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On The Market - EuroLand debt monstrosity coming home to roost

Tuesday 9-6-2011


Dr. John L. Faessel


Commentary and Insights


Quote of the day
“The highest proof of virtue is to possess boundless power without abusing it.”

~ Lord McAuley ~





A terrible jobs report hit the market hard on Friday. But, today's focus will (once again) be the EuroLand debt monstrosity that's coming home to roost. The Euro bank index is down 10% in the last two days. Euro banks hold bonds from very iffy Euro countries and those bonds are crashing. All eyes are on Germany to fund the bummer spendthrift ways of the PIGS and a few new countries of newly found ill-spending repute. It's definitely chaotic and smacks of Lehman / Bear Stearns 2008.


The McClellan is in neutral, Sentiment is terrible, but it looks like it’s due to get a lot worse. With the 10-year Treasury at 1.994% yield there is a panic brewing yet theoretical “going forward” valuations are exceptional - if we don’t go into a recession. Likely we test the lower bands of support at S&P 500 (SPX) 1135 then at 1122. Then at the August 8th lows of 1101. Is EuroLand oversold enough?  Hard to say.


Regarding the Zero new jobs report on Friday, here's a couple of flimsy reeds to hold onto; private employment would have been at least 45,000 higher if not for a two-week strike in August of Verizon workers. Also, the Credit Suisse recession-probability model is still signaling an “only” 30% risk of economic contraction in the next six-months.


Recession worries remain. I've mentioned that recessions since World War II have taken down S&P 500 profits by 15.7% on average, but stocks have come down way more than profits. Importantly for the Bulls, S&P 500 forward price earnings ratios are the lowest since the 1980s and importantly they're sitting on $2 trillion in cash.


So it's likely that this recent wicked correction of about 18% in the major indexes has already been factored in to the "price" equation. We're already well past half way through Q3 and I believe it's unlikely that we go into a negative GDP this quarter. FedEx traffic is up, as is UPS's. Retail sales are up and rail car and truck loadings are also putting in plusses. Gasoline prices are at recent lows. In addition there's been some improvement in Cap-X spending. Most analysts had GDP projections of 3% growth so I think it's unlikely that this recent shock will negatively influence the economy to the degree that it puts us in a recession this quarter.


Resistance in the in the S&P 500 (SPX) is at 1185 then at1230. The 200-day moving average resistance is at 1284. The 50- moving average resistance is at (SPX) 1152.


Price support in the S&P 500 (SPX) is at 1135 then at 1122. Then at the August 8th lows of 1101. The (SPX) closed on Friday at 1173.9.


Last Friday’s key indicators and metrics:



·                 McClellan Oscillator is in neutral @ plus 33        

·                 VIX – 33.92

·                 Gold (COMEX) $1876.9

·                 Swiss Franc – 1.2690

·                 The Treasury 10-year yield 1.996%

·                 Crude oil (NYMEX) $86.45

·                 CBOE Put / Call Volume Ratio – 1.44

·                 Aussie Dollar – 1.0619

·                 US Dollar Index – 74.84

·                 3-month $ LIBOR at 0.335

·                 Copper – 4.245

·                 Silver (COMEX) 43.069

·                 Brent Crude $110.80

·                 Euro – 1.4184

·                 Canadian Dollar – 1.154


Tracking the Bond Markets $ 91 Trillion

The BARRON’s Confidence Index **added a few tics to 71.2.from 70.7 the prior week.  It was 77.1 sixweeks ago, relatively healthy. In mid-February the Confidence Index posted new cycle highs of 83.7. During this cycle it has never reached the 2008 highs of 85 & 86 postings of “times” normal. One year ago the index was 74.4


* Key WEEKLY BULLISH SENTIMENT (i.e. CONTRARY INDICATOR) data points indicate Bullish sentiment is just off the lowest cycle numbers that were posted a month ago.


The “on balance” overview of Bullish Investor Sentiment suggests continuing immense fear in the market.


(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 up ticked slightly to 38.6%. The prior week it was 36.4%. And it was only 27.2% bullish five weeks ago.

In January it ticked new cycle highs in Bullishness at 63.3%. [The lows registered on March 9th 2009 were an historic low posting of only 18.9% BULLISH.] On March 6th the S&P 500 (SPX) ticked its lows of 666.


·        The AAII Investor Survey of BEARISHNESS fell a few % points to 32.3% from 36.4%the prior week. Five weeks ago it ticked CYCLE HIGHS at 49.9% in Bearishness. Seven- weeks ago it was 24.7%.


·        Consensus Index BULLISH investor sentiment was up a bit to 31% from 29% the prior week. Seven-weeks ago it was 56%.


·        The Market Vane (Market Letter Survey) upticked to 49% from the 43% the prior week.Six-weeks ago it was 59%. The survey posted new cycle highs in bullishness at 68% at the top of the market in May.


·        The Citygroup “Panic / Euphoria” Model fell deeper into the Panic stage at a minus 0.25 just over four-months ago it registered a cycle high of a plus, but still in the neutral zone of plus 0.38 close to the Euphoria zone. The model moved from panic into neutral in October 2010. Now the model resides in the Panic stage.

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 74.4


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