Trading Thoughts

I reached maximum frustration today with the markets. When that horrendous of a number comes out and the market can't break a stupid technical trendline, what is the point of having economic data? We might as well just trade and invest in a vacuum. We hit the trendline not once but twice. The first time we hit it (remember the trendline is upward sloping and so actually higher at the end of the day than the beginning) we also hit the 20 day moving average. Somehow, stupid technicals once again trump fundamentals.

Not to harp on the Chicago PMI, but in my scenario I laid out on Sunday, I could not have imagined such a bad number. Production 47.2 versus 52.9 the previous month. New Orders 46.3 versus 52.5 last month. Backlog 36.7 versus 45.8 last month. (remember anything under 50 means contraction) I mean just a jaw dropping miss and speaks poorly for the future.

So today was the last day. For my prediction the last six months that we were going to see an August or September high before our next big leg down, 1080 on the S&P from last week will have to hold. Time will tell if that actually ends up being the case. The market seems to be turning and more importantly my economic thesis the last six months seems to be slowly starting to come to fruition.

Whether we hold that top or not, tomorrow is a key day.

At 7:30 am central time we have personal income from August, personal spending from August, and jobless claims. As I see it:

Personal income - don't have a good feel, would guess bullish (more workers back to work because of cash for clunkers in August)
Personal spending - high confidence that will be bullish (it is from August and cash for clunkers and strong retail sales could make this a blow out number)
Jobless claims - would guess bullish

Than at 9:00 am central time you have construction spending (from August), pending home sales (from August), and ISM index (from September)

Construction spending - bearish
Pending home sales - high confidence that will be bearish
ISM Index - bearish

The perfect scenario for the bears (this would be regardless of what economic data was being reported but actually plays out well with what is being reported and when) is a gap up open between 1060 and 1070 before selling off after the second round of economic data and finishing down strong at the end of the day breaking the trendline.

Those are just my educated guesses on the economic data. Obviously anything different changes the setup.

Something else to be aware of is that China is closed like the next six trading sessions. Very long holiday. Not sure that will impact anything but interesting nonetheless.

The dollar still is not trading like it wants to go higher. I guess when you have Bernanke against you who can blame you but technically it sure seemed like last week marked a good intermediate (six months) bottom.

I feel like I could throw a dart at a stockboard and whatever I would hit would be a good fundamental short. As today proves though, in the short term, fundamentals still don't matter. I invest on fundamentals with the belief that sooner or later they will. Sooner or later. Sooner or later. I will keep telling myself that. Ha

46 Chicago PMI

WOW. Now that is a miss!!! Last month was 50. This month was expected to be between 52 to 54.

I was texting a friend when the news came out. My mouth dropped to the floor and I texted we should be down 200 points today. That is just jaw dropping.

Now should and will mean two different things. We are right on top of that trendline again. Also, end of quarter. I am sure there are some people who have a vested interest in keeping the market from free falling today. Whether they can win or not is another question.

Like I said, yesterday's win by the bears brings my scneario back into play I talked about on Sunday. It makes the ISM number very important tomorrow. Oh and car sales??? Hehehe

By the way, the dollar was going to the toilet last night moving much lower than when I did my post and than Switzerland annouced they intervened to help ruin their currency. That put a bid in the dollar to help stabilize it and cause it to reverse course leading into this number.

Capitalism Lesson 101

No sooner did I mention that I didn't like the way the dollar was trading if we were in the midst of a big reversal when this news out of Japan has sent the dollar spiraling in the last couple of hours. If the dollar doesn't catch a bid it could mean Wall St. will play tomorrow as Rome continues to burn. From Bloomberg:

The Bank of Japan may decide as soon as next month to let its emergency corporate-debt buying programs expire as businesses regain access to private funding, people with direct knowledge of the discussions said.

Officials are concerned that maintaining their purchases of corporate bonds and commercial paper beyond the scheduled end in December would distort capital markets, according to the people, who spoke on condition of anonymity because the deliberations are private.

Wait a minute. Why doesn't this same logic apply to the Fed and the mortgage purchase program? Oh because, Bernanke is dead set on destroying everything good in America by destroying the very thing we use to purchase other goods and services from around the world. That makes alot of sense. If anyone should want a weak currency, after their currency has been on a parabolic rise, it should be Japan.

and

Deputy Governor Hirohide Yamaguchi said on Sept. 18 that the central bank needs to “be mindful that keeping the temporary measures for a long time may hurt an autonomous recovery of market functions and invite the distortion of the allocation of resources.”

Nice to know our government is as worried about "proper allocation of resources." That phrase is at the heart of all things capitalism and Japan is giving us lesson 101 regardless if it hurts their economy. You know, I am an American. I love America. We may muddle through for another year or two, maybe five but in my mind we are becoming the laughing stock of the world. This is just ludicrous.

Neutralized - Key 24 Hours

Today has to be viewed as a big win for the bears. Win may be the wrong word. It at least helped neutralize the whole situation. After yesterday, there was a good chance we would be up a 1% or more. Case Schiller Index came in much better than expected (as I expected) and the market made a go of it before consumer sentiment came in lower and volume returned. We saw the sell off at the end of the day again after yesterday hiatus.

