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The Ten Year Anniversary of NASDAQ 5,000

|Includes: DIA, QQQ, iShares 20+ Year Treasury Bond ETF (TLT)
The US Treasury auctions $21 billion in 10-Year Notes. The NASDAQ Parabolic Bubble Popped in March 2000. How much more upside for the Dow Industrial Average? Housing and Financials are the leaders so far in 2010, which is illogical based upon weak home sales data and the stresses I observed in the Q4 2009 FDIC Quarterly Banking Profile.
 
The 3-Year auction was awarded at 1.437 just above my semiannual pivot at 1.432. The bid to cover was solid at 3.13 with 52% awarded to Indirect Bidders, which include Central Banks.
 
Today’s auction is $21 billion in 10-Year Notes with my semiannual pivot as a resistance at 3.675. This auction could have a tougher time than Tuesday’s 3-Year auction.
 
Chart Courtesy of Thomson / Reuters
 
On Thursday the US Treasury auctions $13 billion re-opened 30-Year bonds
 
Chart Courtesy of Thomson / Reuters
 
The 30-Year is an important auction with semiannual support at 4.823 and semiannual resistance at 4.543. A breakout to higher yields is a drag on equity valuations, which in one year have gone from extreme undervalued readings to having nine of eleven sectors overvalued.
 
My Market Timing Hits and Misses since the Turn of the Century
 
Ten years ago on March 9, 2000 I told investors that the NASDAQ would not sustain gains above 5,000 and recommended reducing NASDAQ exposure by 50%.
 
In the second half of 2002 and in March 2003 on the day our troops began the march to Baghdad I was what I called the "Lonely Bull".
 
Moving forward to March 2007 I predicted Recession in 2008 / 2009 and for a Bear Market to be confirmed by the end of 2007. My call in October 2007 was that the Dow would not sustain gains above 14,000 and that the next 2,000 points were down, not up.
 
March 2009 I predicted a 40% to 50% rally off the low telling subscribers to cover shorts and go long.
 
I predicted a sinking market in the summer of 2009, so I missed the 20% rally from that point. The ValuTrader model portfolio gained 9.8% from July 13 to the end of 2009. The model portfolio was balanced until heavily weighed to the short side in October 2009.
 
I shifted to the long side on February 8, 2010 with the Dow near its year to date low of 9,835. The ValuTrader model portfolio shifted from two longs and eighteen shorts to fourteen longs and six shorts.
 
At Tuesday's open I and shifting to neutral with the model portfolio at 12 longs and 12 shorts. While the Dow has may have another 10% to the upside, the downside risk is 20%. When the upside is less than 10% I tell investors to use strength to reduce longs and increase shorts. Year to date the model portfolio is up 6.0%.
 
The Popping of the NASDAQ Bubble
 
 
Chart Courtesy of Thomson / Reuters
 
Stocks Today Versus One Year Ago
 
Valuations March 9, 2009 versus March 9, 2010 – All eleven sectors were significantly undervalued a year ago with Consumer Durables by 32% at the low end to Healthcare by 44.9% at the high end. Today nine of eleven sectors are overvalued. The three most expensive sectors are Consumer Durables at 14.5% overvalued, Basic Industries at 13.0% overvalued and Energy 10.2% overvalued.
 
 
Technicals, March 9, 2009 – Stocks were extremely oversold and given the cheap fundamentals I looked at the monthly chart for the Dow at the 6,470 low and found that the up trend since the Crash of 1987 low had held. Then I drew the Fibonacci Retracement from that low to the October 2007 high of 14,198 and the 61.8% retracement dissected that up trend at the March 9th low.
 
Chart Courtesy of Thomson / Reuters
 
Technicals, March 9, 2010 – The weekly chart for the Dow is positive and I liked the market off the February 8th low of 9,835. As long as weekly closes are above my annual pivot at 10,379 on the Dow Industrial Average the upside is to my annual and semiannual resistances at 11,235 and 11,442. A monthly close below 10,379 is my signal that the high end of the trading range is set.
 
My forecast – The Dow can become 10% higher on the year, but the next 20% is down from the 2009 close of 10,428. Dow down 20% is 8,342. In round numbers my call is “Dow 8,500 before Dow 11,500”.
 
Housing and Financials are the leaders so far in 2010, which is illogical based upon weak home sales data and the stresses I observed in the Q4 2009 FDIC Quarterly Banking Profile.
 
Year to date 2010, the Housing Sector Index (HGX) is up 7.1% with the America’s Community Bankers Index (ABAQ) up 8.6% and the Regional Bankers Index (BKX) up 14.0%.
 
Reviewing the Ignore Regulatory Guidelines
 
Back in the fall of 2005, the Federal Reserve, US Treasury and the Federal Deposit Insurance Corporation (FDIC) realized that community banks were loaning funds to the housing and real estate markets at a pace above what these regulators thought as prudent. Guidelines were set and monitored via quarterly filings to the FDIC. These guidelines were formalized by the end of 2006. They included the following stipulations:
  • Overexposure to construction and development loans: The first guideline states that if loans for construction, land development, and other land are 100% or more of total risk capital, the institution is considered to have loans concentrations above prudent risk levels, and should have heightened risk management practices.   
  • Overexposure to construction and development loans including loans secured by multifamily and commercial properties: If loans for construction, land development, and other land, and loans secured by multifamily and commercial property are 300% or more of total risk capital, the institution would also be considered to have a CRE concentrations above prudent levels, and should employ heightened risk management practices.
 
There are 380 publicly traded banks overexposed the C&D loans, and another 372 overexposed to CRE loans only. That’s 752 publicly traded banks that are candidates for the ValuEngine List of Problem Banks.
 
Looking at all 8,012 FDIC-Insured Financial Institutions we find 1,514 overexposed to C&D loans, and another 1,312 overexposed to CRE loans only. That’s 2,896 banks or 36.1% of the 8,012 at risk of failure.
Looking at loans versus loan commitments, which I call Pipeline even more banks are feeling additional stress. A “normal” or “healthy” pipeline is when 60% of the C&D and CRE loans are outstanding versus a bank’s total commitment to these types of loans. Of the 8,012 FDIC-Insured Financial Institutions only 594 or just 7.4% have a pipeline between 55% and 65%. Most bank failures have a pipeline above 80%, which is a sign of collection problems: 4,172 banks or 52% have this stress characteristic. Of these, 1,406 have a pipeline that’s 100% funded, which is 17.5% of all banks.
That’s today’s Four in Four. Have a great day.
 
Check out the latest Main Street versus Wall Street on Forex TV Live each day at 1:30 PM. The next broadcast is Monday, March 8, 2010.
 
 
Richard Suttmeier
Chief Market Strategist
(800) 381-5576
 
As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I have daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters as well as my most up-to-date analysis of world markets. My newest products include a weekly ETF newsletter as well as the ValuTrader Model Portfolio newsletter. I hope that you will go to www.ValuEngine.com and review some of the sample issues of my research.
 
“I Hold No Positions in the Stocks I Cover.”


Disclosure: No Positions