Another Low Volume Rally

I had my whole post typed up this morning, and then somehow Blogger lost it and it was gone. I was too busy to retype the whole thing, so I'm just posting some comments at the close.

Today's rally was constructive, even as rallies continue to come on lighter volume for the most part. Additionally, the rally has been led by defensive type names, not the traditional high quality growth names you normally look to for leadership.

There were some solid economic reports today with a good ADP Employment report and a better than expected Chicago PMI report. The big test comes on Friday with the monthly govt. payrolls report. I tend to think they will be disappointing, but we shall see.

Gold prices were higher this morning, but finished lower at $1827; Oil prices finished flat near $88.91.

The 10-year yield got a little bounce, rising to 2.21%; and the VIX closed down -4% to 31.60. But the fact that it is remaining stubbornly above the 30 level makes me think that we haven't seen the last of the volatility days in the market. Next week, after the Labor Day holiday volume levels should pick up again.

Trading comment: No changes to my near-term strategy. I don't want to be lulled into a sense of complacency with these low volume rallies. SPX 1250 still looms as big resistance. So I am remaining cautious, and continuing to trim cyclical names and lagging positions.

Consumer Confidence Drops To 2-year Low

The market is lower in early trading, on the heels of some profit taking and a disappointing consumer confidence number. The S&P 500 has rallied more than 7% in the last five sessions, so traders who were buying last week's lows actually have some profits to take.

The market was down only slightly at the open, but the Consumer Confidence number came out much weaker than expected. Consumer Confidence Index for August fell to a 2-year low of 44.5, down sharply from July's level of 59.2. I tend to view consumer confidence as more of a coincident indicator as opposed to a leading indicator.

The other big news event today will be the release of the recent FOMC meeting minutes. Investors will be looking for hints about additional policy adjustments and what tools the Fed might use if it decides to become more accomodative with monetary policy.

Asian markets were higher overnight, except China which has lagged in recent days. Oil prices are higher near the $88 level; and gold is also higher around $1831.

The 10-year yield is lower today, falling back to 2.18%; and the VIX index fell below its 20-day average yesterday, and is hovering just below the 33 level currently.

Trading comment: The chart below shows the recent bottom for the SPX at the 1120 level. This level was tested several times, but ultimately held. The plunge in stocks was met with some extreme spikes in bearish sentiment. That, along with sharply oversold readings helped the market put in a short-term bottom. But that is different from a longer-term bottom.

Markets rarely make "V" bottoms, where they spike back up to their former highs after just one plunge lower. Far more often, markets have a retest of those lows at some point. If those lows hold the next time around, that can lead to a more sustainable bottom. And if they don't hold you can see the market trade to lower levels. That is why it is too early to call a bottom here. But it doesn't mean that the S&P can't keep rising until it hits more resistance. I could see the SPX working its way back up to 1250, and even that wouldn't necessarily change my intermediate-term outlook.

Monday Morning Musings

The markets are getting a very nice bounce on the heels of the 5% gain last week, the best weekly performance for the market in eight weeks.

Asian markets were higher overnight, except for China which was lower. Europe markets were also higher this morning after two Greek banks decided to merge.

Also, the damages from Hurricane Irene at first glance appear to be less that initially feared, and that is helping boost financials stocks, especially insurance stocks. The positive boost to financials has helped the S&P 500 touch the 1200 level.

The dollar is flattish currently, and commodities are mixed. Oil prices are higher near $87, but gold prices have moved from positive territory back into the red, currently trading around $1793.

The 10-year yield is getting a bounce back to 2.26%. And the VIX is down -6% right now to 33.3. That's below its 20-day average, but still above the psychological 30 level that I would like to see breached.

Trading comment: There continues to be some skepticism about this rally, as evidenced by the elevated VIX readings. Other sentiment indicators I looked at over the weekend continue to show extreme bearish readings. This could play into the hands of the bulls, as the unwinding of some of these bearish bets could keep the market higher. With NYC still a mess today from the hurricane, I expect volume levels to be light. But overall the action from last week was constructive, and I think this bounce could continue to carry higher in the near-term.

Don't Look For Bernanke To Save Us

The market opened under some selling pressure this morning after yesterday's selloff and a weaker than expected GDP report this morning.

