North American major markets are 'correcting' for the second time in 2011.
In normal circumstances major North American market indexes correct approximately 4 times a year. This year's first DJIA and S&P correction (mid Feb-mid March -6%) bounced perfectly off its 200 dma (11,700) before rallying into new post credit crisis high territory and a shade under 12,900. This most recent 6 week DJIA and S&P 8% capitulation feels much more intense having wiped out the lions share of the 2011 gains for the year. The DJIA is enduring it's worst weekly losing streak since 2002! And that's saying something when one considers what we've been through since then!
The TSX has dropped almost 9% since the early April double top level (14,300) led by the heavily weighted financials and having lost all of it's 2011 gains. Major moving averages and key uptrend lines have been violated this week which is often a red flag for long positions.
The TSX Venture Index has dropped a whopping 20+% from its early March high of 2,450. It currently sits under 1,950 and 300 points below the January 1st/2011 opening levels.
This most recent North American swoon accelerated primarily due to the uncharacteristically dour comments from Helicopter Ben and his steroid consuming band of financial quantitative easers. His depressing economic comments and projections sounded like a QE III rehearsal speech to me. Bernake's sour analysis was supported by the Fed's Beige Book reports of 'growing but slowing' US economic activity. Only Dallas Tx reported upbeat growing stats - a possible indication of a looming NBA Mav upset over the Terrific Trio of the Miami Heat. Gentle Ben will have his hands full convincing a surly Congress during looming debt limit 'roid rage' debates to provide financial markets with yet another 'quick fix' to stimulate beleaguered tax payers!
This week's critical major US bond auction went smoothly with the bell weather 10 year bond rate dropping below 3%. The November 2010 'Pre-QEII' 10 year bond yield low was 2.636%.
The level of investor bearish sediment has rapidly increased to almost 50% - the same level as just prior to the November start of the QEII. Let's hope this is not an indication that glass is only half full!
Nasty unemployment stats continue to be reported for most credit challenged Euro zone jurisdictions. It is beyond me how Greece with 16% and Spain with 21% unemployment (and each with a whopping 40+% unemployment for those under 24) will ever deal with their bloated debt balance sheets. The slight .06% drop in German industrial output is equally as concerning considering they effectively finance most of the dysfunctional Euro debt freeloaders. Moody's has become very moody lately with their 'downgrade-a-day' doomsday threats to any fiscally challenged jurisdiction. China suggests they may take their foot off the interest rate accelerator but seem to be more concerned about US financial budget challenges. Thankfully sweltering temperatures in the Middle East have temporarily halted significant internal political and social hostilities for the time being!
In the US the unemployment line has stretched back to a hair over 9% in spite of very positive record levels of exports, rapidly improving personal balance sheets, powerful corporate profit momentum, and a very friendly interest rate/spread environment. Household net worth has increased $US10T in the least 2 years!
Financial pundits are growing increasingly 'gloomy and doomy' in spite of our bikini friendly summer temperatures. Second quarter GDP growth does not appear likely to build significantly on the moribund 1.8% stats reported in the first quarter. 'Stimulative' interest rates cannot drop any lower unless lenders are prepared to start paying borrowers instead of collecting.
The key under valued housing sector is groping for a meaningful bottom like a New York Democratic Representative on Facebook. Merciless waves of fresh foreclosures are bloating already over supplied conditions. R.Shiller (Case-Shiller Index) suggests that residential values may drop yet another 10-25% before the ultimate bottom is hit. That reality would suggest conditions far worse than the devastating carnage of the 'Dirty 30's!' And this after the value of household real estate has already lost $US6.6T from the 2007 peak. I'm not sure a US bank will be left in business if residential house prices drop another 25% from current depressed levels. Currently US Banking balance sheets are being mercilessly 'capital tested' by the Fed while their associated equities try to deal with substantial liquidation and nose diving stock prices.
Prevailing powerful corporate earnings reports are being systematically revised downward reflecting an anticipated drop in world wide economic growth. I hope I'm not cheering you up too much?
Although I'm not planning to cut my personal consumption levels any time soon - the equity markets and economic experts are suggesting otherwise! My wife will not be pleased if they are right and I am wrong!
In the commodity sector widespread 'bubble' proclamations ring out but are not reflected in the current strong price levels so far. The Agra sector is showing renewed strength with Corn futures hitting life of the contract high levels based on reports of reduced planting, lower than expected yields, and weather issues. Soybeans are on the verge of following the lead of corn needing only marginal upside to significantly break out on the upside. Wheat has been the lovable laggard of the group and rests on solid support at $US7.50/bu.
The International Energy Agency released a report calling for a 'Golden Age' for Natural Gas - my personal favorite commodity. Although - I'm not looking forward to increased levels of personal natural gas in my golden age. (Sorry but I had to throw that one in). The thrust of the IEA report is based on Japan's tragic nuclear disaster with Nat Gas being a relatively cheap, pleantiful, and safe substitute. I'm not quite that positive but I think Nat Gas can easily rally to the mid $US6/mcf level - the average break even cost of production. Nat Gas currently is on the verge of a significant intermediate break out through the $US4.90/mcf level on a closing basis. Hot summer temperatures will go a long way to burn off Natural Gas inventory excesses.
