Last Week's Markets

First, on Monday I'm going to do a long article on the markets that I'll keep up most of the day.

The weekly charts look, well, terrible. There is nothing bullish in them at all.

Here's a 5-day, 5 minute chart of the SPYs.



That's a straight shot down with nothing indicating a reason to move higher.

The markets moved lower from Friday to Wednesday. On Thursday they tried to rally but couldn't maintain their momentum. On Friday (thanks to a pitiful jobs report), the market sank big time.

Let's take out the moving averages and add some additional analysis.



Note the following:

-- From Friday to Thursday the market is in a clear pattern of lower lows and lower highs.

-- I highlighted two areas where the markets broke clear support. However, there are others as well.

-- The market consolidated from mid-Wednesday to the end of Thursday. The market tried to rally on Thursday and couldn't hold its momentum.

-- Note the heavy selling volume at the close on Friday.

Short version: this is a bear market chart, plain and simple.



The 5-day, 5 minute QQQQ chart with the moving averages is as bad as the SPYs chart. This is literally a straight shot down.



When we take out the moving averages and add in some trend lines, we notice the following:

-- A clear pattern of lower lows and lower highs.

-- An consolidation on Wednesday and Thursday.

-- a big gap down on Friday followed by a tumble down in a big way. Also note the heavy selling volume at the close of trading on Friday.



We see the same pattern with the IWMs that we do with the SPYs and QQQQs -- a straight shot down; no waiting.



Note the following:

-- A clear pattern of lower lows and lower highs.

-- Numerous breaking of support levels.

-- Several gaps down

Here's the short version: this charts say sell me in a big way.

Weekend Weimar and Beagle

OK -- the markets are almost closed. Don't think about economics or the market until tomorrow. As the schedule says, I'll post a week in review tomorrow morning. Until then relax.

Here are some pictures of the three children of Bonddad and the future Mr$. Bonddad.

This is Kate, "making friends" with a cat.



This is Scooby looking very cute and asking for a piece of Italian food.



And this is Sarge relaxing. Notice he is very relaxed.

And One Last Thought On Employment

The year over year number is now negative.

More On Employment

Here are some notes on from several news sources on the employment numbers.

From CBS Marketwatch

U.S. seasonally adjusted nonfarm payrolls rose by 18,000 in December, the weakest job growth since August 2003, according to a survey of thousands of businesses, the Labor Department reported Friday.

.....

Job growth was revised up by a total of 10,000 in November and October. Read the full report.

A separate survey of households showed employment plunging by 436,000, marking the biggest decline in five years. The number of unemployed adults rose by 474,000, pushing the unemployment rate up to 5% from 4.7%. Economists were expecting the rate to rise to 4.8% in December.

Notice:

-- there was a limited upward revision to previous numbers.

-- the household survey got killed.

And then there was this little gem:

The jobless rate has risen 0.6 percentage points since March. "When unemployment rises by more than 0.5% from its cycle low a recession generally ensues," wrote Robert Brusca of FAO Economics.

From Bloomberg:

Excluding a gain in government jobs, payrolls fell last month for the first time since July 2003, hurt by losses in manufacturing, construction and the retail industry.

``This tells you that the strains from credit problems and so forth that have been developing the last six months are starting to bite and they're biting in a way that now finally draws consumption into question,'' said Neal Soss, chief economist at Credit Suisse Group Inc. in New York.

When the only reason jobs were positive is an increase in government jobs, you know there's a big problem.

And then there is this observation from Reuters

The department said that for all of 2007, payroll employment growth averaged 111,000 a month, down from 189,000 a month in 2006. President George W. Bush told Reuters in an interview on Thursday that he was considering stimulus measures to shore up the struggling economy but had not made any decisions.

In other words -- job growth is clearly slowing.

And Mish adds his comments about the birth/death model:

The BLS model has added jobs 12 consecutive months now even in financial activities in an environment where business capex spending has been weak, housing has been horrid, and over to 210 lenders have gone out of business or stopped writing loans according to Implode-O-Meter. In spite of horrible housing conditions, the BLS has assumed there have been more business expansions in 9 of the last 11 months in construction.

