An Ugly Messy Market

We remain in the "Red Flag Flying" mode, expecting lower prices ahead.

The markets were ugly and messy last week, trending lower to log their 4th consecutive week of declines.

We have three positions in the Standard Portfolio, with unrealized gains of +4.1%, +2.2% and +5.0% and two positions in the Ultra portfolio, with unrealized gains of +6.9% and +2.4%.

So we remain positioned to the short side in both portfolios with 40% of the Standard and 60% of the Ultra still in cash.

The S&P 500 broke a significant bottom this week, generating a "sell" signal on the Point and Figure chart and putting in a new bearish price objective of near 800, as seen in the chart below.

Chart courtesy of StockCharts.com

And it continues resting right at its 200 day moving average and the technically significant 880 level.

Chart courtesy of StockCharts.com

In the chart above you can see we're right at the support level of 880 and just a fraction below the very significant 200 day moving sverage. The MACD at the bottom of the chart also remains on a "sell" signal.

So, all this adds up to a very weak general tone in the market and a 7% decline from the June highs. Quite likely we could see a rebound in the short term because some indicators are becoming oversold, however, the general tone of the markets, both fundamentally and technically, remains negative.

Our strategy will be to continue to seek profits with inverse ETFs and add to our positions as this downtrend is further confirmed. And we will stay on the "short" side and in cash until we get a "Green Flag Flying" signal at which time we'll reposition to long positions.

We can expect significant volatility next week and in the next few weeks as earnings reports and economic data come in.

The View from 35,000 Feet

For the week, the Dow was down -1.5%, the S&P 500 gave back -1.9% and the NASDAQ lost -2.3%.

Downward pressure was provided by an unexpected slide in the University of Michigan Consumer Confidence Index and ongoing worries about the strength of the recovery and earnings season just getting underway.

This week, GM (GMGMQ.PK) emerged from bankruptcy and announced it will be a much smaller GM, with 6,000 white collar job cuts being the first announcement in their restructuring. The United States is now 60% owner of GM with a $60 Billion stake in the company that still seems to be in a fight for survival against Ford and the foreign car makers.

California continues tottering on the edge of disaster as they delayed a $4 Billion payment to their education system and issued more than $450 million in IOUs, with a total of some $3 Billion planned for July.

The only bad news is that a number of large banks have said they won't be accepting the IOUs after Friday.

Oil declined below $60/bbl on continuing concerns of economic weakness and demand.

The shares of CIT Group, the big commercial lender, dropped -18% on Friday when the FDIC balked at guaranteeing their debt that has been reduced to junk status.

And well known economist David Rosenberg wrote that he's expecting a retest of the March lows and that historically such a retest could result in a 20% decline. From the June high of 945, that would indicate a downside target of approximately 750 on the S&P and 7100 on the Dow, another 1,000 points or so from Friday's close of 8146.

And, finally, the trade gap came in at the lowest since November, 1999, indicating declining demand for foreign imports for the 10th straight month of declines, a further indication of U.S. economic weakness.

The Week Ahead

We have a huge week ahead with earnings reports from Intel on Tuesday and from the financial heavy hitters Bank of America, JP Morgan and Goldman Sachs. Overall S&P earnings are expected to be off more than -35% from last year and the outlooks companies offer will be even more important than the earnings they report.

Tuesday: June Producer Price Index, June Retail Sales, May Business Inventories

So I'm really not a bear or a bull but just following our signals which right now point downwards. It's hard to be bullish with the bad news that abounds but no matter which way the market goes, there are always opportunities to profit and that will be our goal.

Thursday: Weekly Jobless Claims, Philly Fed Report

Wednesday: June Consumer Price Index, June Empire State Manufacturing, June Industrial Production

Friday: June Building Permits, June Housing Starts

Sector Spotlight

Weekly Leaders: Inverse ETFs, Taiwan, Japanese Yen, U.S. Dollar

Weekly Laggards: Oil, Commodities, Precious Metals

Disclosure: TLT, RWM, SEF, DXD, DUG

Comments

[Mad Hedge F...:]

How about a "Mayday" call? Every once in a while I stumble across a chart which is so clear, so vivid, so unequivocal in its implications, that it lifts the investment fog. This is that chart. Drawn up by stockchart.com’s Arthur Hill (see www.madhedgefundtrader... ), it shows that we are going to spend the rest of our summer probing for the bottom right hand shoulder in a screamingly obvious “head and shoulders” pattern. It gives a range of possible bottoms from 850 all the way down to 666 by the end of August. The chart fits my own fundamental scenario like a hand in Michael Jackson’s glove (see “The Worm Has Finally Turned” at www.madhedgefundtrader... ). Soaring unemployment, terrible earnings reports, collapsing commodity prices, a catatonic consumer, real estate of every flavor in free fall, and tidal waves of government spending are not what bull markets are made of. Did I mention the weather is terrible? Every feeble, half hearted, low volume rally we saw this week pushed us closer to the edge of the cliff. The charts of every stock and commodity market in the world, rolling over in lockstep like a thirties Busby Berkeley musical, gives you all the smoking gun confirmation you need. Hold on to those shorts as if your life depended on it.

Jul 12 12:26 PM

[Spartacuss:]

Couple this with the big banks not lending as they were supposed to and still all drowning in their toxic level three assets where we, the plebes, have no idea of how much of what is there to be dealt with and couple that with the fact that little of the 800 plus omnibus bill money has actually been spent. Less than ten percent, depends on who you want to believe. So, in all, we are going nowheres fast especially now that the Chinese buying spree of commodities has notieably slowed.

I am one not much for charting as the followers all chime together on where things are headed according to the charts, but then other things always seem to happen. At least in charting I beleive that the charts are right fifty percent of the time, the trick is to know which fifty percent to bet on.

No, I like fundamentals, especially trends that begin at the beginning of the commerce cycle. Unfortunately we got a false signal with the Chinese effort...so now it is back to the drawing board and all those who bought heavily into this upswing look to be getting their clocks cleaned...we'll see.

Jul 12 03:06 PM

[kagame:]

Why the hell are you using ultras? They dont perform like theyre supposed to at all, what with the reweighting and inherent slippage. There have been many articles reporting on this.

I liked another ideas I found on here, short hotels and casinos.

The energy short idea may be a underperformer as far as shorts go, CVX was not as weak as the SMB guys anticipated Friday.

Ove

Jul 12 04:04 PM

[kagame:]

Overall an excellent article.

Jul 12 04:04 PM

[John Nyaradi:]

Thanks for the comments and compliment.

Regarding Ultras, I would refer you to David Fry's recent excellent article regarding these vehicles. I have read many of the negative articles, as well, and certainly there are strong opinions on both sides of this issue.


On Jul 12 04:04 PM kagame wrote:

> Overall an excellent article.

Jul 12 05:07 PM