Today's market action brings back my potential scenario that I wrote about on Sunday. I talked about Wednesday and Thursday being the big days in the market. It looked like Monday was going to nullify that but the market today was able to bring that back into play. The ADP employment report comes out tomorrow at 7:30. Have no idea what that is going to do and than the Chicago PMI at 8:45 (all central times). To me that is the big number. That could be a miss and possibly a big miss. Housing I follow so closely I usually have good feel on those numbers, not so much with manufacturing but because of the cash for clunkers pulled forward production the last couple of months, this months index reading may not be all that it is cracked up to be. At least that is my thought. From a technical perspective, tomorrow is a key day also because of the monthly and quarterly close. A close above 1065 to 1070 will get the technicians yapping about a very strong technical picture for the month ahead. When can we get back to fundamentals??? Please!!

I have been unimpressed with the dollar action the last couple of days. If we were getting a major reversal I would have expected stronger move to the upside than we have gotten. Hopefully it won't start breaking down. If it does it may nullify everything else.

Yom Kippured

I forgot Yom Kippur was today. I read it mid last week and than forgot about that over the weekend. I think I read that the market has been up the last 17 of 20 years on the Yom Kippur holiday. Every time we get close to a breakdown we get a holiday where all of Wall St leaves and the market gets jammed higher shifting the technicals and hence shifting the momentum traders who have ruled this market for months. It happened around the 4th of July, it happened on labor day, and it happened today. We didn't even clear a billion shares on the NYSE. The S&P future didn't clear 1.6 million. It was a ghost town and you combine a day when the market was going up anyway with no volume, chatting computers, and you get an explosion to the upside on no news.

The exact same thing happened on the short labor day trading day. Pull up a chart of the S&P 500. We closed around 1004 on Thursday September 3rd. The key level then was 1015. It looked like we were breaking down. Short holiday trading day on Friday the 4th with no one around and the market gaps up and closes around 1018. Three points above critcal resistance at 1015. What happened today? We have key resistance at 1060. Move strongly up and Wall St makes sure we close at 1062.98. 3 points above resistance.

The break above 1060 was weak also. It wasn't a real break, it just sat there all day once the market got it above it. Either way this takes alot of the momentum away from the bears. Doesn't matter if there was no volume. It changes the momentum indicators when all the traders come back. So the bears will have to reprove they are in control which will be difficult. You could make a case there is some resistance at 1065 but there isn't much.

The German elections ended up being a bigger deal than I thought also. Germany moonshot. I was expecting that would be bullish for Europe but not to the extent it was. The same thing happened after the Japaneese elections. Japan was up around 2 to 3% the day after the election. A month later they down like 5 to 7%. German elections are only a trading event and longer term now that is past I see it as actually a bearish catalyst.

So what to look for from here? Tough to say. Bears have to come back quickly tomorrow or we will not be pushing dramitcally lower any time soon. The only way that happens is if the Case Schiller news surprises to the downside and that is not something I am willing to bet on. This week job related data does not bode well for a sell off because as I said yesterday the job news can be taken anyway the market wants to take it. If the momentum in the market is up, the job news can be kindle for the fire because it will be viewed as improvement.

Being discplined I took about 1/3 of my short exposure off I added in my trading account. I'll take some more off tomorrow if we continue higher.

Since your talking about a probability world the probability has shifted back to 50 to 50 on what the next move will be. (might even favor the bulls)

None of this changes the fundamentals. It can change where we will be in a week or two from now. We will see if we get a September 8th repeat on September 29th. One thing going for the bears was the market did this completely without the dollar today. That won't last. Either the dollar will start going down or the markets won't be doing an early September repeat.

Friends in Low Places

Nice to know that I am not the only one out there who manages money and calling into question the very structure of this rally, recovery, and our system. Good article in the WSJ about a couple hedge funds out there who continue on the lonely road that this whole rally is predicated on smoke and mirrors.

From the Wall St. Journal

Hedge-fund manager Peter Thiel is suffering, not because he lost money in the downturn, but because he missed the rebound.

Mr. Thiel, a billionaire co-founder of online payment company PayPal and an early investor in Facebook, thinks the economy is far from recovered and has bet with the bears amid the relentless rally. His fund has seen double-digit declines as other hedge funds have racked up gains.

"The recovery is not real," he says. "Deep structural problems haven't been solved and it's unclear how we will create jobs and get the economy growing again -- that's long been my thesis and it still is."

The contrarian view puts Mr. Thiel among a group of investors with impressive track records who are holding out, unwilling to buy into the notion of the economy's rebound.

and

"I have rarely been so convinced that the next broader market move is down," says Mr. Bornstein, who avoided most of the market's troubles last year. "The problem is that governments do not create income or wealth, and current stimulus equates to a future tax liability. That will become a major concern in mid-2010 when the stimulus is done."

Bloody Battle

So what about this upcoming week? It will be a very very important week. Bears have not taken complete control but they are close. This week has the potential to be bloody on both sides.

I am speaking only in probabilities and the way this plays out is fairly bifurcated. If I was writing a bearish script, Wednesday and Thursday will be the make or break day. It is the end of the quarter and the beginning of the quarter, some interesting economic data coming out, and a report on the financial health of the European banking system.

