Market comments for Aug. 9th, 2011

The Futures this morning look like we will start with a positive gain of about 130 points on the Dow. Europe is up slightly this morning as well, all less than 0.5% gains. So if you are feeling good this morning that the worse may be over, don't count your chickens just yet. I believe we will have a rally from here and go back over the 11,000 level in the next day or two and maybe test 11,500 eventually again, but soon there after, we will continue the downward trend again going below the lows of yesterday's close at 10,809. This is a good interim time to make adjustments to your portfolio and prepare yourself for more pain to come.

The thinking behind this is Elliott Wave Theory. We have concluded Wave 1 down of a 5 Wave pattern. Wave 2 should be a bounce up and it is impossible to predict its stopping point but I have given you an idea above. Wave 3 will be a down Wave and it will far exceed the lows of Wave 1 and possibly take us down as low as the 9,000 level. I hope I am wrong in my prediction here, for those who get extremely stressed when the market drops like it has.

Productivity data was released this morning and it came in at -0.3% for Q2. The prior quarter was revised down from +1.8% to -0.6%.

The Put to Call Ratio warns again. Are you listening this time?

It should be a quiet day today as the Banks and Stock Markets are closed here in the U.S. for observance of Martin Luther King Day. For those missing market action I decided to recap where we are and what data, if any, was noteworthy from Friday. Well, I found one small piece. It was the Put to Call ratio at the close on Friday. It came in at a 0.57 reading. I thought you would need a context for that reading and so I have included 3 charts below. The first is the Put to Call ratio from Oct. of 2003 to the close on Friday.

As you can see from the above chart, a reading of 0.57 is on the rare side and falls outside the normal range of data with a 95% confidence level. I have identified various dates when a reading this low or lower occurred. Why is this reading important? Well, it is because often it is a sell signal for stocks. I said here, often, not always. The other two charts below are of the Dow. The same dates have been identified on those two charts. The first chart is the Dow plotted linearly and the second chart is the same data plotted on Log scale. Log scale shows a more dramatic change than a linear scale does. Here are those 2 charts.


I think it is quite clear that in all cases in subsequent days following the readings the markets dropped. Some times, like Mar. 16, 2006, it was a small drop of about 800 points and other times it was the massive selloff we experienced where the Dow dropped almost 8,000 points.

We may still rise a few days or a couple of weeks, but we are in store for another correction of at least that 800 points but we could also be at that tipping point of thousands of points again. According to Elliott Wave Theory, we are in for a doozie of a correction all the way to the depths of hell by the time it is complete. These things don't happen in a matter of days months or year. It can take years to unfold but one thing is for sure, when they do come they bring sizable pain. I am not expecting the same levels of depth as does Elliott wave Theory prognosticators, but I do see a drop of at least 5,000 points for the Dow coming and a retest of 6,400 low registered in 2009, which I believe will fail as well in the end. Even the Fed won't be able to stop it when it starts. Not only won't Bernanke be able to stop it but all the Kings horses and all the Kings men won't be able to put Humpty Dumpty back together again!

The real important question to ask yourself is this. What if what I am saying does happen? What actions will you take? Will you start to buy on the dips as the market starts dropping and be buying too prematurely, only to see you selling the stocks you bought and repurchasing them again a bit lower? Or will you just Hold on to your stocks in hopes of a quick turnaround? Or will you be like a Deer in your headlights and be frozen into no action at all? These questions are worth asking yourself. You see they can be grouped in categories like these: Reactive, Responsive and Proactive. Which strategy will be best for you and what does that actually mean? As I learned as a Boy Scout: Be Prepared!

Now for a little light humor. You might call this post today in honor of Dr. Martin Luther King: I have had a Bad Dream!

