boundary of that declining trend-channel, it would suggest that we will likely take out the tops from April.
The market’s message for now is to be cautious as further downside becomes a higher probability.
Greek debt default will trigger bank meltdowns
There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis. Just look to Greece and the financial industry as an example.
Moody’s is getting closer to seeing Greek’s debt the same way as I am. Greece was downgraded them from B1 to Caa1. This is the same rating as Cuba has. As expected the rescue in 2010 failed to prevent Greece’s default risk to be reduced satisfactory, and now another discussion for a second round of funds are being discussed. 50 percent of of those who receive a Caa1 rating have according to Moody’s defaulted on their debt.
The reason why the EU is so afraid of a Greek debt default now is because so many European banks are stuffed with this junk debt on their balance sheets, and most of these banks don’t have the financial strength to take any such writedowns at the current time. And the European Central Bank is so afraid if its implications that it has refused to entertain any talk about the holders of Greek sovereign debt taking a haircut — even in the form of Greece stretching out its payments. This is serious stuff. It is about time we realize that we don’t solve an alcoholics problems by serving him more Ouzo.
Economic indicators slow for April and May
Economic data recently published does not show signs of improvement either (nothing new in other words).
Back in the States, the housing double dip is now “official.” The Case-Shiller home price index fell 0.8% in March. The year-over-year fall is 3.6%, and the index is now lower than its previous bottom in April 2009.
The Chicago PMI fell to a reading of 56.6% in May, the lowest reading in 2.5 years, from 67.6% in April. While that reading is still significantly above the 50-line indicating growth, the eleven-point drop is the biggest one-month deceleration since Oct. 2008.
Consumer confidence slumped last month. The Conference Board’s index drooped from a revised 66 in April to 60.8 last month.
The monthly ISM manufacturing index fell below 60 in May for the first time in 2011. It fell to 53.5, which is the lowest reading since September 2009.
The official China Federation of Logistics & Purchasing Managers’ Index eased to 52.0 from 52.9 in April, marking the slowest pace of growth in nine months.
Market in UPTREND, June 1st
I indicated in my last post on May 24th that the market action that triggered my models into a downtrend was also action that we sometimes see near bottoms in the market. This turned out to be one of those times. The market has proved to be strong since then, breaking through its 50 day moving average and yesterday spiking up in significantly higher volume. This turned enough of my indicators to buy signals to indicate that we are now in a new UPTREND.
But as there were some cautionary signs to the downside last week, so there are in this uptrend. We typically like to see higher percentage gains in the indexes than we did yesterday. Another cautionary factor is that we are now in a third year bull market, and market action typically tend to be choppy with modest gains in such years.
Monitor leading stock for further indication to the strength of this new uptrend.
The strong market action yesterday was set off by indications that a new plan to save Greece was near. The market has chosen to party, at least now in the short-term. And I hope investors enjoy it while it lasts because I am certain (to the degree that anyone can be certain about anything regarding the financial markets and government action for that matter) that helping out Greece will do nothing else than cover over the cracks of the underlying structural problems which in due course will implode and cause even greater harm further down the road. I am confident that neither Greece, Portugal nor Spain will not be able to recover its debt ridden economies without going through debt defaults on a grand scale first, which will have severe global implications.
But for now, lets enjoy this last uptrend which is likely to take the markets above recent highs.