Q2 GDP growth was revised downward to 1.0% from an earlier estimate of 1.3%. So far the first two quarters of 2011 are showing pretty weak growth. I sure hope we see a bit of a pickup in the second half.

But the big news event of the day was Bernanke's speech at Jackson Hole. For the life of me, I don't think anyone actually thought he was going to surprise the world with an announcement of new QE3 measures. More likely, he would reiterate that the Fed will remain accomodative, and that they have additional tools to employ should conditions continue to deteriorate.

True to form, that's about exactly the message he gave. Initially, the market swooned following his comments. But then I think rationality set it, and the market has since rallied all the way back to positive territory. There is still a lot of time left in today's session, so we will have to see how we close. But so far this is pretty constructive action.

Investors should realize that the Fed has remained extremely accomodative, and eventually this should begin to kick in. Mortgage rates have come down a lot, and there are rumors that the govt. might sponsor some sort of national refi program. Getting a bottom in the housing market would help a lot. Also, Obama is supposed to announce some new jobs program soon. That would help as well, as lowering the unemployment rate would improve consumer sentiment. But for now the focus is likely to remain on the problems in Europe.

Asian markets were mixed overnight; the dollar is lower today; oil prices are flattish near $85.35, and gold prices are higher at $1778.

The 10-year yield is lower to 2.19%; and the VIX, which has remained stubbornly high, is down 9% currently to 36. It was never able to get below that 20-day average support level I talked about earlier this week. Hopefully next week it can close below 35 and work its way back down to 30. That would be the first signal that traders expect this heightened volatility to diminish somewhat.

Trading comment: The S&P 500 has bounced back roughly 4% from last week's closing levels. Moreover, despite all of the choppiness the SPX has held above its recent lows around 1120. So for now it looks like that 1120 will hold as a successful floor, and the SPX could lift further from these levels. That doesn't mean we are out of the woods entirely, but that we might be able to rally to higher levels before we get some sort of retest of the recent lows. If we do see a further rally, I will likely continue to employ the same strategy of lightening up on lagging stocks, and staying defensive with our index hedges.

Steve Jobs and Scottie Pippen

I am sad to see Steve Jobs leave the CEO position at Apple (AAPL), although this was not unexpected. Jobs has been on medical leave since January, and has been battling cancer for some time now. I wish him all the best, and hope he will continue to contribute as Chairman.

As to the questions of whether Tim Cook can step into the shoes of Steve Jobs, I think that is an impossibility. There are few executives on earth like Steve Jobs. He has been both a brilliant visionary, a tech artist, and a superb engineer. His success has been so superb that anything will pale in comparison. Jeffrey Immelt was a fantastic executive at GE, but after taking over for Jack Welch it was nearly impossible to live up to expectations.

Sure Tim Cook has been well groomed for years. Jobs knew this day would come, so he had a responsibility to both groom Cook and prepare the company for this day. But Tim Cook is more like Scottie Pippen when he played with Michael Jordan. Pippen was a fabulous player with the Bulls, and shared many championships. He was capable of executing fantastically in that offense, but that was alongside Jordan. Take Jordan out of the picture, and Pippen couldn't carry a team and elevate them to the same level.

So I think it is unfair to keep asking if Cook can replicate Jobs' success. Apple's product road map is pretty well laid out for the next couple of years. I think Cook will do a fine job executing on these plans and continuing to grow the company nicely. It's the longer-term picture that I'm worried about. It's the vision that Jobs possessed. It's the maniacal attention to detail; the perfectionist attitude; and the willingness to navigate unchartered waters.

I trimmed a few shares of AAPL today, but it remains one of our largest holdings. I still think the stock is undervalued relative to its earnings power and growth rate. So I think it is too cheap to discard. I plan on keeping it as a core holding, and trading around it from time to time. But to act like nothing has changed at the company is being a bit naive.

long AAPL

Gold Prices Ease From Record Highs

The market was nicely higher in early trading, but it looks like traders are selling into the lift, and the rally is fading as of this post.

Financials are leading the early action, after Bank of America (BAC) was upped to a Strong Buy at a tier one firm and the stock is up more than 8%. Other large banks are higher as well.

