Monthly Archives: September 2011

30th September 2011 – Germany supports Greek bailout; Dow Theory continues to be bearish; another interesting debate

So much to write about and so little time!

I’ve thought for a while that the Euro doom-mongers have been underestimating the sheer political will behind the project. Ultimately I believe the Euro will survive, but whether or not that will include the debt-afflicted countries remains to be seen. I can’t see how an inevitable Greek default will result in anything else other than their withdrawal, but perhaps I am wrong about this.

I was very surprised at the strength of support Merkel was able to gain from the Bundestag yesterday. She is in charge of a very weak Government, whose margin is thin. Even so 435 of Germany’s 528 members of parliament voted in favour of expanding German participation in the loan guarantee scheme to E211bn from E123bn.

This event increases the likelihood that Greece is going to manage to get its next payment but this surely can’t be the answer. After all, the first E123bn hasn’t worked. The Greeks have been unable to engage in significant reform and, frankly, have lied a great deal. They are not a good partner and I wonder how yesterday’s vote is going to affect German voters.

I just can’t call how the market will react to the Greeks receiving the next tranche of loan. My feeling is still bearish as this will not represent a true solution, but so far the stimulus rally is proving to be resilient at current levels.

On that thought I came across this article. Leaving to one side I found this author’s view intensely stupid, it did remind me to do something. I took a look at the Dow Transportation Index and it is true it hasn’t rallied at all. What the author of the linked article missed is that the current rally hasn’t broken out yet. The market has been trading in a weak range so to say Dow Theory is dead is just wrong. If this rally breaks out above about 11,650 and the Transport Index fails to rally, then possibly such a claim could be made (but I would be loathe to make it). Continue reading

29th September – Amusing American politics

Over the last few weeks I’ve been increasingly amused by statements from the White House aimed at Europe.

We’ve heard numerous utterances from US Treasury Secretary, Timothy Geithner, saying that Europe is not doing enough. Now Obama has weighed in to say more of the same.

Have these people forgotten the pig’s ear they made of discussions over their own Debt Ceiling? Have they forgotten that such was the market’s disdain for it, that it triggered a huge sell-off? Have they forgotten that their own plans for fiscal stimulus will be as much use as the proverbial chocolate fireguard?

Anyone would think there is an election coming….

Not that European politicians are by any means paragons of virtue. I have no doubt that whatever mess they manage to cook up to “solve” the Greek problem it will, at best, be yet another delaying tactic, which will do no more than push back the date of the inevitable and maybe even scrape them through another election.

But herein lies the problem.

All of this farce is our fault. It may not seem like it, but unless the electorate grows up and educates them more about vital macro-issues that have a deep impact on their lives all we can realistically expect from our political “leaders” is the same old rubbish.

I’ve lost a lot of faith in Obama recently. I thought he had started to take the moral high ground during the Deficit Ceiling Debacle, but these poor recent attempts to distract Americans and shift blame onto Europe are troubling. If he does manage to win the next election can we hope that he will be the man to push through radical reform?

I really don’t know.

In the meantime I will keep watching markets and hopefully start to get a bit more of a sense for a next move. The current rally looks weak, but I imagine everything in the medium terms hangs on Greece.

28th September 2011 – A Spanish vision

For anyone who has not yet quite come to terms with what is facing all of us, I came across this salutary article this evening.

I wrote 3 years ago that Iceland’s collapse was a harbinger for us all. My prediction hasn’t yet come to fruition but I do think it only a matter of time. The debt situation is beyond all control. I didn’t anticipate the level of monetary stimulus, but who did?

There has been a lot of talk this week about hopes for a Greek bailout and this has apparently led to a market rally. Even if Greek investors do end up taking a 40% haircut is this going to be the end of the Credit Crisis?

Of course not.

What interested my most in the first article was that regional debt of the area Moratalla is in doubled between 2007 and 2010. Compare this to what happened in Britain during the same period as the deficit-denying and desperate Gordon Brown madly tried to cling onto power.

