Bear Market Rally Near Completion

The Party Is Over

Wall Street Greek technical analyst Steven Ferguson offers his latest technical analysis and market outlook below. Mr. Ferguson suggests the belated bear market rally is near completion. He cites a series of technical indicators, including the infamous "death cross," which offer Greek readers ample warning of the threatening possibility of a stock market downturn. Mr. Ferguson also operates Systemata Corp., a model-based controls design firm.

(Tickers: NYSE: DIA, NYSE: SPY, Nasdaq: QQQQ, NYSE: DOG, NYSE: SDS, NYSE: QLD, NYSE: ICE, NYSE: NYX, Nasdaq: NDAQ, Nasdaq: MEMKX, Nasdaq: GECMX, Nasdaq: JEVOX, Nasdaq: PEMAX, NYSE: EEM, NYSE: VWO, Nasdaq: VEIEX, Nasdaq: ADRE, Nasdaq: PEBIX, Nasdaq: GMCEX, NYSE: MSF, NYSE: EEV, Nasdaq: REMGX, NYSE: GMM, NYSE: EDZ, AMEX: ETF, NYSE: FEO, NYSE: ESD, NYSE: MSD, NYSE: EMF, NYSE: TEI, Nasdaq: EMIF, NYSE: EFN, NYSE: EMT, NYSE: PCY, NYSE: PXH, NYSE: GMF, NYSE: GUR, NYSE: GML, NYSE: GMM, NYSE: EWX, NYSE: GAF, NYSE: EUF, NYSE: EET, Nasdaq: ABEMX, Nasdaq: AEMGX, Nasdaq: APERX, Nasdaq: PMGAX, Nasdaq: PMCIX, Nasdaq: AOTAX, Nasdaq: AOTCX, Nasdaq: AOTDX, Nasdaq: AEMPX, Nasdaq: AOTIX, Nasdaq: AEMEX, Nasdaq: AAMRX, Nasdaq: AEMFX, Nasdaq: AAEPX, Nasdaq: AEMMX, Nasdaq: ACKBX, Nasdaq: ACECX, Nasdaq: AMKIX, Nasdaq: TWMIX, Nasdaq: NDAQ, NYSE: PIZ, NYSE: PIE, NYSE: PDP, NYSE: IWM, NYSE: TWM, NYSE: IWD, NYSE: SDK, Nasdaq: HTOAX, Nasdaq: HTOTX, Nasdaq: HTOBX, Nasdaq: JTCIX, Nasdaq: JTCNX, Nasdaq: JTCAX)

Bear Market Rally Near Completion

Since the last technical analysis installment, the S&P index dipped another 50 points for 4 successive days before rallying sharply, right at the projected "Phi Turn" date of July 1st. Following that, the S&P has indeed rallied back to the 50 day moving average as predicted. Alas, the level is now about 15 points lower than it had been at the time of our last article.

At present, we see that major indices are facing stiff upside resistance, even as earnings season heads into full swing.



From the chart in Figure 1, we observe the following:

• The 50 day moving average has now crossed below the 200 day moving average. This is the so-called "death-cross" which some treat as the defining indicator of bear market conditions


• Index closing prices have been stopped for the last two trading sessions right at the 50 day moving average


• If prices should penetrate that landmark level, the 200 day moving average looms above at 1112


• Prices have also been stopped by a downward trend channel which is further reinforced each time it acts as resistance


• The rally itself is forming a bearish rising wedge pattern (better observed on an intraday chart) that has a minimum downside target of approximately 1020


• Stochastic indicators, shown below the price chart, reveal a nearly overbought condition


• Heavy volume selling has accompanied the downtrend, while rallies have occurred on considerably lower volume


• Note finally that the 13 week moving average (not depicted) has touched the 34 week moving average, a condition that has reliably segregated bearish from bullish market conditions…this is a defining moment!

If the rally does continue and S&P prices break above the June 21st high of approximately 1140, it is very possible that the April 26th top at 1220 would eventually be taken out. However, this doesn't seem the most likely outcome as the week draws to a close and the index appears overbought even at 1100.

Greek readers should consider taking any trading profits from this recent rally.



