Deck the Halls and all that jazz. Enjoy this holiday season and remember, this is the most peaceful time of the year. After January’s rally, head for the hills as trouble will find its way back into the spotlight. What do we mean by trouble? We are speaking of the unrest, and anger that is brewing in the living rooms of most American homes. These grumblings to come won’t be coming from those well healed and with adequate incomes… They will be coming from those who live on the edge of failure, from one bill to the next, finding relief only at the end of the month when all bills are paid. This group is just an inch away from failure and, if they weren’t too busy trying to pay their bills would have made more noise and protests. Now, with winter here and fuel / utility prices on the rise, it is likely that this pass thru cost will push this group over the line of failure. It isn’t a failure on their part but rather a failure of our economy which has been exporting jobs and income away from our shores for years. We are not protectionists but we encourage our fellow Americans to learn to produce products that can be sold. We are the world’s best shoppers, but that just won’t cut it anymore.
We are sure you want to know why the stock market has been in rally mode. Well, that is simple. The money funding the rally is yield seeking money. Because you have a negative return on your money in the money market, treasuries or CD’s, people are seeking yield or profits in the market. At the very least, many of the stocks in the market can and do provide decent yields. The question you must ask yourself is when should I move out of the markets? At this moment we have some caution lights flashing. The public, professionals and market gurus are uniformly bullish, and that is bearish. That said, it is not bearish enough to take flight out of the market. What we need to see to cause this balance to teeter off the apex is a rise in yield. Why, because that would provide competition for the money seeking yield. It is highly likely that investor money will seek safety and run back to the bond market that could offer that safety and possible tax benefit. Tax benefit from tax free municipal bonds or even government bonds. Not all bonds are created equal so educate yourself on bonds. Be sure to understand how these bonds will pay their coupons and how those coupons will be taxed. For example if you buy treasuries, you need to understand that they are not totally tax free; they are subject to federal tax and not state tax. If you buy a bond subject to AMT you will be paying tax on that bond. Bonds that are totally tax free are generally municipal bonds issued by your state or local governments. Many states do not have a state income tax and residents from those states can buy bond from any state. US territories issue tax free bonds many of which are not taxable by the city, state or federal government. Some bonds such as Port Authority Bonds are tax exempt for more than one state.
Tuesday: November PPI is released at 8:30, November retail sales are released at 8:30, October business inventories are released at 10:00 and the FOMC releases its decision on interest rates and makes a statement at 2:15 ( we expect absolutely no change from the last release ).
Wednesday: November CPI is released at 8:30 and industrial production/capacity utilization for November is released at 9:15.
Thursday: 3rd quarter international trade is released at 8:30, November housing starts and building permits are released at 8:30 and Philly Fed survey for December is released at 10:00.
The US Dollar index put in an inside day leaving a doji-like candle on the chart. We managed to creep above the daily Ichimoku Cloud but remain below the clouds for the weekly and the monthly time-frames. We are forming a pennant with the lines converging on Tuesday-Wednesday. The downtrend line is at 80.697 for the Monday session. The uptrend channel lines are 81.150 and 80.245. By Tuesday or Wednesday we will have a good idea where this market is going. The indicators that we follow are mixed. We have a sell-signal from the stochastic indicator, the RSI is on the positive side of neutral and going flat, the Thomas DeMark Expert indicator is issuing a buy signal and our own indicator looks as though it might issue a sell-signal. The 5-day moving average is at 80.318. The top of the Bollinger band is at 81.642 and the lower edge is seen at 78.689. If long, keep your stop at 80.05 for the most extreme and at the 79.62 for those who can tolerate more. The market profile chart tells us that if this index closes above 81.45 and 81.675 there will be little to stop a melt to the upside. The point and figures chart tells us that above 80.80 we will likely move to the upside. Remember this is a quarterly expiration of the December contract as well as the end of the year. Do not expect to see any wild swings in this or any of the indices.
The March S&P 500 futures contract broke the resistance line in the Friday session closing at 1236. We have mixed signals on this index. The stochastic, which is grossly overbought, continues to issue a buy-signal. The Thomas DeMark Expert indicator is issuing a sell-signal. The RSI is hovering at the overbought line and going flat and our own indicator is not giving us a signal. We are above the Ichimoku Clouds for all time-frames. The trade will appear on the first retreat from these levels. Certainly, if this is a good breakout, we will come back and test the former resistance line which is now support. If it holds, it should be a good trade. The uptrend channel lines are 1226.75 and 1268.96. The 5-day moving average is at 1224.60. The top of the Bollinger band is at 1238.34 and the lower edge is seen at 1158.12. A warning that this might be a false breakout is if the market closes below 1213. The market closed in the single print area of the market profile chart. As you know, we are in an area where we could possibly melt to the upside. We have broken out to the upside on the point and figure chart. Support should be at 1233 which is where the break-out occurred.
The NASDAQ 100 did not break to the upside, came close but no breakout……as yet. The stochastic indicator is grossly overbought and continues to issue a buy-signal. The RSI is bending to the upside at overbought levels. The Thomas DeMark Expert indicator I issuing a sell-signal, and our own indicator is going flat. We are above the Ichimoku Clouds for all time-frames. The 5-day moving average is at 2198.25. The top of the Bollinger band is at 2224.49 and the lower edge is seen at 2084.15. The uptrend channel lines are 2191.52 and 2235.22. Right now, we will agree with the bulls and believe that we will take out the previous high and move forward. Remember that quarterly futures and options expire this week and will have an influence on the trade and many close their books for the year. January is around the corner and we already see some of the January effect coming into play in the markets. Although there are extremes in bullishness until we see something different we have to go with the trend. That said, we would keep our stops tight.
The Russell 2000 was the best performer in the Friday trading session. We do have continued signs of exhaustion in this market. The 5-day moving average is at 764.06. The top of the Bollinger band is at 776.39 and the lower edge is seen at 695.23. The stochastic indicator is grossly overbought but continues to issue a buy-signal. The RSI is overbought and is pointing higher. The Thomas DeMark Expert indicator is issuing a solid sell-signal and our own indicator is just issuing a buy-signal but without conviction. The uptrend channel lines are at 760.40 and 781.30. We are above the Ichimoku Clouds for both the weekly and the daily time-frames. So far so good, we are grossly overbought and likely will retreat to the breakout level of 771. We are in the single digit areas on the market profile chart and we have a breakout to the upside on the point and figure chart. Looks okay looks like an early January effect playing out. If long keep your stops tight enough to keep you in the market on small retreats and protect your profits on larger retreats.
Crude oil’s chart really looks like a sine wave. We have broken the uptrend line and could retreat to 85.76 where we will find support. The 5-day moving average is at 88.50. The top of the Bollinger band is at 90.83 and the lower edge is seen at 79.63. We are above the Ichimoku Clouds for both the daily and the weekly time-frames but are below the clouds for the monthly time-frame. The indicators are soft and pointing lower with plenty of room to the downside. We will watch this chart to look for easy entry points. Should the 85 area fall to a bear raid, we will reconsider our bullish view of crude oil.
Gold isn’t doing much and held support at1372 and 1366. The indicators are pointing lower but do not have the momentum seen on the declines seen on Tuesday and Wednesday. The 5-day moving average is at 1397.20. The top of the Bollinger band is at 1418.25 and the lower edge is seen at 1335.01. The chat looks like a market correcting and looking for support. We think the rally in gold is not over yet and that the yellow metal will continue higher.
Jeanette Schwarz Young, CFP®, CMT
83 Highwood Terrace
Weehawken, New Jersey 07086
December 12, 2010