S&P500 Technical Analysis End-Month Update

Despite the volatile market my prediction worked out very well. S&P500 started to form a down trend channel I pointed with dotted blue line. At this point this channel has not conformed yet, but in coming days we will see what is going to play out.
If we move higher I expect to find many sellers at 200 EMA. 940-950 are the next levels to watch.

Friday closing action was ridiculous. Big institutions manipulated the market and manufactured +1% rally in last 10 minutes of closing. I doubt any savvy investor jumps in the market in the last 10-15 minutes of closing and put his money in danger specially when GM is getting close to file for bankruptcy. It just does not make any sense.
The money managers have to show to their investors that they had good month therefore they manufactured a rally that ignited a huge shortsqueeze.

KBW Index

KBW Index hit the Inverted Head and Shoulder target, It's right beneath the 20 EMA if it could move above 20 EMA , it can moves higher to test the 200 SMA.

Geithner's PPIP The Bigest Scam Ever

You might want to check out my post:
"Why Public-Private Investment Program(P-PIP) Will be a Failure?" http://the-us-microeconomics.blogspot.com/2009/04/why-public-private-investment-program.html

Convexity Risk

Here is a link to a good article about Mortgage Convexity Risk Convexity Risk

Dow Jones Transportation Average (May 28th)

Dow Jones transportation average clearly broke the uptrend channel. It's hanging just above the 50 EMA in the past 3 days. So far it hits the 50 EMA twice and every time bounce right back. If we brake bellow it there is good chance Dow Jones transportation could retest the March low.
There are 3 important events are happening in coming days that could shake the market. On Friday 8:30 AM we are going to get the GDP and next Monday ISM Mfg Index and GM bankruptcy.

The U.S Dollar Chart

PowerShares US Dollar Index
Bernanke & Company finally broke the dollar's back. He keeps pushing the printing button and bails out his bodies. Note that $23.90 is an important support, it held in past two days. We will see if it could continue to hold!

S&P500 Technical Analysis May 27th

S&P500 daily chart:
"Please click on the chart to zoom in"

The blue lines show the down trend channel. I expect to see the acceleration rates of decline in coming weeks. The 20 EMA acted as support today ,but I doubt it could hold any more. the 880 support has been hit several times it's about time to break it. I expecting 50 & 90 EMA to act as short term supports in coming days.

Housing Market & Home Builders Future

Today we got the housing data that showed "no evidence" that home-price recovery is here. This should not come by surprise to savvy investors, but for those who listen to "talking heads" in CNBC it was very surprising because they've been told "we see the green shoots of economics..." . They put their heads in the sand. Let's face it the housing market is not going to improve anytime soon. There is so much supplies and to little demands, and tightening the credit does not help the situation. The housing bubble was due to easy credit that won't come back any more. Banks facing the liquidity crisis therefore they are going to hold to their cash and would not lend.

When people losing their jobs, they will be in danger of defaulting on their mortgages and this vicious cycle will continue. When people get older they tend to sell their houses and buy a smaller one. Huge wave of baby-boomers would be a disaster for home builders because it mostly adds to supply. We are dealing with over 10 million access houses in the U.S. , I need to mention this data does not include +600,000 shadow inventories*(1). Banks try not to be in the business of owning homes, and vast shadow inventory of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector. Home builders would not see the recovery in years to come even if the house price bottoms by next year.

Home builders ETF is in the conformed down trend (in blue line). It broke the uptrend 2 weeks ago and it's bouncing at the critical levels, 50,90 & 100EMA became horizontal and it has been moving in this range in last couple days, break below these levels would be the sell signal.

*(1)shadow inventories:(houses that are not in the market and owners are waiting to see some signs of recovery to put them for sells )

Lennar (LEN) and City group (C) Short Term Supports and Resistances

Lennar Corporation Daily chart:



City group Daily chart:
"Please click on the chart to zoon in"

Major Indices Big Picture

Major Indices Big Picture is badly damage as you see the 200 EMA & SMA acted as resistance. note that major indices failed to move above 200 SMA & SMA in daily time frame. If indices move above 200 EMA & SMA they have chance to move higher. In my opinion S&P500 is going to roll over at 940 or 1000 that coincide with 200 SMA(Monthly time frame)

Financial Down-Trend (May 20th)

Financials broke the major uptrend 6 days ago. We formed a down-trend (in red). On the other hand there is a possibility of an uptrend (in doted green line). It's too soon to call it uptrend, but it has the potential therefore I pointed.