Article may interest investors in Nasdaq: MEMKX, Nasdaq: GECMX, Nasdaq: JEVOX, Nasdaq: PEMAX, NYSE: EEM, NYSE: VWO, Nasdaq: VEIEX, Nasdaq: ADRE, Nasdaq: PEBIX, Nasdaq: GMCEX, NYSE: MSF, NYSE: EEV, Nasdaq: REMGX, NYSE: GMM, NYSE: EDZ, AMEX: ETF, NYSE: FEO, NYSE: ESD, NYSE: MSD, NYSE: EMF, NYSE: TEI, Nasdaq: EMIF, NYSE: EFN, NYSE: EMT, NYSE: PCY, NYSE: PXH, NYSE: GMF, NYSE: GUR, NYSE: GML, NYSE: GMM, NYSE: EWX, NYSE: GAF, NYSE: EUF, NYSE: EET, Nasdaq: ABEMX, Nasdaq: AEMGX, Nasdaq: APERX, Nasdaq: PMGAX, Nasdaq: PMCIX, Nasdaq: AOTAX, Nasdaq: AOTCX, Nasdaq: AOTDX, Nasdaq: AEMPX, Nasdaq: AOTIX, Nasdaq: AEMEX, Nasdaq: AAMRX, Nasdaq: AEMFX, Nasdaq: AAEPX, Nasdaq: AEMMX, Nasdaq: ACKBX, Nasdaq: ACECX, Nasdaq: AMKIX, Nasdaq: TWMIX, Nasdaq: NDAQ, NYSE: PIZ, NYSE: PIE, NYSE: PDP, NYSE: DIA, NYSE: SPY, NYSE: NYX, NYSE: DOG, NYSE: SDS, NYSE: QLD, NYSE: IWM, NYSE: TWM, NYSE: IWD, NYSE: SDK, NYSE: ICE, Nasdaq: QQQQ, Nasdaq: NDAQ, NYSE: NYX, Nasdaq: HTOAX, Nasdaq: HTOTX, Nasdaq: HTOBX, Nasdaq: JTCIX, Nasdaq: JTCNX, Nasdaq: JTCAX.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Relief Rally on the Way?

Technical Analysis Shows Near-Term Relief Rally Potential

Wall Street Greek Technical Analyst Steven Ferguson offers his latest critical analysis of the market. Ferguson has authored a series of research articles on econometrics and programmatic trade. In this latest piece, Ferguson sees the potential for a near-term relief rally. Steven also operates Systemata Corp., a model-based controls design firm.

(Tickers: NYSE: DIA, NYSE: SPY, Nasdaq: QQQQ, NYSE: DOG, NYSE: SDS, NYSE: QLD, Nasdaq: MEMKX, Nasdaq: GECMX, Nasdaq: JEVOX, Nasdaq: PEMAX, NYSE: EEM, NYSE: VWO, Nasdaq: VEIEX, Nasdaq: ADRE, Nasdaq: PEBIX, Nasdaq: GMCEX, NYSE: MSF, NYSE: EEV, Nasdaq: REMGX, NYSE: GMM, NYSE: EDZ, AMEX: ETF, NYSE: FEO, NYSE: ESD, NYSE: MSD, NYSE: EMF, NYSE: TEI, Nasdaq: EMIF, NYSE: EFN, NYSE: EMT, NYSE: PCY, NYSE: PXH, NYSE: GMF, NYSE: GUR, NYSE: GML, NYSE: GMM, NYSE: EWX, NYSE: GAF, NYSE: EUF, NYSE: EET, Nasdaq: ABEMX, Nasdaq: AEMGX, Nasdaq: APERX, Nasdaq: PMGAX, Nasdaq: PMCIX, Nasdaq: AOTAX, Nasdaq: AOTCX, Nasdaq: AOTDX, Nasdaq: AEMPX, Nasdaq: AOTIX, Nasdaq: AEMEX, Nasdaq: AAMRX, Nasdaq: AEMFX, Nasdaq: AAEPX, Nasdaq: AEMMX, Nasdaq: ACKBX, Nasdaq: ACECX, Nasdaq: AMKIX, Nasdaq: TWMIX, Nasdaq: NDAQ, NYSE: PIZ, NYSE: PIE, NYSE: PDP, NYSE: DIA, NYSE: SPY, NYSE: NYX, NYSE: DOG, NYSE: SDS, NYSE: QLD, NYSE: IWM, NYSE: TWM, NYSE: IWD, NYSE: SDK, NYSE: ICE, Nasdaq: QQQQ, Nasdaq: NDAQ, NYSE: NYX, Nasdaq: HTOAX, Nasdaq: HTOTX, Nasdaq: HTOBX, Nasdaq: JTCIX, Nasdaq: JTCNX, Nasdaq: JTCAX)

Relief Rally on the Way?

As suggested in our previous article, Monday's close did ultimately foretell the downward pressure on trading action for the entire week. By the end of Friday's session, it seemed major indices might indeed be staring directly down at a 20% drop in the near future. But just when such an outcome seems inevitable in the market, the opposite often occurs! For this reason, we share a complimentary forecast based on intraday data sampled at 15 minute time intervals:



The above forecast is based on spectral analysis of the time series data. While the method underlying the forecast has been unbelievably accurate at times, it is by no means perfect. Indeed, the method works best when the time series is quasi-stationary, which is generally not the case in capital markets, so that this prediction should be viewed for educational purposes only.

