Chris Ciovacco's  Instablog

While Ireland has the funds to avert the need for an immediate rescue, its cash may run out in the middle of next year unless it can raise money from the bond market in 2011. Ireland led a surge in the cost of insuring sovereign debt to a record on Nov. 5 as the government struggles to convince investors it won’t be the next Greece, whose economy was rescued by the EU and International Monetary Fund in May.

While the long-term fundamentals related to the U.S. dollar (UDN) remain bearish, Friday’s significant rally in the greenback leaves the door open for a possible countertrend rally. The conditions highlighted below may be cleared in a matter of days, but as of the close on November 5th the dollar remains susceptible to a surprise countertrend rally.

As shown below, a short-term bullish divergence remains in place between price and the dollar’s relative strength index. The condition can be cleared if RSI drops over the next few trading sessions. A trendline from December of 2009 is also in a position to lend possible support to the dollar (see blue line).

Click on chart to enlarge.


Many believe, including us at CCM, the current rally off the summer lows was sparked mainly by the expectation the Fed would print more money. The chart below shows as the U.S. dollar (red line) began to weaken again in August of 2010, weak dollar assets, like gold (GLD) (blue line), began to rally. If the dollar rallies, then weak-dollar assets may consolidate for a time or experience pullbacks. Our concern is correlation risk between the dollar, gold, silver, oil, and copper.




Could the dollar continue to fall? Yes. Could gold, silver, copper (JJC), and oil continue to rise? Yes, but we have to decide how much risk we are willing to take in order to seek additional gains.  An expanded version of this article, along with additional charts, can be found here.

Friday’s better than expected employment report aligns well with the market’s post-QE2 interpretation the economy is in a little better shape than most believe. Now that mid-terms, QE2, and the employment report are in the rearview mirror, it is a good time to catch our breath and discern what may be in store over the next week or two.

Market participants and their trading algorithms tend to have long memories. We are not big fans of making decisions based exclusively on forecasts, but it always pays to understand where markets may run into some short-to-intermediate-term turbulence. If we can hold onto Thursday’s gains, then stocks and risk assets may have some more room to run. The blue, orange, green, and black lines below represent past areas of importance to both buyers and sellers. A convergence of these lines seems to come into play near 1,256 on the S&P 500 (SPY).

Click on image for larger view.



The chart above is one of many tools we use to better understand the market’s risk-reward profile. We will be watching sentiment, the CCM Bull Market Sustainability Index (BMSI), and the CCM 80-20 Correction Index, along with other tools, to monitor the health of the market’s current bullish stance. It may turn out that (a) we never get to 1,256 on this leg up, or (b) 1,256 does not look as important as we approach it based on readings in other areas. Currently, we do know it makes sense to pay attention near 1,256.

The AAII Investor Sentiment Survey showed a drop in the percentage of bulls and a rise in the percentage of bears this week. The percentage of bears increased from 21.6% of those surveyed to 29.8%, which is an increase of 38% week-to-week. Sentiment is a contrary indicator; the more bullish the average investor becomes, the higher the odds a correction is around the corner. Sentiment seemed to confirm yesterday’s break to the upside, but only if we can hold yesterday’s gain by the close on Friday.

Traders, money managers, and active investors should make a point to get away from the market for a few hours this weekend. QE2 and election burnout is probably common among those of us who live very close to the markets. Recharging the batteries is productive in the long-run – go get some sleep and fresh air.

Disclosure: This article contains the current opinions of the author. The opinions are subject to change without notice. This article is for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.

Below we'll cover a potentially positive development in market breadth. Wednesday morning's financial headlines may help breadth continue to improve in a bullish fashion:

• Bank Of England Open To More Bond Buys (Stimulus)
• China's Industrial Production Up 16.1%
• Machine Orders In Japan Climb 10.4%

The McClellan Summation Index is a market breadth indicator that is derived from the number of advancing and declining stocks in a given market. The concept of breadth is easy to understand; healthy markets have broad participation during rallies.

The charts below show the current Summation Index (2009) and the Summation Index from the early stages of the 2002-2007 bull market (2003). Both charts show the S&P 500 Index under the Summation Index. When the Summation Index experiences a sharp decline followed by a bottom, it can mark the end of a correction in stocks. Compare the green arrows in the Summation Index with the green arrows on the S&P 500. In 2009, the Summation Index is trying to make a turn simultaneously as stocks try to find their footing after a sharp correction. The Summation Index could break below the green line, which would possibly signal more downside for stocks. Current levels on the Summation Index are very similar to those found at the July bottom in the S&P 500. Stocks rallied off the July lows and the Summation Index continued higher helping confirm the end of the July 2009 correction.

From a fundamental perspective, Thursday sees weekly jobless claims announced at 8:30 AM ET , and Friday has international trade numbers due at 8:30 AM ET.

Disclosure: The author and CCM clients have numerous positions, including exposure to U.S. tech stocks, foreign currencies (long and short), emerging market stocks, foreign bonds, and commodities.