Market Update: Up Trend Broken

Due to China raising rates and mortgage repurchase concerns about the banks, the stock markets today broke the strong up trends established since the end of August. Emerging market ETF EEM shows the weakest trend as it stayed below the up channel the whole day. SPY closed below the trend line while IWM closed above trend line despite of intraday violation. The next few days will determine whether the down trend has started. Unless the markets make new highs this week, most likely the top is in.

Short Positions Stopped Out

Wait for the next opportunity. As long as markets exist, there are always opportunities. The important thing is to stay alive. Markets can stay irrational longer than you can stay solvent.

Why this is not a typical post-war recession

What is so unique about this recession? High unemployment and de-leveraging of the consumers. The US unemployment rate has been this high only once in the early 80's. And consumer credit has never contracted as much as this time. This isn't technical analysis. But during the past 60 years, this is the only time consumer credit has contracted to a level below its 50 month moving average.

Unemployment Rate

Total Consumer Credit

Market Update

Markets in general are in neutral mode with a slight edge to the upside. SPY, IWM, and EEM are all sitting right at the channel's upper trend line. SPY and IWM are also right below the 200D moving average. A break of it and last week's high signals more upside and test of early August's highs. On the other hand, if the market fails to break out in the next couple of days, we will come back to the trading range.

Short Signal Triggered

After falling out of the steep up trend channel since 08/31 and failing to make new highs after two days, a short term swing short signal is triggered. Is the market overwhelmingly bearish? No. But I'd say that odds of further decline from here is 50/50 or better. The reason I like to short here is because of the high risk/reward ratio of the trade. Stop loss should be set to 9/3 highs. Therefore, as long as you control your risk and cut loss when you are proven wrong, potential loss is very limited.

Market Update

World markets have rallied sharply in the last week on the back of not-so-negative economic data in the US. With such strong moves within such a short time, markets are short term overbought and are hitting important resistance.

SPY is hitting the upper range of the trend line since April. Plus, it's sitting at the psychologically important 110(1100 for S&P) level. It has failed to successfully break 110 twice in August. For aggressive swing traders, a short position can be entered on Tuesday if Friday's high isn't breached.

Small cap IWM is currently above the trend line, barely. If it doesn't fall back into the range in the next two days, that's a very positive sign.

Like SPY, emerging market EEM is also hitting the upper range of the trend line. It's been trading inside a symmetrical triangle for the past few months. As the two triangle lines converge, EEM will break out one way or the other. For prudent traders, there is no need to jump in before the direction becomes clear. You want to make only high probability trades when the trend is clear.

Lastly, the Japanese yen has been in a strong up trend(the chart is yen/usd) since May. But its speed of appreciation has slowed lately. Let's see if a change of trend is coming.

Can 1040 hold?

Looks like we will test 1040 again today. Can it hold? The more times we test it, the more likely it will be broken. Just the law of math. The market is running out of space to continue this directionless range bounce pattern. It will break out one way or the other. Soon.

Quick Market Update

The S&P 500 tested 1040 on Friday, successfully held it and had a huge reversal day. Short term bottom is likely in. Swing short positions should be covered on Friday. How high will this bounce go? I have no idea. First task is to break the current down trend. Once that's done, the market will possibly re-test the all so important 1100 again.

European Sovereign CDS market deteriorating

The European sovereign CDS market is quietly ticking up again. Greece is approaching the level reached before ECB's rescue. Ireland fared even worse, already breaking the levels reached in May and making new highs every day. At the same time, Portugal, Spain, and Italy are all moving up and climbing towards record levels.

Market Update

The S&P 500 hit the important support level of 1040 yesterday and bounced back. However, today's action is a little discouraging for the bulls as the market opened up but ended in red. Dow closed below 10000. All major market segments are still stuck in down trend. Small cap IWM touched the upper range this morning but did not break out.

Tomorrow will be an important day as the Q2 GDP revision comes out. If the market can close higher, most likely a short term bottom is in. On the other hand, if 1040 is broken, all bets are off. We will see 1000 soon.

Below are 60 minute bar charts of SPY, IWM, and EEM.

Charles Nenner: Dow could fall to 5000

Charles Nenner's interview on CNBC today:

Market Update

Market has been very weak lately. Bulls had a brief rebound from Friday afternoon to the first 20 minutes of Monday morning but quickly gave back most of the gains. At this stage, any further down move will violate major support of the market.

The spdr SPY is in a falling wedge. Until the upper trend line is broken, it continues to be in a down trend. Small cap IWM is at important support of 60. A break to the downside is extremely bearish. Emerging market EEM is sitting on multiple moving averages. Another 1% drop will break all these MAs to the downside.

If my hypothesis about tomorrow's existing home sales turns out to be right, we could see a very bad day and breakdown of the market in all segments.

What will existing home sales be for July?

Tomorrow morning, existing home sales for July will be released. Current estimate is 4.68MM, down from 5.37MM in June and 5.66MM in May. On the surface it seems conservative enough that it is 13% lower than the month before. But if the last two months' pending home sales are any indication, the actual existing home sales could be a lot worse than the current estimate. The majority of pending home sales become existing homes sales one or two months later and therefore can be used to predict actual home sales activity.

 Let's take a look at pending home sales in the last few months. April's pending home sales index is 110.9. In May and June, the index dropped to 77.7 and 75.7. A drop of 30%!

