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ON THE MARKET - Short Covering Rally Should Fizzle In An OVERBOUGHT Market - Reality To Set In As The Global Slowdown Takes Hold: Read It And Weep...

Monday - 7-2-2012

Dr. John L. Faessel


Commentary and Insights

Quote of the Day

"The effect of the divergent cultures in the Eurozone has been grossly underestimated. The only way to have several currencies from divergent nations lumped together is if they are culturally close, such as Germany, the Netherlands and Austria. If they aren't, it simply can't continue to work."

~ Alan Greenspan ~


McClellan OVERBOUGHT at a Plus 236

Red Hot Short Covering Rally Should Fizzle

Reality to Set In as the Global Slowdown takes hold: Read it and weep...

1. Eurozone unemployment rose in May to hit another record of 11.1%, up from April's 11% with Spain's unemployment rate at 24.6% and Greece's 21.9%.

2. Eurozone Manufacturing PMI came in at 45.1 in June, the weakest quarter in three years. Only Ireland and Austria enjoyed growth. China's PMI slowed to 50.2 the lowest in a year.

3. Companies in the S&P 500 (SPX) just posted their worst pre-announcement period since the third quarter of 2001. Nine of the ten S&P 500 sectors have recorded a decrease in earnings growth rates since March 31 (telecom being the only slight exception). S&P 500 earnings (12-month trailing) for 2Q 2012 now projected at $98.52. Compare to the current consensus EPS expectation of $111 for 2Q 2012.

Re "the" Bailout: It's another, "Please share our debt gambit" we screwed up and can't pay, so will you Germans continue to pay for our flighty ways? True, this time though there will be some YET TO BE CREATED central European bureaucratic oversight committee. (HA!) Unless the structure and composition of the newly created regulatory body is to the complete satisfaction of the Germans, the European Stability Mechanism [ESM] cannot assume a single penny of the Spanish bank bailout debt. So, maybe? You never know... Expect Spaniards to flip out (go to the streets) when they hear that Germany has the final say. Merkel "conceded" that ESM funds will be guaranteed by bank assets rather than by sovereign states. Again, contrary to popular belief, that is in fact a victory for Merkel and the German state as 'they can now' seize private assets in a bankruptcy. Key is that; Germany, under the ESM charter, has absolute veto power over every penny of ESM money that is disbursed.

Net, Net is that while this bailout deal is new ground 'with German teeth' the EuroLand is in recession and with China's slowdown underway and even tho US stock markets are cheap - I believe they will get cheaper yet... Prepare for more selling as the market looks weak both long term and short term.

EuroLand Bond Yields have reversed off highs on Friday's Euro Bailout Plan

Greek 10-year yields 24.73%

Italy 10-year (gross) bond yield - 5.70% - off from highs of 7.29% on 11-24.

Spanish 10-year (generic) bond yield - 6.21%

Bullish sentiment continues to remain gloomy and is just off the lows of the cycle. (See below)

The McClellan Oscillator (my favorite measure of overboughtness or oversoldness) is OVERBOUGHT at plus 236. Interesting is that the two prior McClellan's were plus 145 and 148 within the parameters of a "narrow range day" that historically has predicted major moves' of 2 and 3% usually in the direction of the recent trend...

Bummer deal of all time: Bank of America (NYSE:BAC) paid only $2.5 billion to buy Countrywide Credit four years ago, the deal has since cost the bank over $40 billion in real-estate losses, legal expenses and settlements with state and federal agencies. Worse yet is that they could face further legal liabilities of another $5 billion as new lawsuits increase across the country.

Greatest deal of all time: Angelo Mozilo former Chairman, CEO and founder of Countrywide Credit more than any single individual, has come to symbolize, and bear the blame for, the subprime mortgage crisis. He agreed to pay $67.5 million (a tiny fraction of his estimated net worth of $600 million) in fines and accepted a lifetime ban from serving as an officer or director of any public company. (Also; Countrywide paid $20 million of the $67.5 million penalty)

B of A must rue the day that they bit into this deal....

Of note; Mozilo gave below market rate 'VIP' loans to Senate Banking Committee Chairman Christopher Dodd, Speaker of the House Nancy Pelosi's son, Paul Pelosi, Jr., Barbara Boxer, Richard C. Holbrooke, and Donna Shalala are also among those who received VIP mortgages from Countrywide. Also about 30 Fannie Mae employees got the below market VIP loans with Countrywide.


The S&P 500 (SPX) closed Friday at 1362.16

Price resistance at the 'top' of the recent rally is at 1363

Short term price support is at 1355 / 1353 / 1352

50-day moving average support is at 1340

Longer out term price support is at 1313 /1320 / 1306

The 200-day moving average support is at (SPX) 1299

Stronger 'Price' support (the lows last Monday) in the (SPX) is at 1266 and will be the battleground zone as the market tests its lows.


Friday's key indicators and metrics:

Cycle highs or lows are in red

· McClellan Oscillator is OVERBOUGHT at plus 236

· Copper - 3.4900

· Crude oil (NYMEX) $84.96

· Brent Crude $97.80

· Silver (COMEX) 27.612

· Euro - 1.2268

· US Dollar Index - 81.753

· The Treasury 10-year yield 1.66%

· The 30-year Treasury is at 2.76%

· VIX - 17.08

· CBOE Put / Call Volume Ratio - 0.89

· 3-month $ LIBOR at 0.468

· Natural Gas (Globex) 2.824

· Gold (COMEX) $1604.2

· Aussie Dollar - 1.0169

· Japanese Yen 12535

· Swiss Franc - 1.0561

· Canadian Dollar - 0.9816

* This week's Bullish Investor Sentiment.

Certainly, sentiment is remains terrible but just off the recent new cycle lows.

(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 rose a few ticks to 28.7 from 32.9% the prior week. One month ago it was 27.5%. The lows of the cycle were ticked 7-weeks ago at 23.6%.

· The Market Vane (Market Letter Survey) down ticked to 52% % from 55% the prior week.

· Consensus Index BULLISH sentiment fell to 54%from 57% the prior week.

· The AAII Investor Survey of BEARISHNESS increased to 44.4% from 35.9 % the prior week. Six-weeks ago it was 46%. On August 4th 2011 it posted cycle highs of 49.9% in Bearishness.

· The Citigroup "Panic / Euphoria" Model fell to 0.28 in the Panic mode from its cycle lows last week of minus 0.31.

The BARRON's Confidence Index posted a 67.16. The previous week it was 67.6. Just over four-months ago the index posted cycle lows of 66.9. One-year ago it was 78.8.

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 Index is the High-grade bond index divided by intermediate-grade index. A decline in latter vs. former - generally indicates rising confidence, pointing to higher stocks.

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