Excerpts from the latest MarketShadows Newsletter, July 29 2012
Event Horizons
The S&P 500 rose 3.6 percent on Thursday and Friday alone. The rally was triggered when European Central Bank (ECB) president Mario Draghi said, “Within our mandate, the European Central Bank is ready to do whatever it takes to preserve the euro, and believe me, it will be enough.” His statement sent the markets up, UP and AWAY!
The talk didn’t convince former FX trader Bruce Krasting. He wrote in response, “On Friday we got some clarification of what exactly Draghi has up his sleeve when he promised, ‘It will be enough.’ From Bloomberg: ‘DRAGHI’S PROPOSAL SAID TO INCLUDE BOND BUYS, RATE CUT, NEW LTRO [Long Term Refinancing Operation].’
“Bond buys? Rate cuts? New LTRO? That’s Draghi’s bazooka? These things have been tried in the past and have failed. These steps might buy the EU a few weeks (or hours) of market relief, but they have no chance of turning the EU around.”
These measures cannot turn the EU around because the market based-system is not dead yet, in spite of central bank manipulation. Market forces will prevail. Bruce continued, “Draghi thinks he has the power to thwart the markets. He does not have that power. Draghi is either bluffing or lying. That, or he is as blind as a bat…
“An interesting outcome of the Draghi comments is that the Euro ended the week north of 1.2300 (up 1.5%). Whatever chance the EU may have, it is dependent on a weaker Euro exchange rate. In my book, Mario’s words have set the EU back, not forward.” (Draghi – We Will Continue to Fight Until Everyone is Dead)
Instead of Draghi’s promise to save the euro causing a euro selloff, the euro rose, the US dollar fell, and a massive short squeeze in equities followed. Unfortunately, the words “within our mandate” were neglected in the headlines. Perhaps, they were lost on the high frequency trading computers.
In Wolf Richter’s view, Draghi’s main worry now is Spain. The cost of saving Greece is manageable, but saving Spain is prohibitive.
“Despite repeated assurances that Spain would not need a bailout other than the €100-billion bank bailout, Spanish Economic Minister Luis de Guindos flew to Berlin to meet with German Finance Minister Wolfgang Schäuble … to discuss a bailout. For €300 billion. And hours beforehand, ‘sources’ told the Spanish media that if Spain didn’t get its wish list, whose top item was a massive bond-buying program by the ECB to force Spain’s borrowing costs down, Spain would consider ‘more forceful measures.’ Because Spain had no money to meet its obligations in October, it would have to default! The D-word made into print. A scary message for the fearless leaders of the Eurozone [for that whole debacle, read.... The Extortion Racket Shifts to Spain].
“It worked! Thursday, European Central Bank President Mario Draghi caved… ‘within our mandate,’ is controversial. It’s where the ECB had clashed with the German Bundesbank and others who stubbornly clung to the notion that the treaties governing the ECB gave it only one mandate: price stability. Not propping up stock and bond markets.
“Draghi outlined a way around that single-mandate limit: if high borrowing costs for certain countries ‘hamper the functioning of the monetary policy transmission channels, they come within our mandate,’ he said. In other words, every time yields go up somewhere in the Eurozone, the ECB is free to ‘do whatever it takes’ to force them down…
“He’d thrown down the gauntlet. The ECB’s moderate bond-buying program last year caused a stir in Germany…”
Of course, an important, unanswered question is “Who The Heck Is Going To Do All The Bailing Out?” (War Of The Central Banks?)
Bruce Krasting concluded that Germany would be telling Mario that he “can’t have our cake and eat it too.” He noted an article appearing in Germany’s Handelsblatt: Schäuble denies reports of bond purchases.” Next week, Draghi meets with the Bundesbank Weidmann to hammer out their differences.
Market-Moving Forces
Trading Volume ~ The On Balance Volume (OBV) is a technical analysis indicator that measures buying and selling pressure. When the market rises on low volume, as it has been, it is easy to manipulate market moves in any direction.
Investor Sentiment ~ AAII investor sentiment hit a low last week and has since rebounded a little… The S&P remains elevated – on low volume buying…
Sector Exploration
Read MarketShadows July 29 to see what we’re doing with OPK and ABX in our Virtual Portfolio.
