Market Summary

This last week started bullish and ended bearish. Monday and Tuesday were good days in the market giving rise to a pop up higher on Wednesday which looked like a breakout to the upside. That all changed on Thursday with a steep sell off to the downside which continued on Friday. This type of market is what is known as a bull trap. The market rallies and sucks people in and then takes it all away. Part of the reason for the rally was in the financial sector which shot way up on talk about the creation of an Aggregator bank or so called “Bad Bank” to take off bad assets from the banks. I think we will hear more about this and it has the ability to move the markets.

The table below shows the UGA, the US Gasoline Fund ETF, was up 7.78% for the week followed by GLD, the gold ETF, up 2.02%. The worst performer was USO, the US Oil ETF, down 9.59%. The trend as I see it in the markets is to the downside. If we break last weeks low the next support is around the 800 area on the S&P 500. We will just have to wait and see. Click on table to enlarge.

Market Summary

This last week saw gold shoot up by over 10% followed by oil which was up over 7%. All the other indices on the table below were down for the week. The US dollar index continued it climb back up to its recent highs and shows signs of strength as the global recession has led to the exchange of foreign currencies for the US dollar. The UK last week declared that it is now officially in a recession.

Where are the opportunities? Gold continues to shine. As a safe haven currency it is holding up as other foreign currencies decline and the global economy slows. It closed at 897.70 and above its long term 200 day moving average of 853.33 while only 3% of the stocks in the S&P 500 are above their 200 day moving average. No doubt there is a flight to safety as fear about the state of the economy spreads and as concern about the possibility of inflation remains. The CRB index, a measure of inflation based on the price of 19 commodities, appears to have made a bottom after a long decline. However, with a slowing economy it is hard to imagine that the price of commodities will be rising. Also, we will have to watch bond yields which travel inverse to their prices. There appears to have been a bubble in bonds which pushed the yields to very low rates. Now that the rates are rising ETFs that go up when bonds go down may also shine. We will just have to wait and see. Click on table to enlarge.

Inauguration Day

While I was watching our 44th President being sworn in today last years damaging market volatility continued. Today we had the worst stock market decline in Inauguration Day history. The Dow crossed below 8000 declining over 4% and the S&P 500 closed at 805.22 down 5.28%. The NASDAQ closed at 1440.86 down 5.78% and the Russell small cap index closed at 433.65 and was down over 7% today. The financial sector as a whole was down over 16% today. Citigroup was down 20% and Bank of America was down 29% today. The Royal Bank of Scotland projected a massive 41 billion dollars in losses for 2008 and was down over 69%. Amid a global decline foreign currencies sold off in favor of the US dollar with which investors could buy US Treasuries as a safe haven. Also, gold retain its glitter as another safe haven where money flowed. We are in the midst of a black swan with several asset bubbles bursting at the same time.

How low can the markets go? We have to look at support levels and if they are breached we look at the next lower support level. We had a 4th wave from the November low of 741 to the January high of 943 on the S&P 500. We broke a support at the 857 area but held support today with the 817 low. If we break today's low the next target is the 741 low of November. My 5th wave target is for a low somewhere between 714 to 692 on the S&P 500 which is about 15% lower than we are now. Can we get there? Well anything is possible in the markets. We will just have to wait and see.

Market Summary

The market appears to have made a 4th wave high at 94.45 on the SPY and 943.85 on the S&P 500. I posted a target of 960 to 1025 for the S&P 500 as the 38% to 50% retracement levels. However, the long term trends in these markets is lower and any bounce in the market is a selling opportunity.

The table below shows gasoline prices making the only rise in price last week. Gold came in second with a loss of 1.4%. The biggest losers were Oil and the emerging markets. Click on table to enlarge.

Chop Chop Chop

The word “chop” has its roots in the word “chap” as in rough skin. The dictionary defines it as marked by abrupt transitions, rough with small waves, and interrupted by ups and downs. Well that last phrase certainly characterizes the current market conditions with an emphasis on the downs. When we break support levels we go to new lows and a trend is defined as a series of highs and lows. If the series of highs are lower highs and the lows are lower lows the trend is down. If the series of highs are higher highs and the lows are higher lows the trend is up.

