A Broad Look At the Currency Markets

The currency markets are very inter-related; as one currency drops, another rises. So it makes sense to start looking at a group of currencies to see where money is flowing into and out from.



The dollar has been in a downtrend since the beginning of 2006. It has made a clear pattern of lower lows and lowers highs. Also note the accelerated decline since mid-2007 when the Fed started cutting rates.

The dollar formed a bottom at the end of last year, bounced higher and is now consolidating in either a triangle or flag pattern.



On the dollar's daily chart you can see the consolidation very clearly. I think the most appropriate technical call is a bear market flag, however some analysts may see a triangle consolidation.



The euro has been the clear beneficiary of the dollar's decline. Notice that since the beginning of 2006 we have a clear rally with higher highs and higher lows. We also have a consolidation pattern that starts in late 2007.



Here is a closer look at the euro's consolidation pattern, which is a clear bull market flag. Also note the euro and dollar chart's are a near mirror image of each other for the last two years.



The yen had a rough time from 2005 to mid 2007. The market found a bottom in 2005, bounced higher and then fell to a new low in late 2007. This looks an awful lot like a dead cat bounce to me.

The yen stared a pretty strong rally in mid-2007 making a continued pattern of higher highs and higher lows. However, until it also looks as though the yen is in a giant bottoming pattern for this entire chart (roughly 3 years). Until the yen makes a strong move from this area to say 100 I think we could continue to call the yen in a bottoming formation.



On the daily chart there is a very gentle rally with higher highs and higher lows. But the lack of a serious upward sloping incline makes me wonder about trader's sincerity about the rally. To me, this chart says, "we really want to bid this chart higher, but we're really not sure that's a good idea."

So, what do these charts tell us?

-- The euro and dollar are clearly in direct competition with each other.

-- There is a lot of hesitancy to the yen's chart. The lack of a serious upward incline to the latest rally makes me wonder about trader's underlying conviction. This chart says, "the Japanese economy isn't out of the woods yet, at least not according to traders."

Today's Markets

First, let's look at the macro environment. Because of the noise in the candlestick charts, here are three line charts. They should the SPYs, QQQQs, and IWMs are still consolidating.



The SPYs have been forming a solid triangle for the last two months.



Although the QQQQs are trending down, notice they too are in a clear channel



And the IWMs are formed a triangle as well, although we can debate where the lower line is.

Daily gyrations are important to watch, but until we break out in a direction the daily news is a bit pointless.

What Inflation?

I know -- you saw this all day yesterday and now you're thinking "cut it out."

But:

Inflation remained hot in January, led by large increases in energy and food prices but also in a host of underlying core prices, the government reported Wednesday.

U.S. consumer prices rose a seasonally adjusted 0.4% last month, the Labor Department reported Wednesday. See full government report.

Excluding food and energy prices, the core CPI rose 0.3% in January, the biggest gain since June 2006.

The increases in the CPI and core CPI rates were above the median estimates of economists surveyed by MarketWatch. Economists had projected a 0.3% gain in the CPI and a 0.2% increase in core inflation. The report contains updated seasonal factors.

As a result, December CPI was revised up to a 0.4% gain compared with the initial estimate of a 0.3% increase.

On a year-over-year basis, the CPI is up 4.3% in January. Core inflation is up 2.5% over the same period, the fastest pace since February 2007.

The number isn't that bad if you don't eat or drive anywhere.

Market Breadth Still Weak

From IBD:

Last week's follow-through may have marked a bullish turn in the market, but that doesn't mean investors should be in a hurry to buy stocks.

Why? There just aren't many compelling candidates. A strong new rally typically yields a rash of breakouts by new leaders within a few weeks of the follow-through rally confirmation.

This week's IBD 100 is comprised of few new names, especially those with superior fundamentals. That indicates a lack of sector rotation, or emerging leadership.

Meanwhile, much of the market's old guard is still deep in corrections.

Some of their basing patterns show flaws. So even if they look more promising as they build the right side, you need to make sure the stock meets all your fundamental and technical criteria.

Market breadth is an extremely importance coincident indicator. The underlying reason is simple. A rally should attract buyers who continue to bid up more and more shares. As this process continues, more and more shares should make new highs. The reverse is also true. As the market declines, more stocks decline in value than advance. This leads to more stocks making new lows instead of new highs.

Here are the market breadth charts which indicate a deteriorating fundamental situation in the market.



The New York new high/new low chart peaked at the beginning of the third quarter of 2007 and has been declining since.



The New York advance decline line is also in a downtrend, although there is clearly some bullish sentiment preventing a big collapse. The decline is pretty gentle and down trends are followed by uptrends.



The NASDAQ new high/new low chart has dropped off a cliff.



The NASDAQ advance/decline line shows a three year decline, indicating a declining number of market leading stocks.

A Closer Look At the Oil Market

With oil hitting $100/bbl yesterday, let's take a closer look at the oil market.



Above is a multi-year chart of oil. Notice the following:

-- Although oil dropped in mid-2006, that had more to do with Goldman Sachs rebalancing it's energy index than a market fundamental. In other words, the sell-off in the second half of 2006 was a technical rather than fundamental event.

