Thoughts on Bonds, SPX and PMs

1. I am bullish for the month of March. Nothing has been taking this market down. It is being pulled up by 1150 and maybe 1200. TRIN is predicting a bottom. TICK is uncomfortably high -- also shown by the surprising comparative strength in the Russell (which has been a warning signal in the past) and bonds are rising, but for now, I'll give the market the benefit of the doubt. PC ratio is also predicting a bottom and VIX is falling. The Euro refuses to go down. The moon cycle is bearish up to Sunday; today is the most bearish. The moon cycle, bonds, and the TICK are the only bearish indicators, if you can call the TICK bearish. Together, all this paints a bullish picture.

2. Is PMs also a great trade right now? I believe so. Gold wants to hold 1087, which is the 50% retrace of it's prior up wave. (I am already in this trade and will maybe buy SLW calls today.) However, I am as yet not sure if this is a ST or long-term trade. See point 4.

3. EW wise (and in the LT, I am an EW follower), in equities, this is either Wave 2 down or Wave 5 up. From the way we bounced off of 1040 ES, it does appear to be Wave 5 up, in which case my target is at least 1200 and possibly higher. This is what I am trading. Support from this comes also from the recent weakness in the dollar, and the strength in the Euro of all things. Against all predictions, the Euro is rising!

4. In the ST am unsure about the EURUSD. It seems to be making a base, but my main scenario is that this is Wave 4 up: 1.36 should be bought and 1.38 should be sold. Will this correspond with 1130 on the SPX? Will 1130 be sold? That's where the descending, LT trend line may meet the SPX in 4-5 days. I don't know, but for now, I am playing for 1200 SPX and 1.38 EURO. I am long Gold, and if SPX makes it to 1200, Gold will go to 1250, at least. For now, this is what I am targeting with the longer-term account.

5. Bonds and PMs (mid-term- 1 year out; in detail):

The situation for bonds and gold depends upon the same factors: growth and inflation.

The ST picture -- as I see it in my short-term indicators -- does not agree with the MT (1 year) picture as I see it fundamentally.

While there is massive supply of US bonds to fund the deficit, US banks are buying all those US government bonds with the money that the Fed is giving them. So, although the Fed is giving banks tons of money, banks are just turning around and buying government bonds, instead of loaning out the money. John Mauldin (http://www.frontlinethoughts.com/gateway.asp) claims that this is partly because there is no demand for funds, and partly because the banks need to fix their balance sheets. Demand for funds goes down in any recession, and so monetarists (the Greenspan-Bernanke crowd) flood the market. However, this time, I think the monetarists may fail. The massive contraction in credit may overwhelm their efforts to inflate. At least in the medium-term (Q3, Q4 this year and perhaps Q12011), I think credit will contract. In the longer-term, demand from the emerging world may kick in.

Also, the supply of loanable funds (in Britain and the US) will be constricted. Foreclosures are still increasing at a very rapid pace and banks are losing on their loan balances and expect to lose more on CRE. So as long as foreclosures keep increasing (which they will for the next 6-8 months, until there are better programs to stop them), banks will keep buying bonds and not lending.

This makes sense, and this is bearish for rates and equities and bullish for bonds. It means that the economy is not going to be growing very soon because a) there is no real demand for funds and b) there is no supply of funds.

Without consumer spending, there will be no real recovery. Corporate earnings will stagnate.

However, this buying of government debt by banks helps too; it does fix bank balance sheets, and it keeps interest rates low, which does promote economic health in the longer run. So, in the long-term, four years from now, when Obama is running for re-election, I think we will be in a better place.

When the economy starts to improve, the Fed will have to do a humongous mop up job. This may not be possible and if it isn't (and I don't see it being possible with some shocks) there will be serious opportunities in Gold and rates. Until then, I think bonds will continue to be bought (to some extent, perhaps staying in a declining channel) and equities will either hover in a range (say, 1050 to 1150) or fall (to 950 or so). (I believe that there is a strong volume-based floor under 950 SPX and another one under 900). This is my fundamental scenario.

But, as mentioned earlier, in the ST, there is a disconnect with all this:

The situation in Europe is bad, and the Euro failing creates strength in the dollar, which is bearish for risky assets and gold. Then why is the dollar struggling at these levels, and why has the Euro been rising? Why is the VIX so low and falling? If it barks like a dog and acts like a dog, then maybe, it is a dog.

6. Onto the LT

Because I don't think the mop up job will be easy, in the LR, I am bullish Gold and very bearish bonds.