Stock market prediction going into January

I have been looking at the chart of the Dow and decided to look at a 6 month timeframe as it seems the market has been going straight up, although lately seems to be still strong. I wanted to determine whether the Bulls case is warranted and whether there are any signs visible to the average investor with limited knowledge that all might not be as good as all the talking heads are saying. You can't find anyone Bearish right now, except Robert Prechter and his Elliott Wave Theory. Well while I do like the Theory I also use other methods, as long term readers know. Besides the Put to Call ratio, which I like a lot as an indicator of a pending reversal in the market, I also like to use Price/Volume with the emphasis on Volume movement. Today's chart below shows the Dow 6 month Price and Volume movement over the period.

What you will notice from the above chart is that the Volume has been steadily declining over the period. That's the first note worthy piece of data. In fact in the month of December we are at the low on the chart. Even July had much more volume than did December and most are on vacation then.

The other noteworthy consideration is that the price has all but gone steady up on this lower Volume. First rule to observe in trading is that if you have price rising, volume needs to also rise if you want to have a Bullish condition. But if the price is going up and the Volume keeps dropping, as it has especially lately, it is a very bearish sign. Also note the number of recent days which have been distribution days, in red, versus accumulating days, noted in Black on the Volume chart.

To me the signal couldn't be more emphatic. This indicator is flashing RED in Neon lights. Does this mean that next week the market will tank? No, but it should make you wary as to how much you are invested in the market rising right now. There is better than a 50% probability that the market will be turning down soon. It is way overbought by any measure you use. Buyer be Ware! Don't say you didn't know. And ask yourself how can all the prognosticators except one, be on the side of the Bull at this time. And don't tell me it's the Fed. They only have so much they can do.

Where's the market headed? Some facts to consider.

I was trying to use news items to see the probability of the market going up versus down going forward. So I have listed all the things I could remember that would affect the market negatively and which would positively. Here’s a glance at them:

Positives:

-Stock market rallied this past year and recovered 70% of the losses from the lows.
-The SubPrime mortgage problem has run most of its course.
-The divisiveness of the healthcare reform Bill has abated and the Bill passed.
-Personal Savings has increased this past 1 1/2year
-The Dollar has rebounded from its low after the Euro has dropped significantly.
-The US Auto companies have been restructured to be more competitive and profitable
-The Banking system has been saved from total collapse and Deposits are insured by the government, for up to $500,000 per couple.
-Freddie Mac and Fannie Mae were saved from the brink of collapse
-The Stimulus plan has created some jobs.
-GDP was 3% in the first quarter
-Corporate earnings for the most part beat expectations (but expectations were set low last year. Top line growth has been muted but cost savings have led the way for earnings improvement.

Negatives:

-The debt level of the US is astronomical at a significant % of GDP
-The EU has had near collapse of Country debt for Greece and is threatened by similar issues from Spain, Portugal, Ireland, Italy.
-The Gulf Oil crisis is destroying habitat and livelihoods in the Gulf for years to come
-North Korea has threatened war against the South and us over the Missile torpedo on the South Korean ship
-The National debt will be increasingly difficult to pay as interest rates rise.
-People are afraid and causing GOLD and Silver to rise dramatically as they don’t trust currencies.
-Stock market is poised for a Super Grand cycle correction according to Elliott Wave Theory.
-New Home Construction is still down and Home Prices are continuing to go down.
-The CPI is near zero with all the Stimulus money throw at it and we are in Disinflation now and headed towards Deflation.
-Bank lending has tightened significantly and 3 Month Libor (rate the Banks charge each other for lending) rates have increased.
-Official Unemployment rate remains high at 9.9% while the unofficial rate, which includes those looking for Full time work from part-time workers is at 20%.
-Wars in Iraq and Afghanistan
-Issues with Israel for Obama Administration over building Settlements
-Latest incident of Israel raiding the flotilla of boats bringing supplies to Gaza
-Issues with Iran and Nuclear materials for possible bomb building.
-Terrorism: A host of attempts to terrorize us from Detroit bound passenger lighting his pants on fire to the Times Square attempted car bomb and many others trying to harm the US.
-The Tea Party movement
- Political divisiveness between Democrats and Republicans
-Arizona Immigrant laws newly enacted.
-Financial regulation not yet passed to prevent Too Big to Fail banks.
-Stock market looks poised for another selloff
-Now Fixed Rate Mortgage owners are going into foreclosure and rate appears to be increasing.
-Commercial Property is now feeling the problem with businesses closing and there are now an increasing number of For Lease properties For Sale. The U.S. national office vacancy rate of 17.3% was the highest in 16 years.
-Credit Default Swaps still are an issue and have not been resolved since the crash of 2008.
-Most Fixed Income retirees are getting in more and more of a financial bind and may have significant problems financially surviving in their retirement.

