The Option Queen Letter by the Option Royals
It really gets scary when you try to sell and ETF and discover that you can’t. It is almost as scary as breaking the buck on the money market funds. This past week, there were two instances where redemptions were halted on ETFs, State Street halted redemptions of one of its ETFs. Is this a trend on a one-time event? Even if considered a one-time event, it would be prudent to cast a jaundice eye on this. What if other ETFs refuse redemption orders? What do investors do? Short all the stocks or bonds that are in the EFT, if it is a long only fund, in an effort to get out? Seems a bit drastic doesn’t it. That didn’t bode well for the investors. This sort of behavior does not build confidence in a product.
We warned about this sort of thing in past letters. The good news is that this only occurred in two ETFs that we know of. The better news is that the public did not react to this problem by selling ETFs. This does set off some alarm bells for purchasers of these products. It underscores the importance of liquidity in investment products. Thinly traded issues are dangerous and should be avoided if, possible.
The recent retreat seen in the S&P 500 can be viewed as a correction. We gave up some ground and retreated purging ourselves of the overbought condition and allowing some profit taking and portfolio adjustments. When will the correction turn into a bear market? When interest rates are high enough to compete for the yield starved investor dollars which will mark a time when investors leave the equity market and return to the bond market. Are investors frightened? You bet they are but they will not move into bonds for fear that they will lose money. They just might move to the money markets or probably cash.
Onto the next problem which is Obamacare! Picture this, an employer of 50 full time workers would likely have to pay $571,450 on health benefits; however, that can be reduced to a cost of only $40,000. That would yield a savings of $530,450! Seems to be a no brainer and this is how you can accomplish that savings; do not insure your worker’s health care needs and just pay the penalty to the US government of $2000 a person. Sounds like a real good deal. Remember that the first 30 employees are exempt from that $2000 penalty, but even if you didn’t exempt them, the savings would still be huge opting not to insure your employees. So who pays in the end? The employee of course and, if uninsured and poor, we the people pick up the costs. Total genius, great savings plan for employers and huge cost for the employees. You have to love politics and who said that Democrats weren’t Wall Street and business friendly?
As the dollar strengthened, spurred on by the Fed comments and higher bond yields the commodity markets faltered. We remind you that many commodities are priced in dollars so as the dollar strengthens the cost of the commodity priced in dollars is adjusted downward. Basically for those not using dollars and say euros the price isn’t much different but for those in the US the price are retreating. Further downward adjustments are seen as margin clerks liquidate positions.
The S&P 500 closed the session in the fat part of the Market Profile chart. Only 4% of the day’s volume was seen at that level. Without looking at the weekly chart of the S&P 500 we can tell you that we continue in an uptrend. Even the very short-term uptrend line is fine. The longer term uptrend lines 1498.29, is also fine. The short-term channel lines are 1590.17 and 1697.28. The down-trend line is at 1655 and that represents an area which would need to be removed to resume the bullish trend. Right now we are consolidating. The 5-period exponential moving average is 1619.59. This number represents another number which would need to be exceeded to turn this chart bullish. The upper Bollinger Band is 1673.60 and the lower edge is seen at 1484.09. The weekly chart continues to look bullish. As to the indicators, we are not oversold and have more room to the downside. The horizontal lines of support are at: 1594, 1530.75 and 1474.25. The 1% by 3-box point and figure chart does not look all that bad. We are above the uptrend internal lines and do not have any down-trend lines at the moment. That said, the 60 minute chart is very worrisome with downtrend lines and a parabolic SAR sell-signal.
The NASDAQ 100 is oversold. The 5-period exponential moving average is at 2925.29. The top of the Bollinger Band is at 3032.06 and the lower edge is seen at 2897.96. We are inside the Ichimoku Clouds for the daily time-frame but remain well above the clouds for both the weekly and the monthly time-frames. The NASDAQ 100 is approaching oversold conditions. There is a bend in the stochastic indicator and our own indicator but no buy-signal so far. The down-trend line is 2961.92 and although we cut off some of the upside movement, we would need to see a close above that level to reassert the bull’s case. A more important number is 3004 which is a horizontal resistance line. We do see good support at 2858.50; actually Market Profile has 2845 as a place where buyers could step in. Before you buy; however, remember that if that number is removed we could see a big slide to the downside. We have a mechanical sell-signal and a 13 count in this index. The 60 minute 0.1% by 3-box chart does not look good unless you are a bear. We have both internal up and down-trend lines and a major downtrend line. We are on a parabolic SAR sell at the moment. Caution is warranted!