Therefore, if existing home sales drop 30% from last month's 5.37MM, it will come in around 3.75MM, almost 1MM below the consensus of 4.68MM! Even if the 30% drop is measured from the 5.66MM in May, it still implies a dismal 3.96MM, way below the consensus.

Swing Trade Idea: Long USO

USO is the ETF for crude oil. Below is its 60 minute chart. It has been in a down trend(see the solid white line) since Aug. 6th and is down about 10% from its recent peak. But its speed of decline is slowing. In fact, today's low is higher than yesterday's low. And it is showing signs of stabilization. In technical analysis terms, it's made a higher low. If it breaks the downward trend line to the upside tomorrow, a swing long position can be established. A stop loss can be set at 33 or slightly lower to leave a little buffer. Given the tight stop limit, the risk reward is worth a trade. Note, if USO makes a new low before it breaks out, this trade is no longer valid. The theme is to go long only after a higher low is made. Again, this is just a swing trade recommendation, not a long term investment recommendation.

 Update: USO made a lower low pre-market. This trade is off. Wait for the trend to turn. Patience pays.

Initial jobless claims climb to 500k

Initial jobless claims rose to 500k in the week ended August 14th. It's the highest level since November. It has broken the 420k - 490k range of this year and renewed the up trend.

Mortgage Purchase Activity Declines

Mortgage purchase activities continue to be stuck at dismal levels, declining from last month. The index has plummeted since the end of the home buyer tax credit.

Yesterday's housing starts and building permits show the same trend. They are approaching the lows reached in early 2009.

Some bulls are claiming that housing market is stabilizing. Well, if being stuck at historical low levels qualifies as stabilizing, then they are right.

Market Update

It was a good day in the market. Equities are up more than 1% across the board. Has that changed the trend? Not really. As long as the July high is not breached, the market remains in down trend. In fact, the market action in the last hour is kind of bearish, giving back half of the day's gain. Looking at the 3 market areas, emerging market EEM remains the most bullish one as it is now standing above all major moving averages. Small cap IWM remains the weakest as it is below all moving averages.

The startling truth about the housing market

During the session, Norris-who is considered to be a top authority on the Southern California real estate market-shared some intriguing insights. He believes the region is in an artificial market and is concerned about the shadow inventory that could flood the market, forcing prices even lower. However, this isn’t the shadow inventory of bank-owned homes you may have heard about; he refers to all the houses that may yet go into foreclosure. The problem will vary by region, but referring to Riverside County in Southern California, Norris presented some pretty alarming statistics:

• 23% of prime borrowers are not making payments
• 47% of non-prime borrowers are not making payments
• 90% of properties are upside down on value-to-loan (60% owe more than
150% of value)

Many borrowers haven’t made a payment in more than two years and have yet to receive a Notice of Default.


Notes from Appraisal Institute’s 16th Annual Summer Conference

Take a look at the article above. Some of the statistics are frightening. I hope it convinces you that housing has NOT bottomed and in fact has a long way to go.

Why is this not a typical postwar recession?

Most mainstream economists still believe and claim this is a typical postwar recession.

No, it is not. It is the end of an era. And era of binge drinking and gigantic ponzi spending by Americans and western countries in general. The chart below illustrates best what has happened in the past 30 years. The total debt to GDP ratio of US has exploded from 150% to 360% since 1980. And it has been falling at a sharp rate since the crisis began. Never has it happened before since the world war II. To think the economy is experiencing and will continue to experience a V-shaped recovery is to believe the ponzi scheme to borrowing more money from foreigners to pay off existing liabilities can continue infinitely. Unfortunately, the US consumers' balance sheets have been badly damaged and they are trying to save more for rainy days. The US banks' balance sheets have been badly damaged and they are tightening credit to avoid losing more money on bad loans. It's easier said than done to turn back the clock and ask people and banks to spend and lend like nothings happened. The super leveraging cycle is over. And super de-leveraging cycle has just begun. And it is going to take a long time for it to complete. 

Sell Signal triggered

Market broke its up trend across the board. If you are a swing trader, a sell signal is triggered today. Hopefully you got in early in the morning and have made some profits by the close. Stop loss should be set to the recent high in late July, early August. small cap IWM is still the weakest of all. There is no support in sight until 60, another 3% lower from the close.

One thing worth mentioning is that the current market condition is very difficult to trade because of big gap ups or gap downs like today. Therefore, you should be more cautious than normal when trading. If you want to be conservative, you can lower the stop loss price of your shorts to be 08/10's low. If the market rallies above that level, at least cut half of your short positions.

Futures are clearly falling off the bed

and breaking recent uptrend channels across the board. If there is any decent bounce intraday, it would be a good chance to go short. I don't like to short right after a big gap down.

Market Trading Ranges

Emerging market ETF EEM is the strongest of all markets. It's still in an up channel although momentum is fading lately. If it breaks 08/02's high of 42.59 this week, there is more upside.

 

SPY is forming a rising wedge as the trading range is getting narrower by the day. The 06/21 high of 113.20 proves to be strong resistance so far.

Smaller cap ETF IWM is the weakest lately, stuck within a symmetrical triangle and still way below its 06/21 high and even the high reached on 07/27. As the triangle lines are converging, it's going to break out one way or the other. Also, IWM is the latest victim of the ominous death cross of 50MA crossing 200MA to the downside.

Has the US housing market bottomed?

Below are charts of the delinquency rate, new home sales, and pending home sales(pending home sales largely reflect existing home sales in the near future). You be the judge.

 Delinquency Rate

New Home Sales

     Pending Home Sales