To interpret the forecast results, note also the following:

• The forecast is based on the SPY, but is scaled by a factor of 10 so that the value more closely could also represent the S&P 500 nominally


• The forecast period is for sixty 15-min intervals. This works out to be about 2.5 trading days


• Forecasts that fall outside of statistical error bands (such as this one) are usually meaningful


• Based on the forecast, Monday's open should feature major short-covering and a rally to an index high of around 1115 (SPY at $111.28)

From a more traditional view of technical analysis, we also see a charting pattern known as a "falling wedge," which is depicted in the intraday chart below:

• Note the falling trend-line depicted in solid red. This demarcates the top of the bullish falling wedge pattern


• Note that prices broke above the trend-line in early trading on Friday, then "back-tested" as the market closed


• After a successful back-test, the price should rebound as depicted by the upward green arrow above to the pattern target


• Based on the wedge measurements, the pattern target is about 30 points above Friday's close, which is also consistent with the time series forecast

Moreover, it is worth noting that the forecasted relief rally, if it proves accurate, would stop right at the 50 day exponential moving average, shown in Figure 3 below:



Compare the forecast high shown in Figure 1 ($111.28) with the current value of the 50 day EMA, which is $111.24! This suggests the relief rally will be once again stopped in its tracks by the moving average for the index.

Last, from an Elliot Wave perspective, five discrete waves can be counted in the drop from Monday's open. This would suggest that the next wave should provide relief and would likely stop at a Fibonacci retracement of 38%, 50% or 62%. Based on the high and low prices of wave 1 down, a 62% retracement would yield a relief rally high of $110.76.

We may wish to take into account the $0.53 SPY dividend of June 18th, which was distributed one trading day prior to the onset of the downward move. This value adjustment is not explicitly accounted for in the forecast or in the 50 EMA, so it would make sense to adjust the expected retracement accordingly. If we do so, we come up with an adjusted retracement of $111.29!!

All things considered, traders should look for some respite early in the week that follows, with a possible triangular continuation pattern forming by the week's end. However, given the enervated state of the economy, the current, longer-term downtrend and the increased market volatility, a long trade should only be undertaken with stop loss orders in place. And in any case, the drop towards 900 should resume after the holiday weekend, perhaps catalyzed by Friday's non-farm payroll data.



(Relevant Tickers: NYSE: DIA, NYSE: SPY, Nasdaq: QQQQ, NYSE: DOG, NYSE: SDS, NYSE: QLD, Nasdaq: MEMKX, Nasdaq: GECMX, Nasdaq: JEVOX, Nasdaq: PEMAX, NYSE: EEM, NYSE: VWO, Nasdaq: VEIEX, Nasdaq: ADRE, Nasdaq: PEBIX, Nasdaq: GMCEX, NYSE: MSF, NYSE: EEV, Nasdaq: REMGX, NYSE: GMM, NYSE: EDZ, AMEX: ETF, NYSE: FEO, NYSE: ESD, NYSE: MSD, NYSE: EMF, NYSE: TEI, Nasdaq: EMIF, NYSE: EFN, NYSE: EMT, NYSE: PCY, NYSE: PXH, NYSE: GMF, NYSE: GUR, NYSE: GML, NYSE: GMM, NYSE: EWX, NYSE: GAF, NYSE: EUF, NYSE: EET, Nasdaq: ABEMX, Nasdaq: AEMGX, Nasdaq: APERX, Nasdaq: PMGAX, Nasdaq: PMCIX, Nasdaq: AOTAX, Nasdaq: AOTCX, Nasdaq: AOTDX, Nasdaq: AEMPX, Nasdaq: AOTIX, Nasdaq: AEMEX, Nasdaq: AAMRX, Nasdaq: AEMFX, Nasdaq: AAEPX, Nasdaq: AEMMX, Nasdaq: ACKBX, Nasdaq: ACECX, Nasdaq: AMKIX, Nasdaq: TWMIX, Nasdaq: NDAQ, NYSE: PIZ, NYSE: PIE, NYSE: PDP, NYSE: DIA, NYSE: SPY, NYSE: NYX, NYSE: DOG, NYSE: SDS, NYSE: QLD, NYSE: IWM, NYSE: TWM, NYSE: IWD, NYSE: SDK, NYSE: ICE, Nasdaq: QQQQ, Nasdaq: NDAQ, NYSE: NYX, Nasdaq: HTOAX, Nasdaq: HTOTX, Nasdaq: HTOBX, Nasdaq: JTCIX, Nasdaq: JTCNX, Nasdaq: JTCAX)

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Head & Shoulders Go Mainstream

Technical Analysis

Wall Street Greek Technical Analyst Steven Ferguson offers his latest critical analysis of the market. Ferguson has authored a series of research articles on econometrics and programmatic trade. In this latest piece, Ferguson again sees an ominous Head & Shoulders pattern that portends near-term trouble for traders. Steven also operates Systemata Corp., a model-based controls design firm.

