Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. This
is an article that expresses our personal opinions about comments made
on Television and in Print. It is NOT intended to provide any investment
advice of any type whatsoever. No one should base any investing
decisions or conclusions based on anything written in or inferred from
this article. Investing is a serious matter and all investment decisions
should only be taken after a detailed discussion with your investment
advisor and should be subject to your objectives, suitability
requirements and risk tolerances.
1. Amazing Month – One for the Ages
Thus Spake Jim Cramer on Friday evening. And he did not exaggerate. This month, the Dow is up 12%, the S&P is up 13.6%, the NDX is up 12% and the Bernanke favorite Russell 200o is up 18%. Wow!
Another Jim, sort of a polar opposite of Cramer, said simply (see clip 3 below):
world was coming to an end on October 4th and now every problem has
been solved three weeks later“.
Our own short term belief system tends to rest on positioning of major players. As Rich Volpe of RBS said on Thursday, the market is short equities and long fixed income (see clip 2 below).
2. What’s Next for the Stock Market?
Barton Biggs and Jim Cramer said on Friday that the run to year-end is on. Their belief is that most hedge funds are short or not adequately long. So their thesis is that every dip in the markets will be bought by Hedge Funds in a desperate attempt to make their year in the two months left.
Some technicians are bullish as well. Lawrence McMillan of Option Strategist wrote on Friday in his weekly commentary about the trampling of 1260 and 1272 levels (the second being the 200-day moving average):
- The next higher targets of 1310 and then the yearly highs at 1350-1370 should be within range fairly soon.
But the firm of Uber-Bull, Laszlo Birinyi sounded a warning signal after the huge rally on Thursday:
- Currently, the S&P 500 is 5.15% above the top end of its trading envelope, which is the highest it has been in the past year. We consider anything within 2% of that level extremely overbought.
(chart in the CNBC article about Birinyi Associates)
Bespoke Investment Group tweeted on Thursday that 94% of the S&P 500 stocks are above their 50-day moving averages – the highest ever reading since they began tracking in 2008. The McClellan Oscillator was above 300 after Thursday, an extraordinary overbought level.
We now wait for a discussion about whether this is a healthy overbought condition or an unhealthy one. A note from a market master may be appropriate here – Larry Hite told us and hundreds of other listeners sometime ago that overbought-oversold signals are the weakest and perhaps the most misleading indicators around.
An interesting comment came from Abigail Doolittle of Peak Theories Research on CNBC Fast Money Half Time on Friday.
- there’s something very reminiscent about yesterday to me of May 10, 2010, the day after the original bailout of Greece and there was a 4% move up in the equity markets that day. Then there was a little bit of sideways trading and then a drop down. When I look at the charts right now, I think there’s a strong chance we see consolidation ahead. maybe the S&P 500 moves back down towards its 50-day moving average, a move it’s made typically in the past to consolidate this amazing move up.
The 50-day moving average on the SPY is 118.80, an 8% drop from 128.50 close on Friday. The parallel to May 2010 intrigued us. So we looked it up. Here are the facts:
- On Sunday, May 9, 2010, Europe announced a $1 trillion package that was described as European Shock & Awe. The next day, the Dow leaped vertically 404 points to close at 10785.14, the S&P up 48.85 to close at 1159.73. At the end of that week, the Dow closed at 10380.43, a drop of 405 points, and the S&P closed that week at 1157.44. The following Friday, May 21, 2010, the Dow and S&P closed even lower at 10193 and 1087.69. Two weeks later on June 4, 2010, the Dow and the S&P closed at 9931.97 and 1064.88 resp. for a loss of 8% on both indices from the euphoric close of 10785 & 2259 on Monday, May 10, 2010.
Tom Demark, a well known technician, went a bit further on Bloomberg TV by predicting that the “S&P might trap the bulls” after the next rally. Mr. DeMark relates the current market action to the 1973 market (see clip 5 below).