But utilities are also strong this morning, and that group is often considered very defensive. So it's not the usual group of growth stocks leading the market this morning, although many of them enjoyed large percentage moves yesterday.

Gold prices have sold off sharply from their recent record highs. After touching $1900 a few days ago, gold prices are down another $75 today back near $1780. People are now asking whether the run in gold is over. My take is that things just got overheated in gold, and now it is going to have to go through a consolidation period. So just be patient, and let gold build another base. There will be plenty of time to add to positions later on.

In economic news, the July durable goods report rose a much stronger than expected 4.0%. Moreover, orders for the prior month were revised higher. This probably lessens the calls for an immediate recession, but let's see how the GDP data looks later this week.

Asian markets were lower overnight after Japan had its debt rating downgraded one notch by Moody's. Japan has the biggest debt-to-GDP ratio, and the slower growth in the country isn't being helped by the recent strong rise in the Yen.

The dollar is flattish today, and oil and gold are once again mixed. Gold is lower, while oil prices are up a bit near $86.25.

The 10-year yield is seeing a nice little bounce near 2.20%. The VIX is down only slightly to 36.0. It is testing its 20-day support, a level I would like to see it break below to signal the market could rally more.

Trading comment: Of course, how the week ends really hinges on the combined GDP report Friday couple with Bernanke's comments at Jackson Hole. I have said I think expectations are running too high for him to pull another rabbit out of the hat. I think he will say that the Fed will remain extremely accomodative, but I doubt he will explicitly unveil a QE3 program. Hopefully investors realize this and stocks won't selloff after his speech.

The SPX held its recent lows at 1120 this week, and could simply be building a short-term base from which to move higher over the next few weeks. What happened to August being a slow month where portfolio managers could go on vacation?!??

long BAC

Can Stocks Add To This Bounce?

The market has enjoyed a nice rally today, and the Nasdaq is up more than 3% heading into the last hour of trade. The bullish sentiment carried over from both Asia last night, and Europe early this morning. Both regions saw equity market rallies from oversold levels.

The dollar is lower today, but commodities are mixed. Oil is rallying back near $86, and energy stocks are leading the action so far today. Gold prices are finally seeing a down day, with the yellow metal off more than $50 today near $1837.

Financials are lagging the action, as BofA remains under pressure, and Goldman (GS) can't seem to rally today either. Volume in GS is very high again today.

If short-covering continues, there could be continued buying pressure into the close. The real question is whether or not this turns out to be a one-day wonder, or if this rally can carry the markets higher.

The 10-year yield hasn't rallied much, hovering at a still low level of 2.13%. And the VIX is down 12% currently, falling below the 40 level to 37.18 as of now. That's a good start. I would like to see it break its rising 20-day average which will come into play around 33.50, but bulls would really like to see it below 30 again.

Trading comment: While it "feels" good today, I am still not convinced the bottom is in. I hope I am wrong, but my concern is that expectations are too high going into the Jackson Hole meeting on Friday. If Bernanke doesn't come out with something big, I think the markets could sell off again. As such, I am using today's strength to continue to lighten up a little on economically sensitive stocks and add to our index hedges.

Monday Morning Musings

The market is getting a bounce this morning on the heels of no bad news over the weekend, and a nice rally in European markets before the open.

Libyan rebels have taken over Libya, and the energy sector is rallying on the news. The thinking behind the rally is that oil will once again start flowing from Libya, and that lots of oil services will be needed to repair the oil fields and maximize production. Gas prices are slightly lower today on the perceived addition to supply this would create.

Asian markets were mixed overnight. Here in the U.S., there isn't a whole lot in the way of economic data or big corporate news to move the market. You know I don't like a market that opens too strong, as that leaves it vulnerable to late-day selling. I prefer a market that opens weak and strengthens into the close. So we will have to see how the day shapes up.

The dollar is up slightly vs. most other currencies, but that isn't hurting oil or gold. Oil prices are up over $83, while gold prices have rallied yet again, and are now above $1875.

The 10-year is getting a small bounce finally, but only back to 2.12% so far. And the VIX had broken below the 40 level earlier today, but it has since bounced higher and is closer to 41.20 right now. I would like to see it get back near 30 for starters, as these levels indicate traders expect heightened volatility to continue.

