Frank Sinatra - Antonio Carlos Jobim - Medley

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The S&P Low - Are We There Yet ?

"Just a perfect day, drink Sangria in the park..." - Lou Reed, "Perfect Day"

Well, that may be a perfect day for Lou, but for the rest of us it involved sitting around watching the S&P 500 and wondering what it all means? Is this, finally, the bottom?

Recalled the low in October of last year, with the S&P 500 (SPX) at 910, I was looking for potential signs of exhaustion at 777: The longer-term time frames remain dominant, and the initial downside target of 777 for the S&P 500 (SPX) looks likely, with potentially even lower prices later in 2009.

Fast forward a little over four months and here we are below 777 with the market nearing some important potential exhaustion points according to several DeMark indicators.

Before we get into where we are today, here's a brief refresher course on the DeMark TD Sequential indicator. If you have no interest in this, feel free to skip ahead to the conclusion below this refresher.

TD Sequential Refresher

TD-Sequential consists of two components, a setup and a countdown period. Numerically, the setup is complete at 9, the countdown at 13. These patterns help identify potential selling or buying exhaustion points. They are probabilistic and dynamic, because markets themselves are probabilistic and dynamic.

Now, what do these 9s and 13s really mean? Because we are looking for a market low, let's focus on TD-Sequential Buy Setup and TD-Sequential Buy Countdown.

The TD-Sequential Buy Setup consists of 9 consecutive closes that are lower than the close four price bars earlier. The criteria for "perfecting" the sell setup is that the LOW of price bar 8 OR 9 be below the low of BOTH bars 6 AND 7.Typically, after a Buy Setup records, a reaction consisting of 1-4 bars takes place before the larger trend resumes.

Once a Buy Setup is in place, the TD-Sequential Buy Countdown can then begin. The difference between Buy Setup and Buy Countdown is that Buy Setup compares the current bar's close with the close of the bar four bars earlier, while Buy Countdown compares the current bar's close with the LOW two price bars earlier. Also, unlike Buy Setup, Buy Countdown need not occur on CONSECUTIVE bars.

That is the quickie and dirty overview of TD-Sequential!

On the monthly chart of the S&P 500, we have been monitoring a potential TD Sequential Buy Setup unfolding. February did produce a 9 Buy Setup count, but in order to "perfect" the buy setup, we needed to exceed the low of bars 6 and 7, which was 741.02. Today, the final trading day of the month, the Buy Setup was perfected.

Of course, timing is everything, and it's not as simple as just buying today and hoping for the best. There are a couple of things to consider going forward.

First, the reason 777 was able to be identified as an initial downside target last year was not by some magical formula on my part, but simply arrived at by looking at TD Absolute Retracement levels for the S&P 500.

Last November we were concerned that the 777 retracement level on the S&P 500 would be broken in a "qualified' manner. What does this mean? Simple, in order for a breakdown to be "qualified" two things must happen:

1. The bar prior to the breakdown must have been an up close.

2. The bar immediately after the breakdown must open lower than the close, and then must trade lower than the open.

Why such strange rules? Well, if one considers the psychology behind "breaks" one can see that a critical component of a successful break is surprise. A market that cascades into a breakdown will frequently recover back through the break area due to an exhaustion of sellers. The up close prior to the breakdown, however, produces a false sense of security among holders of securities, the feeling that, "ah, looks like we have held."

Bottom Line:

So far, even though we have perfected the monthly TD Sequential Buy Setup by exceeding 741.02 on the downside, we have not yet qualified a break of 777, which is critical to the bullish case. As long as that level remains disqualified as a break, the more likely the market is to recapture it and use it as a springboard to move forward. What we are looking for on the daily chart is a close greater than the close four price bars earlier, followed by a higher high the next day.

And what happens if that level is qualified as a break? The market's next area of attraction is 593.

Finally, remember that the buy setup we are currently working on is a monthly buy setup and monthly bars can have extreme ranges and take (obviously) many weeks to unfold in a positive manner. Do not base short-term trades on long-term monthly charts, just as you would not base longer-term positions on hourly or 30-minute charts.

Buy On Dips Still..!

There is what I am feeling, a lot of love and hate on the Street for gold.

Those who couldn"t get in on this nicely performing asset class earlier can't wait for it to crash and lose its luster. They're also looking at the potential double-top pattern in SPDR Gold Trust ETF(GLD) to substantiate their views.