On the chart below can be seen a low at the 86 area on the SPY (equivalent to the 860 area on the S&P 500) which acted as support during the last week of December 2008. The new year began with a rally to the upside. However, that support line was broken with a gap to the downside and that is a bad sign. This chart is 20 trading days or approximately one calendar month. We have to get above the 94 area to negate the effects of this recent swing low to continue a trend to the upside. Otherwise, we are beginning a trend downward and that would be a 5th wave down. We will just have to wait and see. Also note that today is options expiration day which increases volatility in the markets. Click on chart to enlarge.

Earnings Season

Alcoa kicked off earnings season on Monday night and announced larger than expected losses. It appears there remains a lot of bad news in the pipeline this earnings season. I heard one analyst say the 4th quarter results will be down 20% from last year. The rally that occurred off the November lows occurred at the same time bad news was released. In fact the market continued to rally even when the NFP came out showing the worst unemployment in 26 years. That is a good sign when the markets go up even with bad news. But it appears the markets can only take so much. We have been in a 4th wave from the November lows and 4th waves are choppy. I had expected a retracement back to at least the 38% mark from September highs to November lows as I mentioned in my last post. It would appear now that the market has reached its 4th wave high and is now in the 5th wave headed for a retest of the November lows. Today’s release of the Retail Sales report for December came out at –2.7% more than double the –1.2% analysts expected. The market has tanked on the bad news and with more bad news expected it would appear the market is headed lower. If earnings turn out to be much lower than expected then with a low PE ratio the S&P 500 could be headed to the 600 area. Ouch! This is a trading market and no place to be investing right now. Be sure and use protective stops.

Market Summary

While this last week appeared to be a bad one overall in the market following the prior weeks gains it really was a pull back to support in my opinion. Wednesday the ADP report was released with bad news on the employment picture in preparation for the Friday release by the government of the Non-Farm Payroll (NFP) report. The monthly NFP report is the single most important economic report generated next to the GDP report. Knowing it was going to be bad the market discounted the price of stocks with a sell off on the release of the reports back to support levels. The 50 day moving average should act as support at 888.75 on the S&P 500. This is a 4th wave, which tends to be choppy, in the Elliott wave pattern of 5 waves in the market. I expect the market to rally into the Obama inauguration and up to the 38% to 50% Fibonacci retracement levels on the S&P 500 which are currently about 960 to 1025. Similarily, my targets on the Nasdaq are the 1750 to 1890 area and on the Russell 2000 index 525 to 570. We will just have to wait and see. Click on table to enlarge.

Market Summary

Happy New Year everyone and welcome to 2009. Many may say good riddance to 2008 as it was the worst year in the market in recent memory. There is an expectation among some market observers for a poor first half of 2009 and a pick up in the second half to finish the year up instead of down. Who knows? And that is too far out for me. But it is nice to know some gurus are optimistic and predict a 15% advance for the year which would take the S&P 500 to about 1070. We will just have to wait and see.

The January effect is the tendency of the stock market to rise between December 31 and the end of the first week in January. There are many theories for why this happens, the main one being that it occurs because many investors choose to sell some of their stock right before the end of the year in order to claim a capital loss for tax purposes. Once the tax calendar rolls over to a new year on January 1st these same investors quickly reinvest their money in the market, causing stock prices to rise. The January effect has been observed numerous times throughout history, though the first week of January 2008 was a notable exception. The January Barometer is the first 5 days of the new year and the old saying is as goes January so goes the rest of the year. Again, we will have to wait and see.

Real estate has been the crux of the economic downturn, the crash in the stock market, and the financial crisis. It is reasonable to assume that the recovery in real estate will be necessary for a recovery in the stock market. However, the normal course is for real estate which follows an 18 year cycle to decline following a recession and a rise in unemployment. With high unemployment foreclosures increase. This time the bubble in real estate popped before the recession. With rising unemployment we should see further declines in home prices as foreclosures increase. Home prices will need to stabilize for a sustainable recovery. We have a rough road ahead.

Below is the first weekly Market Summary table for 2009 with 0% gains for the year so I have sorted by the 12 month column. When looking at the near term performance Oil has made a 22.65% gain in the last week. This was the result of the conflict in Israel and Gaza. Also, oil prices had become so low they were do for a bounce. What other markets will lead the way up in the near term? Keeping an eye on these one, two, and four week columns may help us spot the leaders. Click on table to enlarge.