Mr. DeMark’s comments were echoed on Friday on CNBC by Walter Zimmermann of ICAP, the favorite technician of Maria Bartiromo (see clip 6 below). He compares today’s market to the 2007-2008 stock market. His view:
- if this is a textbook perfect bear market correction, it should peak just overhead somewhere between 1305, 1325. So I think you start layering in put strategies up there, risking new highs…the alternate approach is if you fail to break the May peak and then you break the 1074 low from October, then I think you can sell aggressively because that would confirm that, yes, we’re on this bearish path.
Speaking personally, we see some similarities between October 2011 and October 2007. That was one massive rally in risk assets in October 2007. Then came the Bernanke disappointment in the Fed meeting on October 31, 2007. The stock markets declined by 10% in November 2007. Remember Bernanke delivers a Fed proclamation next Wednesday.
The percentages are with the bulls because the October-December period usually features a stock rally. Except, when Deflation is in the cards. And what works best when Deflation is in the air?
3. US Treasuries & the US Economy
On Thursday, the 30-Year Treasury fell by over 4%, as the S&P rallied by 3.4%, a huge day indeed. The break of 2.30% on the 10-Year Treasury yield prompted Rich Volpe of RBS to predict a move to 2.60% (see clip 2 below).
Frankly, we are not persuaded. Look at the
action on Friday. Stocks closed up, VIX fell by over 3%. Yet the Treasury curve rallied. The 30-Year Bond rallied by 1-3/4 % on Friday. We are neither gurus nor experts. But to us, the action in long Treasuries does not indicate sustainable strength in the US economy. They sort of act as if the 2.5% GDP for Q3 2011 might be a peak for awhile.
We really do not have to tax our feeble brain. Uncle Ben will tell us next Wednesday. His words will be more important for the direction of the stock and bond markets for the rest of 2011, we think. What he leaves unsaid will be told by the Non Farm Payroll number on next Friday.
4. Everything Broke Risk’s Way this week
So said Andy Busch of BMO Capital on Friday on CNBC. This simple statement covers the action in currencies and commodities. These days, currencies are behaving like stocks. Any one long the Australian Dollar at 50:1 leverage made money, real money this week.
Next week should be interesting. The Reserve Bank of Australia meets Monday evening. Wednesday is the day of the Bernanke proclamation. And the ECB meets on Thursday with its new head, Mario Draghi of Italy. Does he speak tough to please the Germans or does he cut rates?
These three meetings will decide the action in the US Dollar and of Risk Assets.
For a few weeks, we have argued that the stock market and risk assets do not really care about Europe as long as Europeans do not deliver bad news. They most definitively did not. Instead, they punted. That was just fine and risk markets cheered. This, we found, has also been the opinion of Kenneth Rogoff, he of the Rogoff & Reinhart fame (see clip 4 below).
No one believes the European crisis is over. As Prof. Rogoff said to Bloomberg’s Tom Keene “there are a heck of a lot of not just unanswered but unasked questions”. And what about China coming in with saddle bags of money? Rogoff and Chanos both laughed at the thought.
This week Angela Merkel warned countries that may wish to be like Greece:
- “In Europe, it must be prevented that others come seeking a haircut”.
Surely it sounds much more forbidding in German. Clearly, German Banks have not yet shed much of their exposure to the rest of the PIIS. The final word on Europe’s action this week from Prof. Rogoff:
- I do not think this was the End. I think we are in an escalating
crisis. We are seeing escalating policy reaction. They are still not
ahead of things.
The stock markets know this as well. At some point, they will care about this farce. That should be around the time everybody gets very long in their positioning in risk assets or just after the performance fees are calculated.
