How many of you actually believed that there would be a market upset, inspired by the sub-par loan portfolios? Much of the problem comprised with anticipation, as the consequence of knowing the event was necessarily forth-coming, was the very long lag-time required for the mess to bubble to the surface of the debt pool.
We all knew it was coming; however, it took so long to appear that we actually began to believe that perhaps we’d lost the talent for reading the signs; maybe, Heaven forefend, WE were wrong! Last year, we projected that this mess would begin to arise with the beginnings of mortgage instruments failures. The problem was, that this revelation forecast, took so much longer than anticipated, so long in fact, that we began to believe that WE had miscalculated the net effect. The sad eventuality, albeit a little late, we were correct. The good news is that the troops are rallying round to help the injured; the bad news is that we know that this is just the iceberg-tip of the portfolios of exotic mortgage paper in the system, most of which has not yet emerged to visibility. The net effect of destabilizing the debt market is yet to be felt; the FOMC will not be likely to raise interest rates at this time or, probably into the next quarter. The problem that is emerging is that debt defaults, in the sub-prime market, will have a net effect of tightening up the market, for all debt instruments. We also have rising inflation which is in the system, attributable to spotty shortages, causing a net effect in the rising costs of raw commodities. Such a combination is the worst news possible, because the FOMC has to either bail out the lousy debt problems before it totally kills the mortgage market, or to keep inflation in check. Our guess is that the FOMC will bail out the debt market.
Another piece of news which couldn’t pick a worse time to appear is that China is reducing its appetite for our bonds. China is not liquidating its US Bonds portfolio, rather, it is just buying less of it than it used to buy. Obviously, its trade surplus with the USA is constantly increasing, but China’s appetite for US Treasury instruments is on the decline. This has the side-effect of causing interest rates to rise, irrespective of FOMC agreement. Why? Because to entice buyers back to our market, we either have to be rock solid and stable, or so price our bonds higher, to reflect the risk in the US Dollar and compete with other global debt instruments. Now, this is a conundrum, worth worrying about, especially in this economy, which appears to be robust on the outside, but leaves a lot of thin air on the inside.
We are entering a time when, seasonally, the market seems to become antsy. Yes, we are in the summer rally season, but that is always followed by the October chill. These days, we feel the October chill as early as late August. Will the PPT (Plunge Protection Team) emerge to cast forth a life preserver for the market, or will the inevitable retreat and final correction, appear. This market, as measured by the S&P 500, has been in an upward sloping, trading range. As we have pointed out in recent letters, the upside progress for this market, has been difficult and tedious, with a very heavy feel to it. Of course, had you been short, the upside move would have killed you with each and every tick of it.
This past Friday was the first Friday in a long while that the market retreated. The Russell indices rebalanced at the end of the day. This event is an annual event, which usually boosts the market, as was seen in the last few minutes of the trading day. When we arrive in the office, early on Monday morning, we will be greeted with a continuation of “merger Monday,” ending with the announcement of the mergers on Monday. This week’s candidate is the merger of the London exchange, acquiring the Italian exchange. Post-Script: as debt defaults increase, funding for these mergers will dry up, ending the deal-mania, seen in recent times.
Hey guys: it is a two-day meeting of the FOMC (Federal Open Market Committee) this week. The meeting starts on Wednesday, the 27th, and ends with the decision and statement on Thursday, the 28th, at 02:15. We certainly don’t expect to see a move on interest rates, but do expect to see some concern about inflation and, about the sub-prime debt market. We believe that this rhetoric will more likely try to be “middle of the road,” rather than too hawkish, as their cloak would reveal. When removing the costume that the FOMC players are wearing, you will find a nest of cooing doves, rather than those hawks, they would like you to envision.
It appears that the consumer is alive and spending well. High gasoline prices have, really not had much of an effect, on this groups’-spending habits. We have seen some of the transportation costs of products passed through to the consumer, but there is no problem so far, with the spending habits of those who must pay more.
Oops, dive!! batten down the hatches! The US Dollar index took a steep dive in the Friday session, as the market began to understand the crisis in the debt market. This week, we will have the FOMC’s interest rate decision. Any hawkish comments, will be US Dollar Index, supportive. Okay, after you recover from the drop seen in the Friday session, and look at the chart, you will see that we are merely in a trading range, for the US Dollar index. The top of the range is at 83.010, and the lower edge is at 81.660 to 81.400. The stochastic indicator, our own indicator and the RSI, are all issuing a continued sell-signal. The Thomas DeMark Expert indicator has actually turned up and is issuing a buy-signal. The 5-period exponential moving average is at 82.330. The top of the Bollinger band is at 82.862 and the lower edge is seen at 81.817. When reviewing the weekly chart, the retreat seen in the Friday session is a mere blip on the radar of the chart. The trading range seen on the weekly chart is between the aforementioned high, to 81.100. All the indicators that we follow herein, are issuing a sell-signal, on the weekly chart. It would appear that we can trade the range in the US Dollar index. The downtrend line on the monthly chart is at 82.610; remember, this is a monthly number. The downtrend continues to contain the market, to the downside. We need a monthly close above that number, to break the downtrend line. The indicators on the monthly chart are very flat and are not issuing anything of value.