Head & Shoulders Go Mainstream

While many traders may already be familiar with technical analysis as the basis for timing the entry and exit of long or short positions in the stock market, it is also clear that the use of charting patterns, Fibonacci retracements and moving averages is becoming increasingly popular among a wider audience. And even while mainstream media outlets rush to publish more articles on similar topics, Greek readers can rest assured that important emerging trends, whether based on economic data or strictly on stock charts, will never be overlooked.

To that end, it would appear that major indices are now overlooking another precipice and headed for a further downward plunge. Observe the daily chart for the S&P index, which opened up almost 20 points in early trading Monday but closed near the day's low.



(Tickers: NYSE: DIA, NYSE: SPY, Nasdaq: QQQQ, NYSE: DOG, NYSE: SDS, NYSE: QLD, Nasdaq: NDAQ, NYSE: NYX)

While the close itself is perhaps a harbinger of future downward movement, the following observations point to upcoming decline as well:

• Note first that yet another Head & Shoulders Pattern has emerged in the S&P as well as in all major indices worldwide. This one is bearish and has a technical target of 900 on the index.


• Note also that a short-lived bounce from the 1050 neckline and above the 200 day moving average (red) has halted at the 50 day moving average (blue). Recall that some institutions observe the 200 day moving average as the basis for segregating bull and bear market conditions.


• Note that the 50 day moving average has begun its decent towards the 200 day moving average. Once the 50 day average is aligned below the 200 day moving average, this signal provides strong confirmation of bear market conditions.


• Note also that daily stochastics, the black and red lines featured at the top of the chart, provide cyclical indication that prices are done topping after closing near the high for many days, and are now likely to resume the downward trend that characterized the month of May.


• Finally, note that prices have recovered 50% of the downward move which began on April 26th at 1220 and ended early June at 1040. The subsequent 90 point bounce has provided a near-perfect 50% Fibonacci Retracement.

While the 13 and 34 week moving averages (not depicted) have not yet realigned to indicate bear market conditions, the current Elliot Wave count suggests that sub-wave 3 down is about to begin. By definition, this move will last longer and move further than sub-wave 1, which constitutes the above described move from 1220 to 1040 and which lasted approximately 30 trading days. This would further imply a nominal downward target of 900, which is also consistent with the Head and Shoulders pattern illustrated in Figure 1.

It is the author's opinion that Wall Street Greek readers should exit any remaining long positions and raise cash under these uncertain market conditions.



Article may interest investors in Nasdaq: MEMKX, Nasdaq: GECMX, Nasdaq: JEVOX, Nasdaq: PEMAX, NYSE: EEM, NYSE: VWO, Nasdaq: VEIEX, Nasdaq: ADRE, Nasdaq: PEBIX, Nasdaq: GMCEX, NYSE: MSF, NYSE: EEV, Nasdaq: REMGX, NYSE: GMM, NYSE: EDZ, AMEX: ETF, NYSE: FEO, NYSE: ESD, NYSE: MSD, NYSE: EMF, NYSE: TEI, Nasdaq: EMIF, NYSE: EFN, NYSE: EMT, NYSE: PCY, NYSE: PXH, NYSE: GMF, NYSE: GUR, NYSE: GML, NYSE: GMM, NYSE: EWX, NYSE: GAF, NYSE: EUF, NYSE: EET, Nasdaq: ABEMX, Nasdaq: AEMGX, Nasdaq: APERX, Nasdaq: PMGAX, Nasdaq: PMCIX, Nasdaq: AOTAX, Nasdaq: AOTCX, Nasdaq: AOTDX, Nasdaq: AEMPX, Nasdaq: AOTIX, Nasdaq: AEMEX, Nasdaq: AAMRX, Nasdaq: AEMFX, Nasdaq: AAEPX, Nasdaq: AEMMX, Nasdaq: ACKBX, Nasdaq: ACECX, Nasdaq: AMKIX, Nasdaq: TWMIX, Nasdaq: NDAQ, NYSE: PIZ, NYSE: PIE, NYSE: PDP, NYSE: DIA, NYSE: SPY, NYSE: NYX, NYSE: DOG, NYSE: SDS, NYSE: QLD, NYSE: IWM, NYSE: TWM, NYSE: IWD, NYSE: SDK, NYSE: ICE, Nasdaq: QQQQ, Nasdaq: NDAQ, NYSE: NYX, Nasdaq: HTOAX, Nasdaq: HTOTX, Nasdaq: HTOBX, Nasdaq: JTCIX, Nasdaq: JTCNX, Nasdaq: JTCAX.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Technical Indicators Revisited

Wall Street Greek technical analyst Steven Ferguson offers his latest technical analysis and market outlook below. Mr. Ferguson suggests the end of the bear market rally may be at hand, and if the conditions he lays out fall into place, a fall to the 900 mark on the S&P 500 Index is a real possibility. It is important to note that Mr. Ferguson produced this latest review of technical indicators for us this past Sunday, and updated the data before the market opened on May 18. The major indices have since completed their short-term rally and touched their respective 200 day moving averages as forecast.