That does not mean Monday and Tuesday are not important and the market may just give up the ghost early in the week but the likelihood (especially Monday) is sideways to up action moving with the trendline I talked about last week (to correct a mistake I made last week, that trendline is from the move up in July, not March). In my mind the important number is still 1060. The bears needs to hold this. There is no economic news at all on Monday and the German elections will be wrapped up (Merkel has won reelection). Who knows but this should be slightly bullish all things equal especially with the sell off last week (also bearish for the dollar). Tuesday is the Case Schiller House Price Index and Consumer Confidence. Once again this would tend to be bullish if I had to guess. The Case Schiller will be positive, the only question is if the market has priced in to much and if the markets sees ahead that prices will start dropping again. It would be easy for the bears if the markets dropped Monday or Tuesday. It is just rarely that easy. That trendline is important and usually the market doesn't give up that easily on a trendline. It will trace it for a day or two bouncing above and below before it realizes it lost and you have a big down move. What can't happen for the bears is for it get stuffed back up into that trendline.

Than comes what I think are the important days in the week. Wednesday and Thursday. Chicago PMI comes out on Wednesday and the ISM index comes out on Thursday. Chicago PMI is expected to jump from 50 to 52 and the ISM Index is supposed to jump from 52.9 to 54. I have read differing reports that these numbers could surprise to the downside. (I have also read suprise to the upside) If the downside were to happen, that would be confirmation of Friday's durable goods numbers that the "recovery" is weaker than expected. Than on Thursday, auto sales come out. This will be an ugly ugly number. It may have the affect of shocking the market to the realization that any recovery we have had is made up of smoke and mirrors. A disappointment in the ISM numbers and the auto sales will be very ugly for the markets. There is one more thing going on Wednesday and Thursday that isn't getting much press but has the potential to be very very big (at least in my opinion). According to CNBC a stress test that is being conducted by European regulators will be discussed on Thursday and Friday and the IMF is releasing a study on Wednesday. According to the article:

Twenty-two large banks in Europe may have accumulated credit losses of close to €400 billion for this year and next, according to officials who have seen a draft of conclusions of “stress tests” conducted by European regulators.

At a meeting next Thursday and Friday in Sweden, European Union finance ministers are planning to publish at least one headline figure on banking health based on the results of the tests, the officials, who were not authorized to speak publicly, said Friday.

and

The International Monetary Fund will publish its own forecast of bank health Wednesday as part of its Financial Stability Review.

Now if you remember, the "stress test" sparked a huge rally in American banks. Don't expect the same thing to happen in Europe. For one, there has been a huge rally leading into the stress test and secondly European banks have been much slower to address the problems because the accounting rules historically has hidden the problems much better. More than anything I think this could be a currency event which transforms itself into a stock market event. The U.S. government has already spent tons of money filling holes in the banks, Europe hasn't. If Europe is forced to start spending tons of government cash that would be very bullish for the dollar. I still think Europe is where the next epicenter of the crises will be.

The timing of the importance of this report may not be this week. I don't know but I think over the next few months it could become very important. It is something to be aware of though for the end of the week especially if currencies start moving.

The thing I have not talked about this week is employment numbers. The ADP report comes out on Wednesday, jobless claims on Thursday, and the Nonfarm payrolls on Friday. These numbers will be interpreted anyway the market wants to interpret them. In general my guess is they will be slightly better than forecasted but the market may once again be expecting more than forecast (nonfarm payrolls expected at 225k loss while whisper numbers are around 180k).

Taking a step back looking at the bigger picture, even the bears are scared right now seeing what is developing. Last week was what a top looks like. Everything looked right. Because the bears have just been beaten to a pulp the last six months there are very few who have much confidence that this could be a top. Of course the irony is that is exactly what you need. The media likewise is being very passive. Any previous 2 to 4% pullback it was hand wringing and articles warning about a big correction. Not currently.

One of the main things going for the bears is big institutional selling into the end of the quarter. The market finished on its lows Thursday and Friday selling into the close. I believe (and know in some cases) that big institutions are selling after this monstrous rally has caused there equity holdings as a percentage of their investment portfolio to become to big. This could cause the market to roll over on Monday or Tuesday but at the very least should keep the market from getting jammed back into the trendline in a major way.

Like I said, this week is very bifurcated. It does not matter how the market trades as long as 1060 is held on any test and bears take over at some point this week on a big move down. I do the market gives up the ghost this week and I have laid out one possibility as to how.

A Fundamental View

I have been avoiding what I prefer to post on, fundamentals, the last few weeks(as opposed to trading calls) because they haven't mattered for weeks / months. Even as muddled economic data at best and horrid economic data at worst gets reported, the market has gone up. So your left with just waiting and looking for signs of the top which is what my posts have cenetered on. The fundamentals continue to deteriorate on multiple levels.

An article from the Telegraph by Ambrose Evans-Pritchard points out the facts nicely. As I have mentioned before, he is a large bear but I have been watching these money supply numbers with growing alarm over the past few months. There is no getting around how fundamentally bearish this data is.

Money figures show there's trouble ahead

Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise.

and this really is amazing

If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China's exports were down 23pc in August; Japan's were down 36pc; industrial production has dropped by 23pc in Japan, 18pc in Italy, 17pc in Germany, 13pc in France and Russia and 11pc in the US.

and

Fed chairman Ben Bernanke spoke in April 2008 of "a return to growth in the second half of this year", and again in July 2008 that growth would "pick up gradually over the next two years".

He could only have thought such a thing if he was ignoring the money data. Key aggregates had been in free-fall for months.

and

Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14pc since early Summer: "There has been nothing like this in the USA since the 1930s."

