Archive for January, 2012

Golden Cross Can Lead To Golden Loss

Tuesday, January 31st, 2012

A golden cross occurs when a market’s 50-day moving average crosses above its 200-day moving average. We believe conditions have improved since central banks have cranked up the printing presses, which means the recent “golden cross” in the S&P 500 may turn out to be golden for investors. At the 15:08 mark of a January 17 video, we noted in 2008 emerging markets were “decoupling” from the economic problems in the United States, much as we are told the U.S. is decoupling from Europe today. While the emerging markets were acting as market leaders in ‘08, as the U.S. is today, the index experienced a golden cross (see below).

Golden Cross

As you can see from the chart below, a golden cross can be followed by bearish outcomes as well. In fact, the emerging markets had already peaked when the golden cross occurred in May 2008. Therefore, it is important we keep an open mind about developments in Europe and the possible outcomes in the U.S. after the S&P 500’s recent golden cross.

Golden Cross

Back home in the present day United States, we have high levels of bullish sentiment and an extended market. As we noted in the January 31 video below, the S&P 500 may make another charge higher. The outcome between current levels and 1,343 may set the tone for the next three to six weeks.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video: S&P 500 Analysis

Video: Technical Analysis

We have heard for weeks “a deal is imminent” between Greece and its private creditors. Despite the brave face, the situation is far from fully resolved according to the Guardian (01/31/2012):

Greek officials launched a vociferous behind the scenes attack on European Union and International Monetary Fund negotiators as talks in Athens over the country’s mounting debts appeared to stall.

Before a deal can be finalized, the European Union (EU) and Greece must agree on the terms of the next bailout payment. In those negotiations, the EU is turning the austerity screws again with Germany applying the most force. Getting additional cuts passed in Greece is no walk in the park. From the Guardian:

Prime minister Lucas Papademos told aides that a crisis meeting of party leaders would be called as early as Thursday to thrash out a response to an increasingly intransigent negotiating team sent by Brussels, which is demanding severe austerity measures before sanctioning a further €130bn (£109bn) of bailout funds.

“The troika doesn’t appear to be willing to accept any concessions whatsoever on reducing the minimum wage and scrapping bonuses,” said the government aide. “No political party is willing to move either, saying wage cuts are a red line they are simply not going to cross. You tell me how this is going to be resolved. We have no idea and we’re very worried.”

While both CCM market models have jumped back into bull market territory, the Bull Market Sustainability Index (BMSI) is approaching levels that are typically associated with market corrections (see arrow right side).

CCM BMSI

S&P 500: Another Push Higher Likely

Tuesday, January 31st, 2012

Update as of 11:15 a.m. ET: Recycle counts can be based on 18 days or 22 days. Using 18 days, produces a recycle on the daily chart of the S&P 500, and the e-mini futures, but it does not recycle the S&P 500 pit futures. If you use 22 days, none of the counts have recycled, which tells us we have a mixed bag at the moment. As always, we need to keep an open mind in the short-run.

As described in the video below, the daily DeMark count on the S&P 500 “recycled” after the close on Friday, which has potentially bullish implications for the next two weeks. Other video topics include (a) key S&P 500 levels, (b) bullish case vs. bearish case, (c) ongoing expansion of central bank balance sheets (money printing), and (d) European stock valuations vs. those in the United States.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video: S&P 500 Analysis

Video: Technical Analysis

Respecting Recent Strength

Monday, January 30th, 2012

We still have no resolution (bullish or bearish) relative to the S&P 500 below 1,343. The most recent push higher in the S&P 500 was relatively strong with daily RSI moving above 70. The 2011 chart below shows we may need a weak bounce/push higher sometime in the coming days if stocks are to move significantly lower. Notice the low levels of RSI (top) and MACD Histogram (blue bars) when the S&P 500 tried to recover from early weakness in a reversal pattern.