- Ed Ponsi via Jim Cramer on CNBC Mad Money on Tuesday, October 25
- Rich Volpe on CNBC Fast Money on Thursday, October 27
- Jim Chanos on Bloomberg TV’s First Up on Friday, October 28
- Kenneth Rogoff on Bloomberg TV’s Euro special on Thursday, October 27
- Tom DeMark on Bloomberg TV’s Street Smart on Tuesday, October 25
- Walter Zimmermann on CNBC Closing Bell on Friday, October 28
1. Serious Bank Rally – Ed Ponsi via Jim Cramer on CNBC Mad Money – Tuesday, October 25
Three weeks ago. we featured a videoclip of Jim Cramer relaying the views of
John Roque about the Pretty Girls Index (see clip 5 of the Videoclips of October 3 – October 7, 2011). That clip suggested that high momentum, high growth stocks like Apple, Amazon, NetFlix that dominated
the market action in 2011 may be under-performers going forward. As we wrote, this was
a warning. So far, this warning has been spot on with Apple, Amazon,
Netflix, Green Mountain etc falling steeply during the past couple of weeks.
Just as pretty
stocks were the leadership this year, financial stocks were horrible performers. If it is time for the Pretty Girls to fall in
esteem, is it time for the Uglies to turn beautiful? That is the view
relayed by Jim Cramer this week. The views are of Ed Ponsi of Barchetta
This has turned out to be a prescient clip already. As predicted by Ponsi & Cramer, Financials broke out with a big rally on Thursday. So, deserves has everything to do with this clip getting our pole position of the week. Do note that about 40% of the 10% rally predicted by Ed Ponsi has already taken place.
- … tonight we are going off the charts with the help of Ed Ponsi to show how the landscape changed for the better. Especially for retail and even the banks, the most hated sector out there…Last week the S&P 500 broke out of the trading change…. Ponsi thinks the fact we got out to this high level is positive for most individual sectors. There are two in particular that deserve special attention. One a laggard, one a leader. Both surprising, given the unemployment rate in this country, the Banks and the Retailers.
- …first, take a look at this daily chart of the BKX. That’s the key Bank Index. It is the widely used stand-in for the big financials.…Even though S&P has broken free from its range, the BKX lagged, having failed to break out of its ceiling resistance of $40.….Even with the recent snapback, the banks are weaker than the overall market…
- …However, Ponsi sees something in this chart that makes him believe the banks could be ready… to rocket higher. He identified what’s known as an Inverted Head and Shoulders pattern….a normal head and shoulders formation is the classic dreaded sign of a top. Chartists fear it because it is one of the most accurate patterns around -Nine times out of ten you get a head and shoulders and a big decline.
- But an inverse head and shoulders is the opposite. It looks like an upside down head between two upside down shoulders….it tells the technician like Ponsi a stock or index is bottoming.….If the BKX breaks out above 40, Ponsi believes we could be in for a serious bank rally.….That bank breakout is not that hard to imagine if Europe gets its act together…..
- Take a look at the bottom of the chart… Check out the moving average convergence, divergence or MACD indicator, which measures directional momentum… The MACD line is gaining momentum. That is a signal the stocks are going to take off.…That is a very important divergence. This indicator is anticipating a major move higher. If we get a breakout, Ponsi thinks it could run straight to 44.
Kudos to Ed Ponsi for making a terrific call and to Jim Cramer for highlighting it. The rest of the clip discusses retailers.
2. 2.60% Yield in 10-Year Treasury Notes – Rich Volpe on CNBC Fast Money – Thursday, October 27
Volpe begins speaking at minute 05:56 of this 08:46 minute clip. Scott,
the “Judge” Wapner is the anchor. He reminds viewers about the Fed
meeting next week and then begins speaking with Mr. Volpe
- Judge – Where do interest rates go from here? I guess if you people believe in this equity rally, rates could go higher?
– Huge day in the Bond market today. More teeth in the European bailout
started the downtrade in the traditionally flight to quality markets,
Gilt market, Bund market and US Treasuries. We just came off $99 billion
in supply this week, all the supply is underwater and we broke a
critical level of 2.30% today in 10-Year yields. On a sloppy 7-year
auction, followed by a breakout to the upside in the S&Ps, I really
believe in this, 2.30% is a big level and you have to pay attention –
… it is all about positions, the market is short equities and long
fixed income in anticipation of Operation Twist. And most important
thing here, our market is held by 50% Foreigners in US Treasuries. If
you look since September, if you look at custody holdings, and measure
holdings of Foreigners, they are off about $80 billion. This is massive
selling, they are basically saying to the Fed, you are going to buy
Treasuries at historically very low levels, and we are going to sell
them to you.