M3 money has been falling at a 5pc rate; M2 fell by 12pc in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1pc rate since April.

Private loans have fallen by €111bn since January. Whether you see a credit crunch in Euroland depends where you sit. It is already garrotting Spain. Germany's Mittelstand says it is "a reality", even if not for big companies that issue bonds. The Economy Ministry is drawing up plans for €250bn in state credit, knowing firms will be unable to roll over debts.

College Station Bound...WHOOP!!!

I am headed to College Station shortly. Will be the first Texas A&M football game I have attended this year. For those of you who will be in College Station this weekend, give me a holler and hopefully we can meet up.

Basically an absolute perfect week for the bears. They haven't taken complete control but pretty close. We closed right on top of 1044 (1044.38 to be exact). The thing is this is a trendline not an absolute technical level (like say 840). On Monday the trendline will be around 1046 to 1047. So the indexes have to gain just to maintain this trendline. The DOW at this point has lost the trendline. Unlike an abosolute technical level, trendlines can be breached and bounce around it as the indexes try to grasp onto it. At some point if they don't get stuffed back up into it, it is like the old Wiley Coyote cartoons when Wiley Coyote keeps running and he realizes he ran off a cliff and than plummets. The recogintion isn't immediate and for the markets it could take a few days before it realizes it. Don't expect the indexes to give up this trendline easily. They may try a couple of days to get back into it. I will try to do a post on Sunday on what I think investors should be looking at next week.

Where From Here?

Another perfect day for the bears. You didn't gap down which would have been begging for a reversal. You sold off after being up early after the existing housing sales number just like I thought we would. And finally the markets sold off into the close after a failed attempt at a rally. There are always things to be disappointed about. Volume was heavy but I would have liked to have seen another 100 million shares trade. High yield credit sold off but the spreads were only modestly wider. All in all, though great textbook follow through from yesterday.

In my opinion there is only 2 numbers that really matters tomorrow. 1044 and 1060. People are talking about 1035 and 1018. No, 1044 in the S&P 500 which is the upward sloping trendline that goes all the way back to March. Think it doesn't matter? The Dow hit its uptrend line today (it has been lagging the other indexes) and the Dow only finished down 41 points or .42%. It bounced along that trendline all day not following the other indexes lower and hence not breaking it. That has been major support. A weekly close below this trendline would be huge. It is entirely possible that if that were to occur we would be down 5% a week from when we broke that trendline.

The thing is, at best I am putting that scenario at 50/50. I would say it would be almost impossible if it wasn't for the RIMM earnings after the bell. The RIMM miss and subsequent 10% plus sell off after the bell gives the bears an advantage tomorrow.

Tomorrow you also have an interesting economic news day. Durables orders at 7:30, Michigan consumer sentiment at 8:55 and new home sales at 9:00 (all times central). I really have no expectations for the data. The durables number should be way down from the previous month which was goosed by auto sales (I think I am right on that), while who knows on the Michigan consumer sentiment number. The new home sales (the last number) is the real wildcard. I really don't know. It is such a small piece of the actual pie that in reality it doesn't really matter (you have 5.1 million existing home sales being sold on a yearly basis and 430k new home sales, not even 10% of the total) but right now as everything it is how the market reacts to the news versus the actual news. This number could meet expectations or even beat (I really have no idea) simply on the fact that home builders are targeting the 1st time home buyer and the 8k tax credit from the government. The inventory that is there is better tailor made to the demand. If it beats, you run the risk of the market saying, see housing is fine, and rebounding hard.

We may be up or down tomorrow. It really doesn't matter for the bears or the bulls unless you break 1044 on the downside (big win for the bears) or if you break 1060 on the upside (big win for the bulls). The way the markets work, it seems often times it like to make investors sweat. A 1058 close (not a prediction) would do just that causing both sides to go home and chew on there fingernails over the weekend.

One interesting thing is for the firs time, the media and talking pundits are automatically discounting that this is just a normal run in the mill 3 to 5% pullback. No one seems that worried. Even the bears I follow are not as quick to say this is the real McCoy. That is all really good if your bearish.

Maybe this is all a false breakdown. But if I was writing a script for a market breakdown to break the trendline in the next few days and start a big reversal lower, I could not have written a better one.

Time will tell. The bulls (aka government) may have one more trick up there sleave.

A Foot on Normandy

WOW!!!! Exactly the scenario I laid out. For the bears absolutely perfect. That is what we needed. The key was the dollar. When the Fed released the statement the dollar had a huge spike down to 75.83 from about 76.18. This happened in seconds. Than into the close it slowly reversed coarse and moved past 76.18 to 76.40. This is a huge reversal. On a chart it looks like washout reversal. The last holders of dollars puked them out and there was no one left to sell. If that was the case and this is a beginning of a big reversal that would be huge!!

The equities followed suit moving higher from about 9850 to 9918 on the Dow before closing at 9748. That is a 170 point move lower!!! That is a massive reversal.

Is it a top?? Right now the odds favor it but the odds can change if some things don't happen. For one, the dollar has to hold 76 and start moving up higher. This would solidify that the dollar move down was the final puke move down. Secondly, tomorrow and Friday is huge. Tomorrow is very important for the equity markets. You have jobless claims at 7:30 central. This could be bullish or bearish (i would guess bullish). Than the market opens at 8:30 and at 9:00 you get existing home sales numbers out. I have said before and will say again i think this number is going to be bearish and maybe very bearish. Perfect scenario for the bears is the market opens flat to up slightly (don't really want to get above 1065) and than gets slammed again after the existing home sales number comes out. That would be back to back double punches to the bulls and could permanently shift the momentum in this market.