Time frame and Outlook:

Bullish ES (up to 1200 at least) and Gold (1250?), perhaps up to May 1, bearish on both in the summer up to August (ES 900-950 and Gold 950-1000) . Bearish bonds starting August.

Trade Plan: Long PMs until late April; short the Russell in early May.

ST Indicators (In Progress)

This is a two-year daily line chart of the Russell. The S&P is super-imposed in green. Notice that when the gap between the Russell and the S&P widens, there is often trouble ahead. I interpret the Russell as a breath indicator, much like the A&D line.

http://tinyurl.com/ydsjzoe

I have back tested this for the past ten years (studying charts 2 years at a time) and it is fairly reliable. The two indices are joined at the hip in the strongest bull markets, such as from 2003 to 2005. They deviate at tops, one or the other is ahead, and in a majority of cases the Russell is ahead by a wide margin.

In the VST (1-2 days), I am bullish because of the oversold TRIN and because of other indicators. (See incomplete post below.) However, I am not sure about the next month. Also, 2/28 (this Sunday) is the next full moon date. Be careful.

5 DMA MSEMX:SPX - bearish -1/1

5 DMA CBOE PC Ratio - bullish +2/2

10 DMA CBOE PC Ratio - bullish +2/2

5 DMA TNX - bullish, but barely. went through 5 DMA, at 20 DMA. +1/2

5DMA QQQQ:SPX - down; bearish -1

5DMA MA TRINQ - very bullish + 2

5 DMA TRIN - bullish

5 DMA USD index - bullish (bearish for equities) but toppy. -1

5 DMA SPX - flat ??

5 DMA GLD -?? bearish?

5 DMA USO bullish

NYMO - not overbought any more

5 DMA NYHL - bullish +2

TICK bullish +1

IWM/SPX - dangerous? (See August 2008 top)

Score:

CONCLUSION: VST Bullish. Then bearish?

Consumer Confidence - How Important is It?

Very.

The 46 reading is the lowest since April 2009 and breaks -- by a 9 point margin -- the consensus expectations (of a 55 reading). January retail sales were also lower than expected, and at a lower pace than even last January.

Of course a lot of this could be attributed to the weather this year, but still. At the very least, this is a big red flag.

February numbers may be similar. The weather did not improve till the second half of the month.

Business profits, inventory rebuilds and exports can go only so far.

I will cover my EURUSD long at around 1.36 and wait and see.

______________

5 DMA MSEMX:SPX - bearish -1/1

5 DMA CBOE PC Ratio - bullish +2/2

10 DMA CBOE PC Ratio - bullish +2/2

5 DMA TNX - bullish, but barely. went through 5 DMA, at 20 DMA. +1/2

5DMA QQQQ:SPX - down; bearish -1

5DMA MA TRINQ - very bullish + 2

5 DMA TRIN - bullish

5 DMA USD index - bullish (bearish for equities) but toppy. -1

5 DMA SPX

5 DMA GLD -?? bearish?

5 DMA SLV

5 DMA USO bullish

IWM/SPX - dangerously bullish?

VST Bullish. Then bearish?

The Serenity Prayer

God, grant me the serenity
To accept the things I cannot change,
Courage to change the things I can,
and wisdom to know the difference.

Buying AGQ, BGU (Post in Progress)

Will try to buy these for a 2 week to 2 month trade, on a pullback on Monday or Tuesday, around 1100 on the ES. Conditional stop around 1090 on the ES. Target is ES 1200.

Reasons:

1. 13 DMA of PC ratio.

2. NYMO positive divergence on 1040 low was very similar to that on the March and July bottoms.

3. Bears getting squeezed.

4. This is Wave 3 of 5. It should last 2 weeks and take us to 1160 or so. Inexorable rise.

Will Try to Go Long AGQ

If I can get AGQ around 48, I will buy it for my retirement account. I have a limit order in at 48.1. If I am around and I see market conditions worsen, I will move down the buy price. Loose stop is at 44.50, by which I mean that if it breaks 45, I will exit at favorable prices.

Short-term

Short EURUSD. EURUSD should fall to 1.365 at least.

Short GBPUSD.

PC ratio on U.S. equities suggests that we have had a major I.T. bottom, but also that we are now at a ST top. This suggests that equities (ES) will fall to a minimum of 1075. ES 1040 to 1098 = 58points. 57* 0.5 = 29. 50% retrace is about 1069.

The dollar may have topped. I will be careful shorting the Euro.