-- The market has been rallying for the better part of the last year.

-- The market has been consolidating for the last 4 months.



Above is a chart of the last 6 months. Notice the clear consolidation pattern that is going occurring. Also of interest is the fact that over the last 4 months talk a a recession has increased yet oil hasn't dropped below technical support in the upper 80's. That means that so far -- even with the possibility of a slowdown in growth -- the market still thinks oil is a pretty expensive commodity.

Cracks Emerging in the Treasury Market Rally?

From Bloomberg:

Treasuries fell, pushing the 10-year note's yield to the highest level in more than a month, on speculation accelerating inflation will prompt the Federal Reserve to be less aggressive in cutting borrowing costs.

U.S. debt securities extended their decline after an industry report today showed confidence among homebuilders had its first back-to-back monthly increase in almost a year. Traders eliminated bets the Fed will lower the target lending rate by three-quarters of a percentage point at its meeting next month, in favor of a smaller reduction.

``The Fed is almost done easing because the market won't allow more,'' said Mark MacQueen, a partner and portfolio manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $5 billion. ``Every day that passes, people become less assured there's going to be a recession. I find little value in Treasuries.''

Here is a year long daily chart of the long end (20+ years) of the curve.



Notice the clear break of the uptrend that has been in place since early July.

A Closer Look At the Utilities Sector

The utilities sector is "for widows and orphans" meaning it's an ultra safe area of the market. Let's see what the long, medium and short-term charts are saying.



This is a five year weekly chart if the sector. Notice the clear pattern of higher highs and higher lows. Also notice the increased volume, although the latest volume is less than that from roughly mid-2007.



This is a one year daily chart. While the bottom is arguable, there is a pretty clear broadening formation. We don't know whether this is a consolidation pattern or a topping pattern. The index is still about the long-term (5 year) trend line.



The SMA picture is a bit confusing; there is no clear trend one way or the other. Notice the following.

-- Prices are just below the 200 day SMA

-- The 50 day SMA is clearly in a downtrend, but the 200 day SMA is has a very slight downtrend.

-- Prices are right at the 10 and 20 day SMA

-- The SMAs are within 2 points of each other.

A Closer Look At the Basic Materials Sector

Basic materials is a market sector that has done very well during the latest bull market run. As the world has engaged in more and more infrastructure spending we've seen the likes of steel, iron and other basic materials companies rally. So, let's take a look at the XLBs to see where they are in the cycle.



Above is a five year weekly chart. Notice a clear higher high and higher low patter along with increasing volume over the 5 years period. It's possible the last year or so was seen a "buying frenzy" where everybody and their brother feels the need to get into the sector.



This is a one year daily chart. There is no clear topping pattern emerging. In his book Profits in the Stock Market, Gartley lists seven reversal patterns. One of them is called "complex" and it could also be called, "I have no idea what this is."

There are two lines of support and resistance that seem to exist at roughly 38 and 43. However, those levels are pretty subjective and there is legitimate room for doubt about where the lines should be.



The SMA picture is very confusing. Notice the following:

-- Prices are right around the 200 day SMA, which is the traditional line between a bull and bear market

-- The 50 and 200 day SMA are both moving in a more or less straight line.

-- The 10 and 20 day SMAs are both heading up, but their overall position is pretty messy.

Short version, this sector is still technically in a rally. But it's also looking for direction.

Today's Markets

The big news today was oil closing above $100/bbl. That sent all the indexes lower.



Notice that once the SPYs broke lower, they did so on heavy volume. Also notice the index closed near the daily lows, indicating traders don't want to hold anything overnight.



Like the SPYs, the QQQQs broke lower on heavy volume after oil closed.



The exact same thing happened to the IWMs

On all the chart, notice they all opened higher but couldn't hold onto the gains. That indicates concern.

On the daily charts below, notice we're still in the middle of a consolidation for all the averages. I added a second lower trend line for the IWMs. Also note that on the SPYs and IWMs we have decreasing volume, a classic pattern further confirming consolidation is occurring.

What Inflation? -- Conclusion

The four posts below show the following:

1.) There have been very large price spikes in a variety of energy and food commodities. These are not small increases. In addition, the breadth of the increases nullifies the argument that the price increases are the result of a disruption in a particular market.

2.) One of our largest trading partners [thanks to an anonymous poster for pointing that out] has high and accelerating inflation.

3.) The US dollar -- which is the base currency for most commodities -- has been dropping in value for the last two years. In addition, the zero maturity money supply has been increasing at a high year over year rate for the last year and that rate of increase is accelerating.

4.) The US government's methodology for computing CPI has changed over the last 25+ years and the that methodology may be understating the official inflation rate. I can't speak to the validity of this argument. However, considering the price increases I am seeing at the personal level I find this argument at worst worth discussion.

Conclusion: inflation is a problem.