This what bear market rally tops look like. We need some confirmation. First time in about four weeks that it looks like it could be a top. Four weeks ago it was a headfake but if your playing probabilities this is the best setup we have had since than. Now we need follow through.

It is tough rooting against the market. I want America to do well, I want the market to go up but it can't be built on a shoddy foundation. It has to be built on a strong foundation and the market has not mimicked reality ever since 800 in the S&P. It is all a joke. Maybe truth is starting to shine through.

Word's Longest Basketball Shot From Texas A&M

To get away from finance and everything that doesn't make sense.

If you click on this link which takes you to Yahoo's homepage some ambitious aggies shoot a basketball from the third deck of Kyle Field. Whoosh!!!

Tomorrow is D Day

Back from Arkansas. Very fun weekend which included hold em, dancing, and singing at waffle house.

For us to be near a top, tomorrow is an important day. Tomorrow is the Fed announcement at 1:15 central time. There is any number of ways this could play out. None of them will most likely be comfortable for bears. The market is most likely to have a blow off top when a top eventually comes. We keep getting these days where we open flat and than drift in the first hour or two and than flatline the rest of the day. That is now how a top is likely to form. A top is likely to form when we are up 100 and reverse and finish down 100.

So the market can do all sorts of crazy things tomorrow but for a top to have a chance of being in the market really needs to close lower than the 1:15 announcement and ideally negative on the day. So one scenario (not saying this is likely to happen) is we are up 50 points at the Fed announcement, the market rallies hard to up 125 and than gets slammed down in the final hour on heavy volume to close negative or at least below the +50 where we are at 1:15.

Do I think what the Fed says in the announcement is that important? Not really unless they extend QE. If they extend QE it will catch me and probably others very off guard and the dollar will plummet and the stock market will take a moon shot higher.

So if what they say is not important, than how the market trades is important. If the market does sell off, it sets up perfectly for a second gut shot if the existing home sales number disappoints on Thursday like I think it will. It would be a perfect one two punch to get the momentum turned the other way.

If the Fed annoucement doesn't turn the market by the end of the day...well hello 1100 and higher

Not As Bullish Next Week

I am headed to Arkansas this weekend to hang out with friends, play Texas hold em and watch football. Should be fun. The last two weekends I wrote posts saying basically everything looked bullish in the short term. For someone who is a bear, it wasn't fun. I have been saying for months that I have been expecting a top in August or September. I don't have very many days left for that prediction to come true. Next week, for the first time in three weeks we at least have a chance at a top (top may have occurred yesterday, who knows). Next Wednesday is the Fed meeting. Remember the August meeting they punted the QE decision and said they would wind down through October. Well they are down to around $13 billion out of the remaining $300 billion. With some Fed governors getting worried about the dollar, I would be surprised to see them extend it. Also, Thursday is the August existing home sales number. I am expecting this number to be a miss and be very bad for the market, especially financials.

I am just talking probabilities, so it may not play out like I think probabilistically it will but at least there is a chance that the market could rock lower next week starting the next long decline.

Also, there are finally some other things that I watch as well that could be pointing to the market having at least the opportunity to roll over. Copper is getting slammed today as inventories continue to build. Copper is often times called Dr. Copper because it is the most economically sensitive commodity and it joked to hold a PHD in economics. China corrected its steep sell off last month, hit its 50 day moving average and got slammed last night down 3%. We will see if that continues. Financial problems overnight in Japan and England causing a bounce in the dollar. We will see if that continues. If the Fed doesn't continue QE that could also be very bullish for the dollar.

Anyway, I don't know. The rally doesn't seem to want to stop but for the first time in three weeks there is at least a window of opportunity for it stop. Not everything is screaming to me being bullish in the week ahead. Ideally I wouldn't mind seeing a new high on Monday or Tuesday offset by a hard sell off at the end of the week. Who knows, just looking for signs.

Top Watch

Still looking for a top. Today, I saw a major signal for a possible top. I went to work out around lunch. I travel to another small town where there is actually a decent workout facility. Decent of course is relative. They have all the options but it is in a dingy warehouse sort of place. I am often times in there by myself with sometimes up to 3 or 4 other people if it is hopping. Well today, an individual came in who I have seen before. He starts working out on the elliptical, turns on the tv, and low and behold he turns it to CNBC. I couldn't believe it. I am the only one who ever turns on CNBC in this place and get strange looks when there is anyone around. I wanted to know if he was somehow a professional investor and started talking to him. Nope, just a hobby. He couldn't stand looking at the market last year and wishes he would have invested more in March but now it looks sort of interesting. I started getting sort of excited. A top must be close when the stock market makes it to a town of 5,000 in the middle of cow country.

I don't mean to say this indicates a top was made today (it may have been) but one more sign that the days are ticking down for this seemingly never ending rally.

Lehman's Purpose in Dying

I have been saying for quite awhile that if it wasn't Lehman it would have been someone else. Lehman was not the cause of the financial meltdown, rather it was a symptom of the cause. The New York Times has an article on this very topic and takes it even a bit further.

