Wide Angle Lens Look At The Upcoming Quarter

Time to take a “wide angle” view of this market to get our bearings on where we stand heading into this last quarter of the year. It has been a tough trading year for most hedging strategies as the “one way” up market has, so far this year, made alpha generation a very tough affair and beta chasing the order of the day. The outlook heading into year-end is book cased by two very strong arguments. As I mentioned above, there is no denying that many money managers are going into this quarter behind their benchmarks and the scenario for a year end “mark up” in equities could be a real catalyst for the bulls. The resolution of the extreme uncertainty that will come about by the outcome of the elections should also be supportive of a push higher no matter who wins the election. Business and markets in general can deal with a tremendous amount of obstacles but one thing that it often has trouble with is lack of visibility or uncertainty. Make no mistake about it, the outcome of the elections will make a huge difference in the market environment going forward but the difference is from “good to better” as opposed to “good versus bad” in my opinion. The effect on the economy going forward by which side wins the elections will be drastically different in my opinion but the market will deal with that in due course. The ever more dovish Fed stands ready with gazillions of dollar at the beckon call of financial markets and the “Bernanke Put”, which investors have come to rely on so heavily, stands ready to bailout markets. The recent throw the kitchen sink announcements of QE should provide ample liquidity which banks will gladly throw put to work in the stock market.

Against this rosy backdrop lies the ever worsening domestic and Global economies. The slowdown that started to rear its ugly head back in March of this year has escalated and the recent economic data points have been worsening. Today’s Chicago PMI was one of the worst reports I have seen in a while. The Fed had reason to go so big and if the data points are any indication, we may be headed to another recession in 2013. Corporate earnings are also on the downside and many companies have slashed earnings outlook for the 4th quarter which was heavily weighted in the overall projections for the S&P 500 year end EPS targets. This fundamental slowdown in earnings growth will weigh on a market trading near multi year highs.

Headline risks abound. The situation in Europe is far from over and markets are vulnerable to shock events from this crisis. Like it or not, this risk premium will be with us for a while and will keep multiples pegged to the lower extremes of the recent trend. The political brinksmanship we are sure to see in dealing with the fiscal cliff later this year will augment that headline risk premium as I am fairly certain it will be a drawn out affair particularly if President Obama wins re-election and the Republicans maintain control of the House.

Finally from a technical standpoint, markets are going into the quarter somewhat overbought. The one way move higher since early June had pushed the S&P 500 into real overbought levels at 3 standard deviations from its 34 week moving averages. This had not happened since early April of 2010, a period that was soon followed by a sharp pullback. We have backed off of this extreme over the past 2 weeks but could very well consolidate some more. From a price perspective we are right at the midpoint on the 1 standard deviation regression channel from the March 2009 lows and the recent highs. From this vantage point, a move lower is very probable and my first major downside target here would be 1375 on the SPX. The stochastic oscillator and the accumulation/distribution histogram have shown some signs that support this thesis.

So, from a broad perspective, there you have it. There are several compelling reasons to be either bullish or bearish here. Figuring out when to be either is the name of the game.

C.J. Mendes

cjm

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Earning – A Wide Angle Lens Look At The Upcoming Quarter

Wide Angle Lens Look At The Upcoming Quarter

Time to take a “wide angle” view of this market to get our bearings on where we stand heading into this last quarter of the year. It has been a tough trading year for most hedging strategies as the “one way” up market has, so far this year, made alpha generation a very tough affair and beta chasing the order of the day. The outlook heading into year-end is book cased by two very strong arguments. As I mentioned above, there is no denying that many money managers are going into this quarter behind their benchmarks and the scenario for a year end “mark up” in equities could be a real catalyst for the bulls.

The resolution of the extreme uncertainty that will come about by the outcome of the elections should also be supportive of a push higher no matter who wins the election. Business and markets in general can deal with a tremendous amount of obstacles but one thing that it often has trouble with is lack of visibility or uncertainty. Make no mistake about it, the outcome of the elections will make a huge difference in the market environment going forward but the difference is from “good to better” as opposed to “good versus bad” in my opinion.

