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Shocked & Jolted, but Bounced & Contagion Worries – again...


Monday 7-11-2011


Dr. John L. Faessel


Commentary and Insights


Quote of the day
“A democracy is always temporary in nature: it simple cannot exist as a permanent form of government. A democracy will continue to exist up until the voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority will always vote for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, (which is) always followed by a dictatorship.”

Lord Woodhouselee, i.e. Alexander Fraser Tytler



Shocked & Jolted, but Bounced


Contagion Worries – again...


The “wall of worry” is certainly intact. One wonders about the old " Lord Woodhouselee" quotation above and its prescience? Certainly our political class has created a monstrosity. So now it's Italy that is on the ropes. Much of Europe is doing the “rope a dope” i.e. kicking the can down the road to hopefully infinity. Bond yields of Italy are now skyrocketing as are some of the bonds from the other debt inundated countries in question. European Central Bank President Jean-Claude Trichet quote last week is a beaut; "Our position is clear. No credit event; no selective default; no default."


Do the Germans have enough money to bail out Greece, Portugal, Spain, Ireland and now Italy? And the UK? Maybe they'll (Germany) pal up with Chinese? What a colossal mess!


And here at home, oh my gosh! Conflicting data is the order of the day. On Thursday we received a stronger-than-expected ADP employment report that showed 157,000 private payrolls increase and that shot the stock market to near highs set earlier this year. In fact the Dow Transports ticked another new all-time high. Having the Transports at new highs is a very good thing. But, on Friday a terrible nonfarm payrolls employment report sent the market into an essentially gap down of 130 Dow points. Cooler heads prevailed just before lunch on the market worked higher all day making up more than half of the original jolt.


Today the market will deal with Euro Land contagion and "our" - “cut spending or increase tax” fandango that is playing out at the White House today.  S&P futures are currently off over 17 points and oil futures are off a dollar $1.64 to $94.57.


Copper futures didn't take much of a hit at all and lumber futures are coming out of a 12-week consolidation. While this was Friday's action today should be interesting as the news-flow will likely spin the market to-and-fro.


Actually the recent action in the market except for Friday has been outstanding. One week ago Friday the McClellan Oscillator registered a plus OVERBOUGHT 274 that was the highest tick in about a year. Now it's backed up to the high-end of neutral at a plus 153 so it's possible/likely we can back up some more. Sentiment is still pretty rotten and that’s a good thing for the market.


Obviously, the big worry for the planet is does the USA go into recession. If the GDP drops below a plus 2% that could well indicate a recession is on the way.


But, I continue to like the stock market, although the economy, unemployment, US debt, housing and our government stinks. So what's new?


Price resistance in the in the S&P 500 (SPX) is at Thursday’s top tick at 1356.


Short-term support in the S&P 500 (SPX) is 1334.5, then fallback support at 1317 / 1320.  The 50- moving average support is also at (SPX) 1317, then down a ways at the 200-day moving average of 1272. The (SPX) closed Tuesday at 1343.80.


Cycle highs or lows indicated in Red


Tracking the Bond Markets $ 91 Trillion

The BARRON’s Confidence Index ** upticked again to 79.4 from 78.8 the prior week’s posting. Three (3) weeks ago it was at 10-month lows of 77.1%  .  Just over three-months ago the Confidence Index posted new cycle highs of 83.7, but during this cycle it has never reached the 2008 highs of 85 & 86 postings of “times” normal.


Friday’s key indicators and metrics:


·                 McClellan Oscillator “just” OVERBOUGHT @ plus 153   

·                 CBOE Put / Call Volume Ratio – 1.02

·                 The Treasury 10-year yield 3.016

·                 3-month $ LIBOR at 0.246 (5-year / forever lows)

·                 Copper – 4.4025

·                 Gold (COMEX) $1541.6

·                 Silver (COMEX) 36.536

·                 Crude oil (NYMEX) $96.2

·                 Brent Crude $118.33

·                 Euro – 1.4214

·                 VIX – 15.95

·                 US Dollar Index – 75.51

·                 Canadian Dollar – 1.038

·                 Aussie Dollar – 1.0647

·                 Swiss Franc – 1.1960


* Key WEEKLY BULLISH SENTIMENT (i.e. CONTRARY INDICATOR) data points continue to show some low measures of fear in the market.


Last week Consensus overview of Bullish Investor Sentiment upticked again off the near panic stage of 3-weeks ago (the lows of the market). Friday’s abrupt downstroke wasn’t picked up in the surveys as the compilations are published late Thursday in most cases. 


Worth mentioning again; that three (3) weeks ago the market flashed 13 straight days of Put / Call Volume Ratios above 1.00 demonstrating the extent of the intense fear in the market.  This set the stage for the red hot rally we just enjoyed.


(High BULLISH readings in the Investor Sentiment Readings usually are signs of Market tops; low ones, market bottoms.)

·       The American Association of Individual Investors [AAII] Investor Sentiment Survey of BULLISHNESS was up to 41.8% from 38.3% the prior week.  The cycle lows of 24.4% were put in 5-weeks ago. In January it ticked new cycle highs of 63.3%. [The lows registered on March 9th 2009 were an historic low posting of only 18.9% BULLISH.]

·       The AAII Investor Survey of BEARISH sentiment to 24.7% from 30.2% the prior week. The cycle highs in bearishness of 47.7% was established 5-weeks ago. January’s BEARISH sentiment cycle lows were at 16.4% and that was lows not seen since 2005. The highest Bearishness occurred when it ticked the summer “market retreat” high at 57.1%. Item of note: In August 1987 it ticked the lowest low ever recorded at 6% BEARISH – Remember what happened on October 19, 1987...


·        Consensus Index BULLISH investor sentiment jumped up to 47% from 39% the prior week. Four weeks ago it was 29%. 


·        The Market Vane (Market Letter Survey) was up a few more ticks to 62%. Last week was 54%. 3Four weeks ago it was 51%.a month ago it was 50%. The survey posted new cycle highs in bullishness at 68% 17-weeks ago.


·        The Citygroup “Panic / Euphoria” Model registered an uptick to minus 0.14 from 0.24 from the prior week. We are now at the very low measure of the NEUTRTAL spectrum. 11- weeks ago it registered a cycle high of a plus, but still in the neutral zone of 0.38 close to the euphoria zone. The model moved from panic into neutral in October 2010. During the dot-com bubble highs of December 1999 the model posted ALL-TIME highs of La-La-Land euphoria at 1.70.


** The Confidence Index is the premier measure of how the bond markets trillions (total global is around $91 trillion and USA is 39% of that) are allocated: (The bond market is twice the size of the stock market.) The ability of this key indicator of market health to post near new highs bodes well for the economic recovery and for stocks to continue forward. One year ago the index was 77.9.


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