More on Debt and on LT Investing

(Post in Progress)

Federal Reserve Governor warns that Fiscal problems make it more likely that Fed will have to keep interest rates low, even in the face of inflation.

http://finance.yahoo.com/news/Feds-Hoenig-Fiscal-strains-rb-2209393300.html;_ylt=AggbtDxrTUc89IyhK.nltEu7YWsA;_ylu=X3oDMTE1czFlNGNiBHBvcwM5BHNlYwN0b3BTdG9yaWVzBHNsawNmZWRzaG9lbmlnZmk-?x=0&sec=topStories&pos=7&asset=&ccode=

Foreigners cutting back on buying US Debt; Rates may rise:

http://finance.yahoo.com/news/Foreigners-cut-Treasury-apf-1402391707.html?x=0&sec=topStories&pos=6&asset=&ccode=

By the fiscal problems Hoenig speaks of (in the first article above), he means that the government will have to keep borrowing and running deficits. If the government keeps borrowing, borrowing rates should climb, stifling the recovery. To combat these, the Fed will continue to keep at least the prime rate low, so as to promote lending. The Fed will have to stop printing and buying mortgages, but it will keep rates low. This means that commodities have to rise, because they're the only safe bet. China and India too need commodities. The dollar is doomed, at least against the Aussie and the Loonie, for the next 3-5 years.

A Few Options for IRA/Long-term Account:

1. Short US Debt

a. Long TBT (Inverse TLT - Short US Debt). The problem with TBT is that it is ideal for short-term moves. Because of daily compounding, it may not work well in the long-term.

b. Long PST (2X ultra short 7-10 year treasury.)

or Long TYO 3 X Treasuries. This has horrible returns, for some reason. Much worse than TBT.

c. TLT Leap Puts. Advantage: Good leverage. Problem: Not all IRAs allow Options.

2. Long PMs

Double long Gold ETF: DGP or UGL

Double Commodity long: DYY

Double long Silver ETF: AGQ

3. Long the Aussie Dollar. Via futures. Not for everyone.

4. EDC - 3 X Emerging Markets

U.S. Debt

The long-term outlook for U.S. Debt is not favorable. The fiscal situation is terrible and Congress and the President lack the will to make the necessary budget cuts.

The terrible fiscal situation:

For the last 30 years, Social Security has been used to fund the government. Now Social Security and Medicare are already spending more than they're taking in. The government is at an impasse, with the Republicans refusing to allow this country to move forward, refusing to allow legislation on Budget cuts or a bipartisan budget panel. Fiscal balance looks impossible. Each year we are adding to the debt -- tax revenues are declining and funding programs are increasing. There is a limit to how long people will continue to buy US Debt.

Here are a few good articles on the problem:

http://finance.yahoo.com/news/US-debt-will-keep-growing-apf-219502322.html?x=0&sec=topStories&pos=5&asset=&ccode=

(Why US Debt will keep growing.)

http://www.financialpost.com/story.html?id=2538944

(El-Erian says that German debt is a much better buy, even as a safe haven.)

http://www.theglobeandmail.com/report-on-business/commentary/euro-zone-woes-foreshadow-threat-of-us-debt/article1460923/

(Quotes Roubini warning that focus will gradually shift from Greek and European Debt to US Debt, examines GS economist's analysis of primary debt, concludes that US Debt is unsustainable and that the US lacks the political will to tackle it.)

So the conclusion would be to buy leaps against U.S. Debt at all opportunities. What's interesting is that TLT failed to rise appreciably even when the stock market fell 10% recently. What would it take to get TLT to rise appreciably?

As far as currencies are concerned, the the Aussie, the Loonie, the Indian Rupee and the Chinese Yuan have better long-term fundamentals than the US dollar.

ST Outlook Update

1. U.S. Equities should rise to ES 1090 - 1095 or so and possibly to 1105. Watch the Qs; 5 MA on the daily and 2-hourly charts should give you advance warning about ES.

2. The EURUSD should rise to 13800 or so.

3. After that, I'm not sure about equities, but I will short the EURUSD. The European Union's problems somewhat serious. The problem is the cap on Debt to GDP is set at 3%, impossible for many member states. Overall, the idea of the Union itself is impossible, IMHO.

I am long the EURUSD from 1.3606 for a bounce. Stop is tight, at 1.356, because as of right now, this is a counter-trend trade. I am targeting 1.3700, but this may rise to 1.3850 to overcome ST oversold conditions. USD has a double top overhead resistance at 80.835. Trend change? Possible, but unlikely. I still think USD will rise to at least $82, which also jives with my feeling that we will see more downside on the ES. We should see an ES 1095 top, possibly on Monday. This fits with a moon cycle top on 2/14. So, in short, bounce in equities stalls at 1095 on the ES. Dollar stalls around $ 80.1 or $80.2.