Trading comment: No big news yet, and the weak action at the close last Friday validates our near-term strategy. We continue to focus on playing defense here, using rallies to exit lagging positions and decreasing our overall equity allocation. Areas where we are adding are the high yielding plays like MLPs, utilities, and select REITs. Preservation of capital.

TGIF

The markets opened lower this morning, following yesterday's sharp selloff in the US, which carried over into weakness in Asian markets and in Europe this morning.

But the selling dried up in the first hour of trading, and as of this post the markets are climbing back into positive territory on the day. Of course, with the VIX this high, we know we can expect a lot of intraday volatility. So nothing really matters except how we close on the day.

The concerns in Europe continue to surround sovereign debt, whether Greece can meets its fiscal debt budget, and an overall global economic slowdown.

In corporate news, HPQ reported disappointing results and its stock is getting whacked. This is weighing on the Dow Jones average. Salesforce.com (CRM) reported strong results and its stock is rallying.

The dollar is lower today, which is helping commodities. Oil prices are higher near $82.70, and gold prices have surged to new record highs above $1850.

The 10-year yield continues to languish around 2.08%; and the VIX has been bouncing around, but is currently 2% lower near 41.80, an extremely high level following yesterday's surge higher.

Trading comment: No change to our near-term strategy. If the market is trying to put in a trading bottom, it will be a process and not a one-day event. So we are still using bounces to lighten up on our equity exposure, and staying defensive by adding to index hedges. Preservation of capital remains the best course during a market downtrend.

Have a nice weekend, be safe, and rest up.

Euro Banking Fears Flare Up Again

Another busy morning. The markets are down sharply in early trading, following large selloffs in European markets. The culprit seems to be a report that a European bank went to the ECB lending window for the first time since February and needed a short-term loan at above market rates. This type of report sparks fears of credit tightening, and the markets never like that sort of thing.

On top of that, we had some negative economic reports here in the US. The Philly Fed index absolutely plunged in August to a level of -30.7 from +3.2 last month. That is quite a drop. Additionally, Morgan Stanley downgraded its outlook of the economy and said we are getting closer to recession. I still think the odds of a true recession are about 50/50 right now, and a more likely scenario is just stagnating growth.

The 10-year yield also plunged this morning, touching the 2.0% level. That's lower than it got in December 2008, just for a reference. Investors who think a 10-yr Treasury at 2.0% is a better long-term investment than a blue chip stock with a 3% dividend are going to be sadly disappointed.

We are also seeing spikes in bearish sentiment. The CBOE put/call ratio has been above the 1.0 level for 15 straight days, and the 10-day average hit its highest level since 2008. Today, the volatility index (VIX) is spiking 30% higher back above 40, although it is still below last week's highs at 48.

The dollar is higher, which is weighing on most commodities. Oil prices are down to $83.15. But the flight to safety is pushing gold prices to new highs again, today topping $1820.

Trading comment: This morning's action makes me feel better about the recent sales we have made and the hedges we added to portfolios. Getting defensive when the markets are in a downtrend preserves both financial and mental capital, and both are needed if you want to be in a position to capitalize on things when the dust eventually settles. I hope everyone is managing their risk appropriately.

Financial Transaction Tax In Europe Bad Idea

Sorry for the delayed post this morning. It's already been a busy day of trading for us. We are continuing to do what I have talked about of late, and that is use rallies to lighten up on our equity exposure and get a bit more defensive. So we trimmed more positions while the market was up this morning.

Yesterday the market sold off after the news that one of the ideas out of the Sarkozy/Merkel meeting was to levy a financials transactions tax on EU members. This is a bad idea, and will not help the capital markets. Basically, the meeting produced little tangible ideas to soothe market concerns in Europe. Go figure.

This morning, our markets opened nicely higher, although the rally is fading as I write this post. Target (TGT) posted solid earnings and its stock is higher, while DELL was disappointing and is weighing on the tech sector.

Asian markets were mixed overnight, while Europe is lower this morning. The dollar is lower today, which is boosting commodities. Oil prices are up to $87.80, and gold prices were higher earlier, but have faded back near $1785 currently.

The 10-year yield was also higher before, but has now settled back to 2.17%. Ditto for the VIX, which was down 5% earlier but has climbed back into positive territory near the 33 level. That is still a very high level, as investors continue to worry about heightened volatility in the market. The put/call ratio has been extremely elevated today also.

