Is it much ado about nothing...

Here is a link I ran across on Ritholz's "Big Picture" blog.
The quote below, from the article is descriptive of George Soro's theory of reflexivity.
"
What is really happening in Greece is the operation of a social-feedback mechanism. Something started to cause investors to fear that Greek debt had a slightly higher risk of eventual default. Lower demand for Greek debt caused its price to fall, meaning that its yield in terms of market interest rates rose. The higher rates made it more costly for Greece to refinance its debt, creating a fiscal crisis that has forced the government to impose severe austerity measures, leading to public unrest and an economic collapse that has fueled even greater investor skepticism about Greece’s ability to service its debt."

And the article by Robert J. Schiller here

Gold and bonds and currencies

Three charts:

The US Dollar, the Euro, and Gold.
The USD and the Euro trade inversely. It used to be that when the USD was weak gold went up, and when the USD was strong gold went down. Now it doesn't seem to matter. When the Euro is weak, gold goes up, and when the Euro is strong gold goes up. I think that the world is losing faith in both of these currencies. Imagine a true flight out of either! Where would you go? The Swiss franc is doing well.... As are gold and silver...
Even the safe haven of US Treasurys are not such a safe haven. Particularly because they are denominated in US Dollars.
GLD was an easy buy as it cleared 152.

Lately the 10 yr Treasury is losing ground, even as the stock indexes lose ground.
So I have picked a place to put a bottom in TBT, which is the long only way to short the US 10yr Treasury Note.

A small position here, risked to new lows, add if we clear those recent highs at about 35... Notice how the volume has stayed high as the price went sideways. Quite often this is the sign of a trend reversal...
Control risk!

Markets discount the news

It is said that markets discount the news. Charles Dow, the father if Dow theory stated that all of the information available is reflected in the averages.

With that in mind we have to consider the rally in the stock market averages over the last two weeks. We went from sharp losses to sharp gains. And the news that precipitated those gains: That Greece was bailed out, again.
And the markets rallied back to near their recent highs. This is at a time when "everybody" knows that Italy and Spain and Portugal and Ireland are also on the list of "imminent" default!
In the coming week we are going to hear more about the woes of Europe and how the Euro as a currency is doomed, and how the economies of Europe, with the exception of the robust German economy, will slow down and that will affect the whole world at a time when the U.S. economy is sluggish and fragile, and China is fighting inflation by raising interest rates, and oil and energy prices are on the way back up, and the U.S. Congress is debating whether to let the U.S. govt. default on it's own debt.
And all of that is old news, and the markets are up.
I can only conclude that the markets are going to go up.
There will probably be some sort of decline over the next couple weeks but I have a strong suspicion that the stock markets will handle the decline well.
As I look over a couple hundred individual stocks I am impressed by how many are set to make new highs.
And only a couple months ago I was thinking that a major top had arrived. I think that what made it seem so ominous was that I could see it coming.
Here are a couple charts. I am struck by the volume surge in the S&P 400 midcap fund, IJK.

And the Naz,

Part of stock market "wisdom" is that there is no such thing as a triple top. Meaning that by the third time a stock reaches a high price it has had every opportunity to go down, and will almost always go higher. Individual stock rules don't work as reliably in the stock averages, but I have to wonder, what are these indexes doing back at the highs with all of the bad news out there?

A local favorite of mine

There is a small bank in the U.S. Pacific Northwest called Umpqua Bank. (The Umpqua is a local river, and the name of the native tribe)
A look at the chart of this bank shows a tight consolidation, or coil that has the potential to break out.