S&P500 Levels To Watch

880 is the most important support to watch. If S&P500 drops below 880 ("see the chart in green") it will jeopardize the up trend.
if we move higher we should find some sellers at 920 & 940. Note that 940 will coincide with 200 SMA.

Treasury Bond Mid-Month Update

iShares Barclays 20+ Year Treasury Bond May 18th.
iShares Barclays 20+ Year Treasury Bond May 7th.

It's critical for treasury to hold on to S2 support. Note that 61.8% Fibonacci retracement acted as resistance.

you might want to check out my post back in May 7th. http://the-us-microeconomics.blogspot.com/2009/05/treasury-bonds-at-support-level.html

Why Did LIBOR & TED Spread Drop?

Despite the Bernanke's efforts to improve the credit situation, and recent drop in the LIBOR OIS *1 and TED Spread *2 did not make any difference in bank lending. Banks refused to lend to businesses due to uncertainty in the U.S. economy. The recent issuing equities to raise capital by many banks, tells me that even bankers don't believe in this rally. Therefore they took advantage of the bear market rally to raise capital, before indices head lower again.
The only reasonable explanation of drops in LIBOR and TED Spread is Fed quantitative easing and massive Fed intervention in market by pumping unbelievable sums of cash. On the other hand drops in LIBOR could be a sign of improving bank liquidity as customer deposit growth replaces borrowing in the short-term money markets.

In such an economics uncertainty banks keeping huge sums in reserve and refuse to lend therefore excess liquidity have no where safe to go except into the Treasury or Inter-Bank lending. On the other hand Bankers are risk takers by nature,they received big sums of cash through TARP & TALF obviously they should put it to work. They flood the stock market and bond market with free government money that explain the recent rally or as I call it "assets inflation". Fed quantitative easing to buy Treasuries and to cut interest rate to (0% to 0.25%) at the same time; caused Treasury became unattractive to financial institutions. When Treasuries drop near ~0%*3 there is not any benefit to buy them, banks rather hold cash or invest it in stock market, that's why Fed has been buying treasury, but Bernanke has been denied buying treasury bonds.

China is the biggest U.S. debt holder, they don't have any other options beside continuing buying our debt, because if they suddenly stop to buy our debt it will cause the big drop in the U.S. bonds and ultimately they will lose a lot of money. On the other hand they have started to take action and paying attention to diversification in their investments. They invested heavily in commodities and other currencies. Treasury issued huge amount of bonds to pay for bailout and other government spending, China has increased their purchase, but they did not catch up with increasing rate of debt issued by the U.S. treasury. Chinese did not participate in treasury auctions as strong as they used to. Therefore Fed stepped in and starts to print money to buy Treasuries this phenomena known as "debt Monetization" *4.

"Click on the table to zoom in."

On the other hand bankers has to circulate their excess cash. The only safe option left is the Inter-Bank lending. The excess supply in Inter-Bank lending caused recent drops in LIBOR. The decline in LIBOR has more to do with deposits reducing demand for funds in the interbank market to anything else. I need to remind my readers that deposits at U.S. banks jumped by almost $400 billion in the past six months which has been improving the banks liquidity.

The sharp drops in LIBOR is a sign of improving bank liquidity as customer deposit growth replaces borrowing in the short-term money markets, and it is not necessarily a sign of the willingness of banks to lend and improvement in the credit market.



*1 LIBOR (London Inter-Bank Offer Rate): Is the interest rate that the banks charge each other for loans (usually in Eurodollars). This rate is applicable to the short-term international interbank market, and applies to very large loans borrowed for anywhere from one day to five years. This market allows banks with liquidity requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day.

*2 TED Spread: Is the difference between the rate for Treasury Bills and the rate for Eurodollar Bills. The resulting price discrepancy is an indicator of credit risk. An increasing TED spread is thought to indicate increasing risk, while a decreasing TED spread is thought to indicate decreasing risk.