Those who did get in and made big bucks are looking to justify their long stance; the intensity of the arguments commensurate with the size of their position and/or profits made! Let's see what the charts say about GLD. (above)

Well, as seen here, GLD is at a lateral trend-line and Bollinger band support. My experience has shown me that winners rarely go down without a fight; keeping that in mind, I would be a buyer (for a short-term trade) when the support proves "supportive," and GLD shows some positive momentum here at the $92 level.

If this level is broken, look for stronger support at 50 day moving average (87.6) and 200-dma (84.3).

What about that double top? The volume pattern doesn't suggest that so far - and it's only when support is broken from the lowest point between the peaks that the pattern is validated.

So I wouldn't be too worried about that possibility right now.

Lost In The Deflationary Jungle.

Since August, the dollar has rallied against most major currencies, and has appreciated about 17% against the euro. This isn't for good reasons. Deflation, or the destruction of debt, destroys dollars, and as you destroy the supply of dollars, the value goes up. A strong currency is the hallmark of deflation; a weak one is due to inflation (all other things being equal).

Deflation can actually be viewed as relatively good for savers, and Japan has one of the highest savings rates in the world. It wasn't hard to figure this one out. During the same period, the yen has appreciated versus the dollar by 13%.

Nor was it difficult to figure out the impending nature of the "financial crisis," as it's been labeled by the U.S. government and the media. In Hank Paulson's op-ed in the New York Times, he shamelessly uses the word "unpredicitable" several times to describe the "crisis". Even the word "crisis" connotes suddenness and unpredictability.

The current deflation was very predictable, and it wasn't sudden: It is the culmination of a long process in which the Federal Reserve allowed the US financial system (and other central banks allowed those of other countries) to become extremely super-levered. That's inflation. The system become so levered it couldn't take any more. There wasn't enough (and there isn't enough) income generation to support this level of debt.

If you follow a guide into a jungle, and he gets you lost, are you going to keep following him? Or at some point, does logic tell you to just look up at the sun and figure out which way is west and just keep going in that direction?

The guides are now telling US citizens how to get out of the jungle they got them lost in. They're telling citizens to spend money, not to save it; they're telling them to borrow more and not pay it back; they're telling them to create deficits at the expense of their children's standard of living.

Please keep one thing in mind as the U.S. politicians come up with their "solutions": The government cannot create wealth; they can only transfer it. So when the government "injects capital" or "lends money" to a company, they are transferring that money from somewhere. They get it from people who can never complain because they can't vote as yet: The American children.

And here's the lesson of today: We're all a part of the system. We will all be worse off over the next few years than before. Get used to it.

But you can protect your family better than the rest by just staying the course. Don't try to pick the bottom of the stock markets with your last few free dollars; instead, pay down your debts.

In essence, go in the opposite direction from where our "guides" are telling us to go.

Risk is very high.

Jolt After Jolt,...And The Patient Is Not Responding !

President Obama has been using allegory in an attempt to help people understand his plans for improving the economy. When he says "we need a bold enough plan to jolt the economy back to health," we all think of a heart patient suffering arrhythmia.

But the President and the rest of the government seem to believe, or would have the world believe, that arrhythmia is the disease itself, not a symptom of the disease. Any doctor would tell you that's not true.

So let's take our analogy further. Let's say the heart, which is beating irregularly, or even stopping, needs to be jolted back to health. Now we have to diagnose the patient for the cause of the heart trouble. The first thing any good doctor does is to look at the patient's history.

Twenty years ago, our patient -- let's call him Sam -- began eating too much. He lived on rich foods - far too rich for his metabolism to correctly digest. The body naturally began to produce fat cells. Fifteen years ago, Sam was fat, but still looked relatively healthy and exhibited no outward signs of sickness. By this time, he was hooked on rich foods, and just kept eating.

Ten years ago, Sam was getting pretty fat. He had a mild heart attack. That was a warning. But his doctor wasn't very good. He checked all of Sam's other vitals (not very thoroughly) and decided that even though Sam was fat, he didn't need to go on a special diet - he just needed to eat less of what he was eating. He didn't really need to exercise, either. This doctor didn't like confrontation.