That’s my list. What does it say to you? Do you think that these can be overcome and drive the market higher this year or next? To me the Negatives far outweigh the Positives and my inclination is that bodes poorly for any chance the markets will stay at current levels for any prolonged time. The best hope I can see is that we won't go as low as I have predicted, which is below 4,000 to as low 2,500 on the Dow. Now that is truly scary!

Do you have any items you want to add either on the Positives or negative lists? Please feel free to make a comment with any additions you have.

A philosophical view of the stock market and commentary.

Yesterday's market action was a function of fluctuations in currency movement and the same could happen today, according to Art Cashin of UBS Warburg on CNBC this morning. I don't know if that was the cause but there was a surge of the dollar at the open yesterday and, within an hour of the close, the Dollar dropped. Theses fluctuations are expected to continue as Europeans settle in on what they think about the Euro now in light of the 1 Trillion bailout of EU zone countries.

Having said that, we continue to be in a negative frame of mind in US markets. Today the PPI number for April came in at -0.1%, which is deflationary in itself. That continues to plague our economy as we have had negative CPI or zero CPI with all the money and stimulus the Fed has been actively creating. Even with this major effort, there appears to be deflation worries continuing and so far the Fed has not managed to abate this concern. Inflation watchers, rightfully so, keep looking for inflation to rear its ugly head. It has in effect with the rise in Gold and other precious metals, but not enough to turn the tide in the direction of inflation. There is contention on this topic in most Cable programs based upon commentary by their guests.

You would think this would be the most ideal time to pay down Federal Debt with nearly zero interest rates, but it appears for political reasons we prefer to pay the debt down when interest rates rise and the pain is greater. I just don't understand the shortsightedness of Americans. I do understand the politics of the situation, as we are a democracy where politicians are working to get re-elected immediately after winning an election and pain means sure defeat at the polls. Which is why the pain caused by our lack of backbone in dealing with these issues at a logical time is not great enough to make us move into action. That is why we had a Great Depression and why we are destined to repeat history again, unfortunately. This is why I favor the view the markets will drop significantly and shake us to the core as the excesses of the 80's to the first part of the 21st Century will shape a new generation of true fiscal conservatives. We need a cleansing and we are going to have one. That is why the markets do follow Elliott wave Theory and are based on Fibonacci numbers. It is based upon the very nature of man (and woman).

What's next for the stock market?

What if the stock market does what I hope it doesn't, go down below 4,000 on the Dow. But that is what the charts indicate using Elliott Wave theory. Experts on CNBC are pumping up the fact that they see the economy is growing, even though the Unemployment rate went up to 9.9% in April, up from 9.7% in March. Well the chart above is very scary and I show it for one reason, to give the reader a caution about how much of their wealth is tied up in the market. As yesterday proved, markets can be very irrational and they do not move on news. Many things are pointing to a rebound in the Futures market but watch for people selling into the move up as Volume will increase. Watch the Volatility Index VIX during the day. And if you get a chance go back in time and read some of my market posts.

The chart above points out the Elliott Wave cycles I have counted and where it says we are headed when all is said and done. This will not happen in an exact straight line and will be jagged, going up after some drop and then going lower again. FAIR WARNING!