Quick Technical Update

A quick update before the market opens:

1. The SPX came back to the break out point yesterday. We could see a further drop; a .382 Fibonacci retracement of the move off the Oct 4th bottom would bring us to 1182, roughly where the 50 DMA now sits.

2. The CRB has hit the 50 DMA and backed off as of this writing.

3. WTI spot price hit the 200 DMA on the nose.

Of course all eyes are on the situation in Europe where, in typical fashion, there is not enough clarity on any resolution to the debt crisis. However, they seem to be moving into a tighter range on a Greek bond haircut number. How this is handled will have a big impact on the markets.

At this point I believe something like a 60% haircut for Greek paper has been priced in, so anything up to that point will be welcomed as positive by the market. Anything beyond that, including a Greek exit from the euro, will be problematic. The Italian situation will also have high impact. That is just my read.

Friday Pre-Market Musing

Yesterday’s action was a full serving of ugliness. The action we described in the morning post lasted through the day, except for crude oil, which joined the tank brigade with a 6%+ retreat. We briefly saw a 1 handle on the 10 year Treasury. Think about that for a moment. A 1 handle on the 10 year. That’s nothing less than amazing. If it marks the low, great, and if not…things are not going to be very great at all.

On a more hopeful note, we had a pretty strong volume selloff but didn’t revisit the recent low, which means buyers saw value and came into the market. However the futures this morning are quite negative. I’m hopeful that we won’t see a new low but, as hope is not a strategy, I’m staying on the sidelines. It’s starting to feel like being Cal Ripken’s backup. Anyhow, today’s action is going to be important. We stay above the low going into the weekend, and there is some cause for optimism. We close out with a new low, and there are some dark and scary places on the road ahead.

Returning to the bond yield, I had been making the comment in discussion for several years that we were turning Japanese and European at the same time, meaning that we had chronically falling growth and dis-inflation, coupled with an expanding welfare state. With the folks in Washington looking determined to beat the European out of us (a sensible notion – look what it’s done to the Europeans), I suppose we will be getting on with the all out pursuit of becoming Japanese. Minus the positive external trade balance.

Thursday Morning Update – Not Your Garden Variety Market Rout

Interesting action in the markets this morning. Some bad economic data, including a Philly Fed so negative that you have to do a double-take, thinking it either must be a mis-print, or you just read it wrong. It appears to be neither, just a really horrible data set, and has thrown stocks into a nosedive and bond yields plumbing new depths. We were already off to a negative start on overseas weakness.

What is really interesting is that while we are down a blistering 50+ SPX points as of this writing, most commodities are up: oil, natural gas, copper, all up. Also see that preferred stocks and high yield bonds are not taking the hits they took a couple of weeks ago. That complicates the analysis a bit, showing that this is not an across the board risk off move.

Keep looking at the big picture, we’re getting some mixed signals. If we get heavy volume and hold above the recent lows, we may put in an intermediate term bottom here.

Looking Back at May…and Ahead to June

On May 1st (Sunday) my weekly outlook article on Seeking Alpha considered whether this would be a good year to follow the old market dictum: sell in May and go away.

My recommendation then was to sell commodities and hold stocks and bonds. Let’s see how that might actually have worked out using the most widely held ETFs as proxies for these asset classes. June price returns were

Common Stocks (SPY); 1.12% loss
Multi Sector Bond (AGG); 1.24% gain
Commodities (DBC); 5.17% loss

All in all not a bad call; a balanced portfolio of stocks and bonds broke even on a capital basis and holders collected some dividends for their trouble. My preferred proxy for a drop dead simple portfolio, the Vanguard Balanced Index Fund (VBINX) was minus 0.18% in May.

As we get into June, poor economic data is beginning to accumulate, and bond yields are continuing to fall in surprising fashion. In my most recent SA article I forecast a 2 handle on 10 year Treasury yields; as of this writing we are already there. The ability of the S&P 500 and the Russell 2000 to remain above support levels, at 1340 and 840 respectively, is something I am watching closely.

I am not bearish on stocks at this moment. We could be seeing these indexes (and a number of leading stocks) building new bases at current levels…but an inability to break out to new highs, or a break down through 1300 on the SPX and 810 on the RUT – especially with volume – would turn my outlook to negative.

Commodities still look like a sell to me. For bonds, I expect to see the ten year get to 2.6 – 2.8%.

Dollar Index Slides Again – Support Nearby?

The US Dollar index has broken the 73 level to the downside. It is highly probable that we will see the 72 support area of summer 2008 in the coming days. Implications for stocks and commodities in the near term are bullish, but those markets are not acting as we might expect.

The CRB index made a new high – barely – earlier this month and is drifting sideways with a slight downward bias. Momentum indicators are showing weakness. Major stock indexes have powered to new high but the internals are questionable. Consumer stapes, health care and utilities are strong sectors. Materials and energy are looking toppy, while tech is having trouble overall even with the Intel and Apple blowout earnings. Clearly tech is a mixed bag where stock picking matters.

Overall, my take is that the commodity run looks like its pretty much done, and with the action in stocks we need to proceed with caution. The Dollar index has broken every intermediate support level on the way down, and who knows whether 72 will hold; as we are this close, my inclination would be to continue to be patient and wait to see what develops.

Readers should be aware that my outlook is that of a longer term swing trader. Positions are typically held for a minimum of six months and up to several years. Short term traders may have a different view.

Not Much Noise, Not Much Signal

It was a relatively uneventful week in the financial markets, as US corporate earnings got underway. Even options expiration couldn’t generate a great deal of excitement, and the VIX fell back near recent lows. It’s one of those periods when bulls see the glass half full and bears see it half empty.

See my full analysis at Seeking Alpha

Mid-week Musing

Here is a worthy offering from Ritholtz in two parts, especially for those (hello Shirley) who suspect the end of QE will bring a correction in risk assets. See here and here.

My own speculation on the currency / commodity picture is here. Please note: the editors at SA changed my original title, which now overstates the case a bit, but it isn’t entirely off the mark.