The Madoff scandal and the housing bubble have something in common…..greed. Both scandals were obvious and both scandals were ignored. As a matter of fact, the dot.nothing bubble was based on much of the same greed and piranha feeding. That bubble burst sending interest rates to the floor which inspired the housing bubble which burst and sent the interest rates even lower. So, which is the next bubble to rise to the surface? Remember, it will look okay at first then, will get way out of the realm of reality.
We have been writing these scribblings for many years and we did warn that the housing bubble and the market bubble would come to an end. Madoff….too good to be true returns, and housings creative appraisals have a very similar past. Neither one was controlled and both were built on fraud. Today, the housing bubble burst, sending the many financial institutions into a nose dive and Madoff well, he went bust because the market went bust and took him down with it. Would he have been caught without a downturn in the market? Eventually yes, however; the retreat forced the early end of his scandal.
What we are seeing is human behavior on speed. Things that used to take years are happening in minutes. We are connected to each other in nanoseconds, news sweeps quickly and we have instant replay globally.
Our next concern is with some of the less liquid ETFs. We worry that should something bad happen causing a rush into or out of illiquid securities that the investor, again will be on the wrong end of the trade closer to the donkey’s tail than its head. When investing in ETF’s remember you might have to sell one day. Make sure that the product is not illiquid. We continue to prefer ETF’s to the dinosaur like mutual funds that don’t let you out until 4:00 in the afternoon. Maybe somebody will come up with a mutual fund that allows hourly withdrawals. That would solve some of the problem with mutual funds. Then there are the fees…..whew!
This past week was marked by some funds flowing back into the market. More over, we noticed that the traffic was very bullish and had a renewed sense of confidence in this market. Naked put sellers re-emerged in bigger size than has been seen a very long while. A long while in the commodity pits is just a few months not years. This is the news from the Russell pit in NYC. Put sellers are back!
Monday: November car sales are released and November construction spending is released at 10:00. Tuesday: November factory orders are released at 10:00. Thursday: The Bank of England announces its interest rate decision and November consumer credit is released at 3:00. Friday: December jobs data is released at 8:30 and November wholesale inventories are released at 10:00.
The US Dollar index continued to rally into the first day of trading of the New Year. It does look as though there is more room to the upside for this index. The first resistance area is seen at 82.935 and the second will be at 84.235. Above that area we find some resistance at 85.534. All of the indicators that we follow are uniformly issuing a continued buy-signal with room to the upside; even the MACD has given a buy-signal. The 5-day moving average is at 81.99. The top of the Bollinger band is at 88.568 and the lower edge is seen at 78.659. A move above 82.765 should open the door to a quick jump to the upside taking the market to 86.235. All the indicators that we follow are issuing a buy-signal on the weekly chart, however; the MACD is issuing a sell-signal. We continue to trade below the Ichimuko clouds on the daily and monthly time-frames but we are above the clouds on the weekly time-frame. The indicators on the monthly chart are not confirming the daily and weekly findings. The monthly indicators are negative.
The S&P 500 has been on a tear for the past six trading days closing higher than it opened on all of the days. The Friday high was the highest high seen since early in November. We have gotten ourselves somewhat overbought during this rally. Some give back would not be unusual, however; we could go higher before we see the retreat. We would not be surprised to see the market open higher and then, by the close, retreat. The uptrend line is at 863.45 for the Monday session. We are in the Ichimuko clouds on the daily chart and below the Ichimuko clouds for the weekly and monthly time-frame. The 5-day moving average is at 890.65. The top of the Bollinger band is at 920.71 and the lower edge is seen at 845.32. Notice that we closed above the upper edge of the Bollinger band, a place where we can not stay for long. The chart looks friendly showing us a rounding bottom and a move to the upside in the Friday session. The overhead supply gets thin around 1018.80, so expect to see some selling up to that level. Above that level, we find little resistance until 1174.95. All the indicators that we follow are positive for the weekly time-frame.
The NASDAQ 100 enjoyed a robust rally in the Friday session. This index closed at the upper edge of the Bollinger band and above a previous uptrend line. We are overbought. The 5-day moving average is at 1207.10. The top of the Bollinger band is at 1254.86 and the lower edge is seen at 1148.08. We are inside the Ichimuko clouds for the daily time-frame and below the clouds for both the weekly and monthly time-frame. It is interesting to note, that the NASDAQ 100 has only been up for the past three days while the S&P 500 has been higher for the past six days. All the indicators that we follow herein are issuing a continued buy-signal at overbought levels. Although we expect to see this market open higher, we would not be surprised to see some downside pressure within a day to so.
The Russell 2000 was the surprise of the Friday session. This index, which had been the leader to the upside in the past, was the laggard in the Friday session. The Russell 2000 has been positive for five of the past six sessions. Perhaps, it is tired and needs a rest. The stochastic indicator and our own indicator are both issuing a fresh sell-signal on the daily chart. The 5 day moving average is at 484.82. The top of the Bollinger band is at 501.96 and the lower edge is seen at 440.99. The uptrend line for the Monday session is at 482.82. We are inside the Ichimuko clouds on the daily chart. We expect to see this index lead the others to the downside as some of this past week’s excesses are worked off.
Crude Oil is inching its way higher as the pundits claim that the economy is getting better. The indicators that we follow are approaching overbought conditions but continue to point higher. The 5-day moving average is at 415.40. The top of the Bollinger band is at 516.91 and the lower edge is seen at 357.56. We are trading below the Ichimuko clouds for the daily, weekly and monthly time-frame. We could trade as high as 52.95. We seem to be making a rounding bottom. The weekly chart is possibly more bullish than is the daily chart. We would expect to see crude oil firm and defend its recent low of 35.13.
Gold is grossly overbought and curling over to the downside. We are above the upper edge of the Bollinger band and, as you know, we can’t stay there for very long. The 5-day moving average is at 876. The top of the Bollinger band is at 912.68 and the lower edge is seen at 748.92. We are above the Ichimuko clouds for the daily and the monthly time-frames but inside the clouds for the weekly time-frame. The Market Profile chart tells us that if we can get above 918, we should travel to the upside. We continue to like gold but only on retreats. At this level, a little pull-back looks very possible
Jeanette Schwarz Young CFP, CMT
One North End Avenue
New York, New York 10282