It is true that we might manage to avoid national bankruptcy, but the price for paying off the debt is going to have to be a drastic reduction in living standards. A basic understanding of maths tells us this.

I’m still not convinced that this has really settled in the public consciousness yet. However as we hear more and more stories like that of Moratalla getting closer and closer to home people will have to wake up.

23rd September – The Fed twists and disappoints

I think I was wrong in some of my analysis on Wednesday. In my article I said that Operation Twist would amount to QE3.

This is not correct.

By selling $400billion short term bonds and buying $400billion long term bonds this is a balanced transaction and does not represent new monetary support.

However given the market’s reaction to Wednesday’s news QE3 can’t be far away.

We’ve seen another major sell-off and it is clear that confidence in monetary policy is collapsing. I still maintain that the Fed has one last blockbuster left in them, which will probably provide short-term relief, but sooner or later we are going to have to wake up to the fact that our economies are broken beyond repair and a radical overhaul (including a huge, global write-down of debt) is required.

Encouragingly for me though are the following screenshots. First we can clearly see that the Dow has reversed off, what I now believe is, it’s Primary Resistance Zone.


Please click for full size image


I had been toying with the idea of going short on Wednesday, but just couldn’t afford it. This is a shame especially when I consider the second screenshot below, which is the first I am publishing of my new Market Strength Test tool.

At some point I will explain how this works, but for the time being it will suffice to say that this is giving a clear indication that we are in a bear market. Therefore the likelihood of a reversal off Primary Resistance was significantly increased.




Please click for full size image

I had thought that the Dow would pull back to 10,400 (near its Primary Value Zone), but I wonder now if this will prove to be a support level. Things look pretty bad at the moment and a break through 10,400 could easily see us back to 9,500 (or worse).

One point I will leave you with now, is to remember that this is not a carbon copy of 2008. Thanks to the $2trillion stimulus, this is not a liquidity crisis of the same magnitude (yet). I still believe we will see another rally and could well see the summer highs broken. While this will not reflect the true economic reality we are living in, it will probably still present some good trading opportunities.

21st September 2011 – Fed about to twist?

It is a little late in the day to be writing this blog, but I have been following closely coverage of market expectations for the Fed’s next move (due in about an hour and a half).

Operation Twist is the name given to the strategy first employed in 1961, in which the Fed sort to flatten the yield curve by selling bonds with short maturity dates and buying bonds with longer maturity dates.

The expectation is they are about to do this again. In essence this represents QE3, but my feeling is that for it to have any sort of significant impact, the effort is going to have to be spectacular. Given the spectacular monetary events we have seen over the last 3 years, it is staggering to think what they might actually do next.

I talked with a friend at the weekend and we half-jokingly threw all manner of figure around. Could we see a >$2trillion stimulus package?

I wouldn’t count against it!

One thing Bernanke has been extremely consistent in is living up to his moniker, “Helicopter Ben”. Even though the strategy of pumping trillions into the financial system has clearly not worked, he and his colleagues on the FOMC are now too far in to change course. They have manoeuvred themselves into a position where they have to hope against hope that somehow this situation will resolve itself. The only thing they can do is more of the same.

To alter course, would be to call into question all their previous actions and of course the current positions. Somehow I doubt we will see these people make a selfless sacrifice and quit.

We desperately need new ideas and a radical change of course to see us clear from this mess, but for the time being let’s settle in for more of the same.

19th September 2011 – Why haven’t prices collapsed more?

I caught this article on Bloomberg today and it left me wondering “so why haven’t prices collapsed further?”

With markets approaching 20% declines (the official mark of a bear market) and the gold price parabolic, the level of investor unease is palpable. Yet even so we have seen the Dow doggedly hold the 11,000 level. It has, admittedly, reversed off its Primary Resistance Zone (about 11,600) several times since then, but this relief rally has had some staying power.