Stock Market Reversal Patterns  Tops

Portugal Ready For Center Stage

Monday, January 30th, 2012

Portugal is Europe’s next big problem. According to the Globe and Mail:

Greece has been the debt crisis headline hog for months. This is unfair to Portugal, whose own financial nervous breakdown is getting uglier by the day, to the point that many economists and bond investors think a second bailout, a bond restructuring or outright exodus from the euro zone is inevitable. Most of Portugal’s key economic indicators are going in the wrong direction.

Things are not going well in Spain either. From the Globe and Mail:

Spain’s economy contracted by 0.3 per cent during the fourth quarter, according to official figures, edging the country closer to a new recession as it deals with huge levels of unemployment and painful austerity cuts. The economy is expected to slide further through March, placing Spain back in its second recession in less than three years.

As far as the U.S. markets go, not much has changed. We still have conditions in place for some type of reversal/top. An S&P 500 close below 1,314.65 would bolster the bearish case.

Portugal Default

Potential areas of support to watch include 1,285, 1,275, 1,260, 1,213, and 1,192. A weak bounce between 1,298 and 1,303 would fit well into the reversal case (a move with weak RSI).

Deal With Creditors Not End For Greece

Saturday, January 28th, 2012

Let’s assume Greece and its private creditors reach a “deal”. That deal is far from the final hurdle to preventing a Greek default. According to the Wall Street Journal:

A deal could pave the way for a second bailout package for Greece. However, there have been fresh warnings from euro-zone governments that Greece must improve the implementation of its austerity measures in order to get further assistance. Mr. Rehn has said the euro zone, the European Central Bank and International Monetary Fund may need to inject additional money for a second Greek bailout.

Once a Greek deal is done, an assessment of whether Greece’s debt is sustainable will follow. After that, its official creditors—other euro-zone countries and the IMF—will decide how much money is needed to fill Greece’s remaining financing needs.

The question then is how many of the €200 billion in Greek bonds will be tendered by private bondholders. If too many hold out, then the debt-sustainability sums won’t add up. Greece has said it could then move to force unwilling creditors to accept the bond exchange, transforming the deal from one that could be called voluntary to a coercive default.

Germany also appears to be adding one more significant hurdle according to the BBC:

A leaked plan from the German government proposes a eurozone “budget commissioner” to take control of Greece’s tax and spending, reports say. The Financial Times, which has a copy of the plan, calls it an “extraordinary extension” of EU control. Greek Education Minister Anna Diamantopoulou called the German plan “the product of a sick imagination”. The European Commission said the budget “must remain the full responsibility of the Greek government”. A German official told the Associated Press eurozone finance ministers were discussing the plan.

BBC Source - Merkel “Greece Will Default”

Saturday, January 28th, 2012

You have to take any comments relative to Europe with a grain of salt, but the source of the tweet below is credible.

Merkel Greece Will Default BBC Sources

As we outlined in the past, the levels of debt in Europe relative to tax revenues and capital needs for insolvent banks produce an unsustainable situation. Any additional funds given to Greece will most likely have similar outcomes to a flush of a toilet in the coming months. According to Bloomberg (01/28/2012), the Germans seem to agree:

Lawmakers from German Chancellor Angela Merkel’s coalition rejected increasing aid for Greece, Der Spiegel said, citing members of the parliament in Berlin. There can be no further aid if Greece doesn’t implement the agreed adjustment programs, the magazine said, citing Horst Seehofer, chairman of the Christian Social Union, the Bavarian sister party of Merkel’s Christian Democratic Union.

Recent reporting from the Guardian also seems to hint at a greater probability of default than what is priced in the financial markets. Excerpts from a January 25 Guardian interview with Angela Merkel are below:

Angela Merkel has cast doubt for the first time on Europe’s chances of saving Greece from financial meltdown and sovereign default, conceding that Europe’s first ever multibillion euro bailout coupled with savage austerity was not working after a two-year crisis that has brought the single currency to the brink of unravelling.