And finally, there is this from the above mentioned Bloomberg article:

``It's not a done deal, but if we're going to have a recession, it's too late to do anything about it,'' said Stuart Schweitzer, global markets strategist at JPMorgan Wealth & Asset Management in New York. ``The Fed can't prevent a recession if one's in the making, and we're pretty close.''

As I said below -- there is nothing good in this report.

Employment Up 18,000

From the BLS:

The unemployment rate rose to 5.0 percent in December, while nonfarm payroll employment was essentially unchanged (+18,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job growth in several service-providing industries, including professional and technical services, health care, and food services, was largely offset by job losses in construction and manufacturing. Average hourly earnings rose by 7 cents, or 0.4 percent.

Manufacturing lost 31,000 and construction lost 49,000. That should be no surprise.

Retail lost 24,000. That's very interesting considering we just got done with the Christmas shopping season.

Professional was up 43,000 and education/health was up 44,000.

Short version: this number stinks all the way around; there is no upside. For people that have been arguing for a recession it adds a ton of fuel to the fire.

A Hemmed in Fed

One of the main themes I see for 2008 is a hemmed in Fed. While the economy is slowing commodity prices are increasing implying inflationary pressure. The WSJ had an article this morning mentioning the same theme:

The Fed and the markets agree the economic outlook is worrisome. Minutes of the Fed's December meeting released Wednesday show Fed policy makers share Wall Street's concern that the economy could fall into recession. The minutes raised the prospect of "substantial" further rate cuts if a self-reinforcing spiral of tightening credit and weaker growth develops.

The real disconnect is over inflation. The Fed thinks it is a bigger risk than it was in 2001, and bigger than Wall Street and many prominent economists think. That forces the Fed to accept a greater risk of recession than it did in 2001. That could mean either fewer rate cuts than anticipated by futures markets, which see the Fed's short-term rate target falling to 3% by year-end from 4.25% now, or a quicker reversal of the rate cuts.

Today's situation is in sharp contrast to the Fed's last rate-cutting cycle. In early May 2001, a survey of private-sector forecasters put the odds of recession at 35%. But by that point the Fed, under then-Chairman Alan Greenspan, had already slashed its target for the federal funds rate by two percentage points, to 4.5%, while declaring weak growth to be a bigger worry than inflation. The economy ultimately did experience a mild recession in part because of that September's terrorist attacks, and the funds rate ended the year at 1.75%.

Today, private-sector economists put the odds of recession at 38%, yet the Fed has cut the funds rate only one percentage point since August and has yet to say weaker growth worries it more than inflation.

I have speculated that the Fed's auction plan was a result of their inflationary concern. The Fed wanted to ease the credit crunch and its associated problems but because of rising commodity prices they can't aggressively cut interest rates. As a result, the Fed is looking for ever more creative ways to help the financial sector.

Something else bears mentioning: interest rates aren't that high right now. Here's are three charts from the St. Louis Federal Reserve of various interest rates:

The 10-year Constantly Maturing Treasury



AAA Corporate Paper



BBB Corporate Paper



And that's before we take inflation out of the financing picture.

The bottom line is the issue isn't the cost of money -- it's confidence. People are concerned about the overall condition of the economy. Even if you give someone money in that situation, they are less likely to spend the money. This makes cutting rates a less than stellar policy alternative.

Auto Sates Drop

Although housings woes have dominated the headlines for the last year or so, the auto sector is also experiencing some big problems:

The auto industry's troubles, once centered on Detroit, are spreading to other manufacturers amid a slump in U.S. vehicle sales that is likely to turn 2008 into the weakest year in at least a decade.

The industry yesterday reported a 3% drop in sales of cars and light trucks in December, according to Autodata Corp., as housing woes and high fuel prices scared increasing numbers of consumers away from showrooms.

.....

Overall in 2007, industry sales declined 2.5% to 16,556,423, and most analysts expect more gloom in 2008. They see increasing difficulties for manufacturers, even among some of the foreign companies that have gained share in the U.S. market in recent years.

Rising gas prices, an already heavily indebted consumer and decreasing consumer confidence are playing a factor.

Autos are durable goods. Because they are goods that last a long time, we can use them as soft-of proxy for consumer sentiment. Because a car requires a long-term commitment of 3-5 years, people will probably only but a car if they are confident the future is at least decent. Dropping sales may be an indicating people aren't that confident in the coming 3-5 years.