The effect on the economy

going forward by which side wins the elections will be drastically different in my opinion but the market will deal with that in due course. The ever more dovish Fed stands ready with gazillions of dollar at the beckon call of financial markets and the “Bernanke Put”, which investors have come to rely on so heavily, stands ready to bailout markets.

The recent throw the kitchen sink announcements of QE should provide ample liquidity which banks will gladly throw put to work in the stock market.

Against this rosy backdrop lies the ever worsening domestic and Global economies. The slowdown that started to rear its ugly head back in March of this year has escalated and the recent economic data points have been worsening.

Corporate earnings are also on the downside

many companies have slashed earnings outlook for the 4th quarter which was heavily weighted in the overall projections for the S&P 500 year end EPS targets. This fundamental slowdown in earnings growth will weigh on a market trading near multi year highs.

Headline risks abound.

The situation in Europe is far from over and markets are vulnerable to shock events from this crisis. Like it or not, this risk premium will be with us for a while and will keep multiples pegged to the lower extremes of the recent trend.

The political brinksmanship we are sure to see in dealing with the fiscal cliff later this year will augment that headline risk premium as I am fairly certain it will be a drawn out affair particularly if President Obama wins re-election and the Republicans maintain control of the House.

Finally from a technical standpoint…

markets are going into the quarter somewhat overbought. The one way move higher since early June had pushed the S&P 500 into real overbought levels at 3 standard deviations from its 34 week moving averages. This had not happened since early April of 2010, a period that was soon followed by a sharp pullback. We have backed off of this extreme over the past 2 weeks but could very well consolidate some more.

From a price perspective…

we are right at the midpoint on the 1 standard deviation regression channel from the March 2009 lows and the recent highs. From this vantage point, a move lower is very probable and my first major downside target here would be 1375 on the SPX. The stochastic oscillator and the accumulation/distribution histogram have shown some signs that support this thesis.

So, from a broad perspective, there you have it. There are several compelling reasons to be either bullish or bearish here. Figuring out when to be either is the name of the game.

 

 

Markets- To QE or not QE

Markets- To QE or not QE

The Federal Reserve’s FOMC is really walking a tight rope on additional QE at this juncture. There are several reasons why the Fed could introduce a new easing program based on pure economic indications particularly in regards to the recent employment figures but there are are also several important considerations for not moving at this upcoming meeting. The reasons why have been talked about at nauseum over the past several weeks and months by yours truly and many others so let’s consider why they may not move here even if their recent “modis operandi” suggest they will.

The most glaring reason would be the proximity of the Presidential elections. The Fed, as a supposedly non-political entity, needs to worry about being perceived as partisan and many analysts and economists say that a major announcement of monetary policy this close to the elctions would perhaps cloud the issue particularly when the challenger has made no bones about the fact that he is opposed to the current course of action. In my opinion this is an issue that could weigh on the decision simply because the economy while not robust and gangbusters, is not in crisis mode. The Fed may opt to instead adopt even stronger dovish language and extend the timeframe for an exit of ZIRP well into 2015. Considering that they are still in the middle of their last TWIST operation, the Fed may decide to wait until after the program ends in December before announcing any additional measures

Another possible consideration is that the Fed may want at some point to throw the ball back to the lawmakers. The Fed knows that they will not be able to do the heavy lifting alone without fiscal policy measures and staying on the sidelines for a few months may send the message that lawmakers need to get their act together. The gridlock in Washington is an issue that the Fed has repeatedly warned about and at some point, they are going to run out of monetary policy options. The Fed has warned that the efficacy of these programs are dimished with each additional traunch. The Fed has to be concerned about the “addictive” nature of these stimulus measures on the market.

