Alex Trias'  Instablog

It's getting to be time to sound some alarms. Domestic equities markets are falling into dangerous technical areas.  The total market Vipers (ticker VTI) have observed their long term exponential moving average as resistance, and the 50 day exponential moving average just failed as support. All it will take is for VTI to pace some distance below the 50 day exponential moving average, or to simply observe this area as trading resistance, and the path lower becomes a distinct probability.

Equities markets abroad are fairing somewhat better. The SPDR S&P World Ex-US ETF (GWL) currently sits above it's 50 day exponential moving average, although the question remains: how much longer? Could the US equities markets drag the global equities markets lower? They did last time. It's not a stupid bet to assume that would happen again if the US equities markets fall apart. 

On the bullish side of the equation, GWL is over 10% higher than it's 200 day simple moving average. VTI is similarly above it's 200 day simple moving average - but only by about 2.5%. In fact, VTI is currently testing it's 65 day simple moving average as support - which support is failing as I write. One day will not determine whether this important intermediate technical area acts as support or resistance.

Meanwhile, oil appears poised to drop off a cliff. The 200 day exponential moving average has acted as confirmed resistance, and the short term 30 day exponential moving average is about to drop below the intermediate term 50 day exponential moving average. Technically, this sets up the stage for a sharp break lower. That may be interpretted as a sign of economic weakness, and if so, equities are likely to break lower as well.

What is interesting is the dollar. Often, the dollar tends to zig when commodities, like oil, zag. From a technical posture, the dollar is in worse shape than oil. The fundamental arguments for a lower greenback probably go without saying, so my view is that one of these markets is lying. Is it the dollar, or oil? I have no clue. Or perhaps, will oil and the dollar sink at the same time? Time will surely tell.

Ultimately, earnings will be likely to catalyze the next move in the equities markets. Barring surprising strength in earnings or forward guidance, I'd expect a "sell the news" type of reaction in the markets. That could set the tone, technically speaking - I expect it will.

On balance, I've retained a relatively bearish stance, holding less than 10% of my portfolio in global equities (primarily Chinese and Asian indexes), with negligible US equities exposure. I'm strongly overweight in cash, and will continue that trading posture until the technical posture becomes clearer - and it's more convincingly conveying a very bearish signal.

What keeps me up at night is this: last summer, markets came very close to confirming an upward trend - the short term moving averages converged on, but never crossed, the long term moving averages. The bulls took their best shot and missed. The reaction? The bears utterly slaughtered the markets. Will the same happen this time? I don't know, but it could. If the equities markets do start to fall in earnest, I'd be looking for some support at about 750 on the S&P 500, failing which, a level of about 650 could set a floor.  If that level fails as support, then a level of about 450 would be possible - about the point where the great equities bubble of the 1990s first started to manifest. A level like that would place the S&P500 at a level so cheap that it could well set the stage for a 15 year bull market. Sadly, many market participants would be all but wiped out by then.

Let's hope it doesn't come to that. By the same token, there's less upside potential now than just a couple of weeks ago, so it seems prudent  to avoid the risk of owning equities to any large extent.

By official estimates, over sixteen percent of the entire country is either unemployed or underemployed, and in some cases not even looking for work. Over sixteen percent of our creativity, productivity, ambition, hope...  rotting on the vine.

This is an emergency of almost unimaginable proportions. It is time for the government to act - not only with the blunt instruments of fiscal and monetary stimulus, but with a laser-like focus targeting unemployment specifically.  This can be done through a simple, temporary tax policy change. Not only will this tax policy cost the American taxpayer nothing, it will generate tax net tax revenues instantly.

The solution is a refundable tax credit for every dollar of salary paid to a newly hired employee. It works like this.  Currently, employers can deduct salary expenses from their income - assuming they have any income. This tax deduction shields some, but not all, income for the employer, so on an after tax basis, hiring people costs employers money.  For instance, if Company earns $100 of gross income, pays Alex a $50 salary, and pays tax at a marginal rate of 50%, it costs Company $25 to hire Alex (without Alex, Company would have an after tax net profit of $50, but with Alex on board, Company only earns an after tax net profit of $25).

A tax credit works differently from a tax deduction, in that it can shield a greater portion (or, indeed, all) of the economic cost of a particular expenditure. Suppose Company got a $50 tax credit from the government for hiring Alex, instead of a tax deduction. Company would have $100 reported income, owe $50 in tax on that income, and the remaining $50 would go out to Alex as salary. But, Company would get a $50 tax credit for Alex's salary, wiping out it's tax liability. At the end of the hunt, Company has a net after tax profit of $50 - just like Alex wasn't even in the picture.

It's immediately clear why companies would want to start hiring people if they could get a dollar-for-dollar tax credit for doing so. They'd basically get the work of these new employees at no net salary. The new employees win in the end, too - they have paying jobs now that they otherwise might not. And how does the government prosper? Simple. The new employees pay income taxes that the government would not otherwise collect. At first blush, it looks like everyone comes out ahead.

But, you might ask, doesn't that tax credit end up costing the government money it would have otherwise gotten if salaries for new employees were deductible, rather than credited? In our example, with a tax deduction scheme, the government gets $25 from Company, and with the tax credit scheme, the government gets $0 from the Company.  That math is correct, but the argument assumes Company would have hired Alex in the first place.  That assumption could (and generally does) work in a normal economy, but goes onto very shaky ground when the official unemployment rate goes into the double digits.  