A "confluence of factors," including the widespread credit crunch, high gasoline prices, a housing downturn and "critically fragile consumer confidence," has crimped Toyota's expectations, Mr. Miller said. In 2008, "we see another challenging year," he added.

Bottom line -- consumers aren't happy right now and are pulling in their spending wings.

Today's Markets

The SPYs couldn't hold onto their gains today. They rose until lunch and then fell back towards the close.



On the 5-day chart, notice the SPYs may be bottoming here. There is a deep drop yesterday just before the close in addition to today's action just before the close. The market could be setting itself up for a post employment report bounce (or not).



On the 5-day QQQQ chart, note the exact same situation as the SPYs.



However, the 5-day Russell 200 chart shows a clear downtrend in place.

I want to turn to the Russell 2000 now. Let's assume that the IWMs represent investors risk appetite; the IWM is made up of small cap companies who typically need a strong and growing economy to increase sales and therefore their stock price. If that is a correct assumption, then we have a problem.



The 3-month IWM chart with simple moving averages (SMAs) indicates the longer term trends are now down. The 50 say SMA is heading lower and more importantly, the 200 day SMA is as well.



All of the exponential moving averages are moving lower (EMAs). That means that more recent trading days are pulling the average lower.

Some Notes On Charts

I've had some questions in the comments about certain technical analysis "things". So, I'm going to do a bulk answer. In addition, I wanted to mention why I use certain technical analysis methods and not others.

-- Technical analysis without fundamental analysis is crap. The old maxim goes something like this: "fundamental analysis tells you what to buy while technical analysis tells you when to buy." I don't care how good a chart reader someone is. If they can't tell me a fundamental reason why they like or don't like something I'm not listening.

-- I'm not a big fan of about 90% of the technical analysis (TA) indicators like stochastics, relative strength indicator and the like. There is a huge lie that goes around which basically assumes TA can somehow create a fool-proof system of trading. "If the chart says this, and the indicator says that then do this." Sorry, that doesn't work at all. The main problem I have with most indicators is they aren't foolproof and usually aren't the best indicator of what will happen.

-- That being said, there are about 5 indicators I do like.

-- Most indicates that use volume: On Balance Volume and the Chaiken Money Flow are good at telling you when money is flowing into and out of a security.

-- Simple Moving Average (SMA): This is a great way to see what certain trends are. I use the 10, 20, 50 and 200 day. Because there are 5 days in a trading week, this gives us the 2 week, 1 month, 2 and a half month and and 40 week trend line. This is essentially a range of trends from pretty short to fairly long.

-- The Exponential Moving Average: This simply gives more weight to more recent days trading. It assumes that what happened more recently is more important that what happened less recently.

-- The MACD: I fall in and out of love with this indicator. I like it because it uses SMAs. I don't like it because it's easy to fall into the trap of "this always works." So I use it sometimes and don't use it sometimes.

The main thing I always look for is the trend. That's about all I look for. Where are prices going, and will they continue in that direction? That's really about it; there's nothing incredibly fancy about it.

Now, onto trend lines.

How do I determine the trend line? I wish I had a great rule of thumb, or some great scientific way that I could pass on. What I do is look at the chart and see where the lows and highs connect, or if they connect. That's about it. Some charts give this information easily and some don't give any clue. That's the nature of the beast. It's always possible to disagree about charts because one person sees one thing and someone else sees something else. That's one of the reasons I love to read other TA blogs - to see what they see because I could miss something along the way.

Finally, a note about Bonddad' trading.

Most of my money is conservatively invested. Right now it's mostly in inflation-indexed bonds, utilities and consumer staples. I keep most of my money conservatively invested because I want to retire at some time. I set aside a small amount of "play" money to trade options. I never mention any of the securities I trade because I am not a licensed broker. And despite the disclaimer at the top right of this blog I want to protect myself legally (I am a lawyer, after all).

FYI

These are four random consumer staples stocks. They are long established companies. They have also all recently broken uptrends.

Coke



Pepsi



McDonalds



P&G

What Inflation?