The S&P 500 is trading at near 4 year highs. If the Fed was planning on disappointing the market due to any of the reasons above, would they not perhaps choose to do it while there is ample cushion to the downside? Don’t forget that the Fed has managed to pile on about 160 S&P handles simply jawboning this market higher over the past 3 months. If the Fed wants to send a first shot across the bow of  lawmakers, this would be a good opportunity to do it.

The Fed could decide that if the German courts rule in favor of the ESM, the program would remove quite a bit of the uncertainty currently plaguing the Euro Zone which obviously reflects back to our economy. The ECB policy announcement was the big market mover last week and if markets could hold on to these gains, the fed may feel some more time is warranted before announcing additional easing measures here at home. The US dollar took a beating with the ECB policy announcement which sort of does the job for the Fed.

Finally, the Fed may choose to keep powder dry for any fallout from the Fiscal cliff later this year. Should they announce a program now and juice markets higher, they will be hard pressed to adopt any additional measures should President Obama win the elections and be at laggerheads with congressional Republicans on issues of sequestration and the expiration of the Bush era tax cuts at year’s end.

So while many economists and analysts feel the likelyhood of a robust QE program this week is a “done deal”, I am not so sure. Is it probable that they move here? Perhaps, but it is certainly not a done deal. Caution is advised.

 

Markets – Technicals, Volume, Participation and Complacency Do Matter

Markets – Technicals, Volume, Participation and Complacency Do Matter

August is behind us as is the summer trading season and for 2012, instead of a summer crash, Mr. Market brought us a low volume and low volatility rally. The trading action evolved into a neat trading channel from the lows put in on June 4th through the recent highs put in on August 21st. The one standard deviation regression channel on the chart below tells the story best as we have traded within it for nearly three months now. The narrowing of volatility towards the end of the month really kept the trading action compact and since early August, exclusively above the midpoint of the channel which was only broken again over the past couple of days.

The market should again straddle the 1400 SPX and 13000 Dow levels going into a short holiday week full of economic headlines. The biggie obviously will be what the ECB brings to market to deal with the run on sovereign bonds of countries such as Spain and Italy. These nations cannot endure such high rates for much longer and are in dire need of a bailout. We have already begun to get some details and it seems that the ECB will be buying short term bonds of these nations to keep short term borrowing costs low. There are many hurdles to overcome as the legality of this program will be challenged particularly by the Germans. The details of what these countries are going to have to “give up” to get this ECB assistance is still a huge murky subject . Presumably we can expect the ECB to ask for “the first born” and it remains to be seen if Spain and others are willing to give up so much control. As was the case with the Fed last week, we seem to find “balance” at the 1395 to 1403 level in the broad market SPX going into these headlines.

This weekend and into today we got a very clear look at the ever slowing global growth picture. Pretty much across the board, the economic data is pointing to a pullback in manufacturing. Not exactly what the market wanted to see heading into September… or is it?… The slowing pace of manufacturing should make the case for easing that much more clear for the Fed and ECB which should (in today’s upside down market) be interpreted as bullish for risk assets. Well, today at least, markets are looking at the data very cautiously and perhaps positing that the central banks are behind the curve here as the slowing global economy has picked up some steam to the downside.

The recent global economic data does not portend well to upcoming Q3 corporate earnings season. There appears to have been a strong slowdown in economic activity over the past couple of months and clearly these will be reflected in the upcoming earnings cycle. Over the next few weeks, I expect quite a bit of analysts to come in and adjust earnings expectations lower for the quarter and for year-end.

So, in the very near term, I am still bearish. Not as bearish as I was at SPY 143.09 on August 21st but I think we are certainly headed lower within this established trading pattern to test supports at SPY 137.50 and slightly higher. Where we go from there really depends on very precise binary outcomes to some of these upcoming headlines so to speculate too far ahead at this moment would be just that, speculation.

 

 

 

 

Markets- Held Hostage By The Central Bankers

Markets- Held Hostage By The Central Bankers

There is an incredible amount of anxiety in global financial markets in regards to what the central banks of Europe and the US have in store over the next 2 weeks. Earlier in the summer when the S&P 500 traded at 1280 and unemployment seemed ready to turn higher once again, the probability of more stimulus from the Federal Reserve was high.