The Euro rallied in the Friday session, closing near the highs of the session. The stochastic indicator, the RSI and our own indicator are all issuing a continued buy-signal, with plenty of room to the upside. The Thomas DeMark Expert indicator is issuing a sort of sell-signal, at overbought levels. The 5-period exponential moving average is at1.34579. The top of the Bollinger band is at 1.35853 and the lower edge is seen at 1.33345. The weekly chart of the Euro tells us that the Euro needs to close above 1.35239, by next Friday, to remove the downtrend line. All the indicators on the weekly chart are uniformly issuing a buy-signal. When reviewing the point and figure chart, we do see that the Euro will have some resistance at 1.350 and, further resistance at 1.3580. The market profile chart reveals that if the Euro can close above 1.3512, it will rally quickly, as it enters the rather unstable areas, above.
The S&P 500 suffered in the Friday session. We have a mechanical sell-signal on this index. This signal was issued on Wednesday, and seems to be a good signal. Again, we caution that it is mechanical. The indicators are all, uniformly, issuing a sell-signal; none but the Thomas DeMark Expert indicator, are near oversold levels, at this time. The 5 period exponential moving average is at 1531.15. The top of the Bollinger band is at 1554.27 and the lower edge is seen at 1504.82. The downtrend line for the Monday session, is at 1543.70. We appear to have extended the upper edge of the trading range to 1554.20, in the Wednesday session. The lower edge of the range is at 1494.50. The uptrend line of the weekly chart is at 1521.69. The downtrend line is at 1554.27. The stochastic indicator, the RSI and our own indicator, are all issuing a sell-signal. The Thomas DeMark Expert indicator is issuing a buy-signal, from neutral levels. The weekly chart continues to show signs of buyer-exhaustion, a condition that has been seen for weeks. The monthly chart agrees with the other time-frames, all issuing a sell-signal and, signs of exhaustion. All the indicators on the monthly chart, are issuing a sell-signal. Proceed with caution, which is the bottom-line message. Oh, by the way, there is nothing wrong with going to cash, in times of uncertainty.
The NASDAQ 100 actually never printed the low seen in the Thursday session, nor the highs seen in the Wednesday session. The Wednesday, Thursday, and Friday, sessions all had almost equal-sized, real bodies on the candlestick chart. All the indicators the we follow herein, are issuing a sell-signal. The 5-period exponential moving average is at 1954.94. The top of the Bollinger band is at 1978.50 and the lower edge is seen at 1893.21. The uptrend line is at 134.87 for the Monday session. The weekly chart continues to look positive. The uptrend line on the weekly chart, is at 1944.20. The market must stay above 1872.12, and that is a MUST! The indicators are uniformly issuing a solid sell-signal, from overbought levels. The monthly chart shows signs of exhaustion. The stochastic indicator is issuing a sell-signal. The RSI is going sideways, at overbought levels; our own indicator is curling over, to the downside, and the Thomas DeMark Expert indicator is issuing a buy-signal, at overbought levels. Again, we advise investors to proceed with caution, in this market. We will be seeing more volatility and turbulence, for the duration of this quarter.
The Russell 2000 behaved in a very erratic fashion in the Friday session. We saw wild swings, and lurches, forward and backwards, ending the day with a buy-program, pushing the market from 837.20 at 03:45 to 844.10 by 04:00. The market settled at 840.60. Both the Thursday and the Friday low of 834.60, held. The indicators are uniformly issuing a sell-signal; none are at oversold levels, and all warn of lower levels to come. The 5-period exponential moving average is at 845.33. The top of the Bollinger band is at 860.94 and the lower edge is seen at 827.81. The Russell 2000 must stay above 825.00 and 822.00 or risk a run, back to 811.80 and 796.80, ouch! The weekly chart reflects the stall that this market has seen, on its upside progress. All the indicators that we follow herein, are issuing a sell-signal from overbought levels. The monthly chart has signs of exhaustion. All the indicators are at overbought levels and all, are issuing a solid, sell-signal. The Continuous Commodity Index declined for three of the past five trading days, Friday being the worst, of the declining days. The indicators that we follow are uniformly issuing, a sell-signal. The 5-period exponential moving average is at 411.78. The top of the Bollinger band is at 418.35 and the lower edge is seen at, 401.73. We would not be entirely surprised if the lower edge of the trading range, at 401.18, were tested. The weekly chart highlights the failure of the market to follow through, after printing a new high. The indicators are uniformly issuing a sell-signal on the weekly chart. The monthly chart looks as though we could venture higher. We have mixed signals from the indicators on the monthly time-frame.