Trading comment: There remain more reasons to be cautious right now vs. trying to time the next rally. The market has lifted nicely from last week's lows, but there is still a ton of overhead resistance to deal with. We have been refocusing some of our equity exposure out of cyclical stocks and into high dividend payers like REITs, MLPs, and utilities. At least in those areas investors get paid to ride things out.

Fitch Affirms U.S. AAA Rating

The market is trading lower this morning on some weak economic data out of Europe, and concern that the big meeting between France and Germany to address their fiscal conditions won't produce anything significant. This is overshadowing the news that ratings agency Fitch affirmed the U.S. AAA rating.

There were some positive earnings reports from large retailers like WMT and HD this morning, and those stocks are bucking the weakness so far. Financials are leading the action lower this morning, while consumer staples are down the least.

Asian markets were mixed overnight. The 10-year yield is flattish near 2.27%.

The dollar is up slightly this morning, and this could be weighing on oil prices which are lower near $86.90. But gold prices are higher, trading above $1780.

The VIX is also higher this morning near 32.70. Although it has come down a lot since last weeks huge spike to 48, a level above 30 still indicates that the market expects heightened volatility in the near-term.

Trading comment: The market has bounced a lot in the last few days, but the move higher has been accompanied by very low volume levels. This brings into question the conviction behind the buying. I am not sure a retest of the recent lows is today's event. Mostly likely any sort of retest will unfold in the weeks or even months ahead. But as I have said, I prefer to wait for that retest before adding to stocks. At that time, I will likely add to those that have held up the best. In the meantime, I will look to trade around our positions small, and use market rallies to add to our hedges which will help preserve capital in the event of another trip lower.

Monday Morning Musings

The market is getting another bounce this morning, most likely on the relief that no bad news came out over the weekend with respect to Europe. Europe's markets are also higher this morning, ahead of the big meeting between France and Germany. Hopefully they come up with something big in order to assuage markets.

Asian markets were also higher overnight. Japan's Q2 GPD contracted -1.3%, but that was less than feared following the massive earthquake and radiation spill. Hong Kong rallied 3.3%.

In corporate news, Google (GOOG) has offered to buy Motorola Mobility (MMI) for a whopping 60% premium to Friday's closing price. GOOG is primarily attracted to the patent portfolio that it believes will help support its Android operating system. Oil service stocks are also higher after Transocean (RIG) made a bid for a Norway-based driller.

The dollar is lower today, as the euro bounces. Oil prices are higher, nearing $87. While gold prices are roughly flat near $1742.

The 10-year yield is slightly higher to 2.25%; and the VIX is down -7% today to 33.51. This is below Friday's low, but still a high overall level. I would like to see the VIX fall back below 25 before I feel comfortable saying things have calmed down.

Trading comment: Things feel better today as the S&P 500 approaches the 1200 level. But I don't want to be lulled into a sense of complacency here. I prefer to stay defensive at this time, and will look to raise a little more cash into today's lift. I worry that tomorrow's meeting between Merkel and Sarkozy might not produce the 'shock and awe' type of solution that the markets are hoping for. That said, many sentiment indicators are back near extreme bearish levels and as such could limit the downside on the next market selloff.

long GOOG

Strong Earnings From Cisco, Kohls Boost Stocks

The market got some good news this morning on both the corporate and economic front. Moreover, there has been a pause in the selling pressure on Europe after a meeting with Merkel and Sarkozy was announced. There were also rumors in the market that Italy and France had banned short-selling, but that rumor has not been confirmed.

While Asian markets were lower overnight, European markets have bounced this morning.

In economic news, jobless claims for the week fell below 400,000 for the first time in four months. So that is good news on the jobs front.

In corporate news, strong earnings from Cisco (CSCO) have boosted that stock by +15% and emboldened dip buyers in the Nasdaq. Kohl's (KSS) also reported strong numbers, which is boosting retail stocks. All 10 economic sectors are higher today, led by a snapback in financials.

The flight-to-safety trade is being taken off slightly today, as gold prices have fallen back to $1757, and Treasuries are being sold for the first time in weeks. That has pushed the 10-year yield to a still very low 2.23%, up 9 bps on the day.

