The QQQQs

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The above chart raises an interesting question: what exactly does a market bottom look like? In his book Profits in the Stock Market, Gartley outlines 7 different bottoms: head and shoulders, double, rounding, descending, triangle broadening and complex. There are two possible interpretations of the above chart. The first is a double bottom with the first bottom occurring at the end of last year and the second occurring recently in early March. Using this analysis the next question is "how much time can occur between the bottoms?" There is no firm rule here, although I don't think three months on a multi-year chart stretches the issue beyond credulity.

This bottom also has several features outlined in the book "Encyclopedia of Chart Patterns" by Bulkowski. There is at least a 10% rise between the bottoms, the volume under the second bottom is less than the volume under the first volume and there is less than a 4% difference between the lows in both (I'm eyeballing and using 25 and 26 as the price levels).

The other possible chart pattern is "complex" which is Gartley's way of saying, "this pattern doesn't fit into any other pattern on the books." However, after all the writing of the last two paragraphs, I'm leaning toward the double bottom formation.


The MACD is overbought at these levels, as is




The RSI


The 6 months chart has many bullish characteristics.

-- Prices are above all the SMAs

-- The shorter SMAs are above the longer SMAs

-- All the SMAs are moving higher

-- Prices have been advancing for about a month now

-- Prices have moved through key resistance established by connecting two recent highs

The problem is several important technical indicators indicate we are overbought. The MACD is particularly concerning at current levels. The RSI is less so because an RSI can stay at a 70+ reading for an extended period of time.

Market Monday's

I'm going to spend today taking an in-depth look at all the averages. Last Monday, I asked the question whether or not this was a real rally and answered no -- but just barely. Last week we saw another gain which may have tipped the scales to a bullish picture. So, let's see what's there.

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On the three year chart we have a clear picture of prices moving lower, rallying and them moving through previous lows. This pattern has continued for the last year and a half during which time the market has fallen roughly 45%. Prices are still below the 200 day SMA by 15% but are above all the shorter SMAs.



The MACD is telling us the market is overbought.



The RSI is telling us prices are overbought.



The 6 month chart shows an bullish technical picture. Prices have moved through one downward sloping trendline and are just below a second. The 10 and 20 day SMA are both moving higher and each has already moved through the 50 day SMA. The SMAs are now in the most bullish orientation possible.

However, notice the drop-off in trading volume over the last few days. That tells us people are not participating in the rally as they previously did. Combine that with the longer-term technical information presented above and it could be argued the rally has petered out -- or is about to.

Next up is the QQQQs

Weekend Weimer and Beagle

The markets were never open today, but either way it's time to think about anything except the markets or the economy.

Are Corporate Bonds Telling US Something We Don't Want to Hear?

From the WSJ:

In the fall of 2007, before the economy began to falter, corporate-bond prices were signaling all was not well. The spread between corporate-bond yields and Treasury yields, which had begun to widen amid that summer's mortgage woes, showed little improvement even as the Dow Jones Industrial Average clocked record highs.

It wasn't the first time bonds had signaled something was awry. One of the head scratchers of early 2000 was why stocks were surging when high-yield bonds were wavering. In retrospect, the bonds had it right.

Bond investors are intensely focused on companies' ability to pay down debt. If they see signs business is slowing, they demand higher returns, and thus higher bond yields. Widening corporate-bond spreads can also reflect disruptions in the credit supply -- say, because banks are mired in bad mortgages -- that eventually sap the whole economy. Finally, widening spreads can induce companies to cut back on expansion plans, which also has economic consequences.

Bonds' forecasts haven't always seemed to come true. Many corporate-bond indexes showed spreads widening significantly during the 1998 Russian debt crisis, and yet the economy soldiered on.

Such false signals mightn't be because of corporate bonds themselves, however, but the way corporate-bond indexes are constructed. The bonds in them tend to have much shorter times before they will mature than the 10-year Treasurys that their yields are usually compared with -- which makes for a faulty comparison.