September cocoa had a mixed week, with the low of the week on Thursday. After the low was printed on Thursday, the market rebounded and rallied above its opening level, leaving a very friendly green-bodied candle on the chart. Friday, the market continued the rally that began on Thursday. The stochastic indicator, the RSI and our own indicator are all issuing a buy-signal, but they are approaching overbought levels. The Thomas DeMark Expert indicator is issuing a solid sell-signal, from overbought levels. The 5-period exponential moving average is at 19.37. The top of the Bollinger band is at 19.74 and the lower edge is seen at 18.43. The market looks as though it is getting ready to remove 19.73. The downtrend line for the weekly chart, is at 19.67 and this market must close above that level, to remove the negative look to this chart. The indicators are mixed, with the stochastic indicator, the RSI and our own indicator, all issuing a continued buy-signal, and the Thomas DeMark Expert indicator, pointing lower, from a neutral level. The monthly chart shows that September cocoa is forming a pennant, but that a resolution to that pennant is, off in the distant future.
September sugar enjoyed a continuous rally this past week. Most days, including the Friday session, a probe to the upside was seen. The indicators are uniformly overbought and issuing a sell-signal. The very least we could expect to see, is some backing and filling, to relieve the overbought condition. The 5-period exponential moving average is at 9.47. The top of the Bollinger band is at 9.77, and the lower edge is seen at 8.62. The weekly chart looks friendly. We have broken the downtrend line, and show a very large green-candle, as a result of last week’s trading. The indicators are uniformly issuing a buy-signal. We look as though we could see a return to: 10.49 to 10.65, where resistance will be found. Unfortunately, the monthly chart shows that we are well contained, under the downtrend line.
September coffee failed to rally in the Friday session, expanding the recent low by only 0.10. The indicators are uniformly issuing a sell-signal. The 5-period exponential moving average is at 116.31. The top of the Bollinger band is at 120.66 and the lower edge is seen at 113.44. The weekly chart tells us that September coffee has rolled over to the downside, and could likely test the106.20 area. We would caution that coffee should stop above that level, or risk a run for the stops, residing below that level. On the upside, a run past 121.15, would have the opposite effect, which is that of running for the buy-stops, above the market. The indicators are uniformly issuing a sell-signal, from overbought levels. The monthly chart simply shows that coffee has been stuck in a trading range, for a long time.
September Frozen Concentrated Orange Juice declined for four of the five trading days, last week. We are grossly oversold at this time, however, all the indicators that we follow, although oversold, are signaling that lower prices are in the future. The 5-period exponential moving average is at 133.24. The top of the Bollinger band is at 164.83 and the lower edge is seen at 127.25. The low of the Friday session was at 125.50, just a hair above that lower Bollinger band. The weekly chart shows that we have returned to an earlier congestion area. The indicators on the weekly chart are pointing lower. We have returned to the congestion area of 126 to 131, and below that, 114.90 to 126. The market profile chart shows that we are in a highly unstable area and could wash out to the downside, before a corrective rally is seen.
December cotton has enjoyed another week of a rally, carrying the price of cotton to 62.17, seen in the Thursday session. We have gotten completely and grossly overbought, in the process of this rally. The indicators are uniformly issuing a solid sell-signal, from overbought levels. The 5-period exponential moving average is at 60.52. The top of the Bollinger band is at 61.57 and the lower edge is seen at 54.40. The weekly chart shows signs of exhaustion. The indicators are curling over to the downside, but only the Thomas DeMark Expert indicator has issued a sell-signal. The chart also illustrates that the current rally in cotton, has been, by far, the most aggressive rally in years. The monthly chart continues to point to higher levels. The market profile chart shows that above 61.32, we enter into a very unstable area, with little resistance overhead. On the other side, we note that below 60.48, we will see a drop to 59.22. The point-and-figure chart shows support at 59.80.
Crude oil gapped lower in the Friday session. The stochastic indicator and the RSI, continue to point lower; neither is at oversold levels. The 5-period moving average is at 64.564. The top of the Bollinger band is at 66.821, and the lower edge is seen at 60.229. The past three days of trading have been negative for crude oil. The weekly chart looks as though crude oil is rolling over, to the downside. The stochastic indicator and the RSI are both curling over, although only the RSI is saying: sell-signal. The monthly chart of crude is positive, with both the RSI and the stochastic indicators, issuing a buy-signal.
August gold closed lower than it opened on the two trading days ending last week’s trading. The stochastic indicator and the RSI are both issuing a sell-signal. Strangely, gold declined, along with the market and the US Dollar index; not something you would expect to see. As you know, from your knowledge of intermarket relationships, this usually does not happen. It seems as though the loose cash ran to the treasury market, passing over gold as a safety zone. The 5-period moving average is at 646.20. The top of the Bollinger band is at 656.30 and the lower edge is seen at 604.61. The weekly chart shows a long-legged doji candle, as a result of last week’s trading. The indicators are both curling over, but no sell-signal is evident. The point and figure chart shows support at 648.00; below that level, there will be support at 644 and 636, breaking that, opens the door to 624.00. The market profile chart shows that we are in an area of great stability.
Jeanette Schwarz Young, CFP, CMT
Box 1952 c/o New York Board of Trade
One North End Avenue
New York, New York 10282