Of course we are due the Fed’s next announcement on Wednesday. The expectation is for a further bout of monetary easing, through the Operation Twist programme. It is probable that the major players are waiting to see what Bernanke is going to do next before making their moves.

Even so I would have though prices would be lower by now.

My Market Health Test tool has shown a recent uptick in buying, but it is still not much to write home about and the moving averages of scores point to significant weakness.

I had to take my profits last week, but I believe the line of least resistance is clearly on the short side at the moment.

Ho hum if only I could trade!

12th September 2011 – Sell-off continues

I’ve got a chart on my fridge. On it I’ve printed a colour copy of the Dow’s candlestick chart for the last 5 years. I’ve drawn a few trend lines and annotated the key market movers. I like looking at it.

However it frustrates me slightly. I put it up about 3 months ago and on it I’ve written “2011 bearish; 2012 bullish; 2013 ultra-bearish”. Fortune-telling and market analysis are rarely happy bedfellows in the world of the stock market, but this macro view makes sense to me.

The pressure of the debt crisis has been growing since 2008. All efforts to ameliorate it have failed and the problems look to have got worse (or at least weren’t fully recognised in the first place). Irrespective of this we should remember that in excess of $2trillion “stimulus” is still sloshing around the system and this is providing substantial support to the broken financial system.

Additionally I am not sure we have quite reached the true point of crisis yet, where the wider population loses its faith in money. At some point this is going to happen, it will have to. All the preconceptions, on which our financial system is based, are facing unprecedented challenges. So far they have not stood up well to the harsh scrutiny and ultimate failure seems inevitable.

In the meantime though, we have a Presidential Election and likely further Quantitative Easing to look forward to. I am sure both will happen in 2012 and both will give terminally sick markets a temporary shot in the arm.

The salve this provides will be short lived and once the new President is settled into the Whitehouse and it becomes clear to all that the election promises of jobs and growth were optimistic lies then the real crisis will begin. 2013 will be awful. Continue reading

5th September 2011 – Cashing out

So now I am really happy. My limit of 500 points on the Dow was hit and I am out of the market. I did consider leaving some of my position open, but given my circumstances I need the money now.

After Friday’s terrible jobs report and with US markets closed today, there was a great deal of pressure on markets today.

What happens next is more difficult to decide. I still believe we are going to witness a correction down to about 10,450 in the Dow. This is the roughly where the index’s Primary Value Zone is, but I think the action in the next few days will be telling. If we do make a new lower low, then such a downward move is definitely on the cards.

Had I the resources I would probably trade this as my Market Health Check tool has also highlighted further weakness.

So I am going to watch carefully as the action unfolds and keep working on my next long-term plan.

2nd September 2011 – Tightening stops ahead of data

I am sitting on a nice potential profit at the moment. I’ve nearly stopped out three times, but on each occasion the Dow has failed to break significantly through 11,700. This level is just above where the system indicated resistance occurs.

Overall I am really happy with this trade. I’ve picked a good level and look like I am on the right side of the line of least resistance.

In the last couple of days my Market Health Check tool has also signalled weakness in the market. The buying has slowed down and we have seen a couple of one-day reversals. This is indicative of negative sentiment.

However there is still a large degree of risk in today’s payroll number, which requires I tread carefully. If the data disappoints this could lead to a rally in anticipation of QE3, whereas if it positively surprises this could result in the same market move, based on brightening prospects. Equally a disappointment could spur a bout of further selling as confidence is eroded further. There is even the possibility that a positive surprise could trigger selling as the QE3 believers close positions.

Quite simply no-one knows how the market is going to react.

So, with this in mind (and paper profits), my only course of action can be to tighten my stops ahead of the announcement. I will lock in a profit if the move goes against me, but have decent exposure if the line of resistance holds and the market takes a tumble.

I appreciate this trade is a bit of a coin-flip, but it now isn’t costing me anything.