The first trading day of August saw two equity indices reach major milestones, a rare occurrence. The S&P 500 index closed above the 1000 mark for the first time since last November, while the Nasdaq composite closed above 2000 for the first time since last October.

Where Is the Volume?

Technical Theories: Buy Signals Everywhere

Richard Russell’s Interpretation

“… My interpretation? We are now in a cyclical bull market as opposed to a secular or primary bull market. In effect, we’re in an extended bear market rally. The true bear market bottom lies somewhere ahead.

Over the last month, the equity markets have drifted downwards after the SPX failed to move beyond the 950 level after multiple attempts. During this period, the 200 day moving average has provided the market with a well defined level to trade off, with equities bouncing off this level multiple times. The 870 level on the SPX also held firm with sharp rebounds during intra-day probes of this level. The market is waiting for the earnings season, and if early signs are any indicator, corporate America seems set to please the bulls.

Meredith Whitney Moves the Market

The financial markets continued to trade in a choppy manner on Monday. As I had anticipated, the price action on Friday, with the SPX opening at a new high but closing below prior highs (Trader Vic’s 2B pattern), resulted in more selling yesterday. Equity markets gapped down open and were under negative pressure most of the day. However, the volume in the sell-off was low and the markets did not lose any key technical levels. Later in the day, the markets had a wild swing up with SPX erasing all its losses and going positive before selling off into the close. After the zig-zag action, the equities finished closed to unchanged but with a negative bias.

Reassessing Risk

The financial markets had a roller coaster ride Friday after the surprisingly lower loss in payrolls reported by the non-farm payrolls report. Equity futures shot up almost 1.5%, well above their 2009 highs, while treasuries were sold hard. After an initial sell-off, possibly related to automatic trading linked to equity futures, the dollar rallied with the Dollar Index Futures (DX) finishing 1.68% higher above the key psychological 80 level.

The rise in dollar was a result of perceived strength of the US economy. However as soon as the dollar started rising, equities started to sell-off. The selling took the ES (S&P Futures) from a high of 957.50 down to a low of 933.25. After some more ups and downs, the equity markets finished almost flat with a slight negative bias. Unlike last week there were no fireworks into the close, with the market staying in a narrow range in the final hour, a rare occurrence. Interest rates moved up across the curve, with the biggest changes in the shorter duration (1 to 2 years) leading to a less steep yield curve from the historic highs reached earlier this week.

The equity markets continued where they left off yesterday and closed higher across the board, with the Russell2000 and the Nasdaq making new 2009 highs. The markets were led by two calls related to Goldman (GS): the first an upgrade of the financial sector including Goldman, and the second, Goldman’s new target for crude oil for 2009 ($85) and 2010 ($95). Goldman also predicted a sub-500K loss in non-farm payroll numbers due tomorrow. Consequently the equity markets were led up by the energy, the financial sectors and large cap technology stocks.

Treasuries, Mortgages and the Dollar Sell-Off

The equity markets finally reacted to the broader economic picture after the large gains of the past few days. The ADP employment report which included a steep correction to April’s number, coupled with weaker ISM index of non-manufacturing activity led to a large gap down open in equity markets. News of disagreement about the policies of the ECB in tackling the financial crisis strengthened the dollar. A larger than expected build-up of oil inventories added to the sell-off in crude oil. To top it all off, Fed Chairman Ben Bernanke warned about the risk posed by rising deficits, affirming that any talk of inflation is rather premature. This also led to a sell-off in Gold and a bid in treasury bonds.

Inflation and the Anti-Dollar Play

Equity markets spent the day consolidating the gains of the past two days. All major equity indices reached new highs above yesterday’s highs, but could not hold that level. Treasury bonds got a slight bid after yesterday’s decimation. The dollar continued its downward slide with oil ramping up in sympathy. Risk appetite continued to be high with the small cap Russell2000 putting up the best performance.

Pending Home Sales Surprise: How Many Will Close?

The financial markets built upon the macro themes of the past week, as better than expected economic news from China and the USA lifted the equity markets. The GM bankruptcy filing was completely ignored by the market. The reflation trade was back in full force, and Treasuries were sold hard, with yields getting close to the highs of last week. The Dollar also fell though it finished off its lows. The SPX smashed through its 200 Day SMA and closed at the high for the year, along with the Nasdaq.

Technical Buy Signals: Possible Explanation for Futures Spike?

A significant challenge in predicting the outcome of the current economic crisis is that it is global, with multiple stake-holders each with their own interests, but with a lot of inter-dependence. The intertwined nature of the global economy means that no single player can deviate from the norm, without paying a significant price itself.

This interdependence has a significant impact on asset ownership strategies. In this article I will discuss how foreign, especially Chinese, ownership of US based assets will be affected.