Charting the Universe
Secret Summits
By Allan Harris of Allan Trends
New Signals
GS Daily —————->LONG
PBKEF Daily ———->LONG
Weekend Market Commentary
Here is the GS Daily Trend Model chart going back six months:
(Click on charts to enlarge)
GS
Nice trends: Buying in December @ $100 reversing to short in April @ $116 and riding it down to today’s reversal long @ $100. After three winners in a row, one would expect the next one to be off a bit. But expectations don’t work, even when we think they do – it’s probably more luck than inspiration. I bought September 100 calls today (7/27), even though I “expect” that this market rally is about over.
The same logic applies to the S&P Hourly chart below. Even though I have been pointing out the ominous nature of the April-May TOP pattern, this trading model has a mind of its own:
SPX Hourly
It whipsawed in late June, but nailed the short term trends before and after with seven winning signals against two losers.
Intermediate term, here is a chart of the Nasdaq Daily Trend Model:
NASDAQ Daily
A trading regimen of using SSO/SDS based on the SPX Hourly Model and QLD/QID based on the Nasdaq Daily Model would have done well over the past few months. There is no reason to think it won’t continue, although as the regulators like to have me say, past performance is no guarantee of future results.
Finally, longer term, the chart that I expect will ultimately make us the most money going into the final five months of 2012, the DJIA Weekly Trend Model:
DJIA Weekly
The Perfect Set-Up: As you can see by the last bar on the weekly chart above, the DJIA closed at it’s high tick for the week. If it makes a higher high next week, then closes lower for the week, I intend to act aggressively on the short side of the market. Some definitions of these kind of “Buying Climaxes” require heavy volume and/or 52 week highs to qualify as an orthodox signal, but with yet another European “summit” and news from one of the Fed’s own regularly scheduled, “Secret Summit Among Fiends” due out on Wednesday, if this market can’t finish up by the close next Friday, I’m taking that as a bearish omen.
Full update here.
(Allan’s Trend Following Model is based on his trend-following trading system for buying and selling stocks and ETFs. Most trades last for weeks to months. Risk-free trials: Standard Trial & Active Trader Service. )
Monopoly Money
By Springheel Jack
Draghi’s statement, and apparent agreement of leaders in Europe, has caused changes in the technical landscape. Bonds (TLT) and the US dollar have broken their short term rising support trendlines, and SPX made a new high off the June low. Gold broke up from a two month symmetrical triangle. There is a potential double-bottom on gold indicating it might rise to new highs. This may be the start of a bull run on precious metals:
On the SPX 60min Chart, the failure so far to establish a support trendline from the June low had looked bearish, but not so much any longer. At the low last week, the SPX established a rising channel from the June low. That is potentially bullish and establishes a support trend-line. It would look bullish if the SPX breaks higher.
Short term, I expect a retracement. SPX hit the upper bollinger band on the daily chart and a perfect bearish rising wedge formed on the 15 min chart from Wednesday’s close. Longer term, earnings and fundamentals are weak, but technicals are bullish. There’s channel support on the SPX in the 1335 area. So I’m skeptical but leaning bullish in spite of my doubts.
Full update here.
Next Week’s Travels
In addition to more earnings reports, there will be a plethora of data this week including, on Wednesday, the ADP employment report, ISM manufacturing, and the FOMC rate decision. On Thursday, it’s Initial Jobless claims and an ECB meeting.
Describing the recent flow of money through the system, Lee Adler wrote,
“ECB head Draghi came out on Friday and said the ECB would take whatever steps necessary to save the Euro, and the sentiment reversed on a dime. As opposed to all the piling in [to US Treasuries] earlier in the week, suddenly it seemed that everyone rushed for the exits. Actually, it was probably just a few, but that’s all it takes at the margin.
“If European investors stop fleeing that system for the “safety” of the US Treasury market, we will see a sea change in the bond market. All it will take is for the flood of European capital into the US to slow. That should be enough to end the panic driven bubble in Treasuries. Over the next few days and weeks, we should keep a close eye on the bond market technical indicators for signs of the turn.
“The calendar will be very light next week, with just the 13, 26, and 4 week bills. After Monday’s big settlement is absorbed, the market will have it easy for the rest of the week and for the rest of the month, relatively speaking. The TBAC estimate for the mid month note and bond settlement is for less than $20 billion in new paper. That will seem like a piece of cake for a market accustomed to absorbing double or triple that. Overall, August will be a month where the market faces very little pressure from new Treasury supply until the end of the month.
“Whether the greater benefit accrues to stocks or bonds remains to be seen, but Friday’s action suggests that the stock market will be the beneficiary…”
MarketShadows Newsletter, July 29 2012
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