But without clear warning and prescribed action, Sam kept eating. Six or so years ago, Sam was obese. He had a major heart attack. The doctor, being his same weak self, was more worried about covering his tracks than he was about doing the right thing for Sam. He told Sam he needed a pacemaker to regulate his heartbeat. This would solve all his problems, and allow Sam to enjoy life the way he had learned to enjoy it.

The pacemaker worked - for a time. Sam went merrily along getting fatter and fatter.

Six months ago, Sam's heart failed: It couldn't support the amount of blubber on his body. It couldn't pump enough blood to all the capillaries that had grown to bring blood to the fat cells. The doctor jolted and jolted the hear trying to start it again; but every time the heart began to pump, the pressure was so great it failed again and again.

Sam is now on life-support. Machines are acting as his heart, and Sam can't get off the machines. So the doctor is now exploring an experimental artificial heart that can pump twice as much blood as a normal heart. The doctor knows Sam might explode from the pressure, but the doctor is more concerned about protecting his practice from lawsuits than he really is about Sam's health.

What Sam really needs is a new doctor. Any rational doctor would tell Sam, who now weighs 800 pounds, that he cannot survive at this weight. Sam needs first to lose the weight that's causing his heart problems.

Without doing that, you can jolt the heart all you want - but it will continue to fail!

The Cast of Characters:
Sam : Consumer
Food : Consumption
Heart : Credit markets
Fat : Debt
Blubber : Extreme debt
Doctor : The Federal Reserve
Pacemaker : Fannie Mae

Something We Have Never Seen Before In the History Of Malaysian Street Demonstration. - Law Enforcers Were Stunned, Fearful And Helpless! ..Why?

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The Commodity Outlook.

Oil prices may have further downside, in the short run, reflecting continued reduction in demand as growth slows. Production cuts by OPEC may not be effective as revenue strapped sovereign producers adjust volumes to generate cash flow. Ultimately, the laws of supply and demand, production costs and a finite, constrained resource will support the price.

The outlook for alternative energies is less sanguine. Most alternatives require high oil prices to be economic. Support for alternative cleaner energy is likely to wane as the GFC forces governments to defer climate change initiatives in the face of harsh economic conditions.

The dislocation in financial markets has benefited gold. The gold price has performed well reflecting increasing suspicion about "paper" money and lower interest rates. Governments continue to attempt to re-inflate domestic economies by traditional Keynesian spending, increasing concern about possible inflation providing support for gold. There is a fear of a return to a gold standard leading to hoarding of gold stocks. Emerging market demand for gold, a traditional store of purchasing power, may be fueled by the threat of increased social unrest.

Other precious metals, like platinum, palladium and silver, are likely to be affected by decreased demand, especially due to problems in the automobile sector globally.

Industrial metals (aluminum, copper, lead, nickel, zinc and tin) and bulk commodities (iron ore and coking coal) have been a major proxy for global economic growth, particularly demand from a rapidly industrializing and urbanizing China and India. Slower growth and problems related to inventories and oversupply may mean a continuation of weakness.

The performance of agricultural prices is puzzling. After falling in line with commodities generally throughout 2008, in December agricultural products decoupled from other assets. For example, some grains rose sharply in prices by 10% to 20%.

Prices (adjusted for inflation) are around 40% below long run average prices. Grain inventory levels are low - around 2 months of global demand. Problems affecting financing of crops and trade, low prices and difficulty of hedging (increased in margins and hedging costs) have meant that plantings have been low. Major seed producers report a sharp decline in sales. The increased problems of food production from climate change also means the risk of supply disruption cannot be discounted.

Historically, agricultural products have performed well in economic recessions. Tightening supply, risk of supply shocks and the appeal of a recession resistance asset may underpin prices in relative terms.

Agricultural products that have been linked to oil prices (such as corn, palm oil, soybeans and rapeseed) will be dependent on the broader performance of energy prices.

The current realignment affects financial investments in commodities. The case for commodities as a separate investment asset class has been undermined. Commodities have proved to be highly correlated to other financial assets. The volatility of commodity prices, traditionally high, has proved to be extreme.

One significant change has been the shift in the relationship between spot (immediate) commodity prices and forward (or future) prices. Historically, prices for some commodities, especially non-financial commodities like gold, have exhibited "backwardation"; that is, forward prices have traded below spot prices. This allowed investors to earn the "roll"; that is, they bought forward and then sold the commodity to accrue "the convenience yield" as the contract shortened in maturity. This income, first explained by Keynes, has been a significant source of gain for financial investors.

