What will hold up?
As you can see from our chart set, our major indices are trading very much in sync, more likely than not propelled by trade-bots that already have the next 25 trading days mapped out to take us through the end of the quarter. Of course you can argue that it’s perfectly natural for 8 of 9 different indexes to follow virtually identical patterns as a result of the random trading of millions of individuals trading trillions of dollars worldwide and that’s your prerogative. I prefer to think of it as one giant scam and then figure out ways to make a little money off it for ourselves…
Several times last week I said to members I thought "THEY" were running the market higher so They could sell calls to suckers at high prices but, in general, the move was "fake, Fake, FAKE." What do we do in the face of flagrant market manipulation? What do you think we do - we play along! We don’t complain about good manipulation when we see it - we join in! Don’t be confused by the fact that I complain about it in my morning post - once the bell rings we move right to the other side of the table and happily run with the wolf pack. We’ve tried to fight the power - it’s not fun, nor is it profitable…
We remained fairly conservative last week and, as I discussed in our "Weekend Trend Spotting" post, we are more inclined to believe we are in a range that centers around 10,400 than about to break back over 10,700. The bounce zones we predicted when we first began to sell off in January are finally being tested (red lines on above charts) but the 5% line (blue lines) are still exerting a pull and we NEED some healthy consolidation in between those blue and red lines if we are ever going to get serious about making a real move higher.
Another theme that will be no shock to our subscribers is the oversupply of copper, and Bloomberg reports this morning that copper production outpaced demand by 75,000 tons in November, according to the International Copper Study Group. “High surpluses have resulted in rising inventories,” Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt, said in a report today. Stockpiles of copper in warehouses monitored by the LME have climbed 10 percent this year after jumping 48 percent in 2009, and rose on Feb. 18 to the highest in more than six years, and that does NOT include China, who engaged in massive copper speculation last year as the prices dipped. We are already short Freeport-McMoRanFCX at our target $77.50 from Friday’s Member Chat, also in the May $75 puts so we’re just going to be enjoying the ride at this point. We’re also short on gold at $1,120 - waiting for that shoe to drop. If you want a good commodity - try WOOD.
Asia was mixed overall this morning with the Hang Seng up 1.2% and the BSE up 0.3%, but the Nikkei dropped half a point and the Shanghai fell another 0.7% and back below the critical 3,000 level. This should be good for our EDZ longs, which we took as protection last week. "China Wouldn’t Survive a US Double-Dip Recession," says Isaac Souede, chairman of $20 billion fund of hedge funds Permal. Souede says China does not respect the euro and that an American double-dip recession would spark protectionism in the US.
What Asia did not know last night was that German Corporate Confidence would turn down sharply this morning. Ifo Institute President Hans-Werner Sinn said that the situation in retailing was responsible for the decline. "The economic recovery is expected to continue when winter is over," Mr. Sinn added. The roughly 7,000 companies participating in the Ifo survey were less optimistic about their current business situation. The respective indicator declined to 89.8 in February, from 91.2 in January.
Italian Consumer Confidence fell 4% and French consumer spending fell 2.7% in January as their version of cash for clunkers ended. "It has been a disappointing day for euro zone survey data which, at the least, offers further evidence that the euro zone’s recovery is proving a subdued affair," said Eoin O’Callaghan, an economist at BNP Paribas. Overall, Europe is off about half a point ahead of the US open but the key for us is that the DAX was rejected at the critical 5,750 mark we’ve been watching, and the FTSE is heading back to a possible retest of 5,250, and a failure there would be, as they say at the London School of Economics - NOT GOOD.
Also not good is the very alarming pullback in Commercial and Industrial Loans, which have fallen from $300Bn in new loans annually in 2008 to $300Bn in rescinded credit in 2010. Thus the banks, after getting Trillions in aid from taxpayers (which include US Corporations) have pulled $1Tn in loans out of circulation, thus crippling those same taxpayers.
Banks continue to restructure their own troubled assets but, in another trend we’ve been following here at PSW, the next worry is Commercial Real Estate, or CRE, which has been hit hard by vacancies fueled by rising unemployment. Banks could lose $200 billion to $300 billion on CRE loans, according to a February report by the Congressional Oversight Panel — a watchdog for the government’s $700 billion Troubled Asset Relief Program. Read about COP’s warning and contemplate our long position on SRS (yes, again!).
Case-Shiller Home prices show an additional 2.5% decrease from last year’s horrifying numbers but, through the magic of "seasonal adjustments," the MSM is working to spin this into a positive story this morning (keep in mind there is a great big section full of advertising called "Real Estate" in every newspaper). The index for 20 major metropolitan areas dropped 3.1%, and recovery in the U.S. housing market has been fragile. Demand for new and used homes, after strengthening in earlier months, dropped in December because of cold weather and continuing joblessness. Though housing starts sprang up again in January, an indicator of future groundbreaking fell. In addition, buyers sought to wrap up home purchases before a federal tax credit was set to expire in November, pulling some sales in earlier.
A record 3 million U.S. homes will be repossessed by lenders this year as unemployment and depressed home values leave borrowers unable to make their house payment or sell, according to a RealtyTrac Inc. forecast last month. Last year there were 2.82 million foreclosures, the most since the Irvine, California-based company began compiling data in 2005. The end of Fed purchases of mortgage-backed securities, aimed at keeping borrowing costs low, represents another challenge for the industry. The program is scheduled to expire by March 31.
We’re positioned a little bearish here at the top of our range so we’ll just be sitting back and watching our levels today. Shenanigans are likely to continue through Friday’s end of the month, but down seems to still be the path of least resistance at the moment.