The truth is, companies are not hiring, and the government is losing income tax revenues as a result.  What that means is that the tax credit for salaries paid to new employees won't cost much at all because it's money the government wouldn't have gotten anyway.  A tax credit that neutralizes all or some of the economic disincentive for a company to go out and hire will instantly cause new employment to pick up.  And because every dollar of the tax credit reflects someone's salary, that money can cycle straight back to the government in the form of personal income tax payments from all those newly hired people. So on closer inspection, it really does look like a win for employers, a win for employees and a win for the government after all. 

To be sure, the devil is in the details. What if companies just fire everyone, and hire them right back the next day, just to get this tax credit? Answer: restrict the credit to only those who have never gotten a W-2 from the same (or any affiliated) company at any time in the last five years. What if the companies fire everybody and hire new people, just to get the tax credit? Answer: only offer the credit for salaries paid to new employees hired by companies for net new hires after turnover.  What about investment bankers, who earn millions of dollars just for destroying the economy? Answer: cap the credit at $80,000, and phase it out entirely for salaries over $150,000. At this point, I'm just making these numbers up. What happens when unemployment drops to 5%? Answer: phase out the tax credit - have it expire after two or three years. Hopefully the economy will be somewhat more self sufficient by then.  

Oh there are details to iron out, sure, but the point of this article is to introduce a framework for debate that really needs to start, and start quickly. 

I have only one request from my readers.  If you like this idea, I ask you to spread it around. Forward it to your Congress person. Put it in your own words, tweak it, and take credit for it. Be an economic activist, and get the idea out there - and get your friends to do the same. There are millions of people without jobs, without an income, without hope, who will thank you for it. 

Who could hang a name on you?

Mick Jagger's memorable question burns brightly today: the name is either "bull or bear", and nobody can hang it up on the equities markets at the moment. But at least from a quick technical point of view, a naming opportunity grows close.

Let's start with oil - the price of which can (but does not always) point towards future economic conditions. Or just trading momentum that relates to nothing other than, well, trading momentum.  I have no idea. But what I do know is that the price of oil options hit their 200 day exponential moving average back in June, sold off with furious anger, and now are testing their 50 day exponential moving average as resistance. Upshot? None. It's not unusual for an asset, like oil, that is in the throws of a downturn, to bounce up to it's 200 day moving average, sniff it out as support, and then fall back. It's also not unusual for an asset, at the front end of a technical uptrend, to fail at it's first test of the 200 day average. No telling which situation is at play yet.  No name to be hung on this segment of the capital markets.  Thus, I am avoiding commodity linked asset categories at the moment. If the price of oil were to establish an upwards trend, I'd be looking at adding Latin American stocks and master limited partnerships to my portfolio, but at the moment, I'm holding off.

My hunch? Oil goes up from here - not in a straight line, obviously, but over the next four or five years, yes, up. I believe the economy will recover, demand will increase, and supply will not keep pace. Moreover, I see inflation eventually creeping into the system, and with it, a demand for assets offering some protection against inflation. Commodities come to mind, and oil is an important one. I'd look forward to owning some oil and gas pipelines, which are churning out a tax-advantaged yeild of about 9% or 10%. But patience is in order.

Equities markets are somewhat better positioned than oil, for sure. Vanguard's Total Market Viper (ticker symbol VTI) has observed it's 30 day EMA as support, and is now positioned to mount a second challenge of it's 200 day EMA - this time with far more bottom-up support than it had in early June. A decisive move above will go a long way towards confirming a new bull market in US equities - particularly if the 30 day EMA breaks above the 200 day EMA - and they are getting closer and closer.

Upshot? The next 5% gain in the equities markets comes with enormous risk. A bearish reversal can certainly happen at any moment. Those who shorted VTI at the 200 day EMA a few weeks ago got rich. They will execute the same trade this time, until it starts costing them money. And they might force the market down. If they don't, they'll start buying VTI, and other equities, in droves. That's where the next 30% gain comes in, and that's far less risky than the 5% sitting on the table right now. If you are into preserving capital, then I think it's better to buy too late and sell too soon. That's my plan.

Things are even niftier abroad. The total world ex-US equities index etf (ticker GWL) is above the 200 day EMA, and the 30 day EMA is soon to cross above the 200 day EMA. This will be a fun thing to invest in, but again, I'd rather be a few days "late" getting in.

The story with the simple moving average is, well, far more simple. Take GWl. The 30 and 65 day simple moving average has crossed above the 200 day simple moving average, and GWL is trading above the 30 day simple average as of today. Bull market, pure and simple. Same is true of VTI. Very simple story. I expect the exponential moving averages to follow suit in due course, but again, patience is a virtue. For oil, the simple moving averages are a bit more tricky. The 65  day moving average is right smack on the 200 day simple moving average. Give it a little nudge higher, and you've got yourself a bull market there.

The preponderance of evidence suggests a bull market in commodities and equities is at hand. There are a few more pieces in the puzzle that would confirm it, and these pieces are not unimportant. So it's still too soon to name this market. By the end of the week, it may not be.