As commodity prices fall as a result of reduced demand, the backwardation changes into contango; that is, forward prices are above spot prices. The contango reflects the cost of holding the physical commodity adjusted for holding costs (storage, insurance, interest rates, etc). Weak demand exacerbates the contango as excess supply goes into storage. Financial investors cannot benefit from the convenience yield, thereby reducing one of the sources of return. The long-term effect of these dislocations on financial investment in commodity markets is unknown.

During commodity booms, excesses abound. Oil-rich countries enjoying rapid growth in commodity revenues embarked on grand and expensive projects. For example, in this cycle, Dubai undertook an ambitious expansion program based on real estate, luxury hotels, airlines, financial services and English premier league soccer clubs.

Grandiose plans tend to be launched towards the end of the boom cycle. Food may well be where the smart money heads in these troubled times.

Fundamental demand for food and energy may emerge as key investment drivers - everybody needs to eat, and we're still a fossil-fuel-driven society.

The JANUARY Effect In China.

While much of the investing world was focused on the Dow’s 9% decline in January, setting the tone for the rest of the year, China’s Shanghai Composite closed the month 9% higher instead. If the shot clock didn’t run out on them (the market was closed from January 23 till the end of the month), the difference would have been even more pronounced, judging by the additional 9% it’s advanced since then (at least as of this writing).

The most recent data shows Chinese stocks made up around 6% of the world’s equity-market capitalization. By comparison, about the same percentage of the Dow is made up of Alcoa, General Motors, Pfizer, General Electric, Bank of America, Citigroup, and Intel. Each of their Januarys cost the Dow a combined 188 points.

Which is more telling - 6% of the Dow, or 6% of the world?

There are plenty of reasons to doubt growth statistics from China. There will be plenty of economic disasters, for example, born from finding jobs for young workers (which I’ll take over finding entitlements for retiring workers any day). Manufacturing stuff for consumers around the world who can't buy as much of it will show up in their numbers as well - and it won't be pretty.

But here's an interesting clue to solving the bigger riddle of just how much China is embracing capitalism. China had to dramatically raise export taxes on Urea, a fertilizer compound, for 2 compelling reasons. Inventories are at 5-year lows, and China is afraid of running out- (now that's not good for the plantations in Malaysia!) But here’s the more interesting fact: China's been exporting more than half its domestic production, because prices offered elsewhere were even higher. Capitalism is collliding with domestic consumption. Remember when that happened to the US?

Looking back at 2008, There were many untrustworthy numbers coming from the US as from China. A statistic that's harder to keep down is the approximately 80 million people (about the size of Germany) added to the world’s population last year.

Yes, I’m biased - bailouts in any country make less sense to this German farmboy than bales in every country.

"Mecum Omnes Plangite!"- Everyone Weep With Me!

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The 50-days MA, A Terrific Tool If Used In Proper Context.

Last December when the S&P slipped above the 50-days MA, many pros were utterly excited, they were calling market bottoming and suggested to started "bottom-fishing". Now, lets take a closer look into this subject.

Based on this chart, one might be tempted to conclude that there is a predictive value when price touches its moving average, as each time it has (over the past 6 months), a lower low ensued. The problem arises when you stretch the time horizon beyond the recent past.

Above is the S&P500 covering the past 2 years.

As can be plainly seen, price has criss-crossed its MA on numerous occasions, producing no clear pattern for which an investor can exploit.

The weakness in using the 50-day MA on its own is further demonstrated when you use the simple moving average (price of the past 50 days divided by 50), as opposed to the above-exponential moving average (price of the past 50 days weighted more heavily toward the most recent days). In the above chart, the simple 50-day MA shows an equal, if not greater, lack of predictive value, as price criss-crosses its 50-day MA with regularity.

As the above charts show, the 50-day MA, be it simple or exponential, has no consistent predictive value in relation to its price alone. In my experience, the only consistent, predictive value of it is when it's used in the context of the Mega Trend.

Moving averages are terrific tools, if used properly. On its own, however, the 50-day MA shows itself to have little predictive value. So, please, no more reporter calls and emails on this subject.