The Russell 2000 looks as though it found support at 958.41. 13.1% of the Friday volume was seen at that level. 13.3% of the day’s volume was seen at 957. Clearly, those numbers will be important. We are above the Ichimoku Clouds for all time-frames. The 5-period exponential moving average is at 974.14. The top of the Bollinger Band is at 1002.93 and the lower edge is seen at 962.84. All of the indicators that we follow herein continue to point lower; however, there is a bend in both the stochastic indicator and our own indicator. On the weekly chart, the uptrend line is at 944.90. The stochastic indicator and our own indicator are curling upwards but no buy-signal has been issued. The RSI is flat near oversold levels and the Thomas DeMark Expert indicator continues to point lower. The 60 minute 0.1% by 3-box point and figure chart is negative although the market broke above the internal down-trend line. This index actually looks a bit better than the other indices. The Russell 2000 managed to close up on the day in the Friday session.
The US Dollar index enjoyed a three-day rally thanks to the Fed’s indication that their meddling in the markets just might be tapering off. With that, interest rates rallied, the bond prices fell and the US Dollar index rallied. Higher interest rates are bullish for the dollar. The chart looks like a sine wave with the US Dollar at the midpoint of the previous decline. We are below the Ichimoku Clouds for the daily time-frame but above the clouds for both the weekly and the monthly time-frame. All the indicators that we follow are pointing higher and are getting close to overbought levels, with room to the upside. The 5-period exponential moving average is at 81.78. The top of the Bollinger Band is at 84.319 and the lower edge is seen at 79.86. 16.7% of the day’s volume was seen at 82.60. The 60 minute 0.1% by 3-box point and figure chart shows us that we are above several of the internal uptrend lines yet still below an internal down-trend line and a major down-trend line.
Crude oil continued it sell-off in the Friday trading session. We continue to see crude oil above the Ichimoku Clouds for all time-frames. All the indicators that we follow continue to point lower with plenty of room to run. We are not oversold as measured by these indicators. The uptrend line is at 93.69 and the market needs to stay above that point or risk a trip to 91.41 and even perhaps 86. Looking at the daily 1% by 3-box point and figure chart we have an internal uptrend line and upside unfilled upside target. The 60 minute 0.1% by 3-box chart is bearish. We have internal down-trend lines and we are on a parabolic SAR sell-signal. We have an unfilled down-side target of 90.45. 21.5% of the Friday volume was at 93.75, which is an important level. The 5-period exponential moving average is at 95.81. The top of the Bollinger Band is 98.90 and the lower edge is seen at 91.40.
If you want to see a really awful looking chart, please look at the chart of gold! This market has closed below the lower Bollinger Band for the second day, way below! The top of the Bollinger Band is 1446.92 and the lower edge is seen at 1310.23. The 5-period exponential moving average is 1324. We are below the Ichimoku Clouds for both the daily and the weekly time-frames and are just inside the clouds for the monthly time-frame. The stochastic indicator is actually issuing a buy-signal as is the RSI. We certainly need to see more positives before we would issue anything but an indication of a very short-term bounce. The down-trend line is at 1390.4 and a better down-trend line is seen at 1474.31. The rally in the Friday session was rather weak given the slide seen in the previous four trading sessions. 28.6% of the Friday volume was seen at 1292.50. The 60 minute 0.5% by 3-box point and figure chart has plenty of down-trend lines and not a single uptrend line. Although we believe there will be a bounce, the chart looks awful.
Jeanette Schwarz Young, CFP®, CMT, M.S.
Jordan Young, CMT
83 Highwood Terrace
Weehawken, New Jersey 07086
May 23, 2013
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