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Posts tagged ‘Dow Industrials’

Stock Market Choppy Earnings Season but the Bull Remains Firmly Intact

By Christopher M. Quigley

It was a choppy earnings season but despite its volatility the bull trend remains very much intact.

The Dow Transports and Dow Industrials both are trending upward with higher highs and higher lows and both indices are in congruence. (Though it must be noted that the Transports Index is significantly stronger than the Industrials). In addition The VIX remains at historically low levels and the Advance/Decline line shows no sign of any technical stress what-so-ever.

Despite this strength there are some specific areas of weakness.

One sector experiencing difficulty is technology. It would appear the gloss has definitely come off silicon valley. Review the charts below of Facebook and Twitter. This weakness is asking questions of this industry going forward. If a solid recovery is safely in place these media poster-boys should be “booming”. The chart evidence presented proves they are not. I think the issue here is overvaluation and the inability of future income streams to validate exorbitant P/E ratios.

This technological weakness is not company specific. The  NASDAQ is indicating real technical weakness. The chart below of the QQQ’s shows that the index is hovering about its 100 daily moving average. If the price action breaks below this important average  and then fails to consolidate around the 200 daily moving average (which is only 5% lower), it will be very worrying for the sustainability of this bull market, long term.

Another area of weakness is bio-tech which has technically entered a bear trend. While there has been a 15% retrenchment from previous highs in the bio-tech ETF: IBB, I still anticipate further correction.

As suggested in last month’s brief the consumer staples sector (ETF: XLP) has had a positive season. This I believe is due to rotation by astute money managers into markets offering earnings consistency. The consumer staples bear trend, which began last autumn, is definitely over.

In the general “blogosphere” for the past 2-3 months there has been numerous stories heralding the “collapse” of the American real estate market. While these articles make for interesting reading they are somewhat sensational. The market confidence in this sector remains strong as can be observed by reviewing the Dow Jones Real Estate Index Fund ETF: IYR below. This year this ETF is up 11% and technically the trend is powerful. I think this is one of the reasons the FED is continuing with the QE tapering policy. I think Janet Yellen and her team are genuinely confident the recovery has legs. Of course should this strength become too robust it will call into question the continued low interest rate environment.

Of course when that mantra begins to be played out in the media all bets concerning future market trend will be off ,from my point of view. But that is a discussion for another day.

Dow Jones Transport Index: Daily………………………………..

full article at source: http://www.marketoracle.co.uk/Article45466.html

Quarterly Market Brief & Stock Pick from Wealthbuilder.ie

Wealthbuilder.ie

On the 21st. May we wrote the following:

“Due to lower highs and lower lows on both the Dow Industrials and Dow Transports there is

now a change of trend in existence in the markets. How long this correction will continue no

one can be sure. A bounce can be expected at any time due to the fact that the market is

terribly oversold based on Stochastics and the McClennan Summation Index. However, I do

not think we have seen support lows in place yet. What is the reason for this capitulation? As

mentioned in my last brief I believed the “flash crash” of the 6th. May mortally wounded all

indices from a technical pointy of view. It will take some time, probably the whole summer,

before some degree of confidence is restored.”

full report in PDF here Wealthbuilder_Quarterly_Brief

Phase #2 of the Euro-Zone Debt Crisis

Phase #2 of the Euro-Zone Debt Crisis

by Gary Dorsch | may 26, 2010

“A trend in motion, will stay in motion, until some major outside force, knocks it off its course.” For almost fourteen uninterrupted months stock markets around the globe were climbing higher, recouping $21-trillion of wealth since hitting bottom in March 2009. The global economy was pulling out of its worst recession since the 1930’s, led by locomotives in China, India, and Brazil. On May 4th a survey taken by JP Morgan showed that global manufacturing expanded at its fastest pace in six years in April as output and new orders surged to new multi-year highs.

In the United States factory activity was firing on all cylinders, lifting the Purchasing Manager’s Index (PMI) to a six-year high at 60.4 in April, with employers becoming increasingly confident about hiring. Although manufacturing is not a huge component of the US-economy the factory industry is still where recessions tend to begin and end. For this reason the factory PMI is very closely watched, setting the tone for the upcoming month and other key economic indicators.