(Tickers: NYSE: EDZ, NYSE: DIA, NYSE: SPY, Nasdaq: QQQQ, NYSE: DOG, NYSE: SDS, NYSE: QLD, NYSE: NYX, NYSE: ICE, Nasdaq: NDAQ)

Technical Indicators

On Labor Day of last year, the Greek published my article highlighting a technical charting pattern that had appeared in most major stock indices at that time: a bullish (inverse) Head & Shoulders. I was admittedly skeptical that the current bear market rally would take prices high enough to complete the pattern, particularly within the time frame demanded by a strict interpretation of related criteria for the price target. Turns out that, while I may have been correct about the timing I was ultimately wrong about the eventual level.

On April 26th of 2010, the S&P 500 (cash index) hit a high price of 1219.80, approximately 30 points shy of the nominal 1250 target highlighted in our previous article (see Figure 1 below). Note that a slightly more precise calculation of that target would have produced a refined value of 1220, which would make the intraday high remarkably close to the projection.



As well, another important technical condition may have also been satisfied on April 26th with the near completion of a textbook 61.8% Fibonacci Retracement. Both the DOW Industrials as well as the S&P 500 completed such a near-perfect retracement on that date (see Figure 2 below), recovering approximately 61% of the value lost between the October 2007 high and March 2009 bear market low. Readers may recall the significance of Fibonacci numbers in (human) behavioral processes from a previous installment of our series on technical analysis.



So does the culmination of these two important technical events suggest that the bear market rally is over? At the risk of being labeled as a Perma-Bear Analyst who thrice cried "Wolf," I dare say this may be the case. But let us continue to examine the facts.

During the recent Fat-fingered Flash Crash, major indices not only broke through their 50 day exponential moving averages (EMA), but also dropped briefly below the more important 200 day mark. Moreover, indices have failed to break back above what now appears to be 50EMA resistance and seem bound to retest the longer-term 200 day average in the near future. This "bears" watching closely!



Looking also at the averages on a weekly time frame, we again see some important conditions afoot. Note that the major indices fell below their 13-week EMA for only the second time since the onset of bull market conditions. As long as indices remain bounded by the 34-week EMA support, the rally may indeed continue longer.



However, if the 13 week EMA were to cross back below the 34 week EMA, Bear Market conditions would again prevail, this time with a much lower likelihood of intervention by governments and central banks the world over. It is worth pointing out that these weekly indicators have provided a reasonably accurate segregation of market conditions for many instances in the past, notably marking the onset of the Bear Market in late 2007 as well as the return to low-volatility, Bullish conditions in July of 2010.

Last, Elliot Wave Theory once again points to a strong possibility that Wave B, the rally-phase of the Bear Market, completed on April 26th. The current wave structure suggests that the first minor wave of Wave C down began with the Flash Crash as sub-wave 1, continued with a brief 50 point respite rally at the onset of sub-wave 2, and will continue with sub-wave 3 set to begin early next week. A convincing break above 1160 on the S&P index would suggest the prevailing bearish wave count might be incorrect, and that we might hit one more recovery high before summer's end. A close below the 200 day EMA would reinforce the reality that we are instead heading back to the 900 level over the next few months.

How should Greek readers respond in these "emerging" conditions? Once again, I believe it is prudent to raise cash. Given the underlying, farcical macro-economic conditions and ever-more-tenuous political landscape across the globe, with headwinds from alarming debt, inevitable taxation, imminently higher interest rates, recalcitrant joblessness, dwindling stimulus, …even fallout from both natural and manmade disasters, … readers may choose to take a more aggressive approach. To that end, I might be inclined to join Jim Rogers in his recent short position in emerging markets. In particular, readers may be interested in looking at (NYSEArca: EDZ), an ultra-bear emerging market ETF as a means to hedge the current downside risk.



Article may interest investors in Nasdaq: MEMKX, Nasdaq: GECMX, Nasdaq: JEVOX, Nasdaq: PEMAX, NYSE: EEM, NYSE: VWO, Nasdaq: VEIEX, Nasdaq: ADRE, Nasdaq: PEBIX, Nasdaq: GMCEX, NYSE: MSF, NYSE: EEV, Nasdaq: REMGX, NYSE: GMM, NYSE: EDZ, AMEX: ETF, NYSE: FEO, NYSE: ESD, NYSE: MSD, NYSE: EMF, NYSE: TEI, Nasdaq: EMIF, NYSE: EFN, NYSE: EMT, NYSE: PCY, NYSE: PXH, NYSE: GMF, NYSE: GUR, NYSE: GML, NYSE: GMM, NYSE: EWX, NYSE: GAF, NYSE: EUF, NYSE: EET, Nasdaq: ABEMX, Nasdaq: AEMGX, Nasdaq: APERX, Nasdaq: PMGAX, Nasdaq: PMCIX, Nasdaq: AOTAX, Nasdaq: AOTCX, Nasdaq: AOTDX, Nasdaq: AEMPX, Nasdaq: AOTIX, Nasdaq: AEMEX, Nasdaq: AAMRX, Nasdaq: AEMFX, Nasdaq: AAEPX, Nasdaq: AEMMX, Nasdaq: ACKBX, Nasdaq: ACECX, Nasdaq: AMKIX, Nasdaq: TWMIX, Nasdaq: NDAQ, NYSE: PIZ, NYSE: PIE, NYSE: PDP, NYSE: DIA, NYSE: SPY, NYSE: NYX, NYSE: DOG, NYSE: SDS, NYSE: QLD, NYSE: IWM, NYSE: TWM, NYSE: IWD, NYSE: SDK, NYSE: ICE, Nasdaq: QQQQ, Nasdaq: HTOAX, Nasdaq: HTOTX, Nasdaq: HTOBX, Nasdaq: JTCIX, Nasdaq: JTCNX, Nasdaq: JTCAX.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Dollars and Sense

