Keystone's Trading Week in Review and Path Ahead 11/24/12

On 11/16/12, Friday, OpEx. An independent audit of the FHA (Federal Housing Administration) reveals that this agency remains highly in debt and a future bailout by the American people will be required. The dollar/yen continues to climb strongly higher on expectations of further yen weakening programs by the BOJ.  The euro drops overnight to 1.2738. European leaders say a decision on Greece will be provided on Tuesday.  LaGarde says, however, “it is not over until the fat lady sings.” The Greece problem is punted down the road more than a football during an NFL game. China expects growth to slow in 2013. Traders are skeptical about China’s non-performing loan ratio by banks which remains low; the numbers are obviously fudged trying to hide the oncoming China hard landing.  This behavior is similar to Japan fudging the non-performing numbers (hiding how many loans are defaulting) in the early 1990’s as their economy and markets went off a cliff. Once the true realization hits that businesses and folks cannot repay loans in China, the end game is at hand, just as it occurred in Japan two decades ago. The 10-year Treasury yield is 1.58%. Gold is at 1700-ish.  Israeli troops take positions on the Gaza border. Rockets are firing into and thru Israel and Gaza.   Brent oil moves up over 108.  The news wires confirm that two missiles landed in Tel Aviv but no casualties are reported. WTIC oil is 86.23 not feeling the same impact as Brent.

On Friday, at 8 AM EST, the futures leap higher from down five to up five S&P’s on news that the Whitehouse is putting together a compromise plan for the fiscal cliff.  The broad indexes move lower after the opening bell until 11:30 AM when Speaker Boehner exits the Whitehouse proclaiming that the fiscal cliff can be avoided. A photo-op occurs showing the President and Speaker shaking hands, and Reid, Pelosi, Boehner and McConnell all talk happy talk. The markets sky rocket higher, the SPX moves from 1343 to over 1358, 15 handles, in less than one-half hour’s time.  Volatility moves lower with the VIX dropping under 17. Keystone’s SPX 30-minute chart shows the 8 MA moving up thru the 34 MA indicating bullish markets for the hours and days ahead. Trannies, utilities, telecom and copper all remain weak. Traders are selling dividend stocks due to the higher taxes coming. The broad indexes finish the day on the plus side due to fiscal cliff happy talk but are down for the week.  For the week, the SPX lost -1.5%, the Dow Industrials lost -1.8%, the Nasdaq lost -1.8% and the RUT fell -2.4%. Note that tech and small caps lead the weakness which is bearish for markets. AAPL drops under 500 billion in market cap.

On 11/17/12, Saturday, the Israel-Hamas War heats up. Rocket fire continues and Israeli troops and equipment is staged at the Gaza border ready to begin a ground war.

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On 11/19/12, Monday, the holiday-shortened week begins with President Obama saying he is ‘confident’ that a fiscal cliff resolution will occur and housing data is encouraging.  The market’s rally strongly on the fiscal cliff happy talk, the anticipation of a resolution to Greece’s near-term funding problem and anticipation of further Fed easing tomorrow when Chairman Bernanke speaks.  Brent oil hits the 110 level and WTIC moves over 88 on the Israel-Hamas War turmoil.  The broad indexes catapult higher at the opening bell and never look back. Oddly, however, the 10-year yield remains at 1.61% all day long showing that money is not moving from bonds to stocks and the rally is likely more due to professionals simply trading the bounce for a short term trade.  The SPX is up a huge 27 points, 2%, to 1387.  The SPX moved back above the 150 and 200-day MA’s.  Keystone’s cyclical signals for the SPX 12-month MA and the NYA 40-week MA flip back to the bull side indicating a Cyclical Bull market ahead. The Dow Industrials are up 208 points, 1.7%, to 12796.  The Nasdaq is up 63 points, 2.2%, to 2916.  The RUT is up 17 points, 2.2%, to 793. The bulls came to play today. Tech and small caps lead higher which is a feather in the bulls cap.  In the evening, Moody’s rating agency downgrades France’s rating knocking it off the AAA pedestal.  The euro falls to 1.2778 but the negativity may be muted since Moody’s is simply following S&P’s prior downgrade in January.