The US economy added 570,000 jobs during the first four months of 2010. In sharp contrast, just a year earlier, the US economy was losing more than 700,000 jobs during the worst months of the “Great Recession,” which began in December 2007. Still there’s been a worrisome undercurrent lurking beneath the surface – the U-6 jobless rate, including those who can only find part-time work or are too discouraged to look for a job, rose to depression levels of 17.1% in April highlighting the deepening impoverishment of the American middle class.


Still, traders on Wall Street saw the glass as more than half full rather than half-empty. The key numbers were still turning up spades. The combined net income for S&P-500 companies in the first quarter were 46% higher from a year earlier, helping to fuel the S&P-500 Index’s 75% rebound from its recession low in March 2009. Analysts on Wall Street upped their forecasts for S&P 500 profits to grow 29% this year and 19% in 2011, the biggest two-year advance since 1998.

Bullish traders bought increasingly expensive stocks on all dips, comforted by a steady stream of remarks from Fed officials promising to keep the fed fund rates locked near zero percent for an “extended” period of time. So powerful was the hallucinogenic effect from $1.75 trillion of liquidity injected into the markets by the Fed that speculators bid up the Dow Industrials to the 11,200 level, just shy of the 11,450 level – where horror story of the Lehman bankruptcy began.

Yet according to a Bloomberg opinion poll dated March 19th-22nd, there was always a big “disconnect” between the bullish perceptions on Wall Street and the fear and trepidation felt by workers on Main Street. There was great disbelief in the theory that the Fed could simply inflate the US economy to prosperity. Barely one in three Americans thought the economy was on the right track, and less than 10% predicted the economy would be strong within a year. Most American investors plowed their remaining savings in bond funds and missed the “green shoots” rally.

Still, the strategy pursued by the Fed and US Treasury were rather simple – inflate the value of the stock market through any means possible, including massive money printing, pegging interest rates at ultra-low levels, clandestine intervention in the stock index future markets, and jigging the accounting rules for valuing toxic bank assets. Eventually, the “wealth effect” would kick in and consumers would increase their annual spending by 3.5 cents for every dollar of added wealth. The Fed’s QE scheme opened the monetary floodgates driving high grade and junk bond yields sharply lower, and fueling a $5.5 trillion recovery of US-stock values.


But just as US consumer confidence was rebounding to a two-year high, buoyed by the Dow Industrials’ rally above the 11,000-level and US-home prices showing a year-over-year gain of 2%, the first increase since 2005, “a major outside force, began to knock the stock markets off their upward course.” Few traders would realize how the tiny nation of Greece with just 11-million citizens could bring the world economy to the brink of another Lehman-style meltdown.

Few traders on Wall Street took notice of the obscure and thinly traded Greek credit default swap (CDS) markets. There was a sense of complacency about talk of a Greek debt default, with traders reckoning that at the end of the day politicians in Germany and France would ultimately bankroll a massive bailout and prevent panic and fear from spreading to other highly-indebted Euro-zone countries, like Portugal or Spain, and plunging the Euro into a death spiral.

However, lying beneath the surface of the euphoria on Wall Street a ticking time bomb was winding up and getting ready to explode. The villain igniting the fuse was a most unlikely source – the S&P credit rating agency – which usually lingers far behind the credit default curve. Surprisingly, S&P roiled Euro-zone politicians and shocked the markets on April 26th by downgrading Greece’s €300 billion of debt three notches to junk status, at BB+, and thus, derailing the upward trajectories in industrial commodities and global equities. 

In the eye of the storm Greek CDS rates soared towards 1,200 bps, and yields on Greece’s two-year notes jumped to 25.8 percent. Suddenly stock markets in the fastest growing emerging markets in Brazil, China, and Russia were at the gates of bear market territory after suffering steep losses of 20% or more. Crude oil plunged $23 /barrel to as low as $64 /barrel, and there was a 20% shakeout in the copper market. The Australian and Canadian dollars tumbled 12% and 7% respectively amid a flight from natural resource shares and monetary tightening in China.


