The world is at peace once again, well for the next few minutes it is, so how has this impacted our markets? Both gold and crude oil have retreated and the US markets inched forward a little bit. Now what?
While the world was focused on the news from Egypt last week, the Danish bank Amagerbanken, collapsed. Amagerbanken, considered to be a “small Danish Bank,” is notable because it is the first Danish bank to fail since the Danish government bank guarantees expired. Although this collapse seems far away from our shores, we will watch and wonder how the ramifications of this failure will be seen by other banks and insurance companies. The good news is that the investors who had $135,000 or €100,000 or less in the bank will have insurance to rely on; the rest, well when the dust finally settles will likely find that their investment has suffered, at the very least, a 50% haircut.
With commodity inflation alive and well, thank you very much, we need to wonder when true cost inflation will become more aggressive. Yes, we understand that the major factor to inflation is the cost of labor, which continues to be under control, unless you live in China. There are shortages in foods and materials throughout the globe and these shortages are not getting any better. It seems that “Mother Nature” is on the commodity bull’s side of the price wars and she is winning all around. With floods in India, wheat shortages in Russia, wheat demand from Brazil etc. there seems to be no reason for the food stuff prices to fall. As a shopper, yes, we noticed the reduced size of products found in the large boxes on the shelves. Our boxes are air puffed containers for reduced sized products.
- Monday: New York Fed President Dudley speaks.
- Tuesday: January import prices and January retail sales are released at 8:30 December business inventories.
- Wednesday: January housing starts and January producer price index (PPI) both are to be released at 8:30, January capacity utilization/utilization and the Fed issues minutes from its late January meeting.
- Thursday: January consumer price (CPI) index is released at 8:30, January leading indicators are released at 10:00, February Philadelphia Fed Survey of business conditions is released at 10:00 and Fed Chairman Bernanke testifies before the Senate Banking committee.
- Friday: Fed Chairman Bernanke speaks.
The US Dollar Index rose in the Friday session. The chart looks as though there is an upside-down flag on the chart. On the positive side, the US Dollar index closed above the downtrend line for two days. All the indicators that we follow herein are pointing to higher levels although they all appear to be overbought. The 5-day moving average is at 78.165 and the 20-day moving average is at 78.226. It looks as though the 5-day moving average will cross the 20-day moving average within a day or so, unless, the market changes directions. Should the market close below 77.942 we will be concerned that we will have confirmation of a bearish chart pattern which could open the door to 74.16. The top of the Bollinger band is at 79.347 and the lower edge is seen at 77.105. The weekly chart is a bit more positive than is the daily chart. That said, should we remove the low of 77.00, our projected return to 74.16 will be quite likely. On the other hand if we do not remove that low and continue higher and remove 81.635 on the upside, we will open the door to much higher levels taking us back to 83 and then 89.
The S&P 500 continued on its upside trek in the Friday session. There were only two opportunities for the “buy the dips” crowd to get into this market and it was on January 28th and January 31st. The stochastic indicator, the RSI and our own indicator dipped slightly below the neutral areas and in classic fashion, reversed directions and headed back up to the overbought condition it has enjoyed since December. We do have signs of exhaustion on the chart, but as you have seen in the past these conditions can last far longer than you funds if, you are short the market. The stochastic indicator, our own indicator and the RSI are all pointing to higher levels. The 5-day moving average is at 1320.55. The top of the Bollinger band is at 1329.92 and the lower edge is seen at 1265.47. So long as the market remains above 1308.50 we will continue on this upward trajectory. Should we retreat, our firs support level will be seen at 1296.25, 1267.50 and then 1262.25. The weekly chart is very organized and looks bullish but not frothy, overbought as measured by all but the Thomas DeMark Expert indicator. The market is exhausted yet in a continued motion to the upside.
The NASDAQ 100 continued to the upside in the Friday session printing and closing at a new high for the year. Yes, this market is exhausted but continues higher. All the indicators that we follow herein are overbought yet all, except the Thomas DeMark Expert indicator, continue to point higher. The 5-day moving average is at 2362.00. The top of the Bollinger band is at 22382.55 and the lower edge is seen at 2257.04. The pattern we see on the chart is one of an ascending triangle. Triangles are not our favorite pattern because they are not always reliable. The weekly charts are overbought and look as though this market lurches forward and then back and fills for a while before continuing higher. Our projected high for this move is 2424.50. Should the market retreat, we would expect to see support at 2323, 2237 and 2191.
The Russell 2000 has a nine count on the daily chart. Naturally, this index is overbought as measured by all of the indicators that we follow herein. All indicators continue to point higher telling us that although there is a nine count and the market is extremely overbought, there is nothing indicating that we are going to retreat tomorrow. That said, we would not be surprised to see this index retreat in the coming days. This index has been a lot more volatile than the other indices we write about in this letter. Perhaps it is its volatility that draws people to trade the Russell 2000. We know that it was the volatility and the extreme move seen in this index that originally caught our attention. We noted that we could profit from the exaggerated moves in this index. Naturally the associated options reflect this fact. Thus it was a natural for spreads and packages.
There will not be an update on either gold or crude oil in this report as our charting system apparently has caught a cold and isn’t working.