Ever since that weekend, Mr. Nocera writes, most people, including the columnist himself, have viewed the decision by Henry Paulson Jr., the Treasury secretary at the time, and Ben Bernanke, the Federal Reserve chairman, to allow Lehman to go bust as the single biggest mistake of the crisis. Never mind that the two men have insisted ever since that they had no other option; surely, they could have created some options if they’d wanted to. Or so goes the conventional wisdom.

and

As we approach this anniversary, though, Mr. Nocera says he has begun to question that conventional wisdom. Yes, the fall of Lehman Brothers set off a contagion of panic. And he’s still convinced that Mr. Paulson and Mr. Bernanke could have found a way to save Lehman had they been so inclined (more on that in a moment). But he’s become convinced that, if Lehman had been saved, the collapse would have occurred anyway.

John H. Makin, a visiting scholar at the American Enterprise Institute, wrote recently, “If the Lehman Brothers’ failure had not triggered the panic phase of the cycle, some other institutional failure would have done so.” I’ll go a step further: it is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although nobody realized it at the time, Lehman Brothers had to die for the rest of Wall Street to live.

I love that line because there is so much truth embedded in it. It follows nature and the rules that govern our universe. Forest fires are good, death is good for what is left behind. Americans used to believe in this concept. Capitalism was allowed. It stopped a decade or so ago. If Chrysler would have been allowed to fail under Jimmy Carter, think about how that would have strengthened the U.S. car industry. You could even say if Chrysler would have died it would have saved Detroit. Death in capitalism is a good thing long term. Unfortunately, in my eyes there has been far to little death in the last 12 months in the U.S. even if more death would have meant alot more pain in the U.S. over the last twelve months.

and

Mr. Nocera says that almost everyone he’s ever spoken to in Hank Paulson’s old Treasury Department agrees that without the immediate panic caused by the Lehman default, the government would never have agreed to make the loans needed to save A.I.G., a company it knew very little about. In effect, the Lehman bankruptcy caused the government to panic, which in turn caused it to save the firm it really had to save to prevent catastrophe. In retrospect, if you had to choose one firm to throw under the bus to save everyone else, you would choose Lehman.

Buffett On What He Was Doing A Year Ago

Nothing new on the market. High yields continues to rally (spreads tighten), very little signs of a top. Retail sales numbers were great today with all the government stimulus (no surprise at all) but credit card deliquences were horrible (which was suprising). Either way, it doesn't matter. Market is powering higher.

In the meantime it is interesting to read a year later all the phone calls Warren Buffett was receiving the weekend Lehman went down. Interesting video/read.

From CNBC

This was the funniest part:

Buffett reveals that 10 months later, with the help of his tech-savvy daughter Susan, he discovered a number of voice-mail messages on his cell phone from that weekend, including one from Diamond.

A Potential Game Changer - Obama's Hoover Moment?

If you follow the markets as avidly as I do, this is already old news to you but Friday Obama announced tariffs on tires coming from China. When I read that news my mouth dropped to the floor. I couldn't believe it. Immediately the question became what if anything will China do. It didn't take long.

From Bloomberg:

China announced a probe into the alleged dumping of American auto and chicken products, two days after U.S. President Barack Obama imposed tariffs on imports of tires from the Asian nation.

This has the potential to be the catalyst to start the next long decline in the markets. China is obviously trying to compromise at this point sense the it is a "probe" which means they are giving Obama a chance to withdraw the tire tariffs. At this point, Obama has backed himself into a corner politically. It would seem difficult to completely withdraw the tariff.

Why is this so important? The tariffs of the 1930s was one of the top culprits of the severity of the Depression. No one wins. It sounds good often times politically and even on paper but a wave of protectionism worldwide would crush the recovery. Also, at this point, the markets are not running off fundamentals, but off of pyschology. This could be the change at the margin that shifts supply and demand where more shares are being sold than bought.

I am not saying it will be and Obama and China still control the outcome but it could be the game changer.

Something to watch longer term is the debt levels being run by the government. According to a new report by the European Commission it could very ugly for the UK very quickly.

From the Telegraph:

Britain's public debt will explode to 180pc of GDP within a decade unless future governments take drastic measures to restore fiscal probity, according to a confidential study by the European Commission.

The projection is more than twice the level forecast by the UK Treasury, which expects the debt to peak at around 80pc before gradually falling as growth revives and tax revenues come back to life.

and

Debt anywhere near 180pc of GDP today would test the UK Gilt market to destruction. While Japan is still able to fund an even higher level of debt without paying exorbitant rates, it is does not depend on foreigners to cover the bond auctions.

Key Indicator Strength

Last Sunday I talked about the stock market technicals showing unbelievable strength bouncing off 992 and being manipulated above 1015 at the close a week ago Friday. I talked about the fact that for some stupid reason those levels matter and the probability seemed to favor the bulls.

Well this weekend if your a bear I don't have much more favorable things to report. The stock market went up but it was the rest of the investment universe that was so discouraging. High yield credit surged all week. This has set a high in early August and had been moving down to sideways for over the last month. This week it went up on a rocket ship closing just below the August high. If your a bear this has to be very discouraging because historically the high yield credit markets lead the equity markets. They peaked in September of 2007 while the equity markets went on to set new highs. They hit a bottom before the equity markets did in March. I did hear rumors of a big debt fund being forced out of shorts so it may be technical in nature but that is not a good sign especially if high yield credit manages to set new highs next week.