On May 7th, EU monetary affairs chief Olli Rehn spoke about the need to avoid a Greek default on its debts at all costs. “Little did authorities of the United States know in September 2008 what the bankruptcy of investment bank Lehman Brothers would lead to. The consequence was that the world’s financial system was paralyzed in a way that led to the biggest global recession since the 1930’s. Consequences from Greece’s insolvency would be similar, if not worse,” he warned.

Rhen’s apocalyptic warnings were taken very seriously. Euro-zone finance ministers and central bankers huddled behind closed doors during the May 8-9th weekend working frantically to craft a bank bailout plan before the opening of the Asian stock and currency markets on May 10th. What emerged was “shock and awe” – a 750-billion euro ($1-trillion) bailout package, including standby loans and guarantees that could be tapped by Euro-zone governments that were shut out of the credit markets. Putting the squeeze on naked short sellers the Spanish IBEX Index jumped 15% in a single day and the Euro briefly jumped to a high of $1.3100.

Since May 10th however the “shock and awe” effect has worn-off. The Spanish stock market index has completely surrendered its one-day gain of 15%, and the Athens stock index has retreated to within 5% of its March 2009 lows. The Euro has failed to gain any traction and is still sliding lower along a slippery slope towards parity with the US dollar. While the $1 trillion bailout succeeded in preventing an immediate default on Greece’s sovereign debt, the cost of borrowing for Greece’s biggest banks remains prohibitively high, which could choke its economy to death.

Thus, the focus of the second phase of the European debt crisis has shifted from the specter of a sovereign bond default to a frightful situation where European banks may become unwilling to lend money to the private sector, or could demand higher interest rates or impose tougher collateral rules. In other words, the markets fear a “double-dip” liquidity crunch, which could deprive European companies with junk bond ratings of badly needed funds as banks become more risk averse.

Since May 10th credit default swaps for the Euro-zone’s top 50 junk rated bonds has surged to as high as €625,000 to insure €10 million of debt. That’s up sharply from €460,000 since the $1 trillion bank rescue plan was announced. In fact, the European corporate bond market has been effectively shut down for banks with bond issuance slumping to $2.6 billion in May, down from $82 billion in January.


Amid fears of a liquidity crunch in Europe there are expectations in the gold market that the ECB would respond by ramping up its money printing operations to full throttle, and in the process exerting further downward pressure on the Euro. As of May 21st the ECB had already bought 26.5 billion Euros worth of sovereign bonds as part of its agreement to monetize the debts of the most fiscally irresponsible Euro zone governments. The ECB might end up monetizing as much as 750 billion Euros of sovereign debt, including riskier bank bonds, to avoid a full blown crunch.

After climbing to a record 1,000-euros /oz in mid-May, Gold endured a brief pullback tumbling in tandem with sharp slides in crude oil, copper, nickel, rubber, and other industrial commodities. But gold has proven itself a very resilient metal and highly sought after as the purest form of “hard” currency, shining brightly as a hedge against paper currency devaluations and the monetization of government debt.

The European Central Bank (ECB) has crossed the Rubicon agreeing to monetize hundreds of billions of Euros held in Greek, Portuguese, and Spanish bonds. In the process the supply of Euros in world money markets is likely to increase. The ECB’s efforts at sterilizing the bond purchases are voluntary and have been feeble at best. Furthermore, at the end of the day, there is little chance that Greece’s 2.5 million working citizens can repay 300 billion Euros of debt, while at the same time absorbing 25% wage cuts in the public sector and paying 23% VAT taxes.

At some point Greece’s government would seek to untangle the noose strangling its economy and demand a restructuring the country’s debts, and in a polite way tell its lenders to take a big haircut. Argentina is holding a $20 billion debt swap this month at 45 cents on the dollar, nine years after defaulting on $95 billion of loans. The Euro would remain a very unstable and weak currency. Reports that Beijing is becoming increasingly nervous about its Euro zone bond holdings drove the Euro to as low as $1.2180 and fueled a flight for safety into gold.

source

Gary Dorsch
SirChartsAlot, Inc.