Consider the following charts:

Fed Governor Sees Improvement

From the Minneapolis Fed:

Still, I continue to think that improvement in business activity is not too far off. Interest rates are low and financial conditions are improving, albeit unevenly. Major fiscal policy stimulus is now under way and should add to aggregate demand in a timely way unless consumers and businesses turn exceedingly cautious. Moreover, adjustments which typically occur in a contraction ultimately help to lay the foundation for renewed growth. For example, as business continues to reduce output and employment, inventories shrink, and at some point aggregate supply falls below even the diminished level of demand, leading to increases in hours worked, net new hiring, and a general pickup in activity. There are, moreover, signs that consumer spending is in the process of stabilizing after its sharp fourth-quarter decline and that progress has been made in working off the inventory of unsold, unoccupied homes and condos.

We all know about interest rates; they are now as low as they possibly can be. Let's take a look at commercial paper:

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The above chart shows interest rates spiking but now returning to 2008 levels. That tells us the credit crisis is easing.

The above chart shows which paper was responsible for the big upward spike in commercial paper rates. The big culprit was a2/p2 non-financial paper.


Notice there has been a big drop in asset-backed and financial commercial paper issuance. A previous commenter noted that asset-backed issuance could have been in a bubble caused by the securitization binge of the last 5-7 years. Therefore its drop is a natural consequence of the credit bubble deflating. The drop in financial paper is the result of the lack of trust financial institutions have regarding the health of any other financial institution. Hence, there is a drop in activity.

I talked about consumer spending yesterday. I don't think there is enough data to say with any degree of certainty that they consumer is "coming back" -- especially after the last drop in 2008.



At best, I think we can say retail spending might be decreasing a bit less than before -- especially considering this:

Wary shoppers weren't in much of a buying mood in March, keeping a tight lid on spending and pushing sales at Wal-Mart and many retailers below views.

But reports from some chains painted a brighter picture for days ahead.

Sales at stores open at least a year fell 1.6% vs. a year ago, says Ken Perkins, president of Retail Metrics. Wall Street expected a 0.4% dip. A hefty 60% of retailers missed views.

And consider the accompanying chart:



And then there is this:

Among the positive indicators, the government said exports rose in February for the first time in seven months. Initial claims for jobless benefits fell more in early April than any week since the start of the year.

Note that exports rose "for the first time in 7 months." That means the latest month's figures are counter-trend. And unemployment claims are looking ugly as well:



In general, I do agree that we'll see a turnaround by the end of the year. But let's not get carried away with the strength of the recovery or the "emerging signs of an economic turnaround." There are still plenty of problems out there.

Forex Fridays

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The weekly chart shows the dollar formed a double top over the last few months. This is confirmed from the RSI and MACD forming lower tops. Now prices are consolidating near/around the 10 and 20 week SMA. The longer term trend represented by the 50 week SMA is still moving up. But the 10 and 20 week SMA are meandering a bit. They are still higher, but with less strong trends.


The daily chart is very interesting. First, we can see the price drops from the upward sloping trendline that started in mid-December. But prices are now consolidating in a triangle pattern. In addition, prices and the SMAs are in a tight bunch, indicating traders don't know where to send prices next. The MACD is neatral. The RSI is rising but weakly while the stochastics are at the top of their range indicating prices would retreat.

Today's Markets

The big news on the SPYs is today they broke through the second downward sloping containment line. The bad news is they did so on weak volume. But, you can't have everything. In addition, the 10 and 20 day SMAs are moving higher and prices are above all the SMAs.


The QQQQs advanced through the line that connected recent highs, fell back and then advanced again. In addition we have a bullish SMAs picture - the 10, 20 and 50 day SMA are moving higher, the lower SMAs are above the longer SMAs and prices are above all the SMAs.

On the IWMs, prices moved through the containment line on weak volume. But the 10 and 20 day SMA are moving higher and have moved through the 50 day SMA. Prices are above all the SMAs

Put together, these are three very good charts. At the end of a trading week all of the averages are moving through resistance areas. SMAs are moving higher and prices are above the SMAs. The only drawback is the lack of volume. But that could also be a signal that retail investors are staying out of the market for now, implying there is cash on the sidelines.

