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E.Factor
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Darshan's Daily Market Ponderings
Hello!
Happy new week. My name is Darshan and I'll be bringing you a daily write-up about my thoughts on the markets both from a macro viewpoint and a trading viewpoint too. I hope you enjoy it and I look forward to your comments and some healthy debate. The way the markets are, the more we talk about it - the more we will get out of them. (Please do let me know what you want me to talk more about and of course, talk less off - i.e technical details or more of a macro view?)
Monday 8th June 2009
Is the bear ready to jump out and take down the bull yet?
It's a sunny Monday morning here in London but everyone here knows that it can be sunny one minute and gloomy, wet, cold and windy the next. In this sense the stock market is much like London...it all looks brighter but every smart person is carrying an umbrella because they know this can't last.
The Market State of Play
The S&P500 futures did indeed break their trendline resistance on Friday due to better than expected Non-Farm Payroll results. However, like I thought this would be a fake pump and the market closed off lower on the day. This to me is bearish and indeed we can see that US futures are already 0.81% lower. A re-test of the 200 DMA at 918 on the S&P500 is probably likely before we move up? However, the is no significant economic news out today, so trading volume should be low and so be careful of taking any moves at face value. They can take it lower, set up a bear trap and then pump it right back up by forcing weak bears to cover.Maybe this market has one last hurrah left in it...but it won't be for long. I'll explain what to look out for further down.
Why did the market not sustain it's rally on better than expected NFP results?
Well the sharp jumps in the long end yields have spooked the market, who now doubts whether the FED can reflate the economy through it's quantative easing measures. (Took them long enough to realise this!). These higher long-term interests are worrying investors because it means mortgage rates are shooting up. How is this going to help the housing market? It's not! Higher mortgage rates are going to kill the hopes of economic recovery.
This is especially the case when we revisit the NFP results and the unemployment rate. There was a surprise drop in the NFP numbers with 'only' 345,000 non-farm jobs lost in the last month. However, the unemployment rate increased to 8.4%. Forgive me for being sceptical of the first number but I'll go with the second thanks ( I have no doubt that NFP number will be revised to a larger number next month). A shocking fact is that according to the USDA, one in nine US citizens are now receiving food stamps! That in itself says way more than any made up NFP number.
But Darshan, with such shocking figures why is CNBC in cheerleading freeflow?
Well anyone who values their portfolio or trading account, knows to use CNBC (The Cartoon Network) as a contrarian indicator. The fact is the general concensus in the market is just too bullish right now. This is dangerous when you consider the macro-economic situation. According to an Investors Intelligence survey, the percentage of bears in the market now stands at just 25.3%...the lowest number since January 2008. Does the economic environment warrant such optimism or rather, complacency? I fear not and that's why I am concerned that this bear market rally is on its last legs. What is happening is nothing but TARP money being used to distribute equities to the retail holder...leaving them holding the bag of overvalued paper when the big guys pull the rug.
The fact is that the US Treasury's plan to reflate the economy is just not working. They need to get the money multiplier to be greater than 1, until then we are stuck in a deflationary spiral (The amount of money poured in by the Central Banks is far less than the deleverging that has happened over the last two years). These job losses could be chalked up as lagging indicators because it is thought that we will already be in the midst of recovery before this is indicated by the job numbers. However, that's depending on the economics of money working like they should. In other words, traditionally we would see a gradual increase in consumption but through credit. This would in turn create growth and lead to recovery. However, the simple fact is that until the credit markets are fixed, unemployment is actually a leading indicator. Why? Well, this consumption will have to come from cash (income) not credit (debt). How do these traditional economists arguing that we are seeing the green shoots of recovery, propose that this income will come from? Income comes from jobs, jobs come from increased demand. Companies are still needing to cut costs, let alone borrow more to grow (as if they even can borrow!). So until the credit markets are fixed we are in a real mess. Additionally, the FED has no room to cut interest rates further! Terrifying that we are in this situation with an upwards march in interest rates possibly welcoming us with open arms. This is surely going to be a worry for the market?
What should the FED do?
Economic policy from the Central Banks seems to be a massive gamble with OUR money right now. Personally, they need to focus on funding real growth by unblocking the credit markets. So why not directly fund (lend) to the innovators and gifted who are likely to bring economic growth to our world? Why instead, throw good money at bad money and end up with a situation where those that can do with the money, don't have access to it and those that can't do anything worthwhile with it (Take the motor companies that have plundered countless billions before opting for bankruptcy).
Just something to think about hey. Well economics aside (what did economics ever matter to the markets anyway :-)), in these volatile markets, there are more bear traps and bull traps than I've ever seen before. The fundamentals just do not seem to warrant the market levitating at these levels but we must play the market as we see it.
The clue that will tell us when this bear market rally will end...
Personally all eyes are on the US $ Index , which is pretty much driving every single movement in this market. It is trying to rebound and we saw the whipsaws it caused last Wednesday when it managed it...commodities dropped, equities dropped, gold dropped and vice versa, yesterday it failed to maintain it's momentum and dropped back down in the afternoon. This caused a turnaround in all the markets; We had treasuries making new lows, equities pumping higher (albeit at a snail's pace), commodities shooting back up - in particular Nymex Crude Oil, Gold and Corn. I really feel that the US $ Index is going to bottom around 77 and this should bring about a correlated turn in the markets. The higher the $ gets, the more deleveraging we will see, especially from inflation trades such as commodities. The price of crude oil is purely being driven by capital inflows looking to protect their cash against a depreciating dollar. Once the $ regains strength, we will see money coming out of crude faster than you can fill your car fuel tank. Similarly the same with equities. At the end of the day the strength of a currency is always relative to another. The major world currencies are in no better shape than the US dollar. All movements in the markets are correlated at the moment, it's just depends where the smart money wants to take it.
Keep an eye out for cheerleaders on CNBC - should we get that and talk of a new bull market, then please protect your portfolio...either through puts or by selling what you feel you need to. This market is not finished on the downside...it's just trying to complete a marathon grafity defying dive upwards. What goes up - must come down. I genuinely believe the Dow Jones Industrial Average will not make it above 9400 before it crashes to new lows again. Follow the $ index and you'll follow the tricks of the market players.
Good luck and happy trading!
Darshan
* The information contained on this website and from any communication related to the author’s blog is for information purposes only. The analysis and the market recap do not hold out as providing any financial, legal, investment, or other advice. In addition, no suggestion or advice is offered regarding the nature, profitability, suitability, sustainability of any particular trading practice or investment strategy. The materials on this website do not constitute offer or advice and you should not rely on the information here to make or refrain from making any decision or take or refrain from taking any action. It is up to the visitors to make their own decisions, or to consult with a registered professional financial advisor.