Other indicators aren't positive for the bears either. Europe surged to new highs, as did Dow Transports, the dollar continued its sell off, and China showed strength all week.

There are always bones for the bears. Oil did not set a new high and showed overall weakness especially considering the dollars weakness. Copper also did not participate in any rally. The Baltic Dry Index which I did a post on early was flat all week. Asia at this point is lagging Europe and North America. Treasuries rallied all week which is typically considered a flight to safety trade. Finally the overall strength of the new highs for the U.S. indexes looks weak with fewer and fewer stocks participating.

Looking at everything it just doesn't look right for a major top. Of course no one said it had to but I can't imagine how the equity markets will start going down if the high yield index keeps going up.

I am getting killed but everything in the markets at this point is not being driven by fundamentals and it is hard for me to adjust because I don't consider myself a trader. Primarily is it being driven by the dollar continuing to sell off. THe problem with that though is a weak currency isn't the road to prosperity. If that was the case Zimbabwe would be the richest country on earth. Yeah for now it powers the markets unexplainablly higher.

Baltic Dry Index Leading the Stock Market

I mention from time to time the Baltic Dry Index, the Chinese stock market, the bond market etc looking for signs that the market is turning. The reason is because they experience shifts in liquidity and investor sentiment first. They are the first impacted. Societe Generale Albert Edwards had an interesting piece in his global strategy weekly about the leading nature of the Baltic Dry Index and produced the chart below. The original chart came from a blog called the Trader's Narrative I don't follow this blog and am not endorsing it. Anyway, very interesting graph. Points to another sign of a possible nearing top, even though at this point in the very short term it seems full steam ahead. Don't take this as Gospel. The leading nature of the Baltic dry index is definitely there but the correlation is not one.

Vacation Time?

My motiviation for blogging is really waning because nothing seems relevent to me. I could have done a very long post yesterday on the record drop in consumer credit. The implications for that are massive. Why bother? The market went up yesterday and today. The market doesn't care. The beige book today which showed "stabilization" could be worthy of a post. Market is pricing in 4% GDP growth so stabilization at this point should be a negative. NASDAQ set new highs today. Stocks that may possibly be cheap aren't going up (example could be Wal Mart which has gone nowhere for 6 months) while trash does not stop going up.

When you have JP Morgan upgrade GE yesterday because of sentiment and the stocks goes up 4%, you know your just living in loony land. How a massively funded fundamental equity shop can upgrade a company because of sentiment is beyond me. Goldman came with the second punch today also offering an upgrade. Of course Goldman at least tried to rationalize some fundamentals.

I could talk about Latvia and the new issues developing there. Same with Spain. I could talk about the growing danger signs of problems in option arms but none of it matters until it does. In the interim the market can keep going up on low volume with a few names driving the indexes higher. That is all that is relevent, currently.

Maybe it is just a month long vacation time. Keep the portfolio in place and forget about it. That would probably be best.

Market Open Update

The fishy open led to a sell off close to breakeven for the indexes, commodities stabilized and are now moving up again. Business as normal. Volume has now dried up, looks like a tight range to drifting higher.

Market Open

In a weird way this market gap open so far I actually think is somewhat bearish. Gold opened right at all time highs. Now is selling off. Copper opened right at 10 month highs, is now selling off. Dollar broke down to 77, now is reversing. This could get very interesting. Watch the dollar and commodities. If this gap open in the equity markets is not false, the commodities will tell you. We made be headed to new highs but not convinced...just yet.

Stocks Headed Higher?

Happy Labor Day to all. Hope the grills are roaring and the ski boats purring.

Wall St. returns to "work" tomorrow after the typical month vacation. I am not very hopeful that sanity will return with it. Friday was very bad for the bears. I pounded on three levels last week. 975ish, 992, and 1015. Why these technical levels? Because outside just a few stocks where maybe the fundamentals are being looked at, that is all that seems to matter. Anyway, sure enough, we bounced off 992 twice. Complete failure to even test 975 and on a day where Wall St. was deader than a prehistoric dinosaur, the computers or couple of investors managed to push the indexes to finish above 1015 at 1016. Why does that level matter? I honestly have no idea. I have never understood why technicals at times matter but I know they do. On a weekly closing basis we did not close below 1015 and the chart technicians will consider that bullish. Don't think traders didn't know this. On Friday it was ridiculous. Nobody was around with volume non existant especially in the futures but you had two burst of volume. One at 11:00 which is where most of the day's advance occurred to get the S&P 500 to 1013 and then it went dead again trading at a very tight range. The second burst of volume occurred at 2:55 (central time) which pushed the futures above 1015. Classic control play by someone trading the markets.

There are other things working against the bears. China is now up 5 days in a row, the Baltic Dry Index bottomed on August 25th, and the dollar is once again sliding.

If we have reached the top, no one says it will be easy. It can fool alot of people bouncing between 1000 and 1040 before finally breaking down. On the flip side, we could very easily be headed for 1100 if we haven't reached our top. Ideally, if we have reached a top we will sell off hard at the open tomorrow (maybe open a few points higher first). Honestly, I am not that confident that the markets will do that. In the short term it all seems fairly bullish to me and I would say from a probability perspective it seems like we will make new highs. Unfortunately that probability scenario in my mind is close to 50 to 50 (it leans slightly bullish) so hard to make a bet on.