The volatility index is down only 5% today, despite the major indexes up nearly 3% so far. That is not as big of a drop as I would like to see, and probably indicates we still have some big swings ahead of us.

Oil prices are still higher today at $83.65.

Trading comment: The market is still chopping around and trying to build some support levels from which to stage a bigger bounce. It is good that we have held the recent lows from this week, but we have not been able to take out any overhead resistance levels yet. I would like to see the S&P 500 take out the SPX 1172 level to signal more upside. I have raised a little cash, but would look to do another round of selling if we could rally closer to 1200. I think the market is likely to be rangebound for awhile, with SPX 1100 acting as the lower band, and something like SPX 1200-1250 serving as the upper. But first we have to see if the market can rally towards those levels. My guess is its going to take some good news out of Europe that they are taking steps to get their arms around the debt issues and perceived credit crunch.

Volatility Picking Up

The market is lower again today following yesterday's strong rally. The market sold off following the FOMC's announcement yesterday, but then the Dow rallied furiously into the close, tacking on 600 points in a little over an hour. At the close, the stock market had put together its best single-session since March 2009.

But this morning the attention has once again turned to Europe, and the fears about strains on their banking system. Today the worry is focused on France, whose large bank stocks are taking a hit. Investors don't like banking crises, so the nervousness is understandable.

As for the volatility index (VIX), it came down sharply yesterday back down to the 35 level. But today it is up over 20% again and topping 43. Its high close was Monday at 48.

A lot of comparisons have been made between the market this year vs. the market in 2008 or 1987. I tend to think it is more like 1987 as opposed to 2008. Our banks and companies are much better capitalized today than in 2008, there is much less leverage in the system, and the real estate bubble is behind us not in front of us. We have had a shock to the markets, a la 1987, but the remainder of the year should be more of a trading rangebound environment, imo.

Asian markets were able to muster small gains overnight, but not as strong as our bounce yesterday.

The dollar is up today, but that is not hurting oil and gold. Oil prices are just over $80, while gold has once again risen to new highs near $1779.

The 10-year yield has now fallen all the way to 2.11%. Yesterday the FOMC said it would hold rates at low levels until mid-2013. For bond traders, that meant they now know with certainty that interest rate hikes are not coming, and that gave them confidence to rush into longer-dated Treasury securities. The downside is that the hunt for reasonable yields just became even tougher.

Trading comment: As I mentioned the other day, we used yesterday's bounce to trim some underperforming positions. You don't have to try to catch the ultimate low in the market. Usually the market hits a low, stages a nice bounce, but then comes back down to retest the lows. And it is on that retest that one usually finds a better, lower-risk buying opportunity. So we want to remain defensive, and hold above average cash balances until we get to that point.

Market Finally Bounces

The markets are finally enjoying a respite from the selling and bouncing this morning. Asian markets were lower overnight, and when I went to bed last night our futures were pointing to a lower open. But the selling finally dried up, and those futures were pointing to a higher open by this morning.

Europe's markets are also bouncing slightly, save for Germany which is still down a bit as of this post. Germany has been Europe's best performing market, so it is a little disconcerting to see it still down. Hopefully Asian markets will rally tonight.

The FOMC will make its announcement later today, and investors are on the edge of their seat to see what Bernanke will or will not say regarding future monetary stimulus. I don't think he will say anything that hints of QE3, but hopefully he will say something to sooth the markets. Bernanke wants a positive wealth effect, so I'm sure he hasn't been pleased with recent market action.

The dollar is lower today, which is boost commodities. Oil prices have bounced near $81.90, while gold prices hit record highs earlier but have pulled back to $1724 recently.

The 10-year yield is up slightly from its recent plunge, trading at 2.38% currently. That's about the levels it touched back in October 2010.

As for the volatility index (VIX), it has basically doubled in the last week, and yesterday it surged an astounding 50% to close at 48.0. Today is is down -13% near 41.65, but still elevated.