Economic Recovery Dubious at Best

Visit the front page of Wall Street Greek to see our current coverage of Wall Street, economic reports and global financial markets.

(Tickers: (NYSE: GS, BAC, C, WFC, JPM, MS, TD, PNC, FNM, FRE, AIG, , DIA, SPY, NYX, DOG, SDS, QLD, Nasdaq: QQQQ)

In this article, we continue to explore the state of capital markets from a more fundamental, economic perspective. Some of us (including one Paul Volcker) continue to believe the outlook is dubious at best. So we ask the reader to consider a series of related observations, some anecdotal, some only partially substantiated, but all intended to evoke common sense thinking towards the future that lies directly ahead.

Dollars & Sense - Economic Recovery Dubious at Best

In mid 2008, as the Fed began unprecedented intervention in capital markets, Wall Street Greek warned of the possible ill and unintended effects of excess liquidity:

"But will the central bank engage in a more concerted asset-targeting effort to (in the words of Alan Greenspan, 1994) 'prick the … market bubble?' Or, in a rare but biased show of self-restraint, will the Fed let the market respond naturally to deflationary forces? In either case, the temporary strengthening of the dollar, coupled with coordinated currency support from central banks abroad could have 'unexpected' results. After all, such price oscillation is to be expected in a nearly frictionless system with boiling money sloshing around between asset classes."

Indeed, it seems that the stock market is in another bubble, poised for rapid deflation if and when the greenback bounces off near historically low levels.

• Consider the imminent impact of a stronger dollar. Even reports of a strengthening economy can put immediate pressure on US capital markets. As we have seen in the case of the Yen, an appreciating currency leads to rapid, broad-based deleveraging among foreign investors as they exit the easy money carry trade.


• Consider too the wizard behind the equities facade, errrr… curtain, Helicopter Ben. Does anyone doubt that ill-conceived bailouts, liquidity injections and negative real interest rates, not economic rebound, are the real reason behind current stock valuations?


• Consider that capital allocation has brought current leverage almost to the same level as 2007, so that we are seemingly poised for yet another deflationary drop as banks race to deleverage:

• Consider that stocks are fairly valued only if we see strong economic growth and earnings reports in 2010. Otherwise, trailing S&P P/E ratios are well above 125 on average. Improved bottom line profits generated by cost-cutting simply do not produce the kind of growth that will justify current, forward-looking valuations. Economic risks, which are substantial, are NOT factored in.


• Consider as another example the Contango carry trade. Oil index funds are borrowing money (i.e. applying more leverage) in order to buy and store oil at $70 with the expectation that it will be valued at $110 in 2010 when the inelastic demand and inflationary forces return! Never mind the demand destruction that we expect from alternative energy, or more likely, the future absence of any real economic growth.


• Consider that the Fed is already testing deleveraging mechanisms through reverse repos. And along with the US Treasury Department, the Fed is liquidating TARP stocks and warrants. Banks are quietly following suit with the sale of their own stocks to raise cash. Why are they all selling now if bank stocks, which constitute a large portion of major indices, have further appreciation in store?


• Consider the implications of continuing stimulus programs (e.g. cash for caulkers). If the economy has recovered as the main stream media suggests; if strong growth is to return in 2010, as portended by the forward-looking markets; then why in the world do we need more stimulus?! Why do the Obama administration, the Fed and the rest of the G-20 seem unwilling to take this economy off its training wheels?


• Consider instead the teetering reality that many manufacturing firms, particularly those in the heart of the Country and its true economic engine, the Midwest, are not growing at all. Though production levels have stabilized for some, further contraction is still looming for others. Certainly none are bursting at the seams with new growth!


• Consider that recent order stabilization has come at least in part from production of electric and hybrid vehicles, products that I work on daily. Almost without exception, emerging solutions offer no reasonable payback on initial investment. Even the VP of Advanced Storage Solutions at Johnson Controls, a major battery supplier, acknowledges that demand depends heavily on government incentives. This strongly implies industry growth will abate when government incentives (not to mention global warming myths) disappear!