Are Retail Sales Looking Better?

From Reuters:

Many U.S. retailers posted smaller-than-expected sales declines for March in a sign that shoppers may be regaining confidence to open their wallets after more than a year of recession.

Of the two dozen or so retailers that have reported March sales at stores open at least a year, more than half topped Wall Street estimates, and a handful even raised their quarterly earnings outlooks on Thursday.

"The numbers are still soft, but given the deluge of negative news we have seen in the retail space over the last several months, it's got to be somewhat encouraging," said Ken Perkins, president of Retail Metrics Inc. "It looks like there is a little bit of an uptick, some pent-up demand ... for some discretionary spending."

Yet Perkins cautioned against reading too much into the results. "It is difficult to foresee that really rallying and spiking in the near term," he said.

The International Council of Shopping Centers said it expected overall U.S. same-store sales to rise 1 percent to 2 percent in April and be flat to up 1 percent in May.

There's an awful lot of "because the number wasn't as bad as we thought it was it's actually a good number" analysis going on right now. That's just not good analysis. Personally, I think we should phrase it like this: "the data indicates that the decline in retail sales is decreasing" or something to the like. Consider the following chart of real (inflation-adjusted) retail sales:



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The bottom line is sales have taken a major nose dive over the last year. The reality is maybe sales are stabilizing. Maybe....

3M Cutting Workforce

From Bloomberg:

3M Co. said it will offer 3,600 employees early retirement.

3M spokeswoman Jacqueline Berry spoke today in a telephone interview.

I always liked 3M. While they are not the most exciting company, there was just something about post-it notes that deserves recognition. Seriously -- they have a really good product line that is somewhat recession resistant. So, when they start to talk about lay-offs, it's time to listen.

Fed Minute Paint Glum Economic Picture

Yesterday the Federal Reserve issued the minutes of the March FOMC meeting. The overall tone of the report was very glum:

The information reviewed at the March 17-18 meeting indicated that economic activity had fallen sharply in recent months. The contraction was reflected in widespread declines in payroll employment and industrial production. Consumer spending appeared to remain at a low level after changing little, on balance, in recent months. The housing market weakened further, and nonresidential construction fell. Business spending on equipment and software continued to fall across a broad range of categories. Despite the cutbacks in production, inventory overhangs appeared to worsen in a number of areas. Both headline and core consumer prices edged up in January and February.

The only good news here was the increase in prices which help to alleviate deflationary fears; all the other information is extremely troubling.

Let's look in more detail at the Fed report:

Labor market conditions continued to deteriorate. Private payroll employment dropped considerably over the three months ending in February. Employment losses remained widespread across industries, with the notable exception of health care. Meanwhile, the average workweek of production and nonsupervisory workers on private payrolls continued to be low in February, and the number of aggregate hours worked for this group was markedly below the fourth-quarter average. The civilian unemployment rate climbed 1/2 percentage point in February, to 8.1 percent. The labor force participation rate declined in January and February, on balance, likely in response to weakened labor demand. The four-week moving average of initial claims for unemployment insurance continued to move up through early March, and the level of insured unemployed rose further.

First -- and always keep in mind -- employment is a lagging economic indicator. That being said, consider these charts:


I drew a horizontal line from the current year over year rate of change in establishment jobs back to other times. Notice the last time the year over year rate of change in establishment job growth was this low was the end of the 1950s.



The last time the unemployment rate was this high was the second recession of the early 1980s.


Aggregate weekly hours worked is cliff-diving right now.

Industrial production fell in January and February, with cutbacks again widespread, and capacity utilization in manufacturing declined to a very low level. Although production of light motor vehicles turned up in February, it remained well below the pace of the fourth quarter as manufacturers responded to the significant deterioration in demand over the past few months. The output of high-tech products declined as production of computers and semiconductors extended the sharp declines that began in the fourth quarter of 2008. The production of other consumer durables and business equipment weakened further, and broad indicators of near-term manufacturing activity suggested that factory output would continue to contract over the next few months.