From Bloomberg:

The UBS Bloomberg Constant Maturity Commodity Index of 26 commodities climbed 22 percent last year, its sixth straight annual increase, powered by advances in wheat and soybeans. It was up 9.29 at 1,314.907 at 1:25 p.m. London time. The Reuters/Jefferies CRB Index of 19 raw materials gained as much as 1.11 to a record 367.97.

And consider these points:

Gold and platinum rose to records for a second day and crude oil traded near $100 a barrel as the dollar's slump enhanced the appeal of raw materials as an inflation hedge.

Agricultural commodities also rallied as wheat had its biggest two-day increase in four months, palm oil reached a record, soybeans traded near a 34-year high and corn neared an 11-year peak. Metals including gold, which rose beyond $850 an ounce for the first time yesterday, have more to gain, Evy Hambro, managing director of BlackRock Investment Management Ltd., said today.

Consider the following charts:



Corn has broken through key resistance areas twice in the last two years. In addition, it has broken out of a trading range that lasted for 8 years. An old adage among traders is the longer the base, the stronger the break-out.



Like corn wheat has also broken out of a long base. It spent the last few months of 2007 consolidating its gains.



Platinum is in the middle of a 6 year rally. Notice the strength of this rally -- it continues to push higher and higher in a disciplined manner.



Gold is also pushing to new highs. Notice it has broken through hey resistance levels twice in the last few months.



soy beans have moved into record territory as well, again breaking through key resistance over the last month.

Notice an important common feature to all of these charts: they are all "breaking through key resistance areas. That's an incredibly important fact; it indicates the bulls are running across a variety of commodity prices.

A Closer Look At the Financial Sector

One of the main lessons I learned from reading some of the older market analysts like Gartley, Gann and Schabacker is the importance of long-term trends. You have to know where you are in a particular cycle, be it an index, sector or individual security. Bearing that in mind, let's look at the financial sector to see where we are now.



In late 2002 and early 2003 the sector formed a double bottom. It rose from this bottom at about 20 to 30 in early 2004. That's an increase of 50%. The sector consolidated its gains from 2004 to 2005. The sector started rising at the end of 2005 until mid 2007, moving from 30.5 to 38, or an increase of roughly 23.5%. The sector formed a double top in mid-2007 and has been dropping on heavy volume since.



From a simple moving average perspective, notice the index has used the 200 day SMA for support for the last year and a half. It bounced off the 200 day SMA twice. But now the index is below that index indicating we're in bear market territory.



Notice the sector has sold-off about 50% of it's total 4.5 year rally. It has done so quickly on heavy volume. The sector is also between important price levels established during its 2004 - 2005 consolidation.



On the short-term chart, notice that

-- the shorter SMAs are below the longer SMAs

-- prices are below the SMAs

-- all the SMAs are headed lower.

In other words, expect the sell-off to continue.

FOMC Minutes

Yesterday, the Federal Reserve issued the minutes from their last meeting. It is very informative and shows what the Fed is seeing which supposedly gives us a window into what they are thinking.



Notice the breadth of the slowdown. This isn't just about housing; we're seeing a slowdown in consumer spending and business activity as well as an increase in inflation. In short, this is not a good time to be a Fed governor.

Today's Markets

Happy new year. Well, not really.

The markets opened the new year with a whimper. They gapped down on the ISM news (which came in at recessionary levels) and then continued to drop as oil spiked.

Here's the 5-day SPY chart.



Note:

1.) The gap down on the Chicago news

2.) The heavy volume

3.) The increase in the steepness of the move down compared to the previous 4 days.



The same points from above apply, with the addition that the QQQQs may have formed a double bottom today.



The IWMS (Russell 2000) have been in a weaker, downward trajectory for the last 5 days. They simply continued their pattern today.



On the daily SPY chart, notice prices are now at the lower trend line of either a triangle or a diamond top (pick your pattern). Also notice the volume really picked-up today.



Technically, the QQQQs are still in decent shape. They are still consolidating within a range.

However, before we go an get excited about the NASDAQ because it doesn't have any exposure to real estate:

45 of the 100 NDX stocks have 200 DMA that are already declining (they are in intermediate to long term down trends).

56 of the 100 NDX stocks are below the 200 DMA.

68 of the 100 NDX stocks have a declining 50 DMA (short to intermediate term down trends).

67 of the 100 NDX stocks are below the 50 DMA.
and last but not least 50 of the 100 NDX stocks have 50 DMA that have crossed under the 200 DMA.

