Sentiment Surveys
The Association of American Individual Investors’ weekly sentiment survey had the bulls at 28% again (a decline of 10% points) and the bears increased by the same amount to 55%. This definitely moves sentiment towards real pessimism. The bull/bear ratio is almost equal to late February. But we aren’t quite at an extreme point - yet.

After a mid-afternoon lift, the S&P 500 (879.13 -3.55 -0.40%), DJIA (8,146.52 -36.65 -0.45%), and NASDAQ (1,756.03 +3.48 +0.20%) still closed down a bit, in lackluster trading.

There were no remarkable gains or losses in the leading sectors. The winner was Technology (XLK +0.4%), while Financials (XLF -1.3%) reversed the prior day gain, pulled down by the Banks ($BKX -1.3%).

The next thing to watch for is either a decisive break of the June lows (the S&P 500 briefly dipped below 888 Friday morning -- the May 15 879 level is also support) or a breakout from the 927-930 resistance area. Given the VIX signals from last week and some other technical indications of a market shift, there's a good chance the next break will be down after this bounce is over.

However, strength early next week may provide a good selling opportunity, as "there are indications that a market shift is taking place..." A break of the June lows will confirm the Head & Shoulders topping pattern and likely mean more weakness is coming.

A bit of a mixed bag of economic numbers and a somewhat surprising take on second quarter GDP highlight the economic news Friday.

First, consumer sentiment took a dive. It went from 70.8 in June to 64.6 this month. The expectation had been that it would drop to 70.5 which once again stands as a testament to the ability of the economics profession to forecast anything. It would seem that the people actually out living in the economy and feeling the pain have a slightly different view of things than do the computers.

Well I think you can consign any second (third?) stimulus program to the dustbin. President Obama basically said yesterday that he was sticking to his plan, it is having a positive effect and it was designed to work over time.

From Politico.com:

When I think about asset allocation, I typically begin with my model that chooses between BBB corporate bonds and common stocks. The model still favors corporate bonds. After that, I look at the bond market, and ask myself where I think risks have more than adequate compensation. I look at the following factors:

• Duration (Average Maturity is similar, sort of) — do we get fair compensation for lending long?
• Convexity — does the bond benefit or get hurt by interest rate volatility?
• Credit — are we getting decent compensation for credit risk?
• Structure — Structured notes always trade cheap to rating, but how cheap?
• Collateral/Sectors — Are there any collateral classes or sectors that are trading cheap to their fundamentals?
• Illiquidity — are illiquid issues trading stupidly cheap?
• Taxes — How are munis trading relative to tax rates and creditworthiness?
• Inflation — is the CPI expected to accelerate?
• Foreign currency — if nothing looks good on the above (or few things look good), perhaps it is time to buy non-dollar denominated notes. My view is buy foreign currencies when nothing else looks good, because foreigners will do the same.

At present, I am not crazy about corporate credit relative to other bonds. I would move up in quality.

I’ve written before about the Fed’s de facto triple mandate:

1. Low goods-price inflation.
2. Low labor unemployment.
3. Protect the financial system in a crisis.

Number 3 is the implicit obligation of the Fed, for several reasons:

As I reluctantly start packing my bags after a most enjoyable two weeks of R&R in Europe (see my posts on Slovenia and Switzerland), “Words from the Wise” comes to you a bit more cryptically than usual.

Despite having crisscrossed Heidi’s country, I have yet to find the elusive Swiss gnomes to glean what they make of financial markets at this juncture. Meanwhile, the past week has been characterized by a fresh wave of risk aversion, as uncertainty over the global economic outlook took its toll on stock markets, commodities and precious metals, and investors favored safe-haven assets such as government bonds and the Japanese yen.

The Austrian School of economics is gaining popularity, and followers. Fueling this shift is a belief that Keynesian loose-money policies led our current crisis. While die-hard mainstream economists like Paul Krugman aren’t budging, millions of people are rethinking the role government should play in the economy. Many of them are looking to the Austrian School for answers.

Public outrage over bailouts and rising debt is widespread. The outcry has Wall Street and mainstream economists on the defensive. Banks are so concerned about this “populist overreaction” that their leading industry group, SIFMA, just launched a major PR offensive against this “populist overreaction” (yes, that’s their wording. Read the Bloomberg piece for more). One commenter quipped that the campaign slogan should be Stop Complaining About Getting Fleeced.