The above chart shows the year over year rate of change in industrial production. Notice the last time we were at these levels was the great depression and retooling after WWII and the mid-1970s.


Capacity utilization is dropping hard and fast. This does not bode will for the strength of the recovery. When there is idle capacity there is little reason to invest in new capacity. This will lower overall GDP at the beginning of the next expansion.

The available data suggested that real consumer spending held steady, on balance, in the first two months of this year after having fallen sharply over the second half of last year. Real spending on goods excluding motor vehicles was estimated to have edged up, on balance, in January and February. In contrast, real outlays on motor vehicles contracted further in February after a decline in January. The financial strain on households intensified over the previous several months; by the end of the fourth quarter, household net worth for the first time since 1995 had fallen to less than five times disposable income, and substantial declines in equity and house prices continued early this year. Consumer sentiment declined further in February as households voiced greater concerns about income and job prospects. The Reuters/University of Michigan index in early March stood only slightly above its 29-year low reached in November, and the Conference Board index, which includes questions about employment conditions, fell in February to a new low.

First, here is a chart of total retail sales:



Notice the uptick over the last month or so. This is what the Fed is referring to when they say real retail consumer activity held steady. A big issue is auto sales. Here is a chart from Martin Capital Advisers:



Note these sales have been dropping for the last year. There is little reason to think they will increase anytime soon. While the consumer has shown they are starting to buy non-durable goods, durable goods purchases are down. The the primary reason is the massive destruction of overall wealth we have seen over the last 6 quarters. As the Fed points out, net worth has taken a huge hit from both collapsing stock and housing prices. There is a debate about whether or not this will keep consumers on the sidelines for the foreseeable future or not. I personally think it will force consumers to moderate their spending for some time. Consumers have to rebuild their wealth right now which will force them to pull in their wings, as it were.

Housing activity continued to be subdued. Single-family starts ticked up in February, and adjusted permit issuance in this sector moved up to a level slightly above starts. Multifamily starts jumped in February from the very low level in January, and the level of multifamily starts was close to where it had been at the end of the third quarter of 2008. Housing demand remained very weak, however. Although the stock of unsold new single-family homes fell in January to its lowest level since 2003, inventories continued to move up relative to the slow pace of sales. Sales of existing single-family homes fell in January, reversing the uptick seen in December. Over the previous 12 months, the pace of existing home sales declined much less than that of new home sales, reflecting in part increases in foreclosure-related and other distressed sales. The weakness in home sales persisted despite historically low mortgage rates for borrowers eligible for conforming loans. After having fallen significantly late last year, rates for conforming 30-year fixed-rate mortgages fluctuated in a relatively narrow range during the intermeeting period. In contrast, the market for nonconforming loans remained severely impaired. House prices continued to decline.

Housing is still a wreck. Here is the same chart from Martin Capital Advisers I used above. This time pay attention to the bottom panel:


New home sales have been dropping for three years. Existing home sales leveled off in 2008, but have since moved lower as well. However, the real indicator for the housing market is prices:



When we see the year over year rate of decline in prices slow to 3%-5%, then I'll call a bottom in housing. But so long as prices are dropping over 10% year over year, we're nowhere near a bottom in housing.

Here's the bottom line with the overview of the US economy. We're still in a recession. There have been hints over the last few months that we're getting out of it; but they are just hints so far.

Thursday Oil Market Round-Up

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The weekly chart shows we're still in a long-term uptrend. Prices broke out of a triangle pattern a few weeks ago. The MACD is rising as is the RSI. Prices are about the 10 and 20 week SMAs -- which will now provide technical support for prices. The 10 week SMA has crossed over the 20 week SMA which is a further bullish development.




The daily chart shows a consolidation/pullback. First, note the MACD has given a sell-signal. Also note the RSI is showing weaker prices. Some of this is due to the consolidation of gains in the second triangle pattern on the chart -- a consolidation that occurred after prices broke out of a longer consolidation pattern. But also note the 10 day SMA is about to cross over the 20 day SMA and prices are right at a trend line. None of these are bearish developments as indicated by the weekly chart. But they do indicate traders are at minimum considering the possibility of future gains in light of the current economic backdrop.