This coiling is very evident on the weekly bar chart above. For a longer term trade I would buy as the price breaks out above $12, and add at $13. If the price continues higher over time after that, an additional buy at about $16 and then hold.
The reason for this strategy is that IF the price goes higher I want to have some of this stock. And IF the price KEEPS going higher I want more of this stock. Of course, if the price turns down and my average price is costing me more than about 15% I would get out.(For "investments" I tend to take a little more percentage risk, depending on the volatility of the stock.) The point is that from where this stock is now, and where it and the rest of the market has been over recent history, IF it starts up it has the potential to be the start of a major move.
Again, if I trade this way, using these rules for all my investments/trades I always have a big position on with the stocks that make the big moves in my favor, and if they are losers, they are small losers...
And the daily chart of UMPQ:

Alway control risk! In trading and life.....

Nice rally

Nice rally in the stock indexes the last few days. Is it time to jump back in for the long term. I don't think so. Not just yet. There are a lot of debt issues coming due over the next few months. This last weeks rally was relief over the Greece situation getting kicked down the road again. The U.S. debt situation is on tap for the near future, as is the debt situation in Italy.
Quantitative Easing II ended this week. This was the deal where the Federal Reserve was buying Treasury bonds from the govt. 40% of the govt spending has been financed by the Fed through its purchases of govt. bonds. What will happen to interest rates now that the Fed is out of the picture.
Over the next couple of weeks I believe the stock market will start to contemplate that little problem.
Remember, the indexes are still trading in a range. Don't even think about buying until they make new highs, and hold those highs. And this has been too easy lately.......

Here is a chart of the action in the 10Y US Treasury bond.

This has been hard on the gold and silver markets. Gold and silver have a difficult time in a period of rising interest rates.

I can't help but think that rates rising may make it more profitable for banks to lend, and all of that money that the Fed has been shoveling to the banks may just see the light of day.... That would be a counter-intuitive outcome of rising interest rates. ie, inflation could actually get a foothold due to the money at last getting out of the clutches of the banks.

It may be awhile though.

Here are the gold and silver charts:

Gold has always been a tricky market to trade. It has a way of hitting all the stops and then going the other way. I am not impressed with the selling volume over the last few sessions. Lower on lower volume.....

I'm breaking a few trading rules, but am long silver here. I use Silver Wheaton as my indicator/tell for the silver market. The intraday volume seems to be showing signs of accumulation. It telegraphed the move to the downside, lets see if it works on the upside.....
Control your risks!
gh

Update 7/6/11:

So far so good!

Weak oil stocks...

The broad stock market looks weak due to slowing in the economy. While I have a long term bullish view of oil and oil prices I can't help but notice a possible bearish trade in the oil services ETF: DIG. Notice the topping pattern, a double head and shoulders. A break below the neckline could signal a change in trend.

And the inverse ETF is: DUG. Shown below. It does not exactly track the inverse but is good enough for a trade from the buy side.

There may be some buying triggered above the neckline shown by the bold black line. The reason there may be some serious buying is due to what I perceive as the continued bullish bias in the trading/investing community regarding oil. I myself still am bullish on oil prices, but that may be the best reason to consider a bearish bet. I have found the best trades to be when others are wrong in a big way. I will still limit my risk by scaling into this trade. If it happens. Perhaps looking for a three to four week decline in DIG.

On the fundamental side, the recent squabble in OPEC over raising output. The Saudis wanted to raise output, but they couldn't get the organization to agree. So the Saudis say they will raise their output. If they happen to be wrong about world demand they may just push oil lower than they intend. That would be the trade.
It is strange for OPEC to be disagreeing about raising output. For many years many of them cheated by producing more than they were supposed to. And they lied about their reserves in order to produce more. Now they want to hold it back. I am fairly sure they know they are going to run out of spare capacity, and see no sense in letting go of it cheaply.

Update:

7/6/11:

The DUG trade was a fail. Out with a small loss several days ago...

In fact oil is showing strength, as is the general market.



Accumulation

Here are two charts that demonstrate what appears to be accumulation. This is what I look for when I want to pick a major bottom. Look at the volume.
TWM is a fund that is the inverse of the Russel 2000 index. It goes up when the Russell 2000 smallcap index goes down. Look at the increased volume since about February. Somebody with  some deep pockets expects the Russell to go down...