• Consider that banks, flush with cash created out of thin air and borrowed at next to nothing, are still reticent to lend. For example, even though the SBA will offer government guarantees up to 80% for a small business loan, banks are yet demanding 75% collateral. Consider too the historic yield spreads lenders are demanding on 30-year mortgages, despite unprecedented rate intervention. Reluctance to lend at fair rates to businesses or even to new homeowners is stifling economic rebound.


• Consider all the purported loan modification programs to help out struggling home owners. In many cases, the rate may indeed be reduced to allow for a lower monthly payment, but the increased length of the loan makes the overall interest payout the same or higher. Securing a reduction in principal for upside down mortgages is like pulling teeth. These guys sure are generous after our trillion dollar bailout for their moral hazard! (More on that in a future piece.)


• Consider the millions of homeowners who continue to struggle despite these programs. Here in the geographic center of the Country, the economy has certainly shrunk, but the housing market has been relatively inert. Nevertheless, I know many, many homeowners who, despite recent modifications, are still upside-down in debt and well behind on lowered payments. Why aren't they able to keep up? THEY HAVE NO JOBS! A jobless recovery simply is not possible. That is not a matter of opinion. That is a fact.


• Consider the rash of new ARM resets and interest-only loans that have yet to hit critical mass. With them, more defaults are undoubtedly on the way. And with the expiration of the homebuyer stimulus tax credit in April 2010, artificial demand cannot re-inflate real estate forever.


• Consider commercial real estate losses that loom even more imminently. Banks continue to mark all of these assets to magic, make-believe maturity levels. A developer here in Missouri recently offered to buy several hundred acres of land which had just been seized through foreclosure. He offered an amount that was slightly above fair value based on comparable property sales and which would have covered the loan losses for the lender. But the bank, having restored capital reserve ratios courtesy of the US taxpayer, insisted on holding out for 2007 peak pricing when the property was first purchased. This seems pure fantasy and greed. So, while the developer would have created more construction jobs at the planned development site, the bank insisted that it would be better to keep one bookkeeper a bit busier.


• Consider the financial condition of Federal and State governments. Consider dealers who were never reimbursed by the Federal Government for the clunkers they purchased. Consider how much tax revenues are way down even as over-compensated hordes of government employees have yet to suffer layoffs en masse. Meanwhile, consider those out of work who fail to receive state unemployment checks on time or at all. Consider the states already borrowing from the Federal Government to make these payments. Last, consider those states which are completely insolvent. The list of those is growing. Maybe raising taxes will help? Oh right, people without jobs don't pay much in the way of taxes. Those with jobs may not afford their homes if taxes go up. And businesses cannot grow if their tax expenses increase. What an economic conundrum!


• Consider all these things and then help me see the economic rebound. Help me see why stocks are valued so richly. Help me see how we will avoid more bailouts, more taxes and more inflation, which would only stifle any and all future growth.

In my opinion, we have only one choice. And that choice is right now: Let go! Laissez-faire! Let free markets stand on their own. It may hurt in the short-term, but then too, capitalism might just survive.

The alternative, probably inevitable at this point, is One World Government under One World Currency. Socialism and secularism are upon us. Babylon is on the way. Either this is the culmination of some grand conspiracy wrought by bankers and oligarchs across the globe, or it is simply the result of a lack of plain old common sense. Plenty of dollars, but lack of sense!

A penny for your thoughts? Please discuss the topic here.


Editor's Note: This article should interest investors in Goldman Sachs (NYSE: GS), Bank of America (NYSE: BAC), Citigroup (NYSE: C), Wells Fargo (NYSE: WFC), J.P. Morgan Chase (NYSE: JPM), Morgan Stanley (NYSE: MS), Toronto Dominion (NYSE: TD), Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), AIG (NYSE: AIG) and PNC Financial (NYSE: PNC).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Phi-Turn Analysis Exposes Turn Date

To Every Season Turn, Turn...

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To Every Season, Turn, Turn Turn! The Byrds, and before them Solomon, warned that all seasons come to an end. While the short-term forecast continues to allow for a rise into market highs through the close today, it is likely that the bear market rally will yield to a change in season. December 2nd marks a potentially significant turning point as defined by a so-called "Phi-Turn Date."

Phi-Turn Analysis Exposes Turn Date

Phi-Turn Analysis is just one method of identifying market inflection points. These methods range from examination of lunar cycles, to other astrological events and onto more believable analysis of cyclic content in the market indices. Phi Turn Analysis was conceived by Dr. Robert McHugh, and relies on Fibonacci ratios to establish market turning points. The basis for the calculation begins with the significant top established in 2000.

Throughout 2008, the calculated Phi Turn dates have fallen quite remarkably on significant tops and bottoms in the market. While not every date marks the onset of a multi-month reversal, almost no reversal has happened on a day that has not matched the Phi Turn calculation result.