*3 Treasury as of May 15th:
Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
(%): 0.11 0.17 0.29 0.50 0.88 1.30 2.01 2.65 3.14 4.07 4.09

*4 Debt Monetization: Is a two step process where the government(Treasury department) issues debt to finance its spending and the central bank purchases the debt from the public. The public is left with an increased supply of high powered money that causes inflation on the long run.

Alan Grayson On Too Big to Faile Insurance Companies

Standup Economist

S&P500 Technical Analysis Mid-Month Update

I posted my monthly forecast on May 4th here is the mid-month update. So far my forecast plaid out very well (:

"S&P500 Possible Moves in May ". http://the-us-microeconomics.blogspot.com/2009/05/s-possible-moves-in-may.html

S&P500 Mid-Day Chart

"Click on chart to zoon in."
S&P500 is at critical level; drops below 880 will cause the index to tumble on higher rate. It could move to 897 or 905 then runs out steam and heads lower. On the other hand if S&P500 moves above 910 it's very positive in short term.

Major Indices Head Lower (May 13th)

"Please click on charts to zoom in"

S&P500 10 Minutes time frame, we clearly broke the up trend channel.



Dow Jones 10 Minutes time frame.






NASDAQ 10 Minutes time frame.







NYSE 10 Minutes time frame.

GM Future

Recently there have been many speculation pieces regarding what may or may not happen to General Motors if and when the company has to file for Chapter 11 bankruptcy protection. At the current time, there is no certainty of a bankruptcy filing by GM. The new offer to the unsecured bondholders has not been formally presented to them yet, that is slated to happen this Wednesday when the Auto Task Force and GM officials meet with representatives of the bondholders. That outcome of this most recent bondholder offer is likely going to be the ominous sign of the future of General Motors. If accepted, an out-of-court restructuring may just be possible yet. If the bondholders refuse (again), a Chapter 11 filing will be following shortly. GMI sources have informed us of what the current bankruptcy plans entail after the filing has been made. We feel like it is imperative to clarify what the current plans are.

Reports are correct that, if bankruptcy is filed, General Motors will seek a “363” deal in court. Such a deal has the company split into two portions; one comprised of the “good” assets (let’s call it GoodGM for ease) and one filled with the “bad” assets (call it BadGM). During the proceedings, BadGM would be given over to the holders of GM’s debt to be liquidated to raise money to pay off former GM’s debt. Note that GM has approximately $29 Billion in debt; $7 Billion of which is secured by Saturn assets (including Spring Hill, TN plant). The government’s $13.4 Billion loan to GM is also considered secured debt, with a vast amount of assets up as collateral.

GoodGM would reemerge fairly quickly from the bankruptcy process (if everything goes to plan). The U.S. government would release GM, GoodGM and BadGM of the $13.4 Billion in debt, but as a trade-off take a 100% ownership in GoodGM upon reemergence. Shortly after the new company emerges from bankruptcy, the U.S. government (currently the owner of GoodGM) would issue an initial public offering (IPO) on the new company and it would become a public company much like the current General Motors, though the current GM stock would be canceled in bankruptcy. Most of the money raised from the investment of the new company would likely go to the VEBA fund for the UAW.

A Look at GM's Debt

Itemized:
Unsecured debt: $29 Billion (this is the amount that is taking hold in tomorrow's bondholder meetings)

Debt to U.S. government (considered secured by assets): $13.4 Billion

Secured (non-government) debt: $7 Billion (this is all secured by Saturn and the Spring Hill, TN assembly plant)

UAW VEBA Obligations: $48 Billion (considered unsecured debt)

Total Debt: $97 Billion (including VEBA obligations)
Total Debt (without VEBA): $49 Billion

The above is a very general view of what the bankruptcy plan for General Motors is shaping up to look like. Some will argue against the plan, but GMI sent the above off to our sources for verification prior to publication and in the past they have been spot on. Tomorrow's bondholder meeting is likely to shed light on whether or not bankruptcy is the only answer.

Where the Trillion dollars went?

Rep. Alan Grayson asked the Federal Reserve Inspector General about the trillions of dollars lent or spent by the Federal Reserve and where it went,and the trillions of off balance sheet obligation ,but she was unable to answer the most basic questions!
Who put that idiot on such an important job? Who is going to protect taxpayers?
I have nothing to add the video speaks for itself.