As the summer comes to an end, the Fed through its use of the bully pulpit and timely comments via its “voice” at the WSJ did succeed in buying time to analyze the incoming economic data points. Over in Europe, the head of the ECB, Mario Draghi managed the same with very strong indications that the ECB was going to do whatever it took to ensure the survival of the Euro.

The result of these promises simply stated are 140 or so S&P 500 points and some euro stability. I am not going to present exact figures on this but suffice it to say that this is quite a substantial move on a “promise” to do something rather than the actual delivery of action. The market as a discounting mechanism has already priced in some additional easing at this point, exactly how much obviously depends on what comes forth from the central bankers but I am of the opinion that there is better than fair chance that the market will be somewhat disappointed by what is actually delivered.

Ben Bernanke has an unbelievably difficult job. In no way do I fault him for what ails our economy or stock market at the moment but a review on the effectiveness of these quantitative easing program down the road will arrive at the conclusion that it has been a failure. It has failed because the initial program was not nearly large enough in scope and because it was not accompanied by fiscal policy. Because of this piece meal approach, the market begged and got QE2 and is now begging and will probably get QE3 which will be even more short lived in effect than its predecessor.

It’s somewhat disingenuous of me or anyone really to critic this Fed. I doubt many could have done a better job in dealing with the crisis from a monetary policy standpoint than Ben Bernanke. Nonetheless, it has failed in its purpose of stimulating economic activity and spurring job growth. The fiscal policy issues facing the nation and the stubbornly partisan politics in Washington which refuses to put country first and ideology second in order to address them, has to bear a huge chunk of the blame in this failure.

The end result for us (the American taxpayers), the ultimate losers in this mess, is that we are now at a serious crossroads having mortgaged a good chunk of our children’s future economic health in this exercise. Will more QE “work”? of course it won’t in the sense that liquidity is not the problem facing this economy, It’s the confidence, the visibility, to put this liquidity to work in the economy for more than 5 minutes.

The uncertainty we hear so much about is very real and it does affect how businesses plan for the future. The fact remains that corporate America has done a remarkable job managing through this period and turning over a profit to shareholders. The problem is that they have done this through cost management and through very favorable refinancing of their longer term debt, as opposed to growing business holistically.

This along with favorable currency exchanges over the past several years have allowed companies to plug along and survive if you will, in a very treacherous environment. The fact remains that at some point, folks have to get back to work. Companies have to implement longer term investment plans and have the confidence that the available liquidity will be supported by clear and competitive fiscal policies. That is certainly not the case at the moment.

While QE will not achieve these goals, it will provide another expensive, provisory “kick in the behind” to risk assets. The reason for this is that it will stimulate flow of cash to the stock market and provide another round of artificial thrust to risk assets. Borrowing cash at .25% to invest in the market is a no brainer when everyone is doing the same. The effect is an artificial push higher in asset prices until the “drug” wears off and the addicted party comes back to beg for more. No matter your views on this, if you are in the “stock investing business”, you have two choices, play along or get out. You can’t fight the Fed when these programs are enacted, especially in the short term.

The case for the ECB is even more complex than what we face in the US. It is involves factors that we do not have to deal with, well, at least for now, which are factors relating to sovereign issues and in the actual structure of the European financial union. The demise of the US dollar is nowhere near the “edge of the cliff” as is the Euro. The ECB however does have the ability to learn from the Feds missteps with its QE programs and not make the same errors. A Band-Aid approach by the ECB here would be very damaging to that “confidence factor” I mentioned above.

I read a very simple and concise commentary today from an analyst referencing sentiment as measured by asset flow within the Rydex family of funds. The two basic takeaways is that although many of the traditional metrics we use to gauge the market’s next directional steps are pointing decidedly bearish, the next directional steps are going to be decided by a group of bankers meeting in Jackson Hole, Wyoming and another set meeting in Brussels. What ensues next is anybody’s guess.