After this bounce, USD should go up to 82 and the EUR/USD to a minimum of 1.3330 and possibly to 1.310 or so. Equities? Well, possible bottom around 1020 or 1030. I will look to enter long-term U.S. government bond shorts (leaps) if this happens (i.e. when the ES approaches 1020.

My Post on Carl Futia's Blog

Christian,
Almost nothing on this site talks about macro analysis. On one occasion, about six months ago, I remember Carl posting about how rising bond rates were bullish. While all the bears saw the worst in rising rates, Carl was correct. All the rest of Carl's posts are based upon his work with Lindsay's cycles, his own box theory, his contrarian analysis of popular media, and his analysis of daily movements in the indices. From what I can see, he is almost a pure technician -- in the discounting of fundamental macro or micro (company balance sheet) analysis.

Carl has posted about a LT bear market in Bonds, which implies that he thinks U.S. debt should be sold. I am selling U.S. debt. He also keeps iterating that interest rates are going up. (Look at the daily guesstimates.)

While I agree with Carl's position on debt, interest rates and equities, I don't think he and I see eye to eye on PMs.

Medium-term Update

Two possibilities:

1. USD up move is a three wave correction which is now over or will be over soon. This is bullish for equities. This means that 1041 was the low, OR that the low will come soon -- maybe around 1020.

Or

2. The EURUSD is in the midst of a 5-wave downturn, which will extend much further. This means that equities (ES) should correct to a minimum of 950.

Considerations:

1. Greek Bailout: This should mean a spike in the EURO which could be bought and then shorted, if not for the LT, at least for the ST. Buy 1.37. Sell 1.38 or so. Lots of resistance at 1.38. Max upside for now should be 1.385.

2. TNX: Ten-year rates are rising, have to rise, will rise. 200 MA is rising. This is a bull-market. This means that equities are also in a bull market, and thus, that EUR-USD is probably in a bull-market. Be careful shorting the EURUSD.

3. EUR- USD has almost had it's oversold bounce. We're not going up much more without a correction down, perhaps to 1.3300 (1.318 of previous wave), which may be the bottom. If this happens, equities have to move down to 1020 or so.

4. Best guess: EUR/USD moves up to 138 or so, then down to 133 or so, which may be the end of the down move.

5. AAPL is not looking too healthy right now and could use a trip down to $170 or so. GOOG would be a terrific buy at $500. BKX is looking like it wants to go down.

6. However, look also at PMs. SLV may be about to bottom. If so, the USD may have already topped. If the USD has topped, then we may have seen the bottom in the EUR/USD.

7. Waning moon = bullish for equities. Lunar cycle implies top around 2/14 (Monday?) bottom around 2/28.

8. At the moment, the rate hike picture looks most bullish in the U.S. This points to further strengthening in the dollar, which implies weakness in the EUR/USD. This does not necessarily imply weakness in equities, in the long run. Remember that equities often go up with rates. As growth projections rise, rates and equities rise. If growth projections in the U.S. are higher than those elsewhere, then the dollar and equities can both rise. It happened in early 2010, from 1980 to 1982 and 1987 to 1989 and it can happen again. This would be bearish for PMs.

The picture should become clearer in the next couple of days. For now, assume that the ES will bottom either at 1020 or 950 (or both) and that EUR/USD will bottom at either 133 or 130.3.

Dollar and Bonds

Question for the Equity bears:

The recent meteoric rise in the dollar has NOT been met with a rise in bonds. Look at TLT, for instance. If funds are not going into bonds, as the dollar continues to rise, then where are funds going, and where will they go?

You may answer that funds are not going into US bonds because of (a) the massive (and increasing) US debt, and little understanding of how it will be paid, and (b) very low interest rates.

But, if there was a crisis such as in March 2009, funds would still go into bonds. People don't just put money into savings accounts or under the mattress. (Look at TLT charts.)

Either funds are not going into bonds because equities are still considered a better bet (hence crisis is not considered very extreme) OR funds have not yet gone into bonds, but will do so. Looking at the TLT chart, I don't find the latter a compelling argument. Also, given the TNX chart (bond rates), I find this argument very hard to believe. In fact, it appears to me that TNX has completed a 50% retrace of the past five-wave (December 2009) bull move in a three wave bear move. This would be very bullish for equities. Also look at the SOX and the QQQQ charts.