Indices' Short Term Supports

Here is short term supports for major indices to watch. Please be advised that you should not risk your money and jump in at these levels. These are the levels to be concerns, if they failed to hold you should take some profits and go to the sideline.
Remember in bear markets "CASH IS THE KING".

S&P500 890 THEN ~879

DOW 8190 THEN ~8000

NASDAQ 1695 THEN ~1660

XLF ~11.20 THEN 10.40

The leader start to rolle over

"click on picture to zoom in"
NASDAQ closed below 200 SMA on May 11th. NASDAQ staid above 200 SMA for 3 days, then rolled over. Due to leadership roles of NASDAQ in past couple months it is critical for bulls to see NASDAQ stays above 200 SMA. If NASDAQ failed to move higher it will cause the indices to move lower.

GM At Mercy Of Bondholders.

GM has over $27.5 billion in bond debt that is unsecured. If GM couldn't negotiate a deal with bond holders, game is over for GM. They have to file for chapter-11 bankruptcy. GM has to reach a deal with 90% of its bondholders to avoid the bankruptcy.
Government spent billions in taxpayers' money and all they did was to postpone the unavoidable. GM burns $2 billion per months just to run its facilities. They knew GM could not last anymore but they spent cash for trash anyway!

High Yield Corporate Bond

High Yield Corporate Bond is a good indicator to forecast the market. If it drops below 200SMA it could interprets as red flag for bulls.

What if this rally has some legs!

Dow Jones Industrial Average:(Please click on the picture to zoom in)

Some of my readers have been asking me why I don't give any optimistic analysis, so I honored their requests. Note that I'm not bullish by no measure,but it's smart to be open to the rare events as Nassim Taleb said in his book "Black Swan".
You might be familiar with inverted head & shoulders pattern, but just in case I will explain it to you.
Inverted Head & Shoulders' the target would be the distance between the neck line (in white) and head (circled in blue). Which give us the maximum target of 9800 to 10200 for Dow Jones.
************* PAY ATTENTION ************** If Dow stays above the neck line ("in white") and then it moves above 200SMA, I-H&S pattern could come to play. The failure to move above 200SMA will cause the Dow Jones Industrial Average moves lower to retest the March low . Please see my post "S&P500 Possible Moves in May ". http://the-us-microeconomics.blogspot.com/2009/05/s-possible-moves-in-may.html

Job lost & GDP Outlook.

Consumer spending makes 70.9% of the U.S. GDP. This week 601,000 Americans lost their jobs. New jobless claims dropped by 30,000 compare with previous week,but still it is very high compare with historical data. New jobless claims staid above 600,000 since February, if it would not drop in coming weeks we are going to end up with +9.7% unemployment by end of this year.

Today we got the Nonfarm Payrolls data -539,000,it was slightly better than analysts expectations (-810,000 to -580,000),but here is the catch, government hired 66,000 temporary workers. Yes you heard it right! that's why we end up with better than expectation data. You do the math, 539,000+66,000=605,000.

I need to remind my readers that if someone loses his/her job and not looking for a job, he/she does not consider in this data. It means the actual unemployment rate is much higher than 8.9% . Plus this data lacks the number of unemployed illegal immigrants. Other important data that did not reflect in headlines was the number of unemployed who have been looking for job over 5 months is increased by 500,000.


Considering consumer spending makes big portion of GDP, the high unemployment makes the rate of recovery slower than many investor beliefs. I have a hard time to believe the GDP will be +5% by 4th quarter 2009 as some analysts believe. The math just simply doesn't add up,consumer spending dropped significantly and the stimulate package is not big enough to cover the lack of consumer spending.

Democrats stimulate package or as I call it "Democrats wish list" could not compete with the high rate of Job lost. So you figure it out if we are going to get a big jump in GDP by end of year or not!

NASDAQ closed below 200 SMA (May 7th)

NASDAQ May 6th:


NASDAQ was enjoying the third days above the 200 SMA. That was very positive sign ,but bulls got drunk and fall off chair again!

