Monday, November 29, 2010

Pay attention to 1200 level in S&P500

I got out of my shorts on Friday. I'm in the bull camp. I'm going to ignor Monday market moves. lets see what is going to play out by Tursday. If S&P500 gets above 1200 level, you can jump back in. Please note if S&P500 violates 1170 support level, picture will get ugly.

Tuesday, November 23, 2010

The Importance Of 1200 Level For S&P500

This week would be very tricky to predict due to short holiday week. Market will be choppy, if you want to get involved you better off to do day-trading. Pay attention to 1200 as psychological barrier. If S&P500 tanks below 1190, it would be very bearish. I'm in the bear camp and looking for 5-10% pull back to 1100-1166.
On the other hand if S&P500 stays above 1196 for a couple days it means bulls have the upper hand.

R1: 1194-1196
R2: 1200
R3: 1220
R4: 1228

S1: 1170-1168
S2: 1150
S3: 1131

Related topic:

Tuesday, November 16, 2010

QE2 Cartoon

I made this cartoon I hope you guys like it ;)

S&P500 Technical Analysis (11/16/2010)

S&P500 Technical Analysis Chart:
As I mentioned in my previous post (Click here) 1228 acted as strong resistance. S&P500 got close to it and we get the pull back that I was looking for. Big institutions could send the market lower to trap bears and manufacture a new shortsqueeze. What you need to pay attention to would be 1168-1163 support levels. It is critical for bulls to push the S&P500 above 1196. If S&P gets above 1196 it could move higher. If big institutions fail to do so, there is a good chance S&P500 tanks to 1131.
The last line of defence is 1075 if S&P500 tanks below 1075 it would be impossible for bulls to send the market higher in coming weeks. Due to huge rally a 5-10% pull back is absolutely normal, but you need to get worry if S&P500 breaks the lower side the up trend channel(see the chart in gray color). This channel started back in March 6th 2009. If S&P500 violates it; picture would get very ugly.

R1: 1194-1196
R2: 1220
R3: 1228

S1: 1168-1163
S2: 1150
S3: 1131

Sunday, November 7, 2010

S&P500 outlook and possible Ireland & Portugal bailouts

S&P500 Technical Analysis Chart:
S&P500 cut through 1220 resistance level like a hot knife through butter. What you need to pay attention in coming week is 1228 resistance level. Please note 1228 is the most important resistance; bulls are going to have a hard time to break 1228. I'm looking for 5-10% pull back in comming days. If S&P500 gets above 1228 and big institutions manage to hold the S&P500 above it for a couple days, S&P500 could rally to 1300. S&P may run out of steam at 1253, but it is not as important as 1300 level. Therefore if S&P500 stays above 1228 I would say the rally should continue to 1300 with out any problem.

Ireland 10 year government bond chart: The only event that has the potential to reverse the rally would be European sovereign debt crisis. I have talked about Ireland many times. Ireland government bond yield made a new high of 7.72% recently. Bond market is sending a clear signal to Ireland's president Mary McAleese, that we do not trust your economics policies.The cost of insuring Irish debt rose. Theoretically 7.72% yield means bond market does not have any faith in Patrick Honohan Governor of the Central Bank of Ireland. Ireland will be the next Greece, IMF has no other options beside bail them out. Portugal 10 year government bond yield made a new high of 6.655%. Portugal will be the next right after Ireland in bailout line.

Credit-default swaps on Irish government debt surged 30 basis points to a record 590, according to data provider CMA. On Friday 11/05/2010 the spread (difference in yield), between Irish bonds and benchmark German bonds rose as much as 25 basis points to a new high of 534 basis points. As I explained previously Ireland economy with $172.5 billion GDP is too small to cause a systematic risk, but due to extreme overbought stock market condition the Wall Street could use anything as an excuse to sell.

QE2 positive and negative effects on the economy

On 11/3/2010 the United States Federal Reserve announced that they are going to spend 600 billion dollars to purchase short term treasury bonds. Fed will buy $75b a month through June. On Oct 28, 2010 Bloomberg reported that the Federal Reserve had surveyed bond dealers for forecasts regarding how much asset purchases they expect from its second round of quantitative easing (QE2), and how much they expect such purchases to effect the market. I think they were better off if they just write a blank check to the Wall Street.

The Fed has re-embarked on a policy of quantitative easing. Its first round of quantitative easing, QE1, started in November 2008 and ended in March 2010.
What did Fed achieve by QE1?
The Federal Reserve purchased $1.25 trillion of agency mortgage-backed securities (MBS) and about $175 billion of agency debt. With QE1, the Fed's newly printed dollars were used (for the most part) to purchase illiquid assets such as mortgage backed securities from the large commercial banks. The cash received for these securities is being held on deposit at the Federal Reserve Banks. What all of this means, however, is that in essence, QE1 created very little velocity of money because the cash created in the first program did not move through the system. On the other hand due to absent of Mark-to-market accounting rule Fed over paid MBS and banks pocketed huge sums of money. Oh yes! they did it.