And then there is FAZ. This fund goes up when the banks go down. I featured it a couple months ago. Look at the volume. Higher volume on the up days, lower volume on the down days, while the ETF goes sideways. Classic accumulation. What is wrong with the banks?

See the rounding bottom, and then the breakout above $46.

Two good reasons to be wary of the stock markets....



Risk control

I have found that one of the secrets to getting ahead in financial markets is effectively controlling risk. But to control risk one has to be able to recognize risk. I have been seeing increased risk in the stock markets for some time now. And it seems that the rest of the market is becoming more aware of the increased risk as well.
One of the ways that I attempt to gain insight into the stock markets is by watching the movements in other markets. The bond market is a good "tell" for what the economy, and thus the stock market may do.

Over the last several months the price of oil has gone to $100 per barrel and above. The price of all food items has been rising in the stores, cattle prices have been in an uptrend, as have the prices of precious metals. There has generally been an inflationary trend going on.

Usually the long term bond markets abhor inflation. High rates of inflation cause bond investors to demand high rates of return on their bonds. After all, why would anyone loan out money for a long time at less than the cost of inflation. And long dated bonds are the most sensitive to inflation because they are for such a long time. A lot can change in a long time. Of course, the price of a bond is also related to the ability of the borrower to repay the loan. The better the credit of the borrower, the lower the interest rate or yield of the bond, and the higher the price of that bond, all other things being equal.

That brings us back to seeing risk in the stock market. If the bond market participants see inflation in the future, they will not bid up the price of the long term bonds. But, the long term US Treasury bonds have been in an uptrend for some time. (About 30 years, actually.) But it is the recent trend that I am considering. The recent action in the long bond is more predictive of DEFLATION that inflation. Deflation is what started in 2008. Deflation means lower prices for things. Sometimes lower prices are caused by too much supply, such as when a factory in China produces too many widgets for little cost. Or deflation can be caused by lack of demand. I believe that the deflationary forces that are returning are caused by lack of demand. Many people are still in debt. The job market remains poor. The federal reserve is set to stop the money presses, at least for awhile. And the political mood of the country is toward one of reducing government spending. Government spending and government debt has been on the rise for at 30 years and has been a continual "stimulus" to the U.S. economy. That deficit spending will have to decline or reverse sometime. I think this is what the bond market is predicting. And a slowdown in the economy is bad for stocks in general.

The problem with making a prediction in any market is the issue of timing. If I take money out of a market due to a perception of higher risk, what do I tell my self if I am wrong, and that market goes higher? I'll tell you what I tell myself. "I was wrong". And to avoid being wrong a second time, I get back into that market. But, if I always take the action that has the highest PROBABILITY of my desired outcome, over time I will ALWAYS come out ahead. So if I get out, and then get back in, I consider it to be the cost of insurance against losing money.
And to me, this stock market looks weak. I am out.

I am reminded of a quote from one of my favorite books, "Reminiscences of a Stock Operator", by Lefevre.

"If I am walking along a train track and I see a train coming toward me at sixty miles an hour, do I keep on walking on the ties? Friend, I sidestep. And I do not even pat myself of the back for being so wise and prudent".

I will get back on this train when it is going in the direction that I wish to travel. Here are some updated charts. I think that the evidence is becoming clearer and that more stock market participants are starting to see the evidence.

 Recent action the the long bond:

oil demand destruction

The CEO of Gulf Oil was on CNBC this morning. He stated flat out that he sees demand destruction building in the oil market. He states that he believe that "supply and demand have turned a corner".
Given that the head of a major oil producer has a vested interest in high oil prices, I can only take this as a significant statement, and one that does not bode well for the U.S. economy.

The big selloff that didn't happen.....

After 3 weeks of watching and waiting for the selling to begin in earnest, it didn't.
Todays action in the S and P makes it appear that this bull market has a ways to go.

June 1, 2011

What a difference a day makes.