Of the 33 stocks above the 50 DMA only 14 of them are what I would consider strongly above (making new highs) and 5 of those 33 stocks above the 50 are still below the 200 DMA.

This doesn't paint a pretty picture for tech being a safe haven for investors with only 14 stocks in strong technical positions.

This is why market breadth is so important. Fewer and fewer stocks are responsible for the market's advance.



On the IWMs, remember the blue line is a 4 year support line for the market's rally.

Oil Hits $100/bbl

From Bloomberg:

Crude oil reached a record $100 a barrel and gold soared to the highest ever, leading a commodity surge as the dollar's slump against major currencies enhanced the appeal of raw materials as hedges against inflation.

Spot gold climbed to $860.10 an ounce, and wheat and soybeans jumped more than 3 percent. The UBS Bloomberg Constant Maturity Commodity Index gained as much as 2.2 percent today after climbing 22 percent in 2007. The dollar fell on speculation the Federal Reserve will cut borrowing costs in an attempt to bolster the U.S. economy.

``The most salient buzzword in 2008 is going to be inflation,'' said Michael Pento, senior market strategist for Delta Global Advisors Inc. in Huntington Beach, California, which manages about $1.4 billion. ``The Fed is lowering interest rates and vastly increasing the money supply. They're further fueling inflationary expectations.''

Here's the chart, via Futuresource:



Notice oil had been in a rally for the last year. Today's move breaks through technical resistance. If oil closes above $100/BBL, we'll officially be in new territory -- there is no technical resistance keeping prices from moving higher.

Here's a chart of the dollar:



Because oil is priced in dollars, a decrease in the dollar's value is a de facto price increase in oil. Notice the dollar dropped hard a few days ago. A gap is an indication of a meaningful change in sentiment. Notice the dollar gapped down after a decent rally.

And here is a long term chart of the dollar:



That shows it's clearly in a major downtrend.

And gold is spiking:



Gold consolidated in November and December and has since broken out -- an indication that inflation expectations are increasing.

And here's a long term chart of gold:



Which shows it's really breaking out in a big way.

Beginning of The Year Analysis, Projections, Predictions and Other Stuff

With the beginning of the year upon us, it's time to look back and forward. Some posts from around the blogsphere do a great job.

The Big Picture offers a 2007 performance review.

Afraid to Trade looks at commodities 2007 charts.

ETF Trends has a great ETF round-up

Bespoke offers the Rolaids list, the anti-Rolaids list and all sorts of other analysis.

Business Week offers the best and worst of 2007

Minyanville has a great roundup of 2008 possibilities

Will The Correct SPY Analysis Please Stand Up?

Reading charts is an art as much as a science. In fact, it may be more an art than anything else. The more you look at charts, the more you see multiple interpretations. The current SPY chart is no exception. Sometime over the last few months, I argued the SPY was in a double top formation. This was one of the reasons I argued a bear market was developing. Considering the overall economic backdrop -- a slowing economy with the possibility of a recession occurring -- this analysis made sense.

Since I speculated the SPYs were in a double top the economic news has continued to disappoint. Christmas sales were fair but not great as the consumer is still hemmed in by increasing gas and food prices, durable goods disappointed, regional Fed surveys showed weakness, housing is still a mess and the credit market shows little sign of unfreezing. However, the SPYs now offer multiple possible interpretations.



Here's the original analysis, which still stands. The market formed two tops -- one in early July and one in early October. Since then the market has drifted lower, but has not convincingly entered bear market territory.

But there are other ways to look at this chart.



The second possibility is a diamond reversal, which is defined as:

A technical analysis reversal pattern that is used to signal the end of an uptrend. This relatively uncommon pattern is found by identifying a period in which the price trend of an asset starts to widen and then starts to narrow. This pattern is called a diamond because of the shape it creates on a chart.

I first got this idea from the blog afraid to trade which identified the broadening pattern which is the first part of the diamond top formation. After reading that analysis, my first thought was, "why didn't I see that?" Then I looked at the post broadening pattern and thought, "that looks like a diamond top".



Finally, we have a possible triangle consolidation as well.