What Inflation? pt. IV

Finally, consider this chart from Shadow Stats:

The CPI chart on the home page [as reprinted above] reflects our estimate of inflation for today as if it were calculated the same way it was in 1990. The CPI on the Alternate Data Series tab here [the chart above], reflects the CPI as if it were calculated using the methodologies in place in 1980. Further background on the Alternate CPI and Ongoing M3 series is available in the Archives in the August 2006 SGS newsletter.

What Inflation? pt. III

Above is a long-term chart of the dollar. Notice the chart is in a clear bear market pattern of lower lows and lower highs. Remember that most commodities are priced in dollars, so as the dollar drops in value the value of these commodities by definition increases.



Above is a daily chart of the dollar. There is some good news here. Notice the dollar is consolidating above its recent lows, indicating traders have bid up the dollar a bit. Also note the simple moving averages are bunched, indicating a lack of direction. This is better than all the SMAs moving lower. It looks as though traders are wondering of the dollar is fairly priced right now, or whether it was fallen enough and should be higher.



Finally, above is a chart of the percentage increase from the previous year in MZM which is defined as:

A measure of the liquid money supply within an economy. MZM represents all money in M2 less the time deposits, plus all money market funds.

That's a big damn increase.

What Inflation? pt. II

From the WSJ:

China's consumer prices surged by 7.1% in January, exacerbating the dilemma for policymakers who face both weakening global growth and a domestic economy still at risk of overheating.

The acceleration in inflation, up from 6.5% in December, came after heavy snowstorms in late January froze power grids and shut down road and rail transportation across much of southern and central China. The severe shortages of daily necessities that followed helped push the monthly inflation reading to its highest level since September 1996. And the snow's impact on prices is likely to be felt further in coming months, as it killed farm animals and damaged crops across a large part of the country.

The continued price increases, which have been gaining speed since early 2007, make it more difficult for the government to stimulate the economy to counter the recent financial-market turmoil and economic slowdown in the U.S. and Europe. China's inflation is still confined almost entirely to food -- where prices rose 18.2% in January -- but officials are concerned those increases could feed into bigger price spirals that would be much more difficult to contain.

All China has to do is go to a core inflation policy and everything will be OK.

And then there is this:

China's producer prices rose last month at their fastest rate in more than three years, adding to the inflationary pressures confronting Beijing policy makers.

Producer prices rose 6.1% in January from the year earlier, data issued by the National Bureau of Statistics showed yesterday. The figure was up from 5.4% in December and was the highest since December 2004.

Curbing inflation and excess liquidity remain the focus of China's economic policy as producer prices, along with other recent economic data, suggest that the impact of the global economic slowdown hasn't been obvious in China so far, said Tao Wang, a Beijing-based economist at Bank of America Corp.

"The growing inflationary pressure, especially with buoyant export and money-supply growth, points to the necessity for China to continue its tight monetary policy," she said.

It's not just a US problem now, is it?

Oh yeah in case you missed this on Friday

The January increase in overall imports resumed the upward trend of the past year after a 0.2 percent decrease in December. The index, which had risen 3.1 percent in November and 1.5 percent in October, is up 13.7 percent over the past 12 months, the largest year-over-year increase since the index was first published in September 1982.

But we should be lowering rates right now....

What Inflation?

I've written this title a bunch over the last few months, largely in response to a story of a few commodities hitting new highs. However, I haven't looked at a ton of charts and compiled them into a master list. So here is that list.

First I went to Futures Trading Charts. Then I looked at their futures charts for agricultural and energy commodities. I found 18 charts that show major price moves. All of them are listed below.

If this were one commodity I would dismiss it as a commodity specific price disruption. However, we're looking at major league price spikes across the spectrum of goods. That's a huge deal and it indicates a fundamental development in the markets. I stand by my standard explanation 101: with India's and China's standard of living going up, it's only natural the demand curve gets moved to the right. That means increasing prices.

I eyeballed the gains, so they might be off by a few percentage points either way but you get the rough idea.

Aluminum



Copper



Platinum



Silver



Gold



Canola



Cocoa



Coffee



Corn



Oats



Rough Rice



Soybean Meal



Soybeans



Wheat



Brent Crude Oil



Heating Oil



Light Crude



Propane



Now for the final question. Here is a graph from Martin Capital of Productivity.



Are the gains on this chart enough to absorb all of the cost increases demonstrated in the charts above?

Finally, given what the charts above show (who are you gonna believe -- government statistics or your lyin' eyes?) is this really a good environment to start lowering rates?

Market's Are Closed Today

The markets are closed today. I'm going to catch-up and hopefully get a bit ahead on school work. Or I'll get sucked into the Law and Order Marathon on TNT. I'll be back tomorrow.

The Week Ahead

From an information perspective, we really don't get that much.

First, the markets are closed on Monday for President's day.

Wednesday we get two important stats. Housing starts and CPI. I'm especially curious about CPI in the wake of the import export price release last week that showed the highest rate of growth since 1982.

With any housing statistic, its more a matter of how bad will it be? I can't the the homebuilders doing any major buildouts right now.

As for the market, I'm waiting for one of the big averages to break out of the consolidation pattern we're in.