Employment Numbers

In Daivd Rosenburg's note to clients yesterday, he made some interesting observations about the employment report. A few words of caution. Though David overall view of the world matches with mine nicely, I am actually not the biggest fan of reading his stuff (though I usually glance at it). In my opinion, he is a stereotypical sell side guy except he is bearish (which I understand is not stereotypical). He finds the data that matches his opinion and cherry picks through that data. All July he talked about Redbook numbers which were weak (measures store chain sales during the month), in August these numbers were actually pretty good and he never mentioned them. That stuff infuriates me. So far the numbers below, I have no context. Remember the employment report's data is calculated in two different ways. The unemployment percentage is calculated using a household survey. It determines how many people are looking for a job and who is in the workforce versus out of the workforce. The number of jobs lost is from the establishment survey (also called the nonfarm survey) which talks directly to companies. So David throws these numbers out from the household survey (which caused unemployment to go from 9.4 to 9.7%) but gives no context. So I am left wondering, is this really as bearish as he makes it sound or is it more normal? How could it be more normal? Easily, if things start improving and the news in the evenings starts talking about a rebound, discouraged workers (those who have given up hop in finding a job and aren't even looking and so are not part of the active workforce) all of a sudden start looking for jobs again. That is one reason historically the unemployment rate is always a lagging indicator. Surge in potential workers hit the market as things start to rebound.

Anyway, the paragraphs from David's report yesterday is below. It is interesting, it should make you do a double take but I don't have context or really know how bad that really is.

"What was really key were the details of the Household Survey, which provide a rather alarming picture of what is happening in the labour market.

First, employment in this survey showed a plunge of 392,000 but that number was flattered by a surge in self-employment (whether these newly minted consultants were making any money is another story) as wage & salary workers (the ones that work at companies, big and small) plunged 637,000 - the largest decline since March (when the stock market was testing its lows for the cycle). As an aside, the Bureau of Labor Statistics also publishes a number from the Household survey that is comparable to the nonfarm survey (dubbed the population and payroll-adjusted household number), and on this basis, employment sank - brace yourself - by over 1 million, which is unprecedented. We shall see if the nattering nabobs of positively discuss that particularly statistic in the post-payroll assessments: were are not exactly holding our breath."

The Benefits of Deflation

If you can protect your wealth there are some major benefits of living in an environment we currently live in. Last spring I bought two pairs of jeans, one of which normally retails for over $150 and the other that normally retails for over $80 for $30 and $45 respectively. Considering I dislike the experience of shoping for clothes immensly and rarely do it, it made the experience quite enjoyable.

Well calculated risk had an article on the Maui Prince Hotal being pushed into foreclosure by Wells Fargo.

Well thought I would do a little research and see what kind of deals the Maui Prince Hotel was offering if they are on the verge of foreclosure. According to their website their are many different packages to choose from. You can get the 3rd night free promotion for $298 a night. That works out to $200 a night including the free night. For what looks like a top class resort in Maui, that is a deal!!! You can get the 2009 prince special which comes with the prince room, breakfast, and rental car for $389 a night.

The Lexington Plaza Waterfront Hotel in Stockton California (east of San Franciso and Oakland) is also in trouble. The destination is nowhere near as appealing as Maui but the price is right for what looks like a nice hotel. Special offer of 2 nights for a total of $179.95.

Growl of the Bear

The knockdown the bears experienced yesterday, they got back up delivered their own blow while taking a pound of flesh in the process. It is never the news, it is the reaction to the news and the reaction to the news started weakening last week. This week, the gates opened.

I have been repeatedly pointing to the 1015 level as very very important. We bounced off it numerous times yesterday. Tried to hold it today and then once we broke it, it was a race down. Breaking that increases the probabilities substantially that the August/September top that I have been looking for and talking about for months is finally in. We need to get below 970ish for me to firmly declare a top but the probability is looking really high. A move back above 1015 invalidates it all. We need to hold it. I would not be surprised if we get some sort of challenge in the days ahead.

If you lifted the hood on the market today and peered in, it was incredible. Over 3 million S&P 500 future contracts traded today. I haven't seen that outside of an option expiration day since March. Over 1.7 billion shares traded on the NYSE. Financials took it on the chin and even more importantly insurance companies led the way down. Dollar rallied and copper had a big reversal. Credit sold off and government bonds were bought. VIX spiraled higher. It was a complete bear day in every sense of the word.

If we have indeed topped, we aren't going straight down. As I have said before, I think last week and this week shows the peek of economic data. This seems to be what the market is telling you now also but there will be good data in the weeks ahead. In the short term between 970 and 1015 is chock full of technical junk. It could get ugly over the next few days / weeks. We need to hold 1015. That is a given. The next support level on the downside is 992 area though the 970 area as mentioned is the really big area.

If the market really does have a serious correction, my job will actually turn closer to normal where I can read a 10k with the idea that it may be something I actually want to invest in.

The news, besides the ISM number, was actually not that great. Pending home sales was very disapointing despite all the headline nonesense. It shows that existing home sales will probable decline month over month now. Not, not good. The cash for clunkers auto sales numbers also had to end up being a disapointment.

I am not ready to go all in short yet (I have alot of losses to recover from current shorts) but it won't be to terrible long where it will be safe to short bounces.