Today's Markets

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Although the IWMS (Russell 2000) ran into upside resistance from a downward sloping trendline, it is still in a rally; prices are still above the trendline that started at the beginning of March. In addition, the 10 and 20 day SMA are moving higher and have moved through the 50 day SMA. Prices are currentlyh using the 10 day SMA for support, which is also good news. Also note that prices have not crashed sicne the formed a top, but instead are moving sideways.


The QQQQs are bouncing around the trend line that connects recent highs. In addition, the 10 and 20 day SMA are moving higher and have moved through the 50 day SMA. Prices are also above all the SMAs.



Although prices broke the upward sloping trend line, they are still above all the SMAs. In addition, the 10 and 20 day SMA have moved through the 50 day SMA and both are moving higher. Finally, the "sell-off" of the last few weeks has occurred on lower volume, indicating we're not seeing a massive rush for the doors.


On the DIAs, prices are still above the upward sloping trend line and all the SMAs. In fact, prices are using the 10 day SMA as technical support. The 10 and 20 day SMA have moved through the 50 day SMA and both are moving higher.

Bottom line: prices are consolidating here. On the good side, they are not crashing. In addition, all of these indexes are showing volume drops which is encouraging.

CEO Confidence Hits Record Low

From Reuters:

Two-thirds of U.S. chief executives plan additional layoffs and expect sales to decline in the next six months as their confidence in the economy continues to fall, according to a survey released on Tuesday.

The Business Roundtable's quarterly CEO Economic Outlook Index fell to negative 5 -- the first negative reading in the survey's six-year history -- and down from a fourth-quarter reading of 16.5. A reading below 50 means CEOs expect economic contraction rather than growth.

The poll of 100 U.S. CEOs found they now expect real U.S. gross domestic product to decline 1.9 percent this year. That is below their December forecast, which anticipated flat GDP.

.....

According to the survey, 71 percent of the CEOs expect to cut their U.S. work forces over the next six months, and 66 percent expect to reduce capital spending. Lower sales are expected by 67 percent.

A few points:

1.) The survey has only been around 6 years. So when it say record low, realize the number doesn't even include data from the last recession.

2.) Employment -- while terrible -- is a lagging indicator; it drops at the end of the expansion and doesn't pick up until the recovery has started. That being said, graphs I posted yesterday showed that hours worked had dropped indicating the employment outlook is not good right now.

Consumer Credit Contracts

From the Federal Reserve:

Consumer credit decreased at an annual rate of 3-1/2 percent in February 2009. Revolving credit decreased at an annual rate of 9-3/4 percent, and nonrevolving credit increased at an annual rate of 1/4 percent.

So -- consumers are cutting back on credit card debt. This is not a bad thing in the long run. However, this number could be revised lower or higher by a big margin:

Credit in January grew $8.1 billion, revised way up from a previously estimated $1.8 billion rise. And borrowing in December dropped $5.6 billion instead of $7.5 billion.

The February credit drop of $7.5 billion was bigger than what Wall Street expected, which was a $1 billion decline. It was the fourth decline in six months.

The Wall Street crisis and recession have made it harder for consumers, and businesses, to borrow money. The Fed last month rolled out details of a Term Asset-Backed Securities Loan Facility to loosen credit and relieve the economy.

Here's a chart of the change:



Note -- and here's a big point -- this does not include mortgage debt.

IBD Consumer Confidence is Up

From IBD:

Consumer confidence has begun to rebound as recent stock market gains and better-than-expected economic data fuel hopes that the 17-month recession might be coming to an end.

The IBD/TIPP economic optimism index rose to 49.1 from 45.3 in March, its highest level since November, when Barack Obama's election victory sparked a brief spike. That's still below the 50 mark that indicates optimism, but it's 5.3 points above the 12-month average and only 2.2 points below the long-run average of 51.3.