What does Fed hope to achieve by QE2?
Indeed, I'm not sure that the Federal Reserve or anybody else fully understands how quantitative easing works. The typical explanation between economists is that the Fed's purchases of longer-maturity securities will bring down the interest rates on these securities. The lower interest rates on longer-maturity securities will then induce the nonbank private sector to borrow and spend more. Also, the lower interest rates on longer-maturity securities will make equities more attractive investments at the margin, thereby causing a really in equity prices, which, in turn, will induce the private sector to increase its current spending on goods and services via a wealth effect. Fed hopes by purchasing treasury bonds keep the interest rate low, therefore when Option ARMs resets homeowners could take advantage of lower interest rate which theoretically could save many homeowners from defaulting on their mortgages.

What's wrong with QE2?
1) Liquidity traps: "After interest rate has fallen to a certain level, liquidity preference is virtually absolute in the sense that almost everyone prefers cash to holding a debt at so low a rate of interest. In this event, the monetary authority would have lost effective control." - John Maynard Keynes, The General Theory.

2) Lowering interest rates hurts savers, retirees, and even small-town banks that cannot access the monetary pumping from the Fed and must rely on their depositors. The Fed argument on helping home owners won’t be as easy as it sounds, because when home owners are 30-40% under water they cannot refinance; therefore low interest rate would not do any good. It makes more sense to use strategic default instead of continuing paying mortgage of a house that its value has fallen sharply.

3)Hyper inflation and dollar devaluation. Printing so much money would cause the dollar loses its value and ultimately we could have a very high inflation in the US. We are privileged to print a piece of paper and call it dollar and export it to the rest of world to import goods. What could happen to our economy if Bernake cause the dollar to loose its status as world reserve currency? What could be the side effects of money printing policies? The rest of the world does not need this extra liquidity, and this is where the second problem emerges. Several emerging economies, such as Brazil and China, are already close to overheating; and the euro zone and Japan can ill afford further appreciation in their currencies.

In my opinion quantitative easing(QE2) is just a different way to inject money into insolvent financial institutions. It would be a political suicide to tell to American taxpayers that they want to bailout insolvent banks once again therefore they are going to use QE2 as a cover up. Bernake wants to help Zombie banks by buying Treasury bonds. In last couple months banks has bought huge sums of treasury bonds, and they will be the sellers to Fed. So when Fed buys bond financial institutions are going to pocket the money. Bernanke argues that QE2 could cause the wealth effect, it means when the stocks value increase people should feel wealthy therefore there is a chance they are going to spend more, and spending more would jump start the economy. I don't buy his argument because stock market rallied about 80% since March 2009 but there is no wealth effect so far! What is the guaranty we get it this time? If he is right why Japan central bank could not get any wealth effect after a decade of quantitative easing?

Saturday, November 6, 2010

October 2010 Total Unemployment is 17%

Total unemployed table:
Please note that the real unemployed data is much higher than 17%.

Thursday, November 4, 2010

James Grant on QE2 and dollar future

Big bear James Grant, editor of Grant’s Interest Rate Observer, on QE2 and dollar future.

Monday, November 1, 2010

S&P500 November 2010 forecast

S&P500 Big Picture:
S&P500 Technical Analysis Chart: S&P500 is going to move violently after Fed announcement on QE2. The Wall Street is not going to get what they are looking for. Bernanke is not going to flood the market with huge sums of money. Quantitative easing will be a gradual process. The QE is a very risky move and could effect dollar value significantly, therefore Fed is not going to take a huge risk and go all the way. Probably they would start with 300-500 billion dollars and see what effects would have on economy or Fed may not give any dollar amount and keep the Wall Street in a dilemma.
If you are betting that Republican congress could do anything for economy there is a good chance that you are going to get disappointed. On historical bases gridlocks are bad for stock market, because nothing is going to be done, democrats and republicans are going to spend their time an energy to fight each others.

As I forecasted last week we witnessed selling pressure at 1194. If big institutions want to inflate the bubble more they have to keep the S&P500 above 1194. I'm going to stay in bear camp, I think the risk is to the down side. This is nothing more than asset bubble that is based on speculation on second round of quantitative easing (QE2).
As you see in the chart above rally has halted right beneath the upper side the orange channel. S&P500 has been moving in this channel since July 2010. As you see in the chart the recent rally is a clear "a,b,c" move which completes the sub-wave(2). As long as S&P500 stays in this channel bulls would have the upper hand. It would be very hard for bulls to break out of this channel before 5-10% pull back. Big institutions could send the market lower to trap bears and manufacture a new shortsqueeze. I think it's about time bears get active again. What you need to pay attention to would be 1150 and 1100 support levels. The last line of defence is 1075 if S&P500 tanks below 1075 it would be impossible for bulls to send the market higher in coming weeks. Due to huge rally a 5-10% pull back is absolutely normal, but you need to get worry if S&P500 breaks the lower side the up trend channel(see the chart in gray color). This channel started back in March 6th 2009. If S&P500 violates it; picture would get very ugly.

It is critical for market to stay above 1195 by November 30th and rally above 1220 by end of this year. If big institutions fail to take out these two levels it means they want to send the market lower.

R1: 1194
R2: 1200
R3: 1220

S1: 1165
S2: 1150
S3: 1130