On 11/20/12, Tuesday, the euro recovers moving back above 1.28 in light of the Moody’s downgrade of France last evening.  The France 10-year yield is 2.11%.  Spain’s 10-year yield is 5.9% under the 6% level so Rajoy likely has no intent on requesting the bailout.  The Italy 10-year yield is 4.91%, under 5%, and Germany is 1.38%. The Israel-Hamas War conflict relative calm is broken as rockets are now fired at Jerusalem. Brent oil is at 111.50.  Housing Starts surprise on the upside at near 900K starts, the highest number since before the Fall 2008 market crash, in July-September 2008. A Finance Ministers decision on Greece is promised for the umpteenth time but talks are not going well. Chairman Bernanke wipes the steak sauce from his neck tie and begins speaking saying the “Federal budget is on an unstable path. The fiscal cliff would pose a substantial threat. Housing has shown signs of improvement and is moving in the right direction.” Five Israeli soldiers are injured by a Hamas-fired rocket.  The markets dropped to a SPX 1377 low intraday at 1 PM then recovered into the close. A sideways channel thru SPX 1377-1391 is in play.

On 11/21/12, Wednesday, a bus explosion occurs in Tel Aviv near the Defense Ministry. Brent oil is over 111.  After 11 hours of deliberations, the Euro leaders fail to reach an agreement for Greece. Euro leaders will attempt a solution on Monday. The euro is 1.2804 trying to maintain the psychological 1.28 level. Merkel says “We want Greece to stay in the euro.” She does not want to be labeled as the Lady that Brought Dow the Euro ahead of her September re-election. The markets are typically up 77% of the time today and float higher into the close as the seasonality dictates finishing at the critical SPX S/R at 1391.

On 11/22/12, Thursday, Thanksgiving Day holiday, U.S. markets are closed. China Flash PMI is 50.4 showing expansion after one year of contraction. Copper moves higher and the global markets experience buoyancy although the more positive PMI actually makes China stimulus less likely moving forward. The EU leaders meet to set the EU budget. Eurozone PMI shows continued economic weakness across Europe.

On 11/23/12, Friday, German business confidence is much better than expected which launches the euro above 1.29. S&P rating agency provides clarity on its current banking ratings across Europe, especially Spain, and the outlook on all the Spain bank ratings is negative moving forward. The Spain 10-year yield moves higher to 5.69%. The Greece 10-year yield is moving higher to 16.44%.  Draghi speaks providing pats on the back for everyone including himself, trying to foster stability in markets. Draghi makes the case for the ECB becoming the banking supervisor.  European leaders cannot agree on the EU budget so a decision will be pushed off until the New Year.  The Euro leaders are very skilled at can-kicking. Merkel takes a laissez-faire approach to the budget impasse saying that they can handle the budget next year.  Of course, Merkel’s goal is her re-election in September so anything that keeps the European debt mess together until then is fine by her.  In shocking news out of left field, Argentina may default. There is a debt dispute going thru the courts that involves billions of dollars and Argentina does not have the money. Egypt erupts in violence with protestors setting fires after the Egyptian leader Morsi declares his words as the law of the land moving forward. Morsi was elected but now moves towards dictatorship and many label Morsi as the “New Pharaoh.”  The rioters chant “down with Mohamed Morsi Mubarak,” making reference to the 2011 riots that ousted the Mubarak dictatorship.  Oil price remains buoyant as the global problems grow. Black Friday shoppers are out in force after Thanksgiving dinner shopping thru the night; the great American consumer cannot be stopped. The media reports a robust day of shopping and the sight of the lines at electronics retailers excite the technology sector.  The broad indexes jump at the open and accelerate higher as the session moves into the early close. The positive German sentiment, China PMI from yesterday, seasonality, and the gains in the retail and financial sectors all push the markets higher.  Keystone’s 60-Minute Chart with 200 EMA Cross Indicator signals bullish markets for the hours, days, perhaps weeks ahead. A feeding frenzy in the final minutes sends the SPX over 1400 (up for five days in a row) and the Dow Industrials over 13K.  The SPX adds 18 handles, 1.3%, to 1409, on light volume as would be expected for this day. The Dow gains 173 points, 1.4%, to 13010.  The Nasdaq adds 40 points, 1.4%, to 2967. The RUT is up 9 points, 1.1%, to 807.  Tech (Nasdaq) did not overly outperform the broad indexes and the small caps (RUT) lagged all day, not a ringing endorsement of the rally. For the week, the major indexes gained a huge 4%. The VIX fear gauge drops from over 18 to 15 in the last few days. The euro is at 1.2970.  The 10-year yield is at 1.69%. Brent oil is 111.