Stronger-than-expected durable goods orders and home sales have helped drive a monthlong stock market rally, giving consumers and investors a long-awaited sense of hope. Changes to accounting rules aimed at stemming losses at big banks also helped.

First, let's not get carried away from the durable goods and home sales numbers. Both of those numbers were counter-trend and showed poor year over year performance. Right now people are looking to be more bullish so they are reading the numbers that way.

However, this does tie in with the following charts from Pollster.com





But let's remember that consumers are retrenching from extended balance sheets and have seen their net worth drop over the last 6 months. In other words, just because people are feeling better does not mean they will act on it.

Wednesday Commodities Round-Up

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The industrial metals chart has the beginnings of a bull market. First, prices dropped hard at the end of last year, but then consolidated losses from the end of last year through the first quarter of this year. Now prices have moved through the upside resistance of the containment line. Also note the MACD is rising with plenty of room to run and the RSI is rising as well. The 10 day SMA has crossed over the 20 day SMA and is moving higher and prices are above the 10 and 20 day SMA.


Agricultural prices may be in a triangle consolidation and may have broken through the upside resistance line; we won't know firmly until the chart prints a few more bars. The SMA pricture does not clarify this at all; prices and the SMAs are congested with no clear direction. The MACD is moving higher, but if prices are in a trading range stochastics are a better indicator and they are neutral. RSI is rising, but it's a weak rise. Overall this is a chart that is still looking for direction.

Today's Markets

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On the SPYs, notice that prices have already broken the upward slloping trend line that started at the beginning of March. Also note prices have crossed over one downward sloping trendline, but have been contained by another.


Although prices have broken through upside resistance, they have since fallen through. However, the upward sloping trend line still stands.


The iwms got to one downward sloping trend line, but have since retreated. However, prices are still above the upward sloping trend line that started in early March.

Remember -- sell-offs are natural, especially after strong rallies. But right now prices are right at important levels. In some case -- the IWMs and the QQQQs, prices have moved back through important areas of support which they moved through recently.

We're Nowhere Near a Bottom in Housing

From CNBC:

More U.S. consumers are falling behind on their mortgages, an indication that the housing market has yet to hit bottom, a top credit bureau executive told Reuters.

Dann Adams, president of U.S. Information Systems for Equifax, reported that 7 percent of homeowners with mortgages were at least 30 days late on their loans in February, an increase of more than 50 percent from a year earlier.

He also said 39.8 percent of subprime borrowers were at least 30 days behind on their home mortgage loans, up 23.7 percent from last year.

Employment Overview, Pt II

Average hourly earnings in constant 1982 dollars (inflation adjusted) have been constant for the duration of this expansion. That is consistent with the median household income information from the Census Bureau as well. The recent jump is due to the drop in hours documented below.


Notice the weekly hours have dropped since (roughly) mid-2008. This indicates that employers are trying to do everything they can to avoid lay-offs.

These two statistics tell us two very important facts.

1.) The total hours worked have been dropping for the last year or so, and

2.) Wages have been stagnant for the duration of this expansion.

Employment Overview

Above is a chart for total non-farm payrolls. Notice the following:

-- The total number of non-farm jobs is almost at the level of the peak from the last expansion.

-- The best read of job creation from the last expansion is we created 8.2 million jobs. We have now lost 5.1 million jobs, or 62.19% of all jobs created during the last expansion. That's the largest percentage lost of jobs created in the previous expansion for any expansion in the last 60 years.



Above is a chart for total manufacturing jobs in the US. Notice this area of the economy did not grow at all during the latest expansion. Some of this was caused by the increase in productivity. But there is also the issue of the US not increasing its manufacturing base significantly enough to warrant the hiring of new employees. My guess is this is the result of a bubble economy.


Above is a chart of total service employment. Notice this is the primary place where jobs grew during the last expansion. In fact of the 8.2 million jobs created, 8.5 million came from the service sector. In other words, we have a net loss of manufacturing jobs throughout the last expansion that was entirely made up for by the gain in service sector jobs. And -- we have a long way to go to in terms of service jobs to lose.