Trading comment: The market is currently more oversold than it was at the March 2009 bottom. That is pretty surprising. Moreover, yesterday saw 67 declining stocks for every 1 that rose. My statistician friend told me that is the lowest breadth seen since Germany invaded France in 1940! That means almost no one alive trading today has seen anything like what we witnessed yesterday. I long for the days when big brokerage firms used to actually make 2-way markets in stocks. I hope the SEC looks into this issue and comes up with some sort of remedy or improvement. Anyway, with the markets that oversold, we should get more of a bounce. It may come in fits and starts, but that's okay. You don't have to be a hero and try to nail the bottom. Look for those stocks that held up the best and could lead on future rallies.

Monday Morning Musings

The markets are down sharply this morning, seemingly in reaction to the news that S&P has downgraded the US debt rating to AA+ from its longstanding AAA rating.

I say seemingly because the selloff is not affecting US Treasuries one bit. There is furious buying in long-term Treasuries, such that the yield on the 10-year Note has plummeted to 2.35%. So sentiment for the safety of US bonds has not been impaired.

The ECB came out and said it would be a buyer of Spanish and Italian bonds, but the markets seem disappointed that they didn't do more. I think they could have cut interest rates in a surprise move if they really wanted to elicit a market response.

I think the bigger concerns this morning are for the potential of a global recession, or at least recession-like growth. This is what the plunge in yields is really signaling. The flight to safety is also on in a big way today with respect to gold prices. Gold has spiked more than 2.5% higher today to top the $1700 level.

The opposite is occurring in the energy markets, with oil prices slumping down near $83.50.

Asian markets were also down sharply overnight, led by China's 3.8% drop.

Trading comment: Doesn't seem like anything has changed much from last week. The VIX is screaming higher today, up 25% to the 40 level. So the panic selling is palpable, and history tells us no one ever makes a dime selling into panics. It's not like Lehman Bros. declared bankruptcy over the weekend. But I think the fears of 2008 are still haunting investors. I still think the best course of action here is to remain calm, and wait for the oversold bounce to do any repositioning.

Volatility Remains High Following Stock Plunge

The market had a positive response to this morning's jobs report, but the enthusiasm was short-lived as investors remain skittish following yesterday's stock plunge, and there may be some hesitancy about buying stocks ahead of the weekend.

This morning's jobs report was much better than expected, and should at least take the recession talk off the table for a bit. Nonfarm payrolls grew by 117,000 in July (vs. 84,000 consensus), which is far better that some of the whisper numbers. Moreover, the prior month's payrolls were revised higher. And private payrolls spiked by 154,000. This helped push the unemployment rate down to 9.1%.

Outside of the jobs report, there hasn't been much in the way of news. All eyes are still focused on Europe, where leaders are said to be holding a conference call over the weekend to discuss solutions. Those markets remain lower this morning, and Asian markets were lower overnight also.

The dollar is lower again today, which is surprising. Gold prices are higher today to $1665, while oil prices continue to fall below the $86 level. Hopefully prices at the pump will also work their way lower in coming weeks.

The 10-yr yield is higher today near 2.49%, following a big multi-day plunge from 2.90% at the end of July. As for the VIX, it was lower at the open, but has since spiked another +10% higher to nearly 35. That is a huge move, and it has only been this high one other time in the last 2 years.

Trading comment: Long-time readers know that I usually don't trust strong market opens. They are just too easy for traders to sell into and knock back down. Especially when the market has been weak, as it has been lately. So I wasn't too excited about this morning's open. The most positive action we could see would be this move lower that we are seeing now, but then a reversal later today that finishes back above the SPX 1200 level.

Remember, markets don't usually make "V" bottoms. So you don't have to try to buy this dip. The normal course of action is for the markets to bounce, and then come back down for some sort of retest. If that retest is successful, it will offer a much lower risk entry point for short-term investors. I think it is too early to be talking about making long-term investments until the market downtrend has run its course.

ECB Extends Liquidity To Troubled Europe

The market is sharply lower again this morning, despite yesterday afternoon's reversal higher. The concern continues to wash up on our shores from Europe, where conditions don't appear to be improving any. There has also been intervention by some central banks on the part of their currencies.

The Bank of Japan intervened to knock the rising Yen down, which had been hampering exports there. The Swiss National Bank also made moves to try to halt the rise in the swiss franc. This has served to boost the dollar.