- Judge –
Doesn’t QE3 move perhaps a little bit further away from being likely
even if the dovish talk we have had over the last several days from
Tarullo and some of the other Fed members.?
– sure and some of that speculation is if there is a QE3 be probably be
based in the mortgage market..but if you see the blue print of the map
of QE1, QE2, you see equity indices were up 30% during QE2 and you see
yields trade off about 100-150 basis points. This would imply this move
is not over and you don’t want to fight it
– There is a Fed meeting next week right? You have had a dramatic shift
perhaps in the risk of the European situation, you have an earnings
story that is pretty good here, data story that also seems a little bit
better. Doesn’t that take QE3 almost off the table at this point?
- Volpe – I believe it does. It is far off in the future and short term medium term we are looking at yields close to 2.60% in 10-year notes.
3. China’s Fundamentals have Just Started to Deteriorate – Jim Chanos on Bloomberg TV’s First Up – Friday, October 28
Jim Chanos needs no introduction as a successful Hedge Fund Manager and
as one of the most vocal bears on China. In this 10:28 minute clip, he
speaks with Bloomberg’s Susan Li. This is too long a clip to discuss at
length. A detailed summary of his views can be found on Bloomberg.com
at Chanos: China’s Hard Landing Has Begun.
Below are include some excerpts that are missing from Bloomberg’s summary:
I am a debtor nation other than Greece, I see that by holding out I can
get 50 cents on the Dollar relief on my Debts with no credit event, so
to speak for the credit default swap owners, why won’t other
Governments hold out for this? So this is a band-aid at best, but it
solves the immediate problem for the next handful of months.
world was coming to an end on October 4th and now every problem has
been solved three weeks later. My guess is that the reality is somewhere
Chinese were supposed to save the Greeks directly a few months ago, if
you remember. That didn’t happen. They were supposed to get involved a
year ago in the European crisis a year ago. That didn’t happen. China
will do what is in China’s best interest. The Chinese will say nice
words to them but I doubt we will see some hard cold cash head to Europe
is a big big misconception here….The Foreign Currency Reserves that
China has have liabilities against them and everybody forgets this. The
foreign currency reserves arise when exporters earn income in Euros or
Dollars and go the People’s Bank and turn those in for RMBs. Like any
Central Bank liabilities, there are RMB liabilities against China’s
reserve holdings. So it is not free and clear. People sort of always
Chinese consumer is a declining part of the Chinese economy. Consumer
as a percentage of GDP has been dropping, not going up. Fixed Asset
Investment is driving everything. It is going up. In the latest period
we have fixed asset investment was up another 24% year/year vs. 9%
growth in the economy.
essential problem is China has two governments. It has a central
government that is trying to slow things down, is worried about social
unrest, is worried about social cohesion, income inequality. They are
hitting the breaks. The local governments who are in bed with the
developers have every incentive to keep developing, keep building. And so
while one government is hitting the breaks, another is hitting the
were short homebuilders, and the credit related stocks in the West in
05, 06 and 07. All the way down there were 30-40% rallies and yet,
things kept deteriorating and basically we covered our shorts in 08 when
things basically stopped deteriorating and when the Government did step
in with real cash. We are not in any way close to that in China. It has
just started. As I indicated, the property slowdown started in the 3rd
quarter of this year. Look China is a volatile place and stocks are
going to go up or down like Yo-Yos. We are keeping an eye on
fundamentals. Fundamentals have just started to deteriorate.
Below are some excerpts from Bloomberg’s summary:
China is on “a bigger and faster
treadmill” than ever as property sales slow,
“The Chinese are beginning to realize that property prices
can go down as well as up and this is going to be a very, very
troubling development for the Chinese property market,”
China’s “hard landing” has begun,…..“Most China observers were not talking about
any landing three months ago and now they are confidently
talking about a soft landing.”