“We haven’t overcome the crisis yet. Of course, there’s Greece, a special case where, despite all the efforts that have been made, neither the Greeks themselves nor the international community have yet managed to stabilize the situation.”

“There would be no point in promising more and more money without tackling the causes of the crisis,” said Merkel. “Amid all the billions in financial assistance and rescue packages, we Germans also need to watch that we don’t run out of steam. After all, our capacities aren’t infinite, and overstretching ourselves wouldn’t help us or the EU as a whole.”

Note the ongoing mention of Greece being a “special case” in an attempt to stem the almost inevitable tide of contagion. As we showed graphically on January 27, the ever-increasing yield on Portuguese bonds is indicative of a market that also believes Portugal will be a “special case”. Euromoney also expressed concerns about contagion:

Merkel Greek Default BBC Sources

S&P 100 Large Caps Fatigued

Friday, January 27th, 2012

While it may not morph into anything further, the daily chart of the S&P 100 Index below is limping into the weekend. Numerous indicators show slowing momentum. A close below 595.89 would add to our concerns. The ETF symbol is OEF.

S&P 100 Index Tired  Ciovacco Capital Short Takes

S&P Push Toward 1327-1340 Reasonable

Friday, January 27th, 2012

In early January we stated it made sense to see how the S&P 500 acted between 1,285 and 1,340 (see 1:47 mark of video). Today we sit at 1,316, which means no resolution has come yet. We will pay attention with an open mind, but it is always good to have a base case laid out for the short-, intermediate-, and long-term. From a short-term perspective:

  1. The last push higher in the S&P 500 looked too strong technically for a typical end of a move, which means it would not be surprising to see another push higher, maybe beginning from 1,316ish to 1,293ish.
  2. If we push higher, resistance may come in near 1,327, 1,330, and then 1,340.
  3. If the move higher is weaker, using indicators such as RSI, it may be followed by more significant downside, possibly below 1,200.
  4. Potential areas of support to watch would include 1,285, 1,275, 1,253, 1,210, and 1,192.

A more immediate bullish scenario may follow breaks of 1,330 and 1,343ish. Numerous markets in the United States are looking tired on monthly charts. Thursday’s high was 1,333; so, exercising some patience if we move as high as 1,343 makes good sense.

Find “Greece”, Replace With “Portugal”

Friday, January 27th, 2012

The leaders in Europe want you to believe that Greece “is a special case” and that no other country will be giving bondholders “haircuts”. The market is not buying it. The graph below, from Zero Hedge, shows five-year Portuguese bonds just hit a new crisis low. Think about that – after all the bailouts, backstops, money printing, unlimited three-year loans, and market intervention from central banks, Portuguese bonds are currently showing the highest probability of default during any other point in the crisis.

Portuguese Bonds Yield and Price

The graph above throws some cold water on the face of the “everything is under control in Europe” theory currently touted by Wall Street. The odds are very good the news media will be able to republish many articles recently written about Greece by simply finding “Greece” and replacing it with “Portugal” in their word processor of choice.

The situation was summed up well in the Telegraph (01/26/2012):

A report for the Kiel Institute for the World Economy said Portugal would have to run a primary budget surplus of over 11pc of GDP a year to prevent debt dynamics spiralling out of control, even in a benign scenario of 2pc annual growth. “Portugal’s debt is unsustainable. That is the only possible conclusion,” said David Bencek, the co-author, warning that no country can achieve a primary budget surplus above 5pc for long. “We won’t know what the trigger will be but once there is a decision on Greece people are going to start looking closely and realise that Portugal is the same position as Greece was a year ago.”

Greece & Portugal: More Writedowns

Thursday, January 26th, 2012

From Bloomberg:

“I can understand the strict attitude creditors are taking,” Andreas Plaesier, a Hamburg-based banking analyst at M.M. Warburg, said by phone. “Greece’s behavior could well lead you to believe that this isn’t the last step and that other writedowns could follow. There’s also the concern over whether other countries like Portugal will seek to have their debt load lightened.”