Wealthbuilder market brief 21.05.2010

 

Due to lower highs and lower lows on both the Dow Industrials and Dow Transports there is

now a change of trend in existence in the markets. How low this correction will continue no

one can be sure. A bounce can be expected at any time due to the fact that the market is

terribly oversold based on Stochastics and the McClennan Summation Index. But I do not

think we have seen support lows in place yet. What is the reason for this capitulation? As

mentioned in my last brief I believed the “flash crash” of the 6th. May mortally wounded all

indices from a technical pointy of view. It will take some time, probably the whole summer,

before some degree of confidence is restored.

Wealthbuilder_Market_Brief_21st._May_2010

Recent Market “Events”

If like me you have become puzzled by the recent Market “events” you should find this excellent article sent to me to-day helpful

Recent Market “Events”


Following quite a number of requests from students and clients this brief will deal with my understanding of what transpired last Thursday the 6th. May when just after 2.30 PM the Dow Industrials collapsed by nearly 10% and then suddenly recovered in 11 minutes.

The implications of what occurred are far reaching and unless the regulatory issues are resolved we can expect similar “events” of like nature.

In the main to comprehend the situation in the “Market” one must realise that there are now many markets. In the good old days, in America, all we had was the New York Stock Exchange where real people dealt with real market makers in real time. But computers in general and the internet in particular have changed all that. In addition as well as the “public market” we now have the (OTC) Over the Counter Market. The OTC is basically a private market between banks and large institutions which has little or no active supervision. I find this development strange because the trading activity on the OTC is 60 trillion dollars annually, while turnover on the public market is 5 trillion. Now in addition to public markets and private markets let us now bring in “Dark Pools” to our explanation.

“Dark Pools” What are they? ” Dark pools of liquidity” are crossing networks that provide liquidity that is not displayed on order books. This situation is highly advantageous for institutions that wish to trade very large numbers of shares without showing their hand. Dark liquidity pools thus offer institutions many of the efficiencies associated with trading on the exchanges’ public limit order books but without showing their actions to other parties. This is achieved because neither the price nor the identity of the trading entity needs to be displayed. Many of the OTC “exchanges ” used by the dark pools use high frequency trading programmes to minimise order size and maximise order execution. Now you may think that this manner of doing business on the “stock market” is carried out by minor unknown entities but this is not the case. Below I list the Independent dark pools, the broker-dealer dark pools and exchange-owned dark pools.

Independent dark pools: Instinet, Smartpool, Posit, Liquidnet, Nyfix,Pulse Trading, RiverCross

and Pipeline Trading.

Broker-dealer dark pools: BNP Paribas, Bank of New York Mellon, Citi, Credit Suisse, Fidelity, Goldman Sachs, Knight Capital, Deutsch Bank, Merrill Lynch, Morgan Stanley, USB, Ballista ATS, BlocSec and Bloomberg.

Exchange-owned dark pools: International Securities Exchange, NYSE Euronext, BATS Trading and Direct Edge.

When you understand that all the big players in banking and finance are using the OTC system and have a turnover 12 times that of the “public” markets you get to wonder why there is a New York Stock Exchange at all. Well you see there is a big difference between the OTC “private” market and the NYSE “public” market. The NYSE is comprised of market makers. These market makers are specialists who are obliged to buy and sell on their own and the publics’ account to create a liquid active market. The OTC market faces no such obligation. Over the past number of years attempts have been made to abolish the specialist role and remove the “human” engagement.

What happened on Thursday was the high frequency OTC trading programmes

created “trades” which did not make sense to the NYSE specialists. Accordingly the NYSE stopped handling orders so that the situation could be analysed. The OTC computerized networks then began rerouting orders to other “markets” and with no “public” markets participating prices collapsed through sell stops and the rest is history.

There are many lessons to be learned from this event. But for me the main question is whether a “market” that is only 8% “transparent” is actually a market (5 trillion as a ratio of 60 trillion). Going forward it is obvious that additional “circuit breakers” must be brought in to modify the exchange activity of high frequency dark pools. Whatever the eventual fallout from last Thursday’s events are it is clear that the issues I have touched upon are only the tip of the iceberg and any trader or investor worth his salt must reflect upon what happened and adjust his or her strategies appropriately.