As the U.S. sovereign debt picture is not that much better than the European zone's, I am a long-term (1-2 year) Precious Metals, TNX, and SOX bull. SOX because SOX will fine in the LR.

EUR USD contd.

Three clear waves:

15145 to 141.9 -- 950 pips

145.7 to 135.8 -- 1000 pips (not over yet?)

Wave 1 *1.318

950 *1.318 = 1252.1

There may be at least 250 more pips to the downside on the EURUSD, before Wave 3 is done. This means a target of 133.3

Wave 1*1.5

950*1.5 = 1425. This means 425 more pips on in Wave 3. This means a target of 131.8.

However, Wave 3 of 3 may be over - evidenced by three things: 1) we have touched the lower trend line of the declining EURUSD channel and 2) we broke through the 38.2% retrace levels on the dollar. 3) Daily RSI is so oversold and has been so oversold for so long.

Or it may not. We may yet get a crash in the next week.

But I am almost certain that we will have some sort of a bounce on Monday.

If Wave 3 or 3 is over, it makes sense that Wave 5 of 3 will take us down to 133.3 or 131.8.

this move will pause (may pause) at the 50% retrace of the earlier dollar fall at $82 on the dollar.

However, it is NOT necessary that weakness in the Euro will mean terrible weakness in U.S. equities. Risk trends are turning, and should continue to turn. US Equities should, in my opinion, at some point, return to 950 or even lower. But the public didn't get a chance to get invested in the March rally. And the FXI has completed 5 waves down. And there is record bearishness in the Euro.

(Just like the $, the FXI should make at least 50% retrace of the March to November rally. This may come with the dollar.)

BTW, at least for the last 9 months or so, the FXI has almost a perfect inverse correlation with the US $. You could use it as a proxy for the dollar, if you don't want to use currency pairs.

Conclusion: I am almost certain that we will get a bounce in equities and the Euro of sorts on Monday. I am just as sure that the Euro will, after a bounce, proceed lower.

Finally, I am just as sure that we are now in a longer-term bull. Watch the SEMIs and the NAZ.

Conclusions:

1. U.S. equities are a buy here for the intermediate (or medium) term, with a certain percent of your overall holdings.

2. The EURO has not bottomed.

3. U.S. equities may have had an intermediate (or medium) term bottom last Friday.

Medium-term

Sovereign debt is going to cause problems for the Euro and pound. The Dollar will continue to be a safe haven currency, and that will create headwinds for the stock market and PMs.

The Eurozone has severe problems -- in Greece, Ireland, and now even in Portugal and Spain. These aren't going away.

Eventually, the threat of problems with U.S. debt will catch up, should catch up, and cause problems for the U.S. dollar as well, but for now, dollar is the currency of reserve.

Long-term the dollar is shot. But for the next month or three, the dollar should rise to at least $82 (50% retrace of prior bear move). US equities could double bottom around here, or but should be weak until the dollar tops. Gold should be even weaker.

In general, I am more bullish (or less bearish) on US equities than I am on the Euro. I am more bearish on the Euro. This is mostly chart analysis -- the U.S. equities charts look SO much stronger than FXI, Euro or even GBP charts. And in the U.S. it looks as if there is a possibility of this being a three wave (ABC) correction, rather than a five wave correction. Friday's equity bounce and the hammer candlestick on the daily chart are encouraging and much stronger than the Euro.

However the Euro is VERY oversold. Typical of Wave threes. New Post on the EURUSD.

Stops; Fast Down Moves

Wow. ES down to 1030-1040 range happened much earlier than mid March.

And 1086 should NOT have been bought, at least not without tight stops.

Just goes to show how important stops are.

Also shows how down moves are much faster than up moves. We were back at levels first reached in early September.

2/4 Short-term Outlook

1. ES down to 1086 or so. 1086 should be bought. (2/4)

2. ES up to 1115- 1124 range. (Monday, 2/8)

3. ES down to 1030-1040 range (mid-late March).

2/2 - the upside may be over for now

We will make a lower low, by the end of this week. MACD on the 1.5 hour and 2 hour charts should make a higher low. PMs should make a higher low.

By the end of this week:

Gold down to 1080 again. Range for 2/2: $1090 - 1108.

SLV (YI) down to 16.3.

SPX should go down to 1040 or so. ES range for 2/2: 1075 to 1090.

I will take partial profits on SLV calls on 2/2. Have already sold Qs.