4. We are in an Escalating Crisis – Kenneth Rogoff with Bloomberg’s Tom Keene (07:19 minute clip) – Thursday, October 27
Kenneth Rogoff is a co-author of the celebrated book This Time It Is Different with Professor Reinhart. Like Rosenberg and Shiller, he is a smart man who carries his superb intellect easily and without show.
- Keene – The Euro is inflexible. Is it a failed program?
- Rogoff – I think the Euro is half baked and needs either to be either completely baked or not work
- Keene – Will the Chinese step up here and fund partially or completely this bailout?
– They are happy to hold German bonds, The question is how much
Portuguese, Greek, Irish, Italian bonds will they hold? I
don’t see China coming in any long term solution.
- Keene – … the behavior of equity market today was that typical of your research?
Rogoff – the markets are so relieved that it is not over today that they
were worried about that — they are not looking very far down the
road..There are a heck of a lot not just unanswered questions, but
– I do not think this was the End. I think we are in an escalating
crisis. We are seeing escalating policy reaction. They are still not
ahead of things.
- Keene – What would you like Merkel and Sarkozy to do now? What is the Rogoff “To Do” List?
Rogoff – Most important on the to do list. Just give us a sense of where
we are going. It is very clear that the Euro is constituted does not
work, it needs to move forward. They need to give us a vision of why
this is worth doing.
– I am concerned that the SuperCommittee will agree with each other but
not be able to get anything through the Congress.
5. S&P 500 May “Trap” Bulls After Rally – Tom DeMark on Bloomberg’s Street Smart – Tuesday, October 25, 2011
Tom DeMark is well known as the creators of DeMark indicators. Bloomberg’s Adam Johnson claims in his promo that Mr. DeMark called the bottom and the top of the S&P 500 this year.
- DeMark – 1255 – 1257 was our outside projection We look for market timing models specifically two indicators, combo and sequential to coincide with those price objectives. Unfortunately, we did not get the coincidence we were expecting…. We forecast the 1076 downside, the October 4the low, we projected the upside 1254-1257 on the S&P cash. We think the current market is somewhat akin to the January-August of 1973 market …we like to relate market activity with prior periods. Through the decline from 2007 through early 2009, we compared the markets in 1973 to 1976-77… we are still pretty much in correlation with that period, shorter period, January 11, 1973 peak to the August 23 low, we record a 13 at that market bottom on August 23, 1973 just as we did on October 4, 2011. Subsequently on October 29, 1973 we rallied about 18% and the market topped and resumed its decline.. Currently, we are up not quite the same amount of percentage and we are not currently in model sync with that period… so what we are looking for is 4 or 5 possibly successively higher closes than yesterday..I hate to be really “technical”, but that is how finely we look at the markets ..we look at the market …on a daily basis and we break it all down intraday, weekly and monthly… This is what has happened off that October low. we had a singular move just in the daily, producing a 13, the weekly and the monthly which also spoke at the May 2 high, not in the same mode
- Johnson – If I am hearing you correctly, we went to 1255 which was your target, we are now gonna trade down to may be few percent, find some sort of bottom, and trade back up we might churn back tp that 1255 and we go down again, is that fair?
- DeMark – that is a fair appraisal of the market, we look at possibly 1206.60.. if the market gaps downside again, tomorrow and leaves the gap into the close,,,that’s effectively a bottom and the market will come back, and it is not going to come back with the fervor that it did off the low..we had predicted that the market will hit 1254-1257 in 11-12 trading days and we were right on the money with that..But this next move is going to be labored, it could take 2-3 weeks, it may get us a modestly higher high in the S&P level, the Dow Jones should move, to be specific, 199 points above yesterday’s high and the Nasdaq 100 could move about 40 points higher and go back up to its previous peak in May. But other than that, its going to be selective, rotational – it is going to be trying on most traders, and we don’t see the money being made that we did see off the October 4th low..