NOTE: This article is an amendment to the most recent "S&P 500 Index Winter Forecast." Through the description of Phi Turn Analysis, this completes the series on the search for bear market rally top. We realized Turn Analysis had not been addressed in the article series.


Article may interest investors in NYSE: PIZ, NYSE: PIE, NYSE: PDP, NYSE: DIA, NYSE: SPY, NYSE: NYX, NYSE: DOG, NYSE: SDS, NYSE: QLD, NYSE: IWM, NYSE: TWM, NYSE: IWD, NYSE: SDK, NYSE: ICE, Nasdaq: QQQQ, Nasdaq: HTOAX, Nasdaq: HTOTX, Nasdaq: HTOBX, Nasdaq: JTCIX, Nasdaq: JTCNX, Nasdaq: JTCAX. Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Head and Shoulders

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Head and Shoulders Pattern

As we celebrate Labor Day with an official 9.7% unemployment rate, our Nation indeed appears to be headed for what some are cleverly calling a "jobless recovery." Politicians and economists glibly predict that the rebound will feature high industrial productivity with commensurate corporate profits but may also leave an increasing number of Americans out of work.

Besides being incensed by the insensitivity of these commentators' remarks, when I hear the phrase "jobless recovery" being bandied about ever more frequently, I have to wonder whether those "employing" it really fathom how profoundly foolish their notion is. It's just about as inane as hope for an economic recovery without the participation of the American consumer.

Since the consumer must first produce in order to later consume, and since any such production would naturally require that he or she have a job, any hope of sustained recovery in our economy seems fleeting at best. We should note by exception that the arduous task of making money out of thin air (or from other peoples' pockets) is best left to investment bankers and politicians.

In light of this hollow economic backdrop, fueled by ill-conceived bailouts, stimulus packages and cash-for-clunker programs, one might expect that we could be in the final stages of an extraordinary bear market rally. But even as we look for a technical target, which may already have arrived, many point to a peak some 20% above current index prices.

These analysts point to a prominent chart pattern that has appeared on both the DOW and S&P indices: that of an inverted "Head and Shoulders." Most often, the head and shoulders pattern is associated with a bearish outcome, but when it is inverted as in the chart below, the predicted result is bullish.


Besides bolstering their price target for the S&P index with mark-to-make-believe based earnings predictions, traditional technical analysts measure the distance between the top of the head (i.e. the March low at 666) and the neckline, which is roughly 300 points higher, and extrapolate that price differential as the target for the top of the pattern: 1250. This would suggest we have much higher to go before any meaningful correction would occur.

If technical charting based on such pattern recognition seems like reading tea-leaves, or if the prospect of a rally to 1250 seems far fetched, don’t lose your head! As for the tea-leaves, I must point out that many well-known charting patterns (head & shoulders, bullish falling wedge, broadening formations, etc.) can be constructed from harmonic functions such as sine waves, even using multiple frequencies observed in stock market data. Thus the appearance of these repeated patterns can be explained directly from observable cyclic behavior.

However, the likelihood of such a pattern eventually achieving its technical target may be another matter altogether. Chart patterns, especially those that are ill-formed, often fail to meet price targets. Even those that are picture perfect, such as the bearish head and shoulders pattern that was so well publicized in July, can fail. Notwithstanding the ostensible need for supporting fundamentals, the S&P may therefore fall short of 1250 for other reasons observed by market technicians.

1. First, the eventual price much reach its target within a time frame consistent with the rest of the technical pattern, otherwise the pattern will likely fail. Such "failures" in the head and shoulder pattern can also be simulated using the above mentioned wave reconstruction methods where the amplitude and phase of constituent waves are adjusted to yield an incomplete pattern. Noting further the S&P chart in the figure above, it appears that the right shoulder is slumping in what should presently be a parabolic rise to the 1250 target. Instead, the index is struggling to maintain the millennium mark.



2. Second, market technicians observe that when the head and shoulders pattern appears as a bottoming formation (i.e. inverted), it is imperative that the right shoulder breakout above the neckline on markedly increased volume. Instead, market volume has been light throughout the latter stages of this rally except on recent days involving heavy distribution.



3. Third, given the broad constitution of the S&P index, if it were to reach that high of a target, it would seem relatively unlikely that either the DOW or the NASDAQ would be left behind. While the DOW itself is also presenting a similar pattern, the NASDAQ appears to be forming a more bearish formation. If the NASDAQ index were to pace the correction in coming days, it would further jeopardize any S&P climb to 1250.

In light of the above observations, the S&P is unlikely to reach the 1250 target before the bear market rally has reached its apex, and meaningful correction intervenes. In fact, there remains a strong likelihood that the top is already in, although 1047 remains a possibility. Readers should continue to watch key resistance (1018) and support (976) levels for indication of breakout in either direction. Opportunities for maximum profit seem to be growing short.


Please see our disclosures at the Wall Street Greek website and author bio pages found there.