On March 9^th of this year investment grade spreads on the CDX index peaked at 262bs and the high yield index peaked at 1925bps. The S&P had its lowest close on this very same day at 676.53.

For all intents and purposes, that still holds as the closest thing we know as a true peek over the ledge into the abyss. That both credit spreads and equity prices hit their “ultimates” on the exact same date would, hopefully, dispel for many the anticipatory nature of CDS spread movement. It is, at its correlative high, a coincident indicator at best. But, as a coincident indicator, with a slight flair for anticipation, it has held its own through the thick and the thin on the roller coaster ride we have been on since August of 2007.

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

As promised in my last two articles, Alternate Short Strategy: Purchasing Put Protection for Less (Part I), and Alternate Short Strategy: Purchasing Put Protection for Less (Part II) I will be continuing my list of alternate ways to hedge your portfolio without shorting the stock. To conclude my list, in this post (part 3) I will be covering the stocks ranked from 36 to 50 on the list of 50 (ranked from greatest to least by market cap).

To reiterate my two previous posts: I believe the market is due for a pull back, so it may be a good time to purchase put protection on some of your long positions. I decided to write about the 50 largest stocks (by market cap) in the S&P 500 and give a put protection strategy for each of them. To get a detailed spreadsheet of all 500 stocks, which will allow you to rank them based on their market cap minute by minute with the click of a mouse check out my blog post here.

A research paper, published in June by Dirk J. Bezemer, Groningen University, addresses this question and says the answer is that many saw it coming but those with the power to act did nothing. Bezemer contends that the problem is that economic policy is executed using macro equilibrium models and what is needed to establish economic policy that can anticipate crises, such as we have now, and take actions to head them off, are micro accounting cash-flow models. The entire paper can be read here.

First, let me show you a table that Bezemer has prepared lisiting some of those who saw it coming. Table is in two parts for graphics processing reasons.

I continue ponder the possibility of a quantum shift in the economic fabric which is causing our economic and financial indicators to display incorrectly. I believe there is a fundamental and significant change in the dynamics which drive our economy.

What the punters are telling us that once we shift our personal wealth engines into high gear by talking up the equities markets and we get housing to stabilize or even creep up a little – we are going back to our old ways of spending. They see a direct correlation between wealth and spending.

Below you will find closing prices for the Dow, S&P 500 and Nasdaq as of the close of July 10, 2009. I have included year-to-date stats and important moving averages as well.

In a free market, demand is always a function of price: the higher the price, the lower the demand. What may surprise most politicians is that these rules apply equally to both prices and wages. When employers evaluate their labor and capital needs, cost is a primary factor. When the cost of hiring low-skilled workers moves higher, jobs are lost. Despite this, minimum wage hikes, like the one set to take effect later this month, are always seen as an act of governmental benevolence. Nothing could be further from the truth.

When confronted with a clogged drain, most of us will call several plumbers and hire the one who quotes us the lowest price. If all the quotes are too high, most of us will grab some Drano and a wrench, and have at it. Labor markets work the same way.

Current Futures: Dow -24.00, S&P -2.60, NASDAQ -4.00

Asian markets are currently trading flat, while the S&P futures moved somewhere lower tonight, as investors prepare for the last trading day of the week.

As promised in Alternate Short Strategy: Purchasing Put Protection for Less, I will be continuing my list of alternate ways to hedge your portfolio without shorting the stock. In this post (part 2) I will be covering the stocks from 21 to 35 on the list of 50 (ranked by market cap). To reiterate my previous post: I believe the market is due for a pull back, so it may be a good time to purchase protection on some of your long positions. I decided to write about the 50 largest stocks (by market cap) in the S&P 500 and give a put protection strategy for each of them. To get a detailed spreadsheet of all 500 stocks, which will allow you to rank them based on their market cap minute by minute with the click of a mouse check out my blog post here.

If you're coming across this post you most likely hold or at least have interest in a stock I'll be talking about shortly. In this article I will lay out 15 option ideas, which will help hedge your portfolio against the downside. These ideas all require using the Bear Put Option Spread Strategy.