- Johnson – It sounds like a churn kind of market, Tom..just to summarize, we are at about 1238, we go down to say 1206, we kinda struggle, we churn back to 1255. may be make a couple of little short term highs, but basically it is going to trade back and forth in that area, sounds like it is kind of tired market..
- DeMark – It is. It is going to be tired and disappoint everyone. We are 4-5 higher successively higher closes vs. yesterday’s close, but they are going to be modest..Once that happens, I think the market is going to build a trap and many of the people who are going to be bullish are going to be trapped into a market somewhat similar to what we experienced back in November 1973 if you go back to that period, it was sharp to the downside.
Just in two days, Mr. DeMark proved to be wrong. The “tired” market he saw exploded like a rocket a mere two days later. He said the next move will be labored and take 2-3 weeks. It took 2 days and it was full of fervor. The market did not fall to 1206 and churn back to 1255. We already have 2 closes above his level of 1255 and they have not been modest, at least the way we define modest.
But Mr. DeMark could still end up being right, if the S&P does end up trapping the bulls in early November.
6. S&P Double Dip to 800 & 580 – Walter Zimmermann on CNBC’s Closing Bell – Friday, October 28, 2011
Walter Zimmermann is the Chief Technical Analyst at United-ICAP and a frequent guest of Maria Bartiromo. Like Tom DeMark above, Walter Zimmermann works on pattern recognition and linking today’s market to a previous pattern. His success depends on whether the previous pattern he identifies turns out to be correct.
In this clip, he links the current rally to the March 2008 rally. That was a two month rally from March to early May 2008. This rally is only 3-4 weeks old. But Mr. Zimmermann does not touch on the duration of the 2008 rally in his comments.
- Bartiromo – You say there’s still risk that the S&P 500 will do a double dip.
- Zimmermann – Yes. Because let’s compare the decline from May 2nd to the decline from the all-time high on October 11th, 2007. That initial leg down fell from 1576 to 1256. That was October 11th, 2007, to March 17th, 2008, 108 trading days, a 20% loss in value and almost the same exact pattern as the May 2011 to October 2011 decline. Now, we’re always looking for precedent, pattern repetition, and this pattern repetition of the initial leg down from 1576 to 1256 to this leg down, 1370 to 1074 is astonishing, and it’s ominous at the same time because it’s basically warning that this rally could very well be a bear market correction just as the rally from 1256 in March of 2008 was a bear market correction.
- Bartiromo – So how much lower — how low do you see the S&P potentially going this time around? what would you advise investors to do if, in fact, that’s what it has been, a bear market rally?
- Zimmermann – Well, first of all, if this rally fails to break the May peak, then that in our book targets to 800. The double dip targets to 580. So there’s significant downside risk.
- Bartiromo – How do you get a handle on it?
- Zimmermann – Well, if this is a textbook perfect bear market correction, it should peak just overhead somewhere between 1305, 1325. So I think you start layering in put strategies up there, risking new highs. Now, of course, the alternate approach is if you fail to break the May peak and then you break the 1074 low 1074 low from October, then I think you can sell aggressively because that would confirm that, yes, we’re on this bearish path.
- Bartiromo – Walt, what’s the bottom line here? What should investors walk away from this conversation with?
- Zimmermann – Well, on any further upside, start getting hedged to downside risk, and if you’re looking for a trade, this could be a great trade from the short side, selling overhead, risking a break of the May peak, looking for a double dip that would give you a fantastic return on equity. Unfortunately, it’s a trade to the short side.
We don’t understand the word “unfortunately” in the last statement. Why should a trade to the downside be termed unfortunate? The key is to get your forecast right, Mr. Zimmermann. The real key is to make your viewers money. So a wrong forecast is the only unfortunate forecast.
Mr. Zimmermann’s levels of 1305-1325 are not that far away. A cozy Fed statement or a bullish Non Farm Payroll number might get us there next week. So using put strategies up there seems a relatively low risk, low cost trade.
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