Wealthbuilder.ie


Wealthbuilders market-update (April2010)

Many thanks to www.wealthbuilder.ie  for their stock-market up-date

The upward pulse of the bull trend that commenced in March of 2009 continues to forge ahead with considerable power. Both the Dow Transports and the Dow Industrials gave new buy confirmation

signals last week. That this happened in the middle of an earnings season is most encouraging. Thus it would appear that the probability of the Industrials hitting the 14,000 level without significant difficulty is high, allowing for the odd pullback.

for full report PDF doc here Wealthbuilder_Market_Brief 

Market Up-Date January 2010

Quarterly Market Brief & Stock Pick

Sent to me by  Chris  at  www.wealthbuilder.ie

 
 

The market is currently trying to find its bearings after the spectacular run up since March 2009.

 
 

On a weekly chart the Dow Industrials and Dow Transports both indicate a definite technical consolidation line being formed. The longer the averages remain in their respective November and December ranges the more the the market will discount the March rise and focus on the new support point. According to Hamilton the greater the duration of this “line of consolidation” the more significant the direction of the trend on “breakout.” On probability the market will move North, once the earnings season indicates there are no major surprises in the offing. However, how quickly the averages approach previous highs is anyones guess but price movement is bound to be choppy due to all of the following:

 
 

A:              Will future earnings eventually justify such rich valuations.

B:              When rates start rising will the hikes be benign or aggressive due to explosive inflation.

C:              Will the Real Estate, Financial & Banking sectors “tank” on rate hikes.

D:              When will unemployment stabilise and improve.

E:              Has the market discounted tax hikes.

 
 

As always the market must try to discount such uncertainty but given the mix I see above average risk in the martket given the weak underlying fundamentals.Therefore I am happy to advise clients to hold onto their fabulous 2009 gains and await a clearer economic tablet or a powerful technical indicator.

 
 

Some folk recommend Gold or Silver but again I see major institutional manipulation which makes a traders life a misery. Trading gold makes good fundamental sense but in actuality the technical picture has been muddied by paper gold in the form of ETFs, so I have moved on.

 
 

The situation since March provides all the emanations that TARP funds found a home in equities. In other words the fix was in. The wonderful gains thus far have given “banks” great profits to repay congress borrowed funds. I use the word bank with great delicacy because they are in effect derivitave traders. For this reason the TARP funds were not used to “stimulate” the real economy and therefore cannot be found in credit card account funding or car finance deals or property mortgages or business overdrafts (no that would be too much work and risk). The funds are in hyper leveraged instruments, cross purchased. Thus this is a synthetic bull run, hence the spectacular market rise.
The sooner congress realises this the sooner the true American economy can regenerate. When will it be accepted in honour and faith that the key to recovery was, is, and will be small enterprise. History educates that small entrepreneurs create 80% of ALL NEW JOBS in America. Support them and all will go well.
Ignore them and a double dip
correction will prove inevitable due
to sustained high unemployment.

 
 

I don’t know if any of you noticed but over the Christmas, during a 7 day period, short term interest rates shot up 600% from .01% to .07% and long term rates jumped 25%. In the first days of the new year they were pulled back but short rates are sill up 200%.  This volality indicates the fact that the FED has a major job on its hands holding the “balanced quantatitative easing” story together. A lot is riding on the holding of rates down and if anyone drops the PR ball there will be hell to pay. Ergo the market is risky until the jobs situation shows definite unmanipulated improvement.

 
 

 
 

 
 

 
 

Stock Pick:

RDSA: Royal Dutch Shell plc.

 
 

Royal Dutch has regained about half of the ground lost since their 2008 peak, supported by a partial recovery in oil prices.

 
 

The refining, chemicals and natural gas lines have not snapped back as quickly as the oil pumpimg business.
However, efficiency measures have been implemented and Shell is targeting a return to growth before too long.

 
 

Expansion is on track for the oil and gas exploration business in 2011, when a couple of extra large gas projects in Qatar are due to come on stream.
These top quality ADRs should appeal to conservative investors. While the issue is untimely strong dividend income underpins the good long-term total return potential that we envision.

 
 

Fundamentals:

Dividend Yield:                                  5.5%

Financial strength:              A++

PE Ratio:                            11.0

Return On Cap:                            12.5%             

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