There was some profit taking in tech sector and NASDAQ closed below 200 SMA. If NASDAQ moves above the 200 SMA with in next couple days, it could be positive signal for bulls and should help indices to move higher, but I don't see how could indices rally more ,but in this market anything is possible!
NASDAQ May 7th:

Treasury bonds at support level

iShares Barclays 20+ Year Treasury Bond.
Treasury bonds came down significantly from their high back in December. It's the vote of confidence to stock market, but we are far from normal levels. TLT (iShares Barclays 20+ Year Treasury Bond ETF's) dropped over 62% since December. In the past 4 days TLT staid above the support line, "S1" ,but it failed to move above 61.8% Fibonacci retracement. If it moves above the 61.8% Fibonacci retracement there is good chance that it goes higher, that could interpret as red flag and possible drop in equity market in near future.
On the other hand if it breaks the "S2" support line, the equity rally could continue .

Market Technical Analysis

Did we hit the bottom or indices are going to roll over again?
This the question many investors are asking themselves these days, but nobody knows if the March 6th low, was the bottom or not?
Bulls would say yeah that was the bottom, but from technical perspective March 6th low did not have the characteristics of usual bottoms, therefore I will remain skeptical. I would not go over fundamentals this time, but you can read my post "What's Wrong With The U.S. Economy".
Here is the link:
"http://the-us-microeconomics.blogspot.com/2009/04/what-is-wrong-with-us-economy.html"

I try to analyse the market from technical prospective:

Positive signs:
1) 20&50 SMA are rising and indices are making higher high and lower high.
2) Over 92% of stocks in NYSE are above 50 SMA and 42% are above 200 SMA.

NYSE stocks above 200 SMA:
Things to be concern:
1) +30% rally in 9 weeks with no pull back, make this rally a "dead cat bounce".
2) All indicators scream overbought in the past 4 weeks. As I said many times before, indices could not stay overbought for a long time in bear markets.
3)Volume is diminishing as we go higher and higher.
4)Indices are moving in very tight channels which mostly break lower.
5)With the exception of NASDAQ all indices are below 200 SMA & EMA.

In the eyes of many analysts this rally is over done and we are going to roll over very soon. I think indices could shoot up to 200 SMA and roll over.
On the other hand if indices stay above 200 SMA I will go long.

Over 92% of NYSE Stocks Are Above 50 SMA

92% of NYSE stocks are above the 50 SMA , that from technical perspective is very bullish, but here is the other side the coin:
As you see in the graph, last time indices became so bullish was back in January which they dropped in average of 30%. Considering the rally base on pure technical with no real change in fundamentals made me more than ever suspicious. Bulls might argue that the ISM index became "less bad" or the housing price show lower rates of decline, but they close their eyes the most important data such as -35% drops in corporate earning, -6.1% GDP or 8.1% unemployment. On Friday we are going to get the employment situation data.

I need to remind my readers that the employment situation did not show any improvements. Analysts are expecting 8.5 % to 8.9 % for April.
Unemployment Rate:
Dec 6.7%
Jan 7.2%
Feb 7.6%
Mar 8.1%
Apr ? (8.5 % to 8.9 %)



Every Thursday at 8:30AM we get the weekly jobless claims; if the number of claims stay above 600K we are going to end up with +9.7% unemployment by end of this year and economy will deteriorate much faster than many investors' beliefs.

Weekly jobless claim shows decline in rate of deterioration


Indices formed a tight upward channel. we could continue to move higher until S&P500 hits the 200 SMA -EMA then head lower. If S&P500 stays above 950 for a week or so it could shoot higher. Please see my post "S&P500 Possible Moves in May. "http://the-us-microeconomics.blogspot.com/2009/05/s-possible-moves-in-may.html"



As I said in my previous posts +30% rally with no pull back, could not be sustain it's smart to be alert and use stop lost, because if this house of cards fall apart there will be no returning point.

S&P500 Possible Moves in May (Technical Analysis)

"Please click on the picture to zoom in."
This forecast is based on Elliott Wave Theory and resistance support lines. S&P has been wrestling with 880 resistance in past 2 weeks, please see my post "The Importance of 877-880 Resistance". I give 5% chance of continuation of this rally, I expect it would run out steam at 940 which coincide with 200 SMA & EMA.
Note this rally is not healthy because it failed to make a base and kept moving up with no pullback. Continuation of this bear market rally to 200 SMA & EMA will make the pull back very painful.