There is one important concept at play here and that is two of these patterns are recognized as reversal patterns (the double top and the diamond top). The third -- the triangle pattern -- is either a reversal or a continuation pattern. What matters here is the market's move after it breaks from the triangle pattern.

However, the evidence is leaning fairly heavily towards a reversal of some sort.

Insured Mortgage Defaults Increasing

From IBD:

Nov. defaults on privately insured U.S. mortgages rose 34.7% vs. the year before to 61,300, as more homeowners fell behind on payments. That's the most since the Mortgage Insurance Cos. of America began tracking data in '01. Mortgage insurers such as MGIC Investment Corp., (MTG) PMI Group (MTG) and Radian Group (MTG) lost money in Q3.

Happy new year, housing industry. It's going to be a difficult year....

Economic Outlook 2008

Let's start with what I think is going to happen in the upcoming year. But let me first note that I am not a big fan of projecting what specific numbers will be, or where the market will wind up or where interest rates are going to be, or any of that jazz. There are simply too many variable to consider for there to be any hope of accuracy.

With that being said, I do think it is possible to see general trends with the understanding they could change at a moments notice depending on what is happening in the economy at large.

Trend number 1:

Hopefully, housing will stabilize at some point in 2008, but not until the last two quarters. Housing still has a long way to go before it hits bottom so I don't think it's even possible until the end of the year. Here's the bottom line: inventory is sky high, the credit markets are frozen the underwriting standards are getting tighter. In addition, there is the foreclosure issue. The main estimate I have seen in this area is 1.2 million foreclosures are possible in 2008. The most liberal estimate I have seen for the number of homeowners that will benefit from the Paulson plan is 600,000. Assuming both those numbers to be true, we have an additional 600,000 homes hitting the existing home inventory numbers. That's on top of the people who want to sell for other reasons.

So -- we already have a super-glut of inventory on the market with the possibility of more homes coming on the market and it's harder to get a loan.

Econ 101: Increasing supply + decreasing demand = lower prices.

Trend number 2:

Slowing consumer spending. While I don't think Americans will stop spending (largely because Americans never stop spending) I do expect the combination of the housing market mess and a slowing economy to lower consumer spending for most of the year. Also add in the possibility of higher gas and food prices and you have further hits to discretionary spending habits.

Keep a close eye on the Christmas numbers; these will give us a decent indicator of consumer sentiment and desire to spend.

Trend number 3:

Commodity inflation will be with us for most of the year. Agricultural prices are in the middle of a three year rally:



Oil is in the middle of a year long rally:



There is no reason to think this will change anytime soon. With India and China coming on line there are now two billion more people who want food and energy. That's an awful lot of demand and I think it's enough to keep prices moving higher.

Trend number 4

A hemmed in Fed: Boy would it suck to be a member of the Federal Reserve right now. On one hand the economy is under enormous downward pressure. On the other hand, we have commodity inflation that will probably be getting worse as I detail above. I think commodity inflation is the primary reason the Fed has opted for a liquidity injection rather than a more aggressive rate decision. I would expect more outside the box thinking from the Fed on this issue. Because of commodity inflation I am very wary of aggressive predictions for Fed action.

Trend Number 5

Credit market turmoil continuing: The predictions for total writedowns in the credit markets range from $300 -- $500 billion. But there have only been about $100 billion in total writedowns so far. Assuming the $300 - $500 range is accurate, that means we have an additional $200 billion more of writedowns to go at a minimum. So long as that problem is out there, expect institution to institution level lending to be a problem. And as long as that goes on the credit markets will have a hard time getting anything done.

It's taken us about 6 months to get through about $100 billion in writetdowns. Assuming that time line holds and assuming the $300 - $500 billion of total writedowns is accurate, we've got about a years worth of bad news to go, assuming the pace of announcements during 2007 holds for 2008.

Trend Number 6

Increasing Exports: Thanks to a decreasing dollar US exports are doing quite well. Here is a chart from the Census Bureau of total monthly exports. Notice it has been increasing for the last three years.



All of this being said, let me add this one caveat. There are plenty of plausible reasons why none of these will play out for the entire year. There are simply too many unknowns over a 12 month period to effectively predict the validity of these predictions. So don't assume any of these are golden. They are all based on the information we have as of January 1, 2008.

SO -- keep these in mind, but remember to stay flexible.