In economic news, monthly same-store sales reports were mixed for the most part, which hasn't spurred any enthusiasm in retail stocks. All the sectors are sharply lower so far this morning. The only securities I see that are in the green are the flight-to-safety ones like gold, which is hitting new highs near $1678, and Treasuries as the 10-year yield drops down to 2.48%. Interestingly, the 10-year yield was lower than this last October.

Trading comment: Today feels like capitulation, as many stocks are down 5-7% and volume is very heavy. The market is very oversold, and the conditions for a sharp bounce are falling into place. I have been watching the investor sentiment indicators to see when they get jumpy, and we are starting to see it now. The volatility index (VIX) is up 22% today to 28.50, an extreme jump. The put/call ratio has been above 1.0 all week, and hit 1.45 earlier today. The bears in the AAII poll surged to 50% this week. And today the 1-month T-bill fell into negative territory! That means people were actually paying our Treasury dept. to keep their money safe. Trading bottoms are never pretty, and sometimes scary, but if you're looking to lighten up I think we are closer to that bounce we have been looking for.

Stocks Struggle To Muster A Bounce

The stocks market is struggling to muster even a bounce after yesterday's sharp selloff. Some asked why the market sold off so hard yesterday, given we had a deal on the debt ceiling. As I have said for some time, the debt ceiling was more of a sideshow, and the real underlying concern for global investors was the deteriorating conditions in Europe and the economic slowdown here in the U.S.

This morning, the ADP Employment report showed private payrolls grew more than expected in July, adding 114,000 jobs. This sparked a bit of enthusiasm and the markets staged a small bounce into positive territory. But after the ISM Services Index came out below expectations at 52.7 (down from 53.3 last month), the market began to selloff.

News that bond yields were rising in Italy exacerbated the selling. Investors are worried about the spreading contagion in Europe. It's one thing to bailout a small country like Greece, but if the debt problems spread to Italy and Spain investors worry that the ECB and IMF don't have enough reserves to bailout everyone.

Investors are fleeing into Treasuries, which has pushed yields on the 10-year down to 2.57%. Also, gold prices have hit new highs near $1671. Don't forget that oil prices are now down near $92, and lower oil prices will help out consumers if this continues.

As for the VIX, it is currently -4% lower, and has yet to surpass Friday's high of 26 this week.

Trading comment: I showed this chart below the other day. As you can see, the break of the 200-day average opened the door for more selling. But if you squint to look at the RSI index in the top window of the chart, you can see that we are now more oversold than we have been all year. So the setup for a short-term bounce is in place. If you have been thinking about lightening up, I would wait for an upcoming bounce to sell into. That's how we are playing it, as we wait for a more solid buy signal down the road.

Monday Morning Musings

Well, that wasn't a very fun way to start off the week. Over the weekend leaders of the House and Senate reached an agreement on the debt ceiling to avoid default, and last night the futures on the Dow were up over 150 points. But the enthusiasm was short-lived this morning, as the market opened higher but quickly began to give back its early gains.

It appears that traders were prepared to sell into the opening pop. The Dow was up over 100 points, and then the economic news came out in the form of a disappointing ISM Index for July. The ISM fell to 50.9, well below expectations and also below last month's reading of 55.3. The news was disappointing and increased the selling pressure.

Asian markets had been higher overnight, and Europe was higher this morning. The dollar was also trading higher.

We have also seen reversals in oil and gold. Oil prices were positive this morning, but have slipped back to $95.20. And gold prices started off lower, but have firmed up near $1631.

The 10-year yield is falling further to 2.74% currently, as the bond market still seems more concerned with an economic slowdown than the debt ceiling shenanigans. The VIX is down -2.5% from Friday's spike higher.

Trading comment: The S&P 500 seems to be caught right now between its two key moving averages. Below you can see that it rallied right up to its overhead 50-day average near 1307, before running into resistance. It has now fallen all the way back to its rising 200-day moving average near 1285. This 200-day moving average is key support, and traders will lean on the SPX further if it can't hold that 1285 level.

That's the short-term picture. Right now there is also pressure coming from Europe, where the CDS market is trading near record highs for many Western European countries. Hopefully, we don't have another crisis over there like Greece. Big picture, I am still leaning towards a second half rally in the U.S. and want to buy this dip. If the market can't make new recovery highs later this year, that would be the first sign to me that this bull market may be long in the tooth.