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On Sunday, 11/25/12, Catalonia regional elections in Spain.

On Monday, 11/26/12, Euro leaders promise a decision on Greece, for the umpteenth time once again. Fiscal cliff talks resume.

On Tuesday, 11/27/12, Chairman Bernanke speaks. Consumer Confidence.

On Wednesday, 11/28/12, New Home Sales. Beige Book. Full moon and lunar eclipse.

On Thursday, 11/29/12, GDP.

On Friday, 11/30/12, EOM. Personal Income and Outlays. Chicago PMI.

Europe continues to dictate global market direction with several moving parts;

·         The Spain bailout request must occur before the ECB OMT bond-buying program can begin. Spain must formally request the bailout since it shows a willingness to give up some sovereignty and accept oversight and conditionality. The Spaniards are proud folks so they keep trying to hang on without requesting a bailout. Italy tries to convince Spain to request the bailout since the bond-buying would help Italy’s debt mess. Rajoy likely has no plans to ask for a bailout anytime soon since the 10-year yield is under 6%.  Do not look for a Spain bailout unless the 6.25-6.50% and higher yields occur, unless, major problems develop and Spain is forced to take the bailout so the bond-buying can save the markets. The euro weakens (equity markets weaken) with no bailout but will launch higher with the bailout request.

·         Troika is scheduled to make a decision on Greece’s debt mess on Monday, 11/26/12, but this decision is constantly extended. The euro will jump higher if a solution occurs, which would send equity markets higher as well, however, the strong upside market orgy last week is already pricing in the decision. Greece will likely stay in the euro until the Merkel election occurs in September.

·         Cyprus needs aid. Perhaps the European leaders are working on a package approach where a Spain, Greece and Cyprus aid package will be announced all at once in December or early 2013.

·         Italy, Ireland and other Euro nation’s ongoing individual debt drama’s.

·         Fiscal Union and Banking Union. Merkel is pushing the fiscal union. The banking union is to start up January 2013 but will not be fully functional until January 2014. The schedules and dates continue to slip forward.

·         The Draghi put supporting the markets is the announcement of the OMT program on 9/6/12 at SPX 1403. The SPX 1403 failed showing loss of confidence by traders but the 1403 level was regained during the large rally last week.

·         ECB Rate Decision and Press Conference Thursday, 12/6/12. Europe must lower the value of the euro to increase growth thru manufacturing and exports. If the ECB cuts, the euro will drop and bring down equities. If the ECB stands pat the euro will move sideways and up which will continue to support equities markets

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On 1/1/13, Tuesday, ESM is officially open but will not be fully operational.

On 1/2/13, Wednesday, if Congress does not act, the U.S. hits the ‘massive fiscal cliff’ (a phrase coined by Chairman Bernanke in early 2012) that will cut the GDP, increase unemployment and immediately launch the country into recession, but, on the positive side, the nation’s debt will decrease. On 9/13/12, Bernanke says the Fed does not have tools to handle the fiscal cliff.

In March, the National People’s Congress convenes.  China President Xi Jinping and Premier Li Keqiang take over complete control and the ten-year transition of power is finished. China now sets inflation and budget targets moving forward. China will push to a domestic-led economy, private consumption, rather than an export-led economy, but a domestic economy will grow at a slower pace.

In September, Merkel (Germany) seeks re-election. She will not want to see Greece exit the euro before the election but will not care afterwards. Perhaps Greece and Germany will both exit the euro in the future.