Yields fall as Bond Buyers Remerge

Dollar Sells Off

The yields on treasury bonds spiked up yesterday, in spite of a fairly good treasury auction. According to experts, holders of mortgage bonds are selling them and buyers on the other side are hedging by selling treasuries of appropriate duration.

As I have alluded to, mortgage spreads are at near historic lows and unlikely to tighten further. As a result any further rise in treasury yields will lead to higher mortgage rates. Higher mortgage rates reduce the value of existing mortgage bond holders who are now selling.

The financial markets were rocked by an unreal break-down at the long end of the yield curve Wednesday. The breakdown was even more surprising since it occurred after a fairly successful auction by the US Treasury. Though the economic future is uncertain, the yield curve is now at one of the steepest levels ever.

The equity markets started with a bullish bias, with all the indices trading above Tuesday’s highs. However, the sell-off in the long-bonds led to a nasty sell-off in the equity markets also. Though the sell-off was small given the environment we are in, the breadth and ferocity showed that the equity markets are no longer ignoring what is happening in the bond market. Incidentally, the U.S. Dollar strengthened against the Euro showing that an element of risk aversion is returning, as is the negative correlation between the U.S. Dollar and U.S. equities.

This past week marked a possible turning point in the current financial crisis. It seems all of a sudden the world has awakened to the risk associated with the rescue efforts of the Federal government, primarily the oversupply of dollars. The trigger for this sentiment change was S&P's decision on Thursday to lower Britain’s outlook from stable to negative. This resulted in a major sell-off across all asset classes. Yields on 30 Year treasuries jumped up by 31 bps, the US Dollar lost almost 3.5% against the Euro, and equities gave up most the week’s early gains.

U-Turn in Risk Appetite

The world markets got a shock Thursday when the S&P lowered its outlook on Britain to negative from stable, a signal that the sovereign AAA ratings may be cut. The primary reason cited was the debt/GDP ratio passed 100%. The market soon acknowledged that the US also has the same risk. This resulted in a sell-off across all US assets. The USD fell across all currencies by almost 1%. The long treasury bonds fell by 2% and the equity indices shedding 1.5-2% across the board.

Fed Intervention leads to Treasury Collapse

The equity markets finished the day yesterday with small losses after a roller-coaster ride. As I had alluded to yesterday, I expected another day without a large change in closing prices. Though I did not bargain for a big gap-up followed by a major sell-off, the lack of conviction among both the bulls and bears was very visible.

The equity markets finished mixed on Tuesday, as lower than expected numbers on housing starts tempered enthusiasm about a housing market recovery. The S&P500 and the Dow30 finished slightly negative, while the Nasdaq and the small cap Russell2000 finished slightly positive.

The SPX spent much of the day bouncing between the levels of 910 and 916, before selling off in the last half hour and close at 908. There was a lack of conviction from both the bulls and the bears and it showed yesterday.

Contrary to my opinion, the equity markets opened the week with a massive rally which took the SPX well above the 900 level. The market internals were one of the most bullish I have seen in a long time; the A/D ratio was at 12.75:1 on the NYSE and 3.88:1 on the Nasdaq. The small cap Russell 2000 outpaced all other indices, up 3.35% and showing that risk appetite was back with a vengeance.

The rally was led by financial and real estate stocks, especially Bank of America (BAC). The bullish news from the Indian stock markets, where the circuit breakers were hit on the upside, seems to have helped improve sentiment, with CNBC reporting that traders on the NYSE were also acknowledging the fact.

Seeking Alpha has an interesting article by Geoff Considine, on the performance of equities in emerging markets over the past three years.

Geoff’s article made the following observations:

On option expiration Friday, the equity markets followed a pattern very similar to what was seen on Thursday. The market challenged the 900 level on the SPX again, but was sold off hard even before it reached Thursday’s highs just below 900. The sell-off was brutal with the SPX falling almost 18 points from its intra-day highs before finding its feet. However, the key technical levels around 875-880, corresponding to the 20 day SMA held.

The bears can take heart from the fact that for almost three days, the SPX was rejected at the 900 level. The bulls can take comfort from the fact that the 875-880 level has held during the same period.

The US equity markets bounced back Thursday after the large losses registered on Wednesday. The equity markets shook off a slightly worse than expected job-loss data with across the board gains. Stocks sold off at the open, and tested Wednesday’s low on the SPX. However like Wednesday, the ES futures bounced off the 880 level, forming a double bottom. This set the stage for a bounce which lasted most of the day.

The rally was led by the financials, technology and agricultural stocks. The Russell2000 Small caps led the indices with a 1.40% gain, showing an increased risk appetite among investors. On the fixed income side, treasury bonds were bought today and the yields slipped further.