Gold has impressively absorbed any significant selling to this point and is consolidating near the May 2nd all time high level of $US1,557. Despite recent short term US$ strength - Gold remains within a crisp freshly printed $US20 bill of new record high closing levels. Short term technical negative relative strength divergence is a mild concern for Gold at current levels and may suggest a pull back to $US1,475 support.
Silver continues to impressively absorb and consolidate the recent brutal CME margin increases in the
$US36-38 level. It appears that Silver maybe flowing into longer term strong hands from the short term speculative trading accounts. Gold and Silver have recently been reporting interestingly record low 'deliverable' levels of inventory on the CME. Expect increased volatility around key contract expiry dates throughout the summer.
Copper has held the very profitable $US4/lb level to this point and needs a $US4.25+ level on a closing basis to resume upside momentum. Rising interest rates and/or a slowing world economy would challenge Copper to remain significantly above the $US4/lb level. Downside support is at the $US3.60/lb level.
Oil impressively holds the $US95-105 level primarily based on various OPEC member quota differences, very volatile inventory reporting, and the astonishing news that China has already become the #1 consumer of energy in the world! I hope they got Al Gore's permission first! Significant strength in the US$ would pressure Crude Oil prices in the near term. The $US85-95/bbl level looks to offer significant longer term support with $US110-120 being substantial natural resistance. Intermediate and Senior producing oil equities have significantly discounted lower underlying crude oil price levels which I do not think we will see any time soon. Many quality junior TSX-Venture exchange oil exploration/producing/drilling issues have been hit particularly hard in recent days and look very compellingly priced at current levels.
In Canada, the TSX has also been hit particularly hard in recent weeks in no small part due to unsubstantiated accusations of significant irregularities by TSX 60 listed Chinese Timber company Sino Forest. According to the appropriately named short sellers - 'Muddy Waters' - See No Forest has been nothing more than your basic 'Tree Ex' swindle possessing little or no value. Based on very suspect and 'pre-marketed(?)' negative research, the 35 year old former lawyer & upstart Carson Block, alleges that Sino Forest has grossly over exaggerated stumpage reserves and possibly even title and ownership.
The silent response from the otherwise vigilant regulatory community has been deafening. In the process Ontario domiciled Sino Forest, with a significant 'who's who of finance' as shareholders, has been crushed having lost 80% of its recent $US5B market cap. It appears that the compliance community has little concern about loose cannon renegade short sellers who disparage, denigrate, and generally 'muddy the waters' against relatively helpless publicly listed issuers. Since the fireworks of last week almost every North American Chinese RTO completed over the past 10 years has come under intense scrutiny and pressure. The SEC has finally decided to fly into action! Many issues are no longer marginable at the major brokerage houses based simply on this self interest hearsay!
It is mind boggling in this day of the Dot Com 2002 Sarbanes Oxley Auditing Accountability Act and the most recent assorted Dodd-Frank Sub prime regulatory overkill - that anything even close to this kind of financial chicanery can occur! It sure looks like the regulators could use some regulating themselves!
The TSX closes the week a shade below 13,100 almost 1,200 points (9%) below the March and April recent recovery high levels. Key support, moving average, and longer term uptrend levels have been violated in this significant over sold 8 week sell off. The TSX will be limited on the upside without leadership from the Banking & Financial issues.
Bull market corrections can be as deep as 15% - which in this case would definitely surprise me if the price of gold, base metals, and crude oil continue to stay at current high levels. The TSX list of new 52 week lows has grown considerably in the past few weeks and is starting to feature more quality issues which is not a great sign. Breadth on the downside is another nagging negative.
Bottom Line: What initially looked to be a fairly subdued and contained sell off has morphed into a fairly nasty and powerful selling slump. Persistent sovereign debt teeth gnashing and related QE II debt ceiling stress appears to be accelerating. My personal DJIA/S&P/TSX index 'stop loss' levels have been triggered by the end of the week. As a result I am now more of a mild 'stopped out' bull/bison.
Interestingly a significant amount of this selling has occurred without the usual accompanying negative economic hard data points. The quality (volume, breadth, &leadership) of the next rebound rally will be key to determine if this selling leg is more intermediate in nature - and which could be as much as 15% from the recent post credit crisis high levels. 'If so', that would imply that both the DJIA and TSX could fall another 1,000 points back to their respective long term 200 week moving averages.
In today's terms nothing can be ruled out. Strong balance sheet companies with healthy earnings that appear very attractively priced may get cheaper in the short term. Huge pools of liquidity continue to search for growth and yield. Look for the DJIA 11,700 to offer significant support and a potential double bottom opportunity.
Bear market talk is beginning to circulate around momentum driven trading circles and respected financial commentators. Even worse - Bernake will be speaking before the end of the month! Look for entry points during near term extreme oversold conditions.
'Trading this market through the summer months may